<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
United States
Securities and Exchange Commission
Washington, DC 20549
----------------
Form 10SB
General Form for Registration of Securities of
Small Business Issuers
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
OurPet's Company
(Exact name of Small Business Issuer in its charter)
----------------
Colorado 34-1480558
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
1300 East Street, Fairport 44077
Harbor, OH (Zip code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (440) 354-6500
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
----------------
Introductory Note
OurPet's Company, a Colorado Corporation (the "Company") is engaged in
developing, manufacturing and marketing various proprietary products for the
retail pet business. As used herein, the term Company includes each of the
Company's subsidiaries, unless the context otherwise requires.
This Registration Statement on Form 10SB (this "Report") contains forward-
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including, without limitation,
statements regarding the Company's cash needs and ability to fund its ongoing
working capital requirements, the effects of the sale of the plastic blow
molding business, and increases in the revenues from the sale of proprietary
products to the retail pet business. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. See "Item
1. Description of Business--Risk Factors" for a discussion of these risks.
These factors may cause the Company's actual results to differ materially from
any forward-looking statement.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
When used in this Report, statements that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "anticipates", "plans", "intends", "expects" and similar
expressions are intended to identify such forward-looking statements, which
speak only as of the date of this Report. Although the Company believes that
the expectations reflected in the forward-looking statements are reasonable, it
cannot guarantee future results, levels of activity, performance or
achievements. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
PART I
Item 1. Description of Business.
The Company's management originally founded Napro, Inc. ("Napro"), an Ohio
corporation, in 1985 as an enterprise for launching new ventures and acquiring
companies in various lines of business. In 1993 Napro acquired the assets of a
small blow molding business and in 1996 placed the assets in a newly formed
wholly owned Ohio subsidiary, Sanar Manufacturing Company ("Sanar"). Also in
1996, Napro formed another wholly owned Ohio subsidiary, Virtu Company
("Virtu") to market proprietary products to the retail pet business under the
OurPet's label. Napro then changed its name to OurPet's Company effective March
19, 1998. On July 16, 1998, Manticus, Inc. ("Manticus"), a Colorado
corporation, obtained all of the outstanding shares of OurPet's/Napro in
exchange for 8,000,000 shares of Manticus common stock. After the transaction,
the former holders of OurPet's/Napro shares owned approximately 89% of
Manticus' shares. Effective August 10, 1998 OurPet's/Napro was merged into
Manticus and ceased to exist. Manticus was thereafter licensed in the State of
Ohio as a foreign corporation, known as OurPet's Company (the "Company").
Effective October 12, 1998, Manticus'Articles of Incorporation was amended in
the State of Colorado to reflect its new name as OurPet's Company. After the
merger, management of the former OurPet's/Napro assumed management of the
surviving company.
Sanar manufactures custom blow molded parts for customers in the lawn
equipment, toy, medical accessory and automotive industries in addition to
producing some of Virtu's proprietary products. Although sales, employment and
production capacity increased significantly after its acquisition in 1993,
Sanar's profitability did not follow primarily due to an excess of capacity in
the custom blow molded industry. As a result, in 1999, the Company decided to
sell the business of Sanar. Effective March 31, 2000 Sanar's assets were sold
to an unrelated third party.
Virtu develops and markets products for improving the health, safety,
comfort and enjoyment of pets. The products sold have increased from the
initial "Big Dog Feeder" to approximately 50 products for dogs, cats, birds and
other small animals. All are marketed under the OurPet's label. The
manufacturing of these products is subcontracted to other entities, both
domestic and foreign, based upon price and quality.
According to the American Pet Product Manufacturers Association (APPMA)
1999/2000 Pet Owners Survey, total pet market revenues in 1998 exceeded $30
billion; approximately $21 billion was in food related products, while $9
billion was in pet accessories. It is estimated that there are over 260 million
pets in the USA, with the most popular being cats (approximately 68 million)
and dogs (approximately 62 million). Wild bird watching has grown to
approximately 66 million enthusiasts, with over 200 million wild bird feeders
purchased annually. According to the same APPMA survey, pet industry sales are
anticipated to continue growing at an annual rate of 15-20% for at least the
next ten years.
2
<PAGE>
The Company sells its products in these market segments:
<TABLE>
<S> <C>
mass retailers--Wal-Mart, Kmart
pet store chains--PetsMart, Petco
pet catalogues--Drs. Foster & Smith, New
England Serum
general catalogues--Hammacher Schlemmer,
Solutions
clubs--Costco, BJ's
grocery chains--Stop-N-Shop, Wegmans
pet food mfg--Friskies, Ralston Purina
pet distributors/pet dealers--Central
Garden & Pet
</TABLE>
The Company currently markets products such as dog and cat feeders, dog and
cat toys, and wild bird feeders. The Company conducts its marketing and sales
activities through 5 in-house officers and/or employees, 65 general merchandise
independent sales agents, 15 specialty market independent sales agents and 2
catalog market independent sales agents. Independent sales agents are paid
commissions, which range from 2% to 7% of net sales to customers.
The Company's marketing strategies include, among others, trade shows,
customer visitation, telemarketing, direct mail, trade journal advertising,
product sampling programs and customer support programs, such as advertising
and promotional allowances.
While the Company had approximately 200 customers for the year ended
December 31, 1999, 26.1% of the Company's revenue was derived from one major
customer. Revenue generated from this customer amounted to $803,820.
The Company has been granted four United States patents for dog and cat
feeders and has eight United States patents pending for cat and dog toys, dog
feeders and wild bird feeders. The Company registered its logo, "OurPet's", as
a registered trademark. To protect its trade names it obtained five trademark
registrations and applied for eight trademark registrations, which are still
pending.
The patents issued and granted to the Company are:
<TABLE>
<CAPTION>
Patent
No. Issue Date Title
------ ---------- -----
<S> <C> <C>
5,509,376 April 23, 1996 Animal Feeder Assembly
5,730,081 March 24, 1998 Animal Feeder Assembly
Amusement Device for
6,032,615 March 7, 2000 Household Pets, such as Cats
393,107 March 31, 1998 Small Animal Feeder
</TABLE>
Patent applications that are pending are:
<TABLE>
<CAPTION>
Serial No. File Date Title
---------- --------- -----
<S> <C> <C>
09/170,908 October 13, 1998 Amusement Device for Household Pets,
Such as Cats, Having One or More Pet
Toy Ball Feeders Therein
09/292,492 April 15, 1999 Pet Ball
09/158,714 September 22, 1998 Pet Toy Ball Feeder
09/479,001 January 7, 2000 Simulated Mouse Toy for Pets
Having a Prerecorded Sound Chip
29/105,344 May 21, 1999 Stackable Pet Feeder
60/193,777 March 31, 2000 Filtered Water System for Pets
60/193,363 March 31, 2000 Cover for Pet Food and Water Bowls
60/193,875 March 31, 2000 Food and Treat Dispenser
</TABLE>
3
<PAGE>
Trademark registrations obtained by Company are:
<TABLE>
<CAPTION>
Registration No. Date Registered Name
---------------- --------------- ----
<S> <C> <C>
2,048,003 March 25, 1997 OurPet's
2,016,545 November 12, 1996 Flexo-Feeder
2,219,049 January 19, 1999 Push-N-Roll
2,220,580 January 26, 1999 Triple Track
2,221,776 February 2, 1999 Zig-N-Zag
2,226,341 February 23, 1999 Play-N-Treat
</TABLE>
The following trademark registration applications are pending:
<TABLE>
<CAPTION>
Serial
Number Dated Filed Name
------ ----------- ----
<S> <C> <C>
75/234,325 January 31, 1997 Wufer Ball
75/616,373 January 6, 1999 Deli-Dome
75/669,706 March 29, 1999 DeliDome
75/666,216 March 23, 1999 Play-N-Squeak
75/696,361 May 3, 1999 Store-N-Feed
75/769,802 August 6, 1999 Healthy Pet Diner
75/813,038 September 29, 1999 Molecuball
76/016,936 April 4, 2000 Trek-N-Treat
</TABLE>
As of August 1, 2000, the Company had 10 full-time employees consisting of
the 4 officers, 2 other employees in sales and marketing, 2 employees in
finance and administration and 2 employees in warehousing and shipping. The
Company does not have any employees in manufacturing since that operation is
subcontracted to outside vendors. None of the Company's employees are subject
to a collective bargaining agreement and the Company has not experienced any
work stoppages, nor to the Company's knowledge, are any threatened.
The Company conducts its own research and development activities and also
uses outside sources to perform specific projects such as engineering drawings
and prototype models. Research and development costs are charged to expenses as
incurred, and totaled $52,385 and $47,328 for the years ended December 31, 1999
and 1998, respectively.
Risk Factors
As described in the "Introductory Note," certain statements made herein that
are not historical are forward-looking within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks and uncertainties. Many factors could cause the
actual results, performance or achievements of the Company to be materially
different from any future statements, including, among others, those risk
factors described below.
Substantial Competition
The Company's products are subject to substantial competition from both
domestic and foreign companies, many of whom manufacture their products in low
cost areas such as Mexico and the Far East. Competition is based mainly on
price, product familiarity, and product innovation.
Additional Financing
The Company will need significant additional financing for leasing or
building warehouse space, working capital, research and development of new
products, and molds and tooling to produce new products. There is
4
<PAGE>
no guarantee that such financial resources will be available on a timely basis
or on affordable economic terms, the lack of which will negatively impact the
Company's future performance.
Key Personnel
The Company is and will continue to be dependent on its key management
personnel: Dr. Steven Tsengas, Chairman, President and Chief Executive Officer;
Konstantine S. Tsengas, Vice President of Operations and Secretary; Glenn R.
Godley, Executive Vice President of Marketing/Sales; and John G. Murchie,
Treasurer and Controller. There can be no assurance that such individuals will
be able to successfully implement the Company's strategies or that such
individuals will remain with the Company. The loss of one or more of these
individuals could have a material adverse effect on the business and operations
of the Company. In addition, the Company will need to attract and retain other
qualified individuals to satisfy its personnel needs. There can be no assurance
that the Company will be successful in retaining its key management personnel
or in attracting and retaining new employees.
Patent Protection
The Company's success will depend, in part, on its ability to maintain
protection for its products under United States patent laws, to preserve its
trade secrets and to operate without infringing the proprietary rights of third
parties. The Company has four U.S. patents issued and eight U.S. patent
applications pending. There can be no assurance that any patent applications
will result in issued patents, that any issued patents will afford adequate
protection to the Company or not be challenged, invalidated, infringed or
circumvented, or that any rights thereunder will afford competitive advantages
to the Company. Furthermore, there can be no assurance that others have not
independently developed, or will not independently develop, similar products or
otherwise duplicate any of the Company's products.
Business Conditions
As previously described, the pet industry has enjoyed significant economic
growth due to demographic, social and general economic reasons. There is no
guarantee that such positive business conditions will continue into the future.
A general economic slowdown would most likely negatively impact the Company's
sales.
New Business
The Company has had only six years experience in developing and marketing
its products for improving the health, safety, comfort and enjoyment of pets.
Based on its increasing sales, it appears that the Company's products are well
received by the retailers and pet owners. Although the Company is carefully
developing and marketing its products, there is no guarantee that future
products will enjoy the same level of success.
Dilution
The Company currently has 10,544,687 shares of Common Stock outstanding
which could be diluted by the following potential issuances of Common Stock. As
of August 1, 2000, the Company had outstanding 100,000 shares of Convertible
Preferred Stock convertible into 1,000,000 shares of Common Stock at a
conversion price of $1.00 per share. Also as of August 1, 2000, the Company had
outstanding 2,169,206 warrants to purchase an aggregate of 2,169,206 shares of
Common Stock at exercise prices ranging from $0.50 to $1.50 per share and
options to purchase an aggregate of 632,000 shares of Common Stock at exercise
prices ranging from $0.75 to $1.00 per share. The Company has reserved an
aggregate of 850,000 shares of Common Stock for issuance under the 1999 Stock
Option Plan as of the date of this Report. In addition, the exercise of such
warrants and options could have a material adverse effect on the market price
of, and liquidity in the market for, shares of Common Stock. Further, while
these warrants and options are outstanding, the Company's ability to obtain
additional financing on favorable terms may be adversely affected.
5
<PAGE>
Securities Restrictions on Sales
The Company's securities are subject to Rule 15g-9 under the Exchange Act,
which imposes additional sales practice requirements on broker-dealers that
sell securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
an annual income exceeding $200,000 or $300,000 together with their spouse).
For transactions covered by such rule, a broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
consent to the transaction prior to the sale. Consequently, this rule may
adversely affect the ability of broker-dealers to sell the Company's securities
and may adversely affect the ability of the holders of the Company's securities
to sell such securities in the secondary market.
