<PAGE>
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United States
Securities and Exchange Commission
Washington, DC 20549
----------------
Form 10SB/A
Amendment No. 1
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 disposition 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.
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<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 manufactured 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 entered into an
asset purchase agreement with Akon Plastic Enterprises, Inc. ("Akon"), an Ohio
corporation. The closing was escrowed pending the Akon's refinancing of the
long-term debt, however, Akon assumed immediate responsibility for Sanar's
outstanding obligations and promptly began operating under Sanar's name. Akon
subsequently failed to obtain refinancing of the long-term debt and notified
the Company on September 29, 2000 of its intent to rescind the agreement and to
wind down its operations and go out of business.
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
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The Company sells its products in these market segments:
mass retailers--Wal-Mart, Kmart, Target
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--American Pet Products,
Central Garden & Pet
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, 46 general merchandise
independent sales agents, 12 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. For the
nine months ended September 30, 2000, 60.4% of the Company's revenue was
derived from two major customers. Revenue generated from each of these
customers amounted to $1,281,714 and $693,484, which represents 39.2% and 21.2%
of total revenue, respectively.
The Company has been granted five United States patents for dog and cat
feeders and has six 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 six 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
393,107 March 31, 1998 Small Animal Feeder
6,032,615 March 7, 2000 Amusement Device for
Household Pets, such as Cats
6,158,390 Dec. 12, 2000 Pet Ball
Patent applications that are pending are:
<CAPTION>
Serial No. File Date Title
---------- --------- -----
<S> <C> <C>
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 June 9, 2000 Food and Treat Dispenser
</TABLE>
3
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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
The following trademark registration applications are pending:
<CAPTION>
Serial
Number Dated Filed Name
------- ----------- ----
<S> <C> <C>
75/234,325 January 31, 1997 Wufer Ball
75/669,706 March 29, 1999 DeliDome
75/666,216 March 23, 1999 Play-N-Squeak
75/813,038 September 29, 1999 Molecuball
76/016,936 April 4, 2000 Trek-N-Treat
76/153,934 October 25, 2000 Trek-N-Drink
</TABLE>
As of December 15, 2000, the Company had 9 full-time employees consisting of
the 4 officers, 1 other employee 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 for the year ended December 31, 1999 and $40,631
for the nine months ended September 30, 2000.
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 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
4
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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 five U.S. patents issued and six 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 10,644,687 shares of Common Stock outstanding
which could be diluted by the following potential issuances of Common Stock. As
of December 15, 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 December 15, 2000, the Company
had outstanding 2,331,706 warrants to purchase an aggregate of 2,331,706 shares
of Common Stock at exercise prices ranging from $0.50 to $1.50 per share and
options to purchase an aggregate of 518,000 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.
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
5
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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.
Overview
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.
In March of 2000, the Company issued 150,000 shares of Common Stock to a
director and significant stockholder upon the exercise of warrants at an
exercise price of $0.75 per share and used the cash proceeds of $112,500 for
working capital purposes.
In July and August of 2000, the Company borrowed a total of $275,000 from an
officer, directors, stockholders and an investor for working capital purposes
at an annual interest rate of 10%. A note for $150,000 is due with accrued
interest on February 1, 2001 and the other notes for $125,000 are due on July
31, 2002 with interest payable quarterly. In addition, the lenders received
warrants, which expire in July and August of 2003, to purchase 162,500 shares
of Common Stock at an exercise price of $1.25 per share.
Results of Operations
Nine-month Period Ended September 30, 2000 (Audited) Compared to Nine-month
Period Ended September 30, 1999 (Unaudited)
Net sales from continuing operations for the nine months were $3,262,943, an
increase of 60 percent over sales from continuing operations of $2,042,255 in
the 1999 period. This increase of $1,220,688 was primarily the result of new
customers in the mass retailers market segment and of a new dog feeder, which
was being marketed for the first time in 2000.
Cost of goods sold for the nine months was $2,422,046, an increase of 53
percent over the $1,581,270 in the 1999 period. The smaller percentage increase
in cost of goods sold as compared to net sales was due to improved gross
margins and other costs increasing at a lower percentage than the net sales
increase.
Selling, general and administrative expenses for the nine months were
$879,270, an increase of 37% over the $641,359 in the 1999 period, The increase
of $237,911 was primarily the result of increases in advertising and marketing
of $77,545, in commissions paid to sales representatives of $33,165, in
salaries and wages of $66,337 mainly for the increase in the sales and
marketing staff, and in insurance costs of $24,128 for the increased costs of
liability and health coverage.
Litigation expenses were incurred in 2000 as a result of lawsuits initiated
against a competitor and against a mold supplier and in defending lawsuits
against the Company by former raw material suppliers of the discontinued
subsidiary, Sanar.