SEC regulations define a "penny stock" to be any non-NASDAQ equity security
that has a market price (as therein defined) of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. Prior to any transaction involving a penny stock, unless exempt,
SEC rules require delivery of a disclosure schedule prepared by the SEC
relating to the penny stock market. Disclosure is also required to be made
about commissions payable to both the broker-dealer and the registered
representative and about current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market
in penny stocks.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
During both the years ended December 31, 1999 ("Fiscal 1999") and 1998
("Fiscal 1998") the Company raised cash by selling its shares of stock through
private placements. From April through October of 1998, the Company sold
through a private placement 1,226,298 shares of no par value Common Stock at an
offering price of $.75 per share, and issued warrants, which expire on October
31, 2000, to purchase 1,226,298 shares of Common Stock at an exercise price of
$1.50 per share. The Company accepted $754,502 in cash and cancellation of debt
and accrued interest in the amount of $165,221 as consideration for the sale of
the Common Stock and warrants. From the net cash proceeds of $646,219, the
Company purchased equipment, repaid long-term debt and increased its working
capital. Prior to the Company's private placement in 1998, Napro sold 364,310
shares of its no par value Common Stock for which it accepted $90,618 in cash
and cancellation of debt and accrued expenses in the amount of $65,382 as
consideration for the sale. The cash proceeds of $90,618 were used for working
capital purposes.
From July through November 1999, the Company sold through a private
placement 100,000 shares of no par value non-voting Convertible Preferred Stock
at an offering price of $10.00 per share. Each share of the Preferred Stock is
convertible into ten shares of Common Stock at a conversion price of $1.00 per
share. The Company accepted $965,000 in cash and cancellation of debt owed in
the amount of $35,000 as consideration for the Preferred Stock. From the net
cash proceeds of $878,150, the Company purchased equipment including molds and
tooling, repaid long-term debt and increased its working capital.
Net revenue from continuing operations for Fiscal 1999 was approximately
$3,063,000 consisting of sales of proprietary products for the retail pet
business as compared to net revenue from continuing operations for Fiscal 1998
of approximately $2,777,000 for sales of the same proprietary products. This
increase of $286,000 resulted from new and improved products being marketed in
Fiscal 1999.
Cost of goods sold was approximately $2,425,000 for Fiscal 1999 compared to
approximately $2,131,000 for the prior fiscal year, representing an increase of
approximately $294,000 or 13.8%, while net revenues only increased by
approximately $286,000 or 10.3%. As a result of the cost of goods sold
increasing more than net revenues, the Company's gross margin decreased by
$8,000 for a profit of $638,000 for Fiscal 1999, as compared to a profit of
$646,000 for Fiscal 1998. The increase in revenues was offset by the higher
costs incurred in starting production of new products, such as the lower gross
margins realized when introducing new products, increased depreciation costs
from the molds and tooling acquired to make the new products, and increased
rent for additional warehouse space.
6
<PAGE>
Selling, general and administrative expenses increased by approximately
$246,000 to approximately $979,000 for Fiscal 1999, as compared to
approximately $733,000 for Fiscal 1998. The increases were primarily due to the
following:
. Accountant fees in the amount of $69,000 due to audits of the Company's
Fiscal 1998 and 1999 financial statements.
. Sales commissions of $25,000 due to increased sales and a higher
commission rate for new products.
. Sales consulting fees of $59,000--primarily for the fair value of Common
Stock paid to consultants of approximately $51,000.
. Legal fees of $20,000 due to its Preferred Stock offering and its
litigation initiated against a competitor.
. Salaries and wages of $54,000 due to an increase in sales and marketing
staff.
Interest and other income decreased by approximately $15,000 to
approximately $42,000 for Fiscal 1999, as compared to $57,000 for Fiscal 1998.
This was the result of a decrease in other income associated with certain sub-
contracted manufacturing operations for one of the Company's dog toy products
in Fiscal 1999.
Interest expense increased by approximately $31,000 to approximately $75,000
for Fiscal 1999 from approximately $44,000 for Fiscal 1998. The increase was
primarily the result of an increased level of borrowing under the bank line of
credit and the issuance of notes payable to shareholders in Fiscal 1999 due to
higher levels of accounts receivable and inventories in 1999 as compared to
1998.
Losses from operations of the discontinued subsidiary, Sanar, increased by
$278,000 to approximately $359,000 in Fiscal 1999 from $81,000 in Fiscal 1998.
The higher losses were due to net revenue from outside customers decreasing by
approximately $351,000 and cost of goods sold increasing by approximately
$23,000 as a result of higher labor costs. These losses were somewhat offset by
a reduction in selling, general and administrative expenses of approximately
$106,000, primarily due to reductions in salaries of $42,000 and non-operating
expenses of $43,000.
The Company recorded an extraordinary item for the gain on extinguishment of
debt of $391,000 in Fiscal 1999. To facilitate the divestment of Sanar,
$233,000 in debt and accrued interest owed by Sanar to an officer and a
stockholder was canceled. Furthermore, $158,000 in accrued rentals owed by
Sanar to a related party were also canceled. The Company issued 500,000
warrants for the purchase of Common Stock at $1.00 per share which expire on
December 14, 2004 to the officer, stockholder, related party, and their
designees.
The Company has funded its operations principally from bank and Small
Business Administration ("SBA") debt and the proceeds from equity financing. As
of December 31, 1999, the Company had approximately $1,469,000 in principal
amount of indebtedness (excluding $45,000 borrowed under capital lease
obligations), consisting of: (i) approximately $524,000 aggregate principal
balances under line of credit agreements with a bank, which bear interest at
the prime rate plus 2%; (ii) approximately $411,000 outstanding principal
amount under the term loan with a bank, which bears interest at the prime rate
plus 2.25% and is payable in monthly installments of $8,750 plus interest
through October 1, 2001 and a final installment of $218,750 on November 1,
2001; (iii) approximately $234,000 outstanding principal amount under the term
loans with the SBA ("SBA Loans"), which bear interest at 5.244% and 6.999% and
are payable in monthly installments of $5,300 including interest; and (iv)
approximately $300,000 outstanding principal amount under notes payable to a
director, which bear interest at 10% and are due in the amount of $100,000 on
August 1, 2000 and $200,000 on August 31, 2001 plus accrued interest. The
Company's indebtedness is secured by liens on its assets and the indebtedness
has been used to finance its equipment and working capital requirements. The
agreements related to such indebtedness contain the customary covenants and
default provisions. As part of the sale of Sanar's assets, approximately
$279,000 of the indebtedness referred to in subsection (i) above and all of the
indebtedness referenced in subsection (ii) above will be extinguished by the
purchaser who is in the process of refinancing the loan as part of its purchase
of Sanar's assets. Furthermore, the purchaser assumed the SBA Loans, referenced
in
7
<PAGE>
subsection (iii), as part of its purchase of Sanar's assets. In addition, the
note payable to a director in the principal amount of $100,000 was converted
into 100,000 shares of Common Stock in March 2000.
The Company's capital lease payments were approximately $16,000 for Fiscal
1999 and are estimated to be approximately $15,000 for the fiscal year ending
December 31, 2000, under current commitments. The company has no other material
commitments for capital expenditures.
Net cash used in operating activities for Fiscal 1999 was $384,549. Of this
amount cash was used for the net change of $435,947 in the Company's operating
assets and liabilities, consisting primarily of increases in accounts
receivable ($122,002) and inventories ($288,505), and a decrease in accrued
expenses ($127,032), which was partially offset by an increase in accounts
payable ($108,480). Cash was provided by net income for the year of $51,398,
net of non-cash charges for depreciation, amortization, Common Stock issued for
services rendered to the Company, and the extraordinary item.
Net cash used in investing activities for Fiscal 1999 was $483,149 for the
acquisition of property and equipment. Net cash provided by financing
activities for the year was $872,593. Of this amount, $878,150 was received
from the cash sales of Preferred Stock and $385,151 was received from the
issuance of notes payable. This cash provided was offset by $375,949 in
payments and cancellation of debt, and $14,759 in payment on capital lease
obligations.
Item 3. Description of Property.
The Company leases a 28,000 square foot production, warehouse and office
facility in Fairport Harbor, Ohio from a related entity, Senk Properties. Senk
Properties is a general partnership comprised of Dr. Steven Tsengas,
Konstantine S. Tsengas, Nicholas S. Tsengas and Evangelia S. Tsengas. The
current monthly rental is $10,940 plus real estate taxes with annual increases
of approximately 3%. The initial lease term was five years ending on May 31,
1998, which has been extended for five additional five year terms for a total
possible term of twenty five years. The Company is currently subleasing the
26,000 square feet of production and warehouse space for a monthly rental of
$9,825 on a month-to-month basis.
The Company also leases a 22,000 square foot warehouse facility in
Painesville Township, Ohio under a one year lease which expires on August 31,
2000. The monthly rental is $8,243. The Company plans to consolidate operations
in its Fairport Harbor, Ohio location upon the expiration of the Painesville
Township, Ohio lease. The Company believes that this facility will provide
adequate warehouse and office space to meet the needs of the Company for the
immediate future. Any longer-range future growth can be accommodated by
expanding that facility or leasing nearby space.
In the opinion of the Company's management, all of the properties described
here are adequately covered by insurance and such coverage is in accordance
with the requirements contained in the Company's various debt agreements.
8
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of August 1, 2000, certain information as
to the stock ownership and voting power of all persons (or group of persons)
known by the Company to be the beneficial owner of more than five percent (5%)
of the Common Stock, each director of the Company, each of the executive
officers and all directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name of Beneficial Owner(1) Beneficially Owned(2) Voting Power(3)
--------------------------- --------------------- ---------------
<S> <C> <C>
Joseph T. Aveni(4)...................... 416,668 3.6
Greg W. Johnson(5)...................... 110,000 *
Dr. James W. McCourt(6)................. 1,039,245 8.9
Dr. Steven Tsengas(7)................... 3,503,261 29.4
Glenn R. Godley(8)...................... -- --
John G. Murchie(9)...................... -- --
Konstantine S. Tsengas(10).............. 1,049,403 9.1
All directors and officers as a Group (7
persons)(11)........................... 6,118,577 49.7
Evangelia S. Tsengas(12)................ 887,292 7.6
7768 Litchfield Drive
Mentor, OH 44060
Nicholas S. Tsengas(13)................. 1,049,403 9.1
7007 Southmeadow Drive
Concord Twp, OH 44077
</TABLE>
--------
* Less than one percent
(1) Unless otherwise indicated and subject to applicable community property
laws, each stockholder has sole voting and investment power with respect
to all shares of Common Stock beneficially owned by such stockholder.
Unless otherwise indicated, the address of each stockholder is c/o
OurPet's Company, 1300 East Street, Fairport Harbor, OH 44077.
(2) The number of shares beneficially owned by each person named in the table
includes shares held by each individual of (i) the Company's Common Stock;
(ii) the Company's Preferred Stock, as if converted into Common Stock; and
(iii) Common Stock subject to warrants that are presently exercisable or
exercisable within 60 days of August 1, 2000. No shares that are subject
to the 1999 Stock Option Plan are included since none are exercisable or
exercisable within 60 days of August 1, 2000.
(3) Applicable percentage of voting power is based on the 11,544,687 shares of
Common Stock outstanding as of August 1, 2000. That number is comprised of
10,544,687 outstanding shares of Common Stock and 1,000,000 shares of
Common Stock issuable upon conversion of 100,000 outstanding shares of
Preferred Stock. Shares of Common Stock subject to warrants and options
that are presently exercisable or exercisable within 60 days are deemed to
be beneficially owned by the person holding such warrants and options for
the purpose of computing the percentage of ownership of such person but
are not treated as outstanding for the purpose of computing the percentage
of any other person.
(4) Includes 233,334 shares of Common Stock held and currently exercisable
warrants to purchase 183,334 shares of Common Stock.
(5) Includes 70,000 shares of Common Stock issuable upon conversion of 7,000
outstanding shares of Preferred Stock and currently exercisable warrants
to purchase 40,000 shares of Common Stock.
(6) Includes securities issued to Dr. McCourt, and to Beachcraft Limited
Partnership, in which Dr. McCourt serves as Trustee for its general
partner, and to DKKS, LP in which Dr. McCourt is the general partner.
Securities issued directly to Dr. McCourt include 448,180 shares of Common
Stock; Beachcraft Limited Partnership holds 152,303 shares of Common Stock
and currently exercisable warrants to purchase 606 shares of Common Stock;
and DKKS, LP holds 119,078 shares of Common
9
<PAGE>
Stock, 200,000 shares of Common Stock issuable upon conversion of 20,000
outstanding shares of Preferred Stock and currently exercisable warrants to
purchase 119,078 shares of Common Stock.
(7) Includes 3,129,721 shares of Common Stock held and currently exercisable
warrants to purchase 269,540 shares of Common Stock issued to Dr. Tsengas
and also currently exercisable warrants to purchase 104,000 shares of
Common Stock issued to Senk Properties in which Dr. Tsengas is a partner.