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Interest expense for the nine months was $87,289, an increase of 76% over
the $49,692 in the 1999 period. This increase of $37,597 was primarily due to
the higher level of borrowings to finance the Company's increased inventories
and the higher prime rate of interest charged under the bank line of credit in
2000 as compared to 1999.
The loss from continuing operations for the nine months in 2000 decreased to
$149,922 from $208,006 in 1999 or by $58,084 as a result of the increase in net
sales being larger as a percentage than the increase in the cost of goods sold
and selling, general and administrative expenses. Those improvements were
partially offset by the increased costs for interest and litigation.
The loss from operations of the discontinued subsidiary, Sanar, for the nine
months decreased to $53,650 in 2000 from $230,207 in 1999. The loss in 2000 is
basically for the three months ended March 31 and in 1999 is for the nine
months ended September 30 since the discontinued subsidiary's operations were
disposed of as of March 31, 2000.
As a result of the March 31st disposition, the Company recorded a loss on
disposition of the discontinued subsidiary of $122,597 from the purchase price
paid, assets disposed, liabilities extinguished, and costs incurred. At the end
of September 2000 the buyer, Akon, defaulted on the purchase agreement and
subsequent thereto the lenders that were secured by the assets that were sold
have repossessed the assets and are proceeding to liquidate the assets to pay-
off their loans. The Company may incur expense in the future for any of the
loans that are not repaid from the liquidation of assets, and which cannot be
recovered from the buyer. The Company has accrued $247,453 in the financial
statements pending the liquidation of the assets by the lenders based upon the
estimated net realizable value of the assets to be sold.
Fiscal Year Ended December 31, 1999
Net revenue from continuing operations for Fiscal 1999 was approximately
$3,063,000 consisting of sales of proprietary products for the retail pet
business. Cost of goods sold was approximately $2,425,000, 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. 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.
Selling, general and administrative expenses increased by approximately
$243,000 to approximately $976,000 for Fiscal 1999. The increases were
primarily due to the following:
. Accountant fees in the amount of $69,000 due to audits of the Company's
Fiscal 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. 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.
7
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Interest expense increased by approximately $30,000 to approximately $74,000
for Fiscal 1999. 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.
Losses from operations of the discontinued subsidiary, Sanar, increased by
$278,000 to approximately $359,000 in Fiscal 1999. 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.
Liquidity and Capital Resources
The Company has funded its operations principally from bank and Small
Business Administration ("SBA") debt and the proceeds from equity financing. As
of September 30, 2000, the Company had approximately $1,936,000 in principal
amount of indebtedness (excluding $36,209 borrowed under capital lease
obligations), consisting of: (i) approximately $918,000 aggregate principal
balances under line of credit agreements with a bank, which bear interest at
the prime rate plus 2%; (ii) approximately $345,000 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 $198,000 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 $475,000 outstanding principal amount under notes payable to an
officer, directors, shareholders and an investor, which bear interest at 10%
and are due in the amount of $150,000 on February 1, 2001, $200,000 on August
31, 2001 and $125,000 on July 31, 2002, 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.
The Company's capital lease payments were approximately $16,000 for Fiscal
1999 and are estimated to be approximately $15,000 and $8,000 for the fiscal
years ending December 31, 2000 and 2001, respectively, under current
commitments. The company has no other material commitments for capital
expenditures.
Net cash used in operating activities for the nine months ended September
30, 2000 was $827,107. Of this amount cash was used for the net change of
$798,036 in the Company's operating assets and liabilities, consisting
primarily of an increase in inventories of $1,489,889, which was partially
offset by a decrease in accounts receivable of $202,847 and an increase in
accounts payable of $564,191. Cash was also used for the losses from operations
of $203,572 reduced by the non-cash charges for depreciation of $166,100 and
amortization of $8,401.
Net cash used in investing activities for the nine months ended September
30, 2000 was $194,970 for the acquisition of property and equipment of $215,982
reduced by the proceeds from the disposition of the discontinued subsidiary of
$21,012. Net cash provided by financing activities for the nine month period
was $959,405. Of this amount $620,812 was borrowed under the lines of credit,
$275,000 was borrowed from shareholders and $112,500 was received from the sale
of Common Stock upon the exercise of warrants. This cash provided was offset by
$48,907 in payments of debt and capital lease obligations.
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<PAGE>
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 of $122,002 and inventories of $288,505, and a decrease in accrued
expenses of $127,032, which was partially offset by an increase in accounts
payable of $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 $11,247 plus real estate taxes with annual increases
of approximately 3%. The initial lease term was five years ending on May 31,
1998, and has been extended for an additional five year term, with the
possibility of four additional term extensions of five years each. 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.