The number of warrants to Senk Properties attributed to Dr. Tsengas is
based upon his ownership percentage of 52%. Excludes option to purchase
200,000 shares of Common Stock which is not exercisable within 60 days.
(8) Excludes option to purchase 100,000 shares of Common Stock which is not
exercisable within 60 days.
(9) Excludes option to purchase 50,000 shares of Common stock, which is not
exercisable within 60 days.
(10) Includes 1,008,403 shares of Common Stock held and currently exercisable
warrants to purchase 5,000 shares of Common Stock issued to Mr. Tsengas
and also currently exercisable warrants to purchase 36,000 shares of
Common Stock issued to Senk Properties in which Mr. Tsengas is a partner.
The number of warrants issued to Senk Properties attributed to Mr. Tsengas
is based upon his ownership percentage of 18%. Excludes option to purchase
150,000 shares of Common Stock, which is not exercisable within 60 days.
Mr. Tsengas is the son of Dr. Tsengas.
(11) Includes 5,091,019 shares of Common Stock held, 270,000 shares of Common
Stock issuable upon conversion of 27,000 outstanding shares of Preferred
Stock and currently exercisable warrants to purchase 757,558 shares of
Common Stock. Excludes options to purchase 500,000 shares of Common Stock,
which are not exercisable within 60 days.
(12) Includes 728,292 shares of Common Stock held and currently exercisable
warrants to purchase 135,000 shares of Common Stock issued to Mrs. Tsengas
and also currently exercisable warrants to purchase 24,000 shares of
Common stock issued to Senk Properties in which Mrs. Tsengas is a partner.
The number of warrants issued to Senk Properties attributed to Mrs.
Tsengas is based upon her ownership percentage of 12%. Mrs. Tsengas is the
wife of Dr. Tsengas.
(13) Includes 1,008,403 shares of Common Stock held and currently exercisable
warrants to purchase 5,000 shares of Common Stock issued to Mr. Tsengas
and also currently exercisable warrants to purchase 36,000 shares of
Common Stock issued to Senk Properties in which Mr. Tsengas is a partner.
The number of warrants issued to Senk Properties attributed to Mr. Tsengas
is based upon his ownership percentage of 18%. Mr. Tsengas in the son of
Dr. Tsengas.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
The members of the Board of Directors of the Company are Joseph T. Aveni,
Greg W. Johnson, Dr. James W. McCourt, and Dr. Steven Tsengas.
The Executive Officers of the Company are:
<TABLE>
<S> <C>
Dr. Steven Tsengas............. Chairman, President and Chief Executive Officer
Konstantine S. Tsengas......... Vice President of Operations and Secretary
Glenn R. Godley................ Executive Vice President of Marketing/Sales
John G. Murchie................ Treasurer and Controller
</TABLE>
10
<PAGE>
The name, business address, present principal occupation or employment and
five (5) year employment history of each of the directors and executive
officers of the Company are set forth below. All such individuals are citizens
of the United States unless otherwise indicated.
<TABLE>
<CAPTION>
Position(s) with the Company;
Principal occupation or Employment;
Name, Age and Business Address Five(5) Year Employment History
------------------------------ -----------------------------------
<C> <S>
Joseph T. Aveni(65).............. Mr. Aveni was elected to the Company's
6000 Rockside Woods Blvd. Board of Directors in November 1998. Mr.
Suite 220 Aveni is currently the Chief Executive
Cleveland, OH 44131-2350 Officer of Realty One and serves on the
Board of Directors of the Cleaveland Ballet
and the Greater Cleveland Growth
Association.
Greg W. Johnson(47).............. Mr. Johnson was elected to the Company's
2241 Park Place Board of Directors in December 1999. Mr.
Suite E Johnson is the founder and currently the
Minden, NV 89423-8602 Chief Technology Officer of
Homeseekers.com. Mr. Johnson previously
served as Chairman of the Board from 1996
through 1999 and as President and Chief
Executive Officer from 1988 to 1996 of
Homeseekers.com.
Dr. James W. McCourt(59)......... Dr. McCourt was elected to the Company's
PO Box 280 Board of Directors in December 1999. Dr.
Cooksville, TX 75558 McCourt recently retired from his dentistry
practice in Harlingen, Texas.
Dr. Steven Tsengas(63)........... Dr. Tsengas has served on the Company's
1300 East Street Board of Directors since the merger in 1998
Fairport Harbor, OH 44077 and also was a director of Napro since it
was incorporated in 1985. Dr. Tsengas has
also been Chairman, President and Chief
Executive Officer of the Company for the
same period of time. Dr. Tsengas received
his BS in Industrial Engineering from the
State of New York University at Buffalo,
his MS in Business from the University of
Rochester, W. Simon Graduate School of
Management, and his Ph.D. degree in Natural
Health from Clayton College of Natural
Health.
Konstantine S. Tsengas(36)....... Mr. Tsengas has been Vice President of
1300 East Street Operations and Secretary of the Company
Fairport Harbor, OH 44077 since the merger in 1998 and served in the
same capacities with Napro since 1995.
Mr. Tsengas received his BS in Industrial
Engineering from the University of Toledo
and has completed graduate level courses in
marketing and organizational behavior at
Cleveland State University.
Glenn R. Godley(36).............. Mr. Godley has been Executive Vice
1300 East Street President of Marketing/Sales of the Company
Fairport Harbor, OH 44077 since May of 1999. From 1991 to 1999 Mr.
Godley was Regional Manager of Sales and
Marketing for Catalina Industries. Mr.
Godley received his BS in Business
Administration and Marketing from Cleveland
State University.
John G. Murchie(62).............. Mr. Murchie has been Treasurer and
1300 East Street Controller of the Company since January of
Fairport Harbor, OH 44077 2000. From 1995 through 1999, Mr. Murchie
served as Acting Chief Financial Officer,
Controller and Chief Administrative Officer
of Conversion Technologies International,
Inc. and one of its subsidiaries. Mr.
Murchie received his BS in Business
Administration from Miami University of
Ohio.
</TABLE>
11
<PAGE>
All directors of the Company are elected by the stockholders, or in the case
of a vacancy, by the directors then in office, to hold office until the next
annual meeting of stockholders of the Company and until their successors are
elected and qualified or until their earlier resignation or removal.
Board Committee
The Board of Directors has established a Compensation Committee, which makes
recommendations to the Board with respect to general compensation and benefit
levels for employees, determines the compensation and benefits for the
Company's executive officers and administers the Company's stock option plan.
The current members of this Committee are Joseph T. Aveni, Dr. James W. McCourt
and Dr. Steven Tsengas.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation contains provisions to indemnify
its directors, officers, employees and agents of the Company to the fullest
extent permitted by Colorado law, and also includes provisions to eliminate the
personal liability of the directors, officers, employees and agents of the
Company to the fullest extent permitted by Colorado law. Under current law,
such exculpation would extend to an officer's or director's breaches of
fiduciary duty, except for (i) breaches of such person's duty of loyalty, (ii)
those instances where such person is found not to have acted in good faith and
(iii) those instances where such person received an improper personal benefit
as a result of such breach.
Item 6. Executive Compensation.
Summary Compensation Table
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company for the years ended December 31,
1999, 1998 and 1997 to its Executive Officers.
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
------------------------- ---------- --------------------
Other Securities
Annual Underlying LTIP All Other
Name and Principal Salary Bonus Compensation Options/ Payouts Compensation
Position Year ($) ($) ($) SARS(#) ($) ($)
------------------ ---- ------ ----- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dr. Steven Tsengas...... 1999 74,375 -- -- 200,000(3) -- --
Chairman, President 1998 75,000 -- -- -- -- --
& Chief Executive 1997 75,000 -- -- -- -- --
Officer
Konstantine S. Tsengas.. 1999 59,500 -- -- 150,000(3) -- --
Vice President of 1998 60,000 -- -- -- -- --
Operations & Secretary 1997 50,000 -- -- -- -- --
Glenn R. Godley(1) ..... 1999 32,506 -- -- 100,000(3) -- --
Exec. Vice President of 1998 -- -- -- -- -- --
Marketing/Sales 1997 -- -- -- -- -- --
John G. Murchie(2)...... 1999 -- -- -- -- -- --
Treasurer and 1998 -- -- -- -- -- --
Controller 1997 -- -- -- -- -- --
</TABLE>
--------
(1) Mr. Godley became an executive officer of the Company in May of 1999.
(2) Mr. Murchie became an executive officer of the Company in January of 2000.
(3) Represents options granted in December 1999 pursuant to the Company's 1999
Stock Option Plan which vest one-third on each of the second, third and
fourth anniversaries of the date of grant, expire on the fifth anniversary
of the date of grant and have an exercise price of $0.825 per share for Dr.
Tsengas and $0.75 per share for Mr. Tsengas and Mr. Godley.
12
<PAGE>
Option Plan
The Company maintains the 1999 Stock Option Plan (the "Plan") for its
officers and key employees under which options may be granted at the discretion
of the Board of Directors. The Company has reserved 850,000 shares of its
Common Stock for issuance upon the exercise of options granted under the Plan.
Under the Plan, options to purchase an aggregate of 632,000 shares are
outstanding as of June 1, 2000. These options vest one-third on each of the
second, third and fourth anniversaries of the date of grant and expire on the
fifth anniversary of the date of grant. The Company grants options for the Plan
at exercise prices equal to or greater than the fair market value of the Common
Stock on the date of grant.
The following table sets forth the number of individual stock option grants
made to each Executive Officer during 1999.
<TABLE>
<CAPTION>
Percent of
Number of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Expiration
Name Granted(#) 1999(1) Price ($/sh) Date
---- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Dr. Steven Tsengas........... 200,000 33.3% $0.825 12/04/04
Konstantine S. Tsengas....... 150,000 25.0% $ 0.75 12/04/04
Glenn R. Godley.............. 100,000 16.7% $ 0.75 12/04/04
John G. Murchie.............. -- -- -- --
</TABLE>
--------
(1) The Company granted options to purchase an aggregate of 600,000 shares of
Common Stock during 1999, all of which were granted on December 4, 1999.
The following table sets forth information (on an aggregate basis)
concerning exercises of stock options during 1999 by each of the Executive
Officers and the final year-end value of unexercised options.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying unexercised "In-the-Money"
Options/SARs Options/SARs
Shares Value at Year-End(#) at Year-End($)(1)
Acquired or Realized -------------------------- --------------------------
Name Exercise(#) ($) Exercisable Unexerciseable Exercisable Unexerciseable
---- ----------- -------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Steven Tsengas...... -- -- -- 200,000 -- $35,000
Konstantine S. Tsengas.. -- -- -- 150,000 -- $37,500
Glenn R. Godley......... -- -- -- 100,000 -- $25,000
John G. Murchie......... -- -- -- -- -- --
</TABLE>
--------
(1) Calculated based upon the difference between the exercise price and the
estimated fair market value of $1.00 a share on December 31, 1999.
Compensation of Directors
In 1999, directors who were full-time employees of the Company received no
cash compensation for services rendered as members of the Board of Directors or
a committee thereof. Directors who were not full-time employees of the Company
received reimbursement for out-of-pocket expenses for attendance at Board of
Director meetings. Non-Employee directors received no other compensation for
their services as directors.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Other than the Company's standard form of non-competition and
confidentiality agreement, the Company does not presently have any employment
contracts in effect with the Executive Officers of the Company, including any
compensatory plans or arrangements resulting from the resignation, retirement
or other terminations of the Executive Officers.
13
<PAGE>
Item 7. Certain Relationships and Related Transactions.
In September 1996, Napro entered into a sales commission agreement with
Anthony O'Rourke, owner of Macke International Trade, Inc., and a former member
of the Board of Directors. The agreement provides for the payment of a 4%
commission on net sales to a certain customer for which commission of $34,244
and $29,200 were earned in 1998 and 1999. O'Rourke, through Macke International
Trade, Inc., also provided sales consulting services for which $7,900 and
$1,000 was expensed in 1998 and 1999, respectively. The Company issued 67,224
shares of Common Stock to Mr. O'Rourke in 1999 as payment for sales consulting
services. Such shares were valued at $50,418.
The Company leases production, warehouse and office facilities from a
related entity, Senk Properties, a general partnership comprised of Dr. Steven
Tsengas, Konstantine S. Tsengas, Evangelia S. Tsengas and Nicholas S. Tsengas.
At December 31, 1999, the current monthly rental was $10,940 plus real estate
taxes with annual increases each May in the base rental of approximately 3%.
The initial lease term was for five years ending on May 31, 1998. It has been
extended for five additional five year terms for a total possible term of
twenty five years. Lease expense before the cancellation of accrued rent
described in the Extraordinary Item Note to Consolidated Financial Statements
was $138,795 and $134,464 for Fiscal 1999 and 1998. As of July 31, 2000, the
Company is current in its monthly rental payments.
In February 1998, Dr. Steven Tsengas converted $50,000 in debt and $2,800 in
accrued interest into 123,249 shares of Common Stock.
In March 1998, the Company borrowed $100,000 from DKKS, LP, a firm for which
Dr. James W. McCourt (who became a member of the Board of Directors in December
1999) is the general partner and $50,000 from Dr. Steven Tsengas. Both loans
were for equipment purchases. In connection with these loans, the Company
issued 100,000 warrants for the purchase of Common Stock at $0.75 a share to
DKKS, LP and warrants to purchase 50,000 shares at the same price to Dr.
Tsengas. These warrants expire on October 31, 2000.
In connection with the 1998 Private Placement of Common Stock and warrants
for the purchase of Common Stock which expire on October 31, 2000 (i) DKKS, LP
converted $87,500 in debt and $1,809 in accrued interest into 119,078 shares of
Common Stock, 119,078 warrants exercisable at $1.50 a share, and 50,000
warrants exercisable at $0.75 a share; (ii) Dr. Tsengas converted $43,750 in
debt and $905 in accrued interest into 59,540 shares of Common Stock, 59,540
warrants exercisable at $1.50 a share and 25,000 warrants exercisable at $0.75
a share; and (iii) Joseph T. Aveni, a director, purchased for $100,000 in cash
133,334 shares of Common Stock and 133,334 warrants exercisable at $1.50 a
share.
On February 1, 1999 and September 1, 1999, the Company borrowed $100,000 and
$200,000 for working capital purposes from Mr. Aveni. The initial Note for
$100,000 was converted into 100,000 shares of Common Stock in March, 2000. The
second note is due on August 31, 2001 and has an annual interest rate of 10%.
In addition, Mr. Aveni received 50,000 warrants for the purchase of Common
Stock at $0.75 per share which expire on July 31, 2001 and 100,000 warrants for
the purchase of Common Stock at $1.00 per share which expire on August 31,
2001.
In connection with the 1999 Private Placement of Preferred Stock, DKKS, LP
purchased 20,000 shares for $200,000 in cash and Greg W. Johnson purchased
7,000 shares for $70,000 in cash.
In December 1999, the Company issued an aggregate total of 500,000 warrants
for the purchase of Common Stock at $1.00 per share which expire on December
14, 2004 to Dr. Steven Tsengas, Konstantine S. Tsengas, Evangelia S. Tsengas,
Nicholas S. Tsengas and the grandchildren of Dr. Tsengas.
On December 4, 1999, the Board of Directors approved the 1999 Stock Option
Plan (the "Plan") subject to shareholder approval, which approval was obtained
on August 5, 2000. This Plan replaced the prior plan and provided that the
options previously granted to officers and key employees would be exchanged for
options under
14
<PAGE>
the Plan in an equal amount and identical exercise price. Dr. Tsengas, Mr.
Tsengas and Mr. Godley were granted options to purchase 200,000, 150,000 and
100,000 shares, respectively, of Common Stock at an exercise price of $0.825
for Dr. Tsengas and $0.75 for Messrs. Tsengas and Godley. One-third of such
options vest on each of the second, third and fourth anniversaries of the date
of grant and expire on the fifth anniversary of the date of grant.
In January 2000, the company issued 40,000 warrants for the purchase of
Common Stock at $1.00 per share, which expire on December 31, 2001, to Greg W.
Johnson, a director of the Company, for consulting services to be provided by
Johnson to the Company.
Item 8. Description of Securities.
The following statements constitute a brief summary of the Company's
Certificate of Incorporation, as amended. Such summary does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Certificate of Incorporation.
The Company is authorized to issue 50,000,000 shares of Common Stock, with
no par value. As of the date hereof, there are 10,544,687 shares of Common
Stock outstanding, excluding shares reserved for issuance upon the conversion
of 100,000 shares of Preferred Stock into 1,000,000 shares of Common Stock and
the exercise of 2,169,206 warrants and 632,000 issued and outstanding Common
Stock options.
The holders of Common Stock are entitled to one vote per share with respect
to all matters on which holders of the Company's Common Stock are entitled to
vote, including the election of directors. The Common Stock does not have
cumulative voting rights and, therefore, holders of shares entitled to exercise
more than 50% of the voting power are able to elect 100% of the directors of
the Company. In the event of dissolution or liquidation or winding up the
Company's business, whether voluntary or involuntary, the holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and payment to the holders of the Company's Preferred Stock.
The Company is also authorized to issue 5,000,000 shares of non-voting
Convertible Preferred Stock, with no par value. As of the date hereof, there
are 100,000 shares of such Preferred Stock outstanding and each share is
convertible into ten shares of Common Stock at a conversion price of $1.00 per
share. The Company may redeem the preferred shares at $10.00 per share or
convert each preferred share into ten common shares, at the option of the
shareholder, at such time as the common shares are trading on a public exchange
at a closing price of $4.00 or above for a period of ten consecutive business
days. The holders of the Preferred Stock are entitled to a 10% stock dividend
paid annually in common shares beginning in November 2000. Under certain
conditions in the agreement with the Company's bank lender described in the
next paragraph, each preferred shareholder may elect to receive a cash dividend
in lieu of the Common Stock dividend.
Each share of Common Stock has an equal right to receive dividends when and
if the Board of Directors decides to declare a dividend after the payment of
any accrued dividends on Preferred Stock. Under its agreement with its bank
lender, if the Company generates adequate "cash flow" (net income plus
depreciation and amortization minus principal payments on non-lender
indebtedness as determined in accordance with Generally Accepted Accounting
Principles), it may pay up to 100% of its cash flow in cash dividends on its
capital stock. The Company has never paid cash dividends and does not
anticipate paying cash dividends in the foreseeable future on its Common Stock.
The holders of the Common Stock are not entitled to preemptive rights.
There are no conversion rights or redemption or sinking fund provisions with
respect to the Common Stock. All of the outstanding shares of Common Stock are
fully paid and non-assessable.
15
<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
The Company intends to apply for trading in the over-the-counter market and
for listing on the Over-The-Counter Pink Sheets.
From April through October of 1998, the Company sold through a Private
Placement 1,226,298 shares of no par value Common Stock and issued warrants,
which expire on October 31, 2000, to purchase 1,226,298 shares of Common Stock
at an exercise price of $1.50 per share. The Company accepted $754,502 in cash
and cancellation of debt and accrued interest in the amount of $165,221 as
consideration for the sale of the Common Stock and warrants.
From July through November of 1999, the Company sold through a Private
Placement 100,000 shares no par value non-voting Preferred Stock. Each share of
Preferred Stock is convertible into ten shares of Common Stock at a conversion
price of $1.00 per share. Each share of Preferred Stock is entitled to a 10%
stock dividend paid annually in common shares (one share of Common Stock for
each share of Preferred Stock) beginning in November 2000. Under its agreement
with the bank lender, if the Company generates adequate "cash flow," it may pay
up to 100% of its cash flow in cash dividends if a Preferred Stock shareholder
elects to receive cash rather than Common Stock. The Company accepted $965,000
in cash and cancellation of debt owed in the amount of $35,000 as consideration
for the sale of the Preferred Stock.
As of August 1, 2000, the Company had outstanding: (i) 100,000 shares of
Preferred Stock convertible into 1,000,000 shares of Common Stock at a
conversion price of $1.00 per share; (ii) 2,169,206 warrants to purchase an
aggregate of 2,169,206 shares of Common Stock at exercise prices ranging from
$0.50 to $1.50 per share; and (iii) options to purchase an aggregate of 632,000
shares of Common Stock at exercise prices ranging from $0.75 to $1.00 per
share.
As of August 1, 2000, the number of holders of the Company's Common Stock is
193.
The Company has never paid any cash dividends nor does it intend, in the
foreseeable future, to make any cash distributions to its Common Stockholders
as dividends.
Item 2. Legal Proceedings.
On November 19, 1999, the Company commenced litigation in the Court of
Common Pleas, Cuyahoga County, Ohio, against Petzone Products, Inc., a direct
competitor of the Company, and Shirish Patel, a principal/shareholder of
Petzone Products, Inc. The Company has alleged that the Defendants converted
certain trade secrets and committed fraud, for which they owe the Company
damages in excess of One Million Dollars ($1,000,000.00) in compensatory and
punitive remuneration. In answering the Company's complaint, the Defendants
also counter-claimed against the Company alleging that one of the Company's
products unfairly and deceptively competes with a product sold by Petzone
Products, Inc. Petzone asks for statutory damages, injunctive relief and for
its costs of suit. The Company answered Petzone's counterclaim denying all the
material allegations thereof. Discovery is set to be completed by the end of
June, with trial expected in October of 2000.
On or around May 3, 2000, litigation was commenced against the Company by
Sinitron, a supplier of certain Company mold designs, in the Franklin County
Municipal Court, Court of Small Claims Division. Sinitron has asked, through
two separate lawsuits, for relief in the sum of $3,424.18 plus interest for
services rendered to modify two Company molds. The Company has settled these
lawsuits, and will attempt to recoup the settlement payments in a separate
lawsuit against the supplier and others for negligence, fraud, and assorted
other tortious and contractual claims.
16
<PAGE>
On May 17, 2000, litigation was commenced against the Company in the Court
of Common Pleas, Summit County, Ohio by a supplier, Southern Polymer, Inc.
Numerous co-defendants exist as well, including the purchaser of the business
of a discontinued Company subsidiary, Sanar. The supplier seeks payment of
unpaid invoices in the amount of $79,339.60 plus interest. The Company's
position is that the purchaser of Sanar's assets has, by agreement,
contractually assumed this liability and is bound to indemnify and defend the
Company against this lawsuit. The purchaser is currently attempting to settle
this matter in a way that would also dispose of the claims against the Company.
On June 20, 2000 litigation was commenced against the Company in the Court
of Common Pleas, Summit County, Ohio by a supplier, Goldmark Plastics, Intl.
Numerous co-defendants exist as well, including the purchaser of the business
of the discontinued company subsidiary, Sanar. The supplier seeks payment of
unpaid invoices in the amount of $117,189.41 plus interest and costs. The
Company's position is that the purchaser of Sanar's assets has, by agreement,
contractually assumed this liability and is bound to indemnify the Company
against this lawsuit. Given the recent commencement of this action, it is not
yet known how matters will proceed.
On July 19, 2000, the Company commenced litigation in the Court of Common
Pleas, Cuyahoga County, Ohio, against Sinitron Corporation (a supplier of
certain Company mold designs), Jack Lemkin, owner and operator of Sinitron
Corporation, and a manufacturer, Bennett Plastics, Inc. The Company has alleged
against the Defendants breach of contract, negligence, unjust enrichment and
breach of warranty of fitness for a particular purpose. The Company did not
specify damages in its Complaint, but estimates compensatory and consequential
damages to exceed Five Hundred Thousand Dollars ($500,000.00). The Defendants
have yet to file their respective Answers. As this action has been recently
commenced, it is not yet known how matters will proceed.
In addition to the above matters and in the normal course of conducting its
business, the Company may become involved in various other litigation. The
Company is not a party to any litigation or governmental proceeding which its
management or legal representatives believe could result in any judgments or
fines against it that would have a material adverse effect or impact in the
Company's financial position, liquidity or results of operation.
Item 3. Changes in and Disagreements with Accountants.
During the company's two most recent calendar years or any later interim
period, there have been no changes in, or disagreements with, the Company's
principal independent accountant or a significant subsidiary's independent
accountant.
Item 4. Recent Sales of Unregistered Securities.
During the last three years, the Company has sold the following securities
without registering them under the Securities Act of 1933, as amended (the
"Securities Act").
From March 1997 through February 1998, Napro privately placed 1,529,577
shares of no par value common stock for which it accepted as consideration for
the sales $498,619 in cash and cancellation of debt and accrued expenses in the
amount of $156,581. Of the debt and accrued expenses converted, $120,000 was
from Dr. Steven Tsengas for debt and accrued interest owed to him. The common
stock was sold in reliance upon exemptions from registration provided by Rule
506 of Regulation D and Section 4(2) of the Securities Act. In connection with
the sales: Napro did not conduct any general advertisement or solicitation;
each purchaser was provided with a Confidential Memorandum for his or her
review prior to any sale; and each purchaser represented that, among other
things, the purchaser was an "accredited investor," as that term is defined in
Regulation D, and the purchaser was purchasing the shares for investment and
not with a view to distribution.
17
<PAGE>
In 1998, the Company sold through a Private Placement 1,226,298 shares of
no par value Common Stock, at an offering price of $.75 per share, and issued
warrants, which expire on October 31, 2000, to purchase 1,226,298 shares of
Common Stock. The exercise price of the warrants is $1.50 per share. The
Company accepted $754,502 in cash, and cancellation of debt and accrued
interest in the amount of $165,221, as consideration for the sale of the
Common Stock and warrants. Travis Morgan Securities, Inc. ("Travis Morgan"), a
registered NASD broker dealer based in California, served as the Company's
Agent for the Common Stock distribution for sale by various brokers and/or
dealers. The Company paid brokers or dealers a cash sales commission of 10%, a
fee for unaccountable expenses of 3% and issued them warrants, which expire on
October 31, 2000, to purchase 113,208 shares of Common Stock at an exercise
price of $0.825 per share. The Common Stock and warrants were sold in reliance
on exemptions from registration provided by Rule 504 of Regulation D and
Section 4(2) of the Securities Act. In connection with the sales: the Company
did not conduct any general advertisement or solicitation; each purchaser was
provided with a copy of the private placement memorandum for his or her review
prior to any sale; and each purchaser represented that, among other things,
the purchaser was an "accredited investor," as that term is defined in
Regulation D, and the purchaser was purchasing the shares for investment and
not with a view to distribution. Appropriate legends were affixed to the
certificates representing the shares.
In 1999, the Company sold through a Private Placement 100,000 shares of no
par value non-voting Convertible Preferred Stock, at an offering price of
$10.00 per share. Each share of Preferred Stock is convertible into ten shares
of Common Stock at a conversion price of $1.00 per share. The Company accepted
$965,000 in cash and cancellation of debt owed in the amount of $35,000 as
consideration for the sale of the Preferred Stock. Travis Morgan again served
as the Company's Agent for the Preferred Stock distribution for sale by
various brokers and/or dealers. The Company paid brokers or dealers a cash
sales commission of 8% and issued them warrants, which expire on October 31,
2004, to purchase 77,200 shares of Common Stock at an exercise price of $1.10
per share. The Preferred Stock was sold in reliance upon exemptions from
registration provided by Rule 504 of Regulations D and Section 4.2 of the
Securities Act. In connection with the sales: the Company did not conduct any
general advertisement or solicitation; each purchaser was provided with a copy
of the private placement memorandum for his or her review prior to any sale;
and each purchaser represented that, among other things, the purchaser was an
"accredited investor," as that term is defined in Regulation D, and the
purchaser was purchasing the shares for investment and not with a view to
distribution. Appropriate legends were affixed to the certificates
representing the shares.
To assist the Company in strategic business and marketing planning during
1999, the Company entered into consulting services agreements under which the
consultants received in June 1999, 68,224 shares of Common Stock valued at
$51,169. Included in the shares issued were 67,224 to Anthony O'Rourke, a
former director.
Item 5. Indemnification of Directors, Officers, and Others.
The Company's Certificate of Incorporation provides that the Board of
Directors shall have the power to:
A. Indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the Company), by reason of the fact
that he is or was a director, officer, employee or agent of the Company or
is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonable
incurred by him in connection with such action, suit or proceeding if he
acted in good faith and in a manner he reasonable believed to be in the
best interests of the Company and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement or conviction or upon a plea of nolo contendere or its
equivalent shall not of itself create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in the
best interests of the
18
<PAGE>
Company and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
B. Indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or
in the right of the Company to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee or agent of the
Company or is or was serving at the request of the Company as a director,
officer, employee or agent of the Company, partnership, joint venture,
trust or other enterprise against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in the best interests of the Company; but no
indemnification shall be made in respect of any claim, issue or matter as
to which such person has been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Company unless and only to
the extent that the court in which such action or suit was brought
determines upon application that, despite the adjudication of liability,
but in view of all circumstances of the case, such person if fairly and
reasonably entitled to indemnification for such expenses which such court
deems proper.
C. Indemnify a director, officer, employee or agent of the Company to
the extent that such person has been successful on the merits in defense of
any action, suit or proceeding referred to in Subparagraph A or B above or
in defense of any claim, issue, or matter therein, against expenses
(including attorney's fees) actually and reasonably incurred by him in
connection therewith.
D. Authorize indemnification under Subparagraph A or B above (unless
ordered by a court) in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in said Subparagraph A or B. Such determination shall be made by the
Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to such action, suit or proceeding, or, if such a
quorum is not obtainable or even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
by the shareholders.
E. Authorize payment of expenses (including attorney's fees) incurred in
defending a civil or criminal action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding as authorized in
Subparagraph D above upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount unless it is
ultimately determined that he is entitled to be indemnified by the Company
as authorized above.
The Company's Bylaws contains the following Indemnification provision:
Article VII.
Indemnification
No Officer or Directors shall be personally liable for any obligations of
the Corporation or for any duties or obligations arising out of any acts or
conduct of said Officer or Director performed for or on behalf of the
Corporation. The Corporation shall and does hereby indemnify and hold harmless
each person and his heirs and administrators who shall serve at any item
hereafter as a Director or Officer of the Corporation from and against any and
all claims, judgments and liabilities to which such persons shall become
subject by reason of his having heretofore or hereafter been a Director or
Officer of the Corporation, or by reason of any action alleged to have
heretofore or hereafter or omitted to have been taken by him as such Director
or Officer, and shall reimburse each such person for all legal and other
expenses reasonably incurred by him in connection with any such claim or
liability, including power to defend such persons from all suits or claims as
provided for under the provisions of the Nevada Revised Statutes; provided,
however, that no such persons shall be indemnified against, or be reimbursed
for, any expense incurred in connection with any claim or liability arising out
of his own negligence or willful misconduct. The rights accruing to any person
under the foregoing provisions of this section shall not exclude any other
right to which he may lawfully be entitled, nor shall
19
<PAGE>
anything herein contained restrict the right of the Corporation to indemnify or
reimburse such person in any proper case, even though not specifically herein
provided for. The Corporation, its Directors, Officers, employees and agents
shall be fully protected in taking any action or making any payment, or in
refusing so to do in reliance upon the advice of counsel.
As of August 1, 2000 the Company does not have, but reserves the right to
purchase and maintain, directors and officers insurance insuring its directors
and officers against any liability arising out of their status as such,
regardless of whether the Company has the power to indemnify such persons
against such liability under applicable law.
Insofar as indemnification for liabilities arising under the Securities
Exchange Act of 1934 may be permitted to directors, officers, and controlling
persons of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
PART F/S
The following financial statements are provided below:
. Unaudited consolidated financial statements for quarter ended March 31,
2000 and (audited) year ended December 31, 1999.
. Audited consolidated financial statements for the years ended December
31, 1999 and December 31, 1998.
20
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
FAIRPORT HARBOR, OHIO
FINANCIAL STATEMENTS
MARCH 31, 2000
21
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Consolidated Balance Sheets of Ourpet's Company and Subsidiaries as of
March 31, 2000 and December 31, 1999.................................. 22
Consolidated Statements of Income of Ourpet's Company and Subsidiaries
for the three month periods ended March 31, 2000 and 1999............. 23
Consolidated Statements of Stockholders' Equity of Ourpet's Company and
Subsidiaries for the three month period ended March 31, 2000.......... 24
Consolidated Statements of Cash Flows of Ourpet's Company and
Subsidiaries for the three month periods ended March 31, 2000 and
1999.................................................................. 25
Notes to Consolidated Financial Statements............................. 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations.........................................................
</TABLE>
22
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents.......................... $ 117,679 $ 108,324
Accounts receivable--trade, less allowance for
doubtful accounts of $ 33,168 and $ 30,768........ 809,302 771,885
Inventories........................................ 1,238,586 1,019,616
Prepaid expenses................................... 92,420 34,848
----------- -----------
Total current assets.............................. 2,257,987 1,934,673
----------- -----------
PROPERTY AND EQUIPMENT
Machinery and equipment............................ -- 1,729,031
Furniture and fixtures............................. 83,166 79,358
Vehicles........................................... 5,649 5,649
Leasehold improvements............................. 22,443 48,843
Tooling............................................ 962,713 727,977
Property held under capital leases................. 52,143 70,061
Construction in progress........................... 118,571 252,788
----------- -----------
Total............................................. 1,244,685 2,913,707
Less accumulated depreciation...................... 326,260 1,318,810
----------- -----------
Net property and equipment......................... 918,425 1,594,897
----------- -----------
OTHER ASSETS
Deposits........................................... 37,012 44,083
Loan acquisition costs, less amortization of $7,337
and $9,971........................................ 9,316 17,783
Patents, less amortization of $7,520 and $6.519.... 49,032 48,212
----------- -----------
Total other assets................................ 95,360 110,078
----------- -----------
Total assets...................................... $ 3,271,772 $ 3,639,648
=========== ===========
LIABILITIES
-----------
CURRENT LIABILITIES
Notes payable...................................... $ 700,644 $ 623,938
Current maturities of long-term debt............... -- 153,981
Current portion of capital lease obligations....... 14,474 11,131
Accounts payable--trade............................ 531,349 775,357
Accrued expenses................................... 206,813 155,428
----------- -----------
Total current liabilities......................... 1,453,280 1,719,835
----------- -----------
LONG-TERM DEBT
Long-term debt--less current portion above......... 200,000 690,893
Capital lease obligations--less current portion
above............................................. 25,497 34,258
----------- -----------
Total long-term debt.............................. 225,497 725,151
----------- -----------
Total liabilities................................. 1,678,777 2,444,986
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
COMMON STOCK, no par value; authorized 50,000,000
shares, issued and outstanding 10,544,687 and
10,294,687 shares.................................. 2,115,460 1,902,960
PREFERRED STOCK--no par value; authorized 5,000,000
shares, issued and outstanding 100,000 shares...... 913,150 913,150
PAID-IN CAPITAL..................................... 65,710 107,240
ACCUMULATED DEFICIT................................. (1,501,325) (1,728,688)
----------- -----------
Total stockholders' equity........................ 1,592,995 1,194,662
----------- -----------
Total liabilities and stockholders' equity........ $ 3,271,772 $ 3,639,648
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Net revenue.......................................... $ 1,424,677 $ 813,638
Cost of goods sold................................... 1,025,002 533,259
----------- -----------
Gross profit on sales................................ 399,675 280,379
Selling, general and administrative expenses......... 282,831 181,855
----------- -----------
Income from operations............................... 116,844 98,524
Interest and other income............................ 814 20,007
Interest expense..................................... (23,316) (14,456)
----------- -----------
Income from continuing operations.................... 94,342 104,075
Loss from operations of discontinued subsidiary...... (58,535) (73,733)
Gain on sale of discontinued subsidiary.............. 191,556 --
----------- -----------
Net income........................................... 227,363 30,342
Preferred Stock dividends............................ (41,530) --
----------- -----------
Net income applicable to Common Stock................ $ 185,833 $ 30,342
=========== ===========
Basic Income (Loss) Per Common Share:
Income from continuing operations.................. $ 0.01 $ 0.01
Loss from operations of discontinued subsidiary.... (0.01) (0.01)
Gain on sale of discontinued subsidiary............ 0.02 --
----------- -----------
Net income......................................... $ 0.02 $ --
=========== ===========
Weighted average number of common shares
outstanding....................................... 10,341,940 10,226,463
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------- ---------------------
Number Total
of Number of Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------- -------- ---------- ---------- -------- ----------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999................... 100,000 $913,150 10,294,687 $1,902,960 $107,240 $(1,728,688) $1,194,662
Common Stock issued in
exchange for
cancellation of debt... 100,000 100,000 100,000
Common Stock issued for
cash................... 150,000 112,500 112,500
Preferred Stock
dividends.............. (41,530) (41,530)
Net income.............. 227,363 227,363
------- -------- ---------- ---------- -------- ----------- ----------
Balance at March 31,
2000................... 100,000 $913,150 10,544,687 $2,115,460 $ 65,710 $(1,501,325) $1,592,995
======= ======== ========== ========== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations.................... $ 94,342 $ 104,075
Loss from discontinued operations.................... (58,535) (73,733)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation expense............................... 84,874 73,718
Amortization expense............................... 3,301 16,215
(Increase) decrease in assets:
Accounts receivable.............................. (300,034) 39,666
Deposits......................................... 7,071 (4,668)
Inventories...................................... (465,050) (211,242)
Patent costs..................................... (1,822) (7,203)
Prepaid expenses................................. (58,017) 32,630
Increase (decrease) in liabilities:
Accounts payable................................. 207,701 (110,411)
Accrued expenses................................. 24,220 15,138
---------- ----------
Net cash used in operating activities.......... (461,949) (125,815)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment................ (104,326) (24,400)
Gain on sale of discontinued subsidiary.............. 25,000 --
---------- ----------
Net cash used in investing activities.......... (79,326) (24,400)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt................. (42,175) (37,486)
Issuance of notes payable to shareholders............ -- 160,000
Issuance of notes payable............................ 483,275 84,978
Principal payments under capital lease obligations... (2,970) (2,911)
Issuance of Common Stock............................. 112,500 --
---------- ----------
Net cash provided by financing activities...... 550,630 204,581
---------- ----------
Net increase in cash........................... 9,355 54,366
CASH AT BEGINNING OF PERIOD............................ 108,324 103,429
---------- ----------
CASH AT END OF PERIOD.................................. $ 117,679 $ 157,795
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid........................................ $ 42,142 $ 38,919
SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS
Notes payable converted into Common Stock............ $ 100,000 $ --
Dividends accrued on Preferred Stock................. $ 41,530 $ --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented have been included. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and related
notes for the fiscal year ended December 31, 1999 included in the Company's
annual report on Form 10-KSB.
INVENTORIES
Inventories are carried at the lower of cost, first-in, first-out method or
market. Inventories at March 31, 2000 and December 31, 1999 consist of:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Finished goods......................................... $1,238,586 $ 875,278
Raw materials.......................................... 119,868
Production supplies.................................... 24,470
---------- ----------
Total................................................ $1,238,586 $1,019,616
========== ==========
</TABLE>
All inventories are pledged as collateral for bank and small business
administration loans
REVENUE RECOGNITION
With respect to revenue from product sales, revenue is recognized only upon
shipment of products to customers. The Company derives its revenues from the
sale of proprietary pet products under the OurPet's brand name.
For the three months ended March 31, 2000, 67.4% of the Company's revenue
was derived from two major customers. Revenue generated from each of these
customers amounted to $628,339 and $334,202, which represents 44.0% and 23.4%
of total revenue, respectively.
For the three months ended March 31, 1999, 46.0% of the Company's revenue
was derived from two major customers. Revenue generated from each of these
customers amounted to $280,261 and $96,857, which represents 34.2% and 11.8%
of total revenue, respectively.
NET INCOME PER COMMON SHARE
Basic net loss per Common Share is based on the net loss attributable to
common stockholders for the year, divided by the weighted average number of
common shares outstanding during the year. Potential common shares have not
been included since their effect would be antidilutive. Common shares that
could be potentially dilutive include 660,000 stock options, 2,169,206
warrants and 1,000,000 shares underlying the Preferred Stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133
27
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MARCH 31, 2000
(Unaudited)
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. FAS 133, as
amended by FAS 137, is effective for periods beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts.
Accordingly, FAS 133 is not expected to affect the Company's financial
statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Three Months ended March 31, 2000 Compared to Three Months ended March 31,
1999
Net revenue from continuing operations for 2000 was approximately $1,425,000
consisting of sales of proprietary products for the retail pet business as
compared to net revenue from continuing operations for 1999 of approximately
$814,000 for sales of the same proprietary products. This increase of $611,000
was mainly the result of a new dog feeder which was being marketed for the
first time in 2000.
Cost of goods sold was approximately $1,025,000 for 2000 compared to
approximately $533,000 for the prior year, representing an increase of
approximately $492,000 or 92.2% when net revenues increased by approximately
$611,000 or 75.1%. The larger percentage increase in cost of goods sold was
mainly due to lower gross margins realized when introducing new product, higher
freight costs incurred when shipping to individual locations of a pet store
chain, increased depreciation on the molds and tooling acquired to make new
products and increased rent for additional warehouse space.
As a result of the above increases in net revenue of $611,000 and in cost of
goods sold of $492,000, the Company's gross margin increased by approximately
$119,000 to a profit of $400,000 for 2000 compared to a profit of $281,000 for
1999. The increase in net revenue more than offset the higher costs incurred
for new product, freight, depreciation and rent.
Selling, general and administrative expenses increased by approximately
$101,000 to approximately $283,000 for 2000, as compared to approximately
$182,000 for 1999. This increase was primarily the result of increases in the
accrual for professional fees for accountants of $13,000, in marketing
promotions for products of $17,000, in commissions paid to sales
representatives of $16,000 due to increased sales, in the accrual for annual
customer rebates of $13,000 due to a new program started in 2000, in salaries
and wages of $13,000 for the increase in the sales and marketing staff, and the
accrual for the employee profit sharing of $18,000 for the new incentive
started in 2000.
Interest and other income decreased by approximately $19,000 to
approximately $1,000 for 2000, as compared to $20,000 for 1999 as a result of
the decrease in other income related to sub-contracted manufacturing operations
for one of the dog toy products in 2000.
Interest expense increased by approximately $9,000 to approximately $23,000
for 2000 from approximately $14,000 in 1999. This increase was mainly due to
the higher prime rate of interest charged for borrowings under the bank line of
credit and the issuance of notes payable to shareholders that were outstanding
in 2000 and not in 1999.
The loss from operations of the discontinued subsidiary decreased to
approximately $59,000 in 2000 from approximately $74,000 in 1999 or by $15,000.
The decreased loss was due to several factors, while net revenue
28
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--(Continued)
from outside customers decreased by approximately $23,000, the cost of goods
sold decreased by approximately $50,000 resulting in an increase in gross
profit on sales of $27,000, selling, general and administrative expenses
decreased by approximately $7,000, which were somewhat offset by an increase in
net interest and other income of approximately $19,000.
The Company sold the operations of the discontinued subsidiary as of March
31, 2000 with the buyer purchasing assets of approximately $1,211,000 and
assuming liabilities of approximately $1,378,000. The sale resulted in a gain
of approximately $192,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its continuing operations principally from bank debt
and the proceeds from equity financing. As of March 31, 2000, after the sale of
the operations of the discontinued subsidiary, the Company had approximately
$901,000 in principal amount of indebtedness (excluding $40,000 borrowed under
capital lease obligations), consisting of (I) approximately $701,000 principal
balance under the line of credit agreement with a bank, which bears interest at
the prime rate plus 2% and (ii) approximately $200,000 outstanding principal
amount under a note payable to a director, which bears interest at 10% and is
due on August 31, 2001. The Company's indebtedness is secured by liens on its
assets and the indebtedness has been used to finance its equipment and working
capital requirements. The agreements related to such indebtedness contain
customary covenants and default provisions.
Net cash used in operating activities for the three months ended March 31,
2000 was $461,949. Of this amount, net income for the quarter provided cash of
$124,882 net of non-cash charges for depreciation and amortization and cash was
used for the net change of $586,831 in our operating assets and liabilities,
consisting primarily of increases in accounts receivable and inventories which
were partially offset by an increase in accounts payable.
Net cash used in investing activities for the quarter was $79,326 with the
acquisition of property and equipment using $104,326 and the sale of the
discontinued subsidiary providing $25,000.
Net cash provided by financing activities for the quarter was $550,630 with
the net borrowings under the bank line of credit providing $483,275 and the
sale of Common Stock upon the exercise of a warrant providing $112,500. Cash
was used for the principal payments on long-term debt and capital lease
obligations in the amount of $45,145.
29
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
FAIRPORT HARBOR, OHIO
FINANCIAL STATEMENTS
DECEMBER 31, 1999
30
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Auditors......................................... 32
Consolidated Balance Sheets as of December 31, 1999 and December 31,
1998.................................................................. 33
Consolidated Statements of Operations for the years ended December 31,
1999 and December 31, 1998............................................ 34
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999 and December 31, 1998............................... 34
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and December 31, 1998............................................ 36
Notes to Consolidated Financial Statements............................. 37
</TABLE>
31
<PAGE>
Report of Independent Auditors
To the Stockholders and Board of Directors
OurPet's Company and Subsidiaries
We have audited the accompanying consolidated balance sheets of OurPet's
Company and Subsidiaries, a Colorado corporation, as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
Except as explained in the following paragraph, 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 consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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.
We did not observe the physical inventory (restated at $ 406,620) taken as
of December 31, 1997, since that date was prior to our initial engagement as
auditors for the Company, and the Company's records do not permit adequate
retroactive tests of those inventory quantities. Accordingly, the scope of our
work was not sufficient to enable us to express, and we do not express an
opinion on the statements of operations, stockholders' equity and cash flows
for the year ended December 31, 1998.
In our opinion, the accompanying balance sheets present fairly, in all
material respects, the consolidated financial position of OurPet's Company and
Subsidiaries as of December 31, 1999 and 1998, and the consolidated results of
their operations and cash flows for the year ended December 31, 1999 in
conformity with generally accepted accounting principles.
S. R. Snodgrass, A.C.
Certified Public Accountants
Mentor, Ohio
February 17, 2000, except for the
footnote for subsequent event as
to which the date is March 31, 2000
32
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -------------
(As Restated)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents.......................... $ 108,324 $ 103,429
Accounts receivable--trade, less allowance for
doubtful accounts of $ 30,768 and $ 45,394........ 771,885 649,883
Inventories........................................ 1,019,616 731,111
Prepaid expenses................................... 34,848 65,191
----------- -----------
Total current assets.............................. 1,934,673 1,549,614
----------- -----------
PROPERTY AND EQUIPMENT
Machinery and equipment............................ 1,729,031 1,728,109
Furniture and fixtures............................. 79,358 62,509
Vehicles........................................... 5,649 5,649
Leasehold improvements............................. 48,843 47,693
Tooling............................................ 727,977 491,884
Property held under capital leases................. 70,061 67,984
Construction in progress........................... 252,788 36,088
----------- -----------
Total............................................. 2,913,707 2,439,916
Less accumulated depreciation...................... 1,318,810 1,033,423
----------- -----------
Net property and equipment......................... 1,594,897 1,406,493
----------- -----------
OTHER ASSETS
Deposits........................................... 44,083 24,356
Loan acquisition costs, less amortization of $9,971
and $771.......................................... 17,783 26,983
Organization costs, less amortization of $35,286
and $27,028....................................... -- 8,258
Patents, less amortization of $6,519 and $3,955.... 48,212 44,370
----------- -----------
Total other assets................................ 110,078 103,967
----------- -----------
Total assets...................................... $ 3,639,648 $ 3,060,074
=========== ===========
LIABILITIES
-----------
CURRENT LIABILITIES
Notes payable...................................... $ 623,938 $ 498,787
Current maturities of long-term debt............... 153,981 150,949
Current portion of capital lease obligations....... 11,131 12,207
Accounts payable--trade............................ 775,357 666,877
Accrued expenses................................... 155,428 282,460
----------- -----------
Total current liabilities......................... 1,719,835 1,611,280
----------- -----------
LONG-TERM DEBT
Long-term debt--less current portion above......... 690,893 644,874
Notes payable to related parties................... -- 200,000
Capital lease obligations--less current portion
above............................................. 34,258 30,864
----------- -----------
Total long-term debt.............................. 725,151 875,738
----------- -----------
Total liabilities................................. 2,444,986 2,487,018
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
COMMON STOCK
No par value; authorized 50,000,000 shares, issued
and outstanding 10,294,687 and 10,226,463 shares.. 1,902,960 1,851,791
PREFERRED STOCK
No par value; authorized 5,000,000 shares, issued
and outstanding 100,000 shares.................... 913,150 --
PAID-IN CAPITAL..................................... 107,240 107,240
ACCUMULATED DEFICIT................................. (1,728,688) (1,385,975)
----------- -----------
Total stockholders' equity........................ 1,194,662 573,056
----------- -----------
Total liabilities and stockholders' equity........ $ 3,639,648 $ 3,060,074
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
Ended December 31,
--------------------------
1999 1998
----------- -------------
(As Restated)
<S> <C> <C>
NET REVENUE......................................... $ 3,063,144 $2,777,109
COST OF GOODS SOLD.................................. 2,425,203 2,130,793
----------- ----------
Gross profit on sales............................. 637,941 646,316
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 978,950 732,873
----------- ----------
Loss from operations.............................. (341,009) (86,557)
----------- ----------
OTHER INCOME (EXPENSE)
Interest and other income......................... 41,459 56,786
Interest expense.................................. (74,357) (43,851)
----------- ----------
Total other income (expense).................... (32,898) 12,935
----------- ----------
LOSS FROM CONTINUING OPERATIONS..................... (373,907) (73,622)
LOSS FROM OPERATIONS OF DISCONTINUED SUBSIDIARY..... (359,473) (81,007)
----------- ----------
Loss before extraordinary item.................. (733,380) (154,629)
EXTRAORDINARY ITEM--GAIN ON EXTINGUISHMENT OF DEBT.. 390,667 --
----------- ----------
Net loss........................................ $ (342,713) $ (154,629)
=========== ==========
BASIC LOSS PER COMMON SHARE:
Loss from continuing operations................... $ (0.04) $ (0.01)
Loss from operations of discontinued subsidiary... (0.03) (0.01)
----------- ----------
Loss before extraordinary item.................... (0.07) (0.02)
Extraordinary item................................ 0.04 --
----------- ----------
Net loss.......................................... $ (0.03) $ (0.02)
=========== ==========
Weighted average number of common shares
outstanding...................................... 10,263,659 9,104,353
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------- ---------------------
Number Total
of Number of Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------- -------- ---------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1998, as previously
reported............... -- $ -- 1,001,363 $ 884,351 $107,240 $(1,129,685) $ (138,094)
Prior period
adjustments............ -- -- -- -- -- (101,661) (101,661)
------- -------- ---------- ---------- -------- ----------- ----------
Balance at January 1,
1998 as restated....... -- -- 1,001,363 884,351 107,240 (1,231,346) (239,755)
Additional shares issued
in reverse takeover.... -- -- 7,634,492 -- -- -- --
Common Stock issued in
private placement, net
of issuance costs...... -- -- 1,006,002 646,219 -- -- 646,219
Common Stock issued in
exchange for
cancellation of debt
and accrued interest... -- -- 373,076 230,603 -- -- 230,603
Common Stock issued for
cash................... -- -- 211,530 90,618 -- -- 90,618
Net loss................ -- -- -- -- -- (154,629) (154,629)
------- -------- ---------- ---------- -------- ----------- ----------
Balance at December 31,
1998................... -- -- 10,226,463 1,851,791 107,240 (1,385,975) 573,056
Preferred Stock issued
in private placement,
net of issuance costs.. 100,000 913,150 -- -- -- -- 913,150
Common Stock issued in
payment for services... -- -- 68,224 51,169 -- -- 51,169
Net loss................ -- -- -- -- -- (342,713) (342,713)
------- -------- ---------- ---------- -------- ----------- ----------
Balance at December 31,
1999................... 100,000 $913,150 10,294,687 $1,902,960 $107,240 $(1,728,688) $1,194,662
======= ======== ========== ========== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-----------------------
1999 1998
--------- ------------
(As Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations..................... $(373,907) $ (73,622)
Loss from discontinued operations................... (359,473) (81,007)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation expense............................... 311,822 266,224
Amortization expense............................... 31,120 24,958
Common Stock issued for services................... 51,169 --
Extraordinary item................................. 390,667 --
(Increase) decrease in assets:
Accounts receivable.............................. (122,002) (139,255)
Deposits......................................... (19,727) (22,567)
Inventories...................................... (288,505) (356,145)
Loan acquisition costs........................... -- (27,754)
Patent costs..................................... (17,504) (19,336)
Prepaid expenses................................. 30,343 19,409
Increase (decrease) in liabilities:
Accounts payable................................. 108,480 (85,570)
Accrued expenses................................. (127,032) 47,226
--------- ---------
Net cash used in operating activities.......... (384,549) (447,439)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment............... (483,149) (268,360)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt.......................... -- 525,000
Principal payments on long-term debt................ (150,949) (708,636)
Issuance of notes payable to shareholders........... 360,000 185,000
Payment and cancellation of notes payable to
shareholders....................................... (225,000) (29,125)
Issuance of notes payable........................... 25,151 482,670
Payment of notes payable............................ -- (480,002)
Principal payments under capital lease obligations.. (14,759) (10,633)
Issuance of Common Stock, net of offering costs..... -- 736,837
Issuance of Preferred Stock, net of offering costs.. 878,150 --
--------- ---------
Net cash provided by financing activities...... 872,593 701,111
--------- ---------
Net increase (decrease) in cash................ 4,895 (14,688)
CASH AT BEGINNING OF YEAR............................. 103,429 118,117
--------- ---------
CASH AT END OF YEAR................................... $ 108,324 $ 103,429
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid....................................... $ 184,010 $ 146,976
========= =========
SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS
Purchase of equipment through capital lease
agreements......................................... $ 17,077 $ 18,443
========= =========
Notes payable converted into Preferred Stock........ $ 35,000 $ --
========= =========
Long-term debt and accrued interest converted into
Common Stock....................................... $ -- $ 230,603
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations--OurPet's Company's (the "Company")
management originally founded Napro, Inc. ("Napro"), an Ohio corporation, in
1985 as an enterprise for launching new ventures and acquiring companies in
various lines of business. On April 30, 1993 Napro acquired the assets of a
small blow molding business, Gorman Plastics, which has been accounted for as
a purchase. In February 1996 Napro placed these assets in a newly formed
wholly owned Ohio subsidiary, Sanar Manufacturing Company ("Sanar"). Also in
February 1996 Napro formed another wholly owned Ohio subsidiary, Virtu Company
("Virtu") to market proprietary products to the retail pet business under the
OurPet's label. Napro then changed its name to OurPet's Company effective
March 19, 1998. Sanar manufactures custom blow molded parts for customers in
the lawn equipment, toy, medical accessory and automotive industries in
addition to producing some of Virtu's proprietary products. Virtu develops and
markets products for improving the health, safety, comfort and enjoyment of
dogs, cats, birds and other small pets.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of the Company and both of its wholly owned subsidiaries.
Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Policy of Cash Equivalents--For purposes of the financial statements, cash
equivalents include time deposits, certificates of deposit and all highly
liquid debt instruments with original maturities of three months or less.
Inventory--Inventories are carried at the lower of cost, first-in, first-
out method or market. Inventories at December 31, 1999 and December 31, 1998
consist of:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Finished goods........................................... $ 875,278 $562,917
Raw materials............................................ 119,868 146,896
Production supplies...................................... 24,470 21,298
---------- --------
Total.................................................. $1,019,616 $731,111
========== ========
</TABLE>
All inventories are pledged as collateral for bank and small business
administration loans.
Property and Equipment--Property and equipment are reported at cost.
Depreciation is provided by using the straight-line and accelerated methods
over the estimated useful lives of the assets, which range from 5 to 39 years.
All property and equipment is pledged as collateral for bank and small
business administration loans. Total depreciation for the years ended December
31, 1999 and 1998 was $ 311,822 and $ 266,224, respectively.
Loan Acquisition Costs --Loan acquisition costs are being amortized on the
straight-line method over the term of the respective loans.
Organization Costs--Organization costs are being amortized on the straight-
line method over 5 years.
37
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Patents--Virtu has filed for patents for its proprietary products. The costs
incurred have been capitalized and are being amortized over 15 years. All
patents are pledged as collateral for bank loans
Revenue Recognition--With respect to revenue from product sales, revenue is
recognized only upon shipment of products to customers. The Company derives its
revenues from the sale of proprietary pet products under the OurPet's brand
name.
For the year ended December 31, 1999, 26.1% of the Company's revenue was
derived from one major customer. Revenue generated from this customer amounted
to $ 803,820.
For the year ended December 31, 1998, 43.2% of the Company's revenue was
derived from two major customers. Revenue generated from each of these
customers amounted to $ 910,274 and $ 295,016, which represents 32.6% and 10.6%
of total revenue, respectively.
Research and Development Costs--Research and development costs are charged
to operations when incurred and are included in operating expenses. The amount
charged for the years ended December 31, 1999 and 1998 was $ 52,385 and $
47,328, respectively.
Advertising Costs--Advertising costs are charged to operations when the
advertising first takes place. Advertising expense for the years ended December
31, 1999 and 1998 was $ 90,182 and $ 143,102, respectively.
Net Loss Per Common Share--Basic net loss per Common Share is based on the
net loss attributable to common stockholders for the year, divided by the
weighted average number of common shares outstanding during the year. Potential
common shares have not been included since their effect would be antidilutive.
Common shares that could be potentially dilutive include 600,000 stock options,
2,379,206 warrants and 1,000,000 shares underlying the Preferred Stock.
Fair Value of Financial Instruments--Fair value estimates discussed herein
are based upon certain market assumptions and pertinent information available
to management as of December 31, 1999. The respective carrying value of certain
on balance sheet financial instruments approximated their fair values. These
financial instruments include cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses. The fair value of the Company's long-
term debt is estimated based upon the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of the
same remaining maturities. The carrying value approximates the fair value of
the debt.
Recent Accounting Pronouncements--In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS
133 requires companies to recognize all derivative contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. FAS 133,
as amended by FAS 137, is effective for periods beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts.
Accordingly, FAS 133 is not expected to affect the Company's financial
statements.
Reclassifications--Certain reclassifications have been made to the prior
year financial statements to conform to the current year presentation.
Income Taxes--The Company has available net operating loss carryforwards.
Following is a list of losses by year with expiration dates:
38
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Loss
Year Loss Expires
---- -------- -------
<S> <C> <C>
1995........................................................ $374,001 2010
1996........................................................ 259,811 2011
1997........................................................ 464,680 2012
1998........................................................ 150,362 2018
1999........................................................ 438,085 2019
</TABLE>
NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Note payable--Bank, open $ 1,000,000 line of credit with
interest at prime plus 2% (10.5% at December 31, 1999
and 9.75% at December 31, 1998). The note is secured by
accounts receivable, equipment, inventory, trademark,
patents and the personal guarantee of a stockholder.... $ 244,969 $ 323,515
Note payable--Bank, open $ 500,000 line of credit with
interest at prime plus 2% (10.5% at December 31, 1999
and 9.75% at December 31, 1998). The note is secured by
inventory, equipment, receivables, trademarks, patents
and the personal guarantee of a stockholder............ 278,969 175,272
Note payable--Small Business Administration $ 270,000 in
1993, due in monthly installments of $ 3,121 beginning
January 1, 2000 and $2,987 beginning September 1, 2002
through October 1, 2003 including interest at 5.244%.
This note is secured by accounts receivable, inventory,
property and equipment, and the personal guarantee of
certain stockholders................................... 122,608 151,858
Note payable--Small Business Administration, bridge note
increased to $ 175,000 in 1995, due in monthly
installments of $ 2,180 beginning January 1, 2000 and
$2,089 beginning September 1, 2002 through May 1, 2005
including interest at 6.999%. This note is secured by
various equipment purchases, and the personal guarantee
of certain stockholders................................ 111,016 127,715
Note payable--Bank, $ 525,000 in 1998 due in 35 monthly
payments of $ 8,750 through October 1, 2001 and a final
payment of $ 218,750 on November 1, 2001, plus interest
at prime plus 2.25% (10.75% at December 31, 1999 and
10% at December 31, 1998). This note is secured by a
blanket lien on all assets and the personal guarantee
of a stockholder....................................... 411,250 516,250
Note payable--director, due on August 31, 2001, interest
at 10% payable at maturity. This note is subordinated
to the bank loans...................................... 200,000 --
Note payable--shareholder, $ 50,000 due on demand.
Interest is payable quarterly at prime plus 1.5% (9.25%
at December 31, 1998). The note is subordinated to the
bank loans............................................. -- 50,000
---------- ----------
1,468,812 1,494,610
Less current portion of long-term debt.................. 777,919 649,736
---------- ----------
$ 690,893 $ 844,874
========== ==========
Note payable--director, due on August 1, 2000, interest
at 10% payable at maturity. This note is subordinated
to the bank loans...................................... 100,000 --
Note payable--shareholder, $ 150,000 due on demand.
Interest is payable quarterly at 7%. This note is
subordinated to the bank loans......................... -- 150,000
</TABLE>
39
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ ----------
<S> <C>
2000............................................................ $ 777,919
2001............................................................ 558,387
2002............................................................ 54,395
2003............................................................ 47,078
2004............................................................ 22,999
Thereafter...................................................... 8,034
----------
$1,468,812
==========
</TABLE>
The bank and small business administration loan agreements contain various
restrictive and customary covenants and default provisions under which the
Company must obtain permission from its lenders to (i) purchase or retire any
of its capital stock; (ii) pay dividends in cash on any of its capital stock
in excess of 100% of its cash flow (defined as net income plus depreciation
and amortization minus principal payments on non-lender indebtedness as
determined in accordance with Generally Accepted Accounting Principles); (iii)
exceed $ 200,000 annually for capital expenditures; and (iv) pay officers and
directors annual aggregate compensation in excess of $ 250,000. In addition,
the Company must follow certain other requirements as to maintaining a minimum
cash flow ratio and an adjusted tangible net worth.
On March 1, 1999, the Company borrowed $ 60,000 from three stockholders of
the Company for working capital purposes at an annual interest rate of 10%.
The notes and accrued interest were paid on September 1, 1999 with $ 25,000 in
principal being paid in cash and $ 35,000 in principal being converted into
Convertible Preferred Stock. Also on June 30, 1999, the Company borrowed $
20,000 from an officer and significant stockholder of the Company for working
capital purposes at an annual interest rate of 9% which was paid with accrued
interest on November 3, 1999 in cash.
On February 1, 1999, The Company borrowed $ 100,000 from a director and
stockholder of the Company for working capital purposes at an annual interest
rate of 10% and is due on August 1, 2000. In addition, the lender received
50,000 warrants for the purchase of Common Stock at $ 0.75 per share.
On September 1, 1999, the Company borrowed $ 200,000 from the same director
and stockholder of the Company for working capital purposes at an annual
interest rate of 10% and is due on August 31, 2001. In addition, the lender
received 100,000 warrants for the purchase of Common Stock at $ 1.00 per
share.
RELATED PARTY TRANSACTIONS
The Company leases production, warehouse and office facilities from a
related entity, Senk Properties. Current monthly rentals are $ 10,940 with
annual increases of approximately 3% plus real estate taxes. The term of the
lease was for five years ending on May 31, 1998 and it has been extended for
an additional term of twenty-five years, in five-year increments. Lease
expense for the years ended December 31, 1999 and 1998 was $ 138,795 and $
134,464, respectively.
The Company owes Senk Properties for past due rent in the amount of $
26,869 at December 31, 1999.
MERGER
On July 16, 1998, Manticus, Inc. ("Manticus") obtained all of the
outstanding shares of OurPet's Company in exchange for 8,000,000 shares of
common stock of Manticus in a transaction accounted for as a
40
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pooling of interests. After the transaction, the holders of the former OurPet's
shares owned approximately 89% of the shares of Manticus, resulting in a
reverse takeover. On October 12, 1998, Manticus changed its name to OurPet's
Company. After the merger, management of the former OurPet's Company continued
to manage the new OurPet's Company.
EXTRAORDINARY ITEM
During 1999, the Company recorded a gain on the extinguishment of debt as a
result of an officer and a stockholder canceling $ 232,607 in debt and accrued
interest owed to them and a related party canceling $ 158,060 in accrued
rentals owed to it. These transactions resulted in an extraordinary gain of $
390,667 or $ 0.04 per share.
CAPITAL STOCK
From April through October 1998, the Company sold in a Private Placement
1,226,298 shares of no par value Common Stock and issued warrants, which expire
in October, 2000, to purchase 1,226,298 shares of Common Stock at an exercise
price of $ 1.50 per share. The Company accepted $ 754,502 in cash and
cancellation of debt and accrued interest in the amount of $ 165,221 as
consideration for the sale of the Common Stock and warrants. Of the debt
converted, $ 133,963 was from two significant directors and/or stockholders of
the Company who converted all of the debt and accrued interest owed to them.
The Company paid brokers or dealers a cash sales commission of 10%, a fee for
unaccountable expenses of 3% and issued them warrants, which expire on October
31, 2000, to purchase 113,208 shares of Common Stock at an exercise price of $
0.825 per share.
Also in 1998, prior to the Private Placement, Napro sold 364,310 shares of
its common stock for which it accepted $ 90,618 in cash and cancellation of
debt and accrued expenses in the amount of $ 65,382 as consideration for the
sale. Of the consideration received, $ 52,800 in debt and accrued expenses was
from a significant director, officer and stockholder of Napro.
From July through November 1999, the Company sold in a Private Placement
100,000 shares of no par value non-voting Convertible Preferred Stock. Each
share of the Preferred is convertible into ten shares of Common Stock at a
conversion price of $1.00 per share. The Company may redeem the preferred
shares at $ 10 per share or convert each preferred share into ten common
shares, at the option of the shareholder, at such time as the common shares are
trading on a public exchange at a closing price of $ 4.00 or above for a period
of ten consecutive business days. The holders of the Preferred are entitled to
a 10% stock dividend paid annually in common shares beginning twelve months
from the final close of the Private Placement. Under certain conditions, each
Preferred shareholder may elect to receive a cash dividend in lieu of the
Common Stock dividend. The Company accepted $ 965,000 in cash and cancellation
of debt owed to two stockholders of the Company in the amount of $ 35,000 as
consideration for the sale of the Preferred. The Company paid brokers or
dealers a cash sales commission of 8% and issued them warrants, which expire on
October 31, 2004, to purchase 77,200 shares of Common Stock at an exercise
price of $ 1.10 per share.
WARRANTS
At December 31, 1999, the Company had the following Common Stock purchase
warrants outstanding, all of which were exercisable:
41
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Number Exercise
of Shares Price Expiration Date
--------- -------- -----------------
<S> <C> <C> <C>
1998 Private Placement:
Subscribers............................ 1,226,298 $ 1.500 October 31, 2000
Brokers or dealers..................... 113,208 0.825 October 31, 2000
Lenders' financing..................... 277,500 0.750 October 31, 2000
Others................................. 35,000 0.500 October 31, 2000
1999 Private Placement to brokers or
dealers................................. 77,200 1.100 October 31, 2004
1999 Notes payable to Director........... 150,000 0.750 July 31, 2001 and
& 1.000 August 31, 2001
1999 Issuance to related parties......... 500,000 1.000 December 14, 2004
---------
Total................................ 2,379,206
=========
</TABLE>
STOCK OPTIONS
On December 4, 1999, the Board of Directors approved the 1999 Stock Option
Plan subject to shareholder approval. This Plan replaced the prior plan and
provided that the options previously granted to key employees would be
exchanged for options with substantially similar terms. Stock options may be
granted at the discretion of the Board of Directors for which the Company has
reserved 850,000 shares of its Common Stock for issuance upon the exercise of
options granted under the Plan. The options vest one-third on each of the
second, third and fourth anniversaries of the date of grant and expire of the
fifth anniversary of the date of grant. The Company grants stock options at
exercise prices equal to or greater than the fair market value of the Company's
Common Stock on the date of grant.
The following table summarizes the activity in options under the Plan:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Shares Price
------- --------
<S> <C> <C>
Outstanding at January 1, 1998.............................. 140,000 $.75
Granted................................................... 450,000 .75
Exercised................................................. -- --
Forfeited................................................. -- --
-------
Outstanding at December 31, 1998............................ 590,000 .75
Granted................................................... 170,000 .84
Exercised................................................. -- --
Forfeited................................................. 160,000 .75
-------
Outstanding at December 31, 1999............................ 600,000 .78
=======
</TABLE>
The following table summarizes options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Number Average Remaining
of Exercise Contractual
Range Shares Price Life
----- ------- -------- -----------
<S> <C> <C> <C>
$0.75-$1.00 600,000 $0.80 4.9 years
</TABLE>
There were no options exercisable at December 31, 1999.
42
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CAPITAL LEASES
The Company is the lessee of equipment under capital leases expiring in
various years through 2004. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease payments
or the fair value of the asset. The assets are amortized on a straight-line
basis over their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in depreciation
expense in 1999 and 1998 was $ 11,554 and $ 11,300, respectively.
A summary of property held under capital leases, included in property,
plant and equipment, is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Office equipment......................................... $ 17,077 $ 15,000
Production equipment..................................... 36,361 36,361
Vehicle.................................................. 16,623 16,623
-------- --------
70,061 67,984
Less: accumulated amortization........................... (25,910) (27,358)
-------- --------
Total.................................................. $ 44,151 $ 40,626
======== ========
</TABLE>
Minimum future lease payments under operating leases, together with the
present value of the net minimum lease payments for capitalized leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
----------- ---------
<S> <C> <C>
2000................................................... $15,198 $208,490
2001................................................... 15,510 146,579
2002................................................... 7,944 150,519
2003................................................... 12,276 63,354
2004................................................... 4,114 --
------- --------
Total minimum lease payments......................... 55,042 $568,942
========
Less: Amount representing interest..................... (9,653)
-------
Present value of net minimum lease payments.......... $45,389
=======
</TABLE>
Interest rates on capitalized leases vary from 9.1% to 16% and are imputed
based on the lower of the Company's incremental borrowing rate at the
inception of each lease or the lessor's implicit rate of return.
Total rent expense of the Company for the years ended December 31, 1999 and
1998 was $ 224,736 and $ 192,046, respectively
PRIOR PERIOD ADJUSTMENTS
The accumulated deficit at the beginning of 1998 has been adjusted to
correct for the following errors made in a prior year, which had no effect on
the net loss for 1998:
<TABLE>
<S> <C>
Overstatement of inventory at December 31, 1997................. $ (76,870)
Elimination of intercompany inventory profit at December 31,
1997........................................................... (31,654)
Correct prior year's depreciation............................... 8,640
Record capital leases from prior years.......................... (1,777)
---------
Total......................................................... $(101,661)
=========
</TABLE>
43
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PRIOR PERIOD ADJUSTMENT (CONTINUED)
The accompanying consolidated financial statements for 1998 have been
restated to correct an error in recording the elimination of intercompany
inventory profit made at December 31, 1998. The effect of the restatement was
to increase the loss from continuing operations, loss before extraordinary
item, and net loss for 1998 by $ 77,074 ($ 0.01 per share).
LITIGATION
In November 1999, the Company commenced litigation in the Cuyahoga County
Common Pleas Court, State of Ohio, against a direct competitor. The Company
alleged in its complaint, among other things, conversion of trade secrets and
fraud, and seeks damages in excess of $ 1,050,000. The competitor has served an
answer alleging affirmative defenses and counterclaims against the Company for
unfair competition and deceptive trade practices. The competitor seeks to
recover lost profits and statutory damages and for injunctions prohibiting the
Company from continuing to market and sell their product.
In addition to the above matter and in the normal course of conducting its
business, the Company may become involved in various other litigations. The
Company is not a party to any litigation or governmental proceeding which its
management believes could result in any judgments or fines against it that
would have a material adverse affect on the Company's financial position,
liquidity or results of operations.
SUBSEQUENT EVENT
On December 4, 1999, the Company adopted a formal plan to sell the business
of its subsidiary, Sanar Manufacturing Company ("Sanar"). As of March 31, 2000,
the Company sold the assets of Sanar. The assets sold consisted primarily of
accounts receivable, inventories, property and equipment and the assumption of
notes payable, long-term debt, and accounts payable. The closing has been
escrowed pending the purchaser's refinancing of the long-term debt. The selling
price was $100,000 in the form of cash and notes.
Operating results of the business of Sanar for the years ended December 31,
1999 and 1998 are shown separately in the accompanying consolidated statements
of operations.
Net revenue of the business of Sanar for the years ended December 31, 1999
and 1998 were $ 2,254,880 and $ 1,978,475 excluding intercompany transactions.
These amounts are not included in net revenue in the accompanying consolidated
statements of operations.
Assets and liabilities of the business of Sanar that were sold consisted of
the following at their face amounts at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Accounts receivable.................................... $ 239,279 $ 214,383
Inventories............................................ 222,590 220,237
Property and equipment................................. 763,403 945,144
---------- ----------
Total assets......................................... $1,225,272 $1,379,764
========== ==========
Notes payable.......................................... $ 278,970 $ 175,272
Accounts payable....................................... 434,987 419,902
Long-term debt......................................... 648,479 809,578
---------- ----------
Total liabilities.................................... $1,362,436 $1,404,752
========== ==========
</TABLE>
44
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: June 30, 2000 OurPet's Company
By: /s/ Steven Tsengas
___________________________________
Steven Tsengas
Chairman, President and
Chief Executive Officer
45
<PAGE>
PART III
Item 1. Index to Exhibits.
(2) Charter and Bylaws
(3) Instruments defining the rights of security holders
(5) Voting Trust Agreement--Not Applicable
(6) Material Contracts
(7) Material Foreign Patents--Not Applicable
(12) Additional Exhibits
(27) Financial Data Schedules
Item 2. Description of Exhibits.
<TABLE>
<C> <S>
2.1 Articles of Incorporation of Manticus, Inc., dated May 23, 1996.
2.1.1 Articles of Amendment to the Articles of Incorporation of Manticus,
Inc., changing the name of the corporation to "OurPets Company",
effective September 1, 1998.
2.1.2 Articles of Amendment to the Articles of Incorporation of Manticus,
Inc., nka OurPet's Company, reflecting changes to the corporation's
capital structure, adopted July 20, 1999.
2.2 Bylaws of Manticus, Inc.
3.1 Common Stock Certificate.
3.2 Preferred Stock Certificate.
3.3 Promissory Note dated September 1, 1999 for $200,000, made by the
Company to Joseph T. Aveni.
6.1 Asset Purchase Agreement, dated March 31, 2000, between Akon Plastic
Enterprises, Inc. and Sanar Manufacturing Company, a wholly-owned
subsidiary of OurPets Company.
6.2 Indemnity Agreement, dated March 31, 2000, between Indemniters, Akon
Plastic Enterprises, Inc. and David Harman, and Indemnitees, OurPet's
Company, Steven Tsengas, Evangelia Tsengas, Nicholas Tsengas, and
Konstantine Tsengas.
6.3 Noncompetition Agreement, dated March 31, 2000, between Akon Plastic
Enterprises, Inc. and OurPet's Company and Dr. Steven Tsengas.
6.4 Lease Agreement dated March 17, 1993, with Addendums, between Senk
Properties and GPI Division, NAPRO, Inc.
6.5 Letter dated February 14, 1998, to Anthony O'Rourke from Konstantine
("Dean") Tsengas and Steve Tsengas regarding sales commission, sales
consulting and Board participation.
6.6 Letter from Company to Greg Johnson dated October 12, 1999 regarding
consulting services.
6.7 Lease Agreement dated June 24, 1999 between W.E.B. Developers, Inc. and
the Company.
6.8 1999 Stock Option Plan.
6.9 Standard Option Agreement.
6.10 Standard Common Stock Purchase Warrant.
</TABLE>
46