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Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of December 15, 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
Name of Beneficial Beneficially of Voting
Owner(1) Owned(2) Power(3)
------------------ ------------ ----------
<S> <C> <C>
Joseph T. Aveni(4)...... 441,668 3.7
Greg W. Johnson(5)...... 117,000 1.0
Dr. James W.
McCourt(6)............. 1,276,745 10.8
Dr. Steven Tsengas(7)... 3,553,261 29.4
Glenn R. Godley(8)...... -- *
John G. Murchie(9)...... -- *
Konstantine S.
Tsengas(10)............ 1,049,403 9.0
All directors and
officers as a Group (7
persons)(11)........... 6,438,077 51.4
Evangelia S. 887,292 7.5
Tsengas(12)............
7768 Litchfield Drive
Mentor, OH 44060
Nicholas S. 1,049,403 9.0
Tsengas(13)............
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 December 15, 2000. No shares that are
subject to the 1999 Stock Option Plan are included since none are
exercisable or exercisable within 60 days of December 15, 2000.
(3) Applicable percentage of voting power is based on the 11,644,687 shares of
Common Stock outstanding as of December 15, 2000. That number is comprised
of 10,644,687 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 208,334 shares of Common Stock.
(5) Includes 7,000 shares of Common Stock held, 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, 180,000 shares of Common Stock issuable upon conversion of 18,000
outstanding shares of Preferred Stock and currently exercisable warrants
to
10
<PAGE>
purchase 38,106 shares of Common Stock; and DKKS, LP holds 139,078 shares
of Common 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 319,540 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 5,118,019 shares of Common Stock held, 450,000 shares of Common
Stock issuable upon conversion of 45,000 outstanding shares of Preferred
Stock and currently exercisable warrants to purchase 870,058 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>
11
<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
------------------------------ -------------------------------------------------------
<S> <C>
Joseph T. Aveni(66).............. Mr. Aveni was elected to the Company's Board of
6000 Rockside Woods Blvd. Directors in November 1998. Mr. Aveni is currently the
Suite 220 Chief Executive Officer of Realty One and serves on the
Cleveland, OH 44131-2350 Board of Directors of the Cleaveland Ballet and the
Greater Cleveland Growth Association.
Greg W. Johnson(48).............. Mr. Johnson was elected to the Company's Board of
1427 Highway 395 N Directors in December 1999. Mr. Johnson is the founder
Suite C and currently the Chief Technology Officer of
Gardnerville, NV 89410 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(60)......... Dr. McCourt was elected to the Company's Board of
PO Box 280 Directors in December 1999. Dr. McCourt recently
Cookville, TX 75558 retired from his dentistry practice in Harlingen,
Texas.
Dr. Steven Tsengas(63)........... Dr. Tsengas has served on the Company's Board of
1300 East Street Directors since the merger in 1998 and also was a
Fairport Harbor, OH 44077 director of the predecessor company 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 Operations and
1300 East Street Secretary of the Company since the merger in 1998 and
Fairport Harbor, OH 44077 served in the same capacities with the predecessor
company since 1995. Mr. Tsengas received his BS
inIndustrial Engineering from the University of Toledo
and has completed graduate level courses in marketing
and organizational behavior at Cleveland State
University.
Glenn R. Godley(37).............. Mr. Godley has been Executive Vice President of
1300 East Street Marketing/Sales of the Company since May of 1999. From
Fairport Harbor, OH 44077 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(63).............. Mr. Murchie has been Treasurer and Controller of the
1300 East Street Company since January of 2000. From 1995 through 1999,
Fairport Harbor, OH 44077 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>
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.
12
<PAGE>
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 nine months ended September
30, 2000 and 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...... 2000 60,000 -- -- -- -- --
Chairman, President & 1999 74,375 -- -- 200,000(3) -- --
Chief Executive Officer 1998 75,000 -- -- -- -- --
1997 75,000 -- -- -- -- --
Konstantine S. Tsengas 2000 46,500 -- -- -- -- --
Vice President of 1999 59,500 -- -- 150,000(3) -- --
Operations & Secretary 1998 60,000 -- -- -- -- --
1997 50,000 -- -- -- -- --
Glenn R. Godley(1)...... 2000 46,500 -- -- -- -- --
Exec. Vice President of 1999 32,506 -- -- 100,000(3) -- --
Marketing/Sales 1998 -- -- -- -- --
1997 -- -- -- -- --
John G. Murchie(2)...... 2000 39,559 -- -- 50,000(3) -- --
Treasurer and 1999 -- -- -- -- -- --
Controller 1998 -- -- -- -- -- --
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 and January 2000 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, $0.75 per share for Mr. Tsengas and Mr. Godley
and $1.00 per share for Mr. Murchie.
13
<PAGE>
Option Plan
The Company maintains the 1999 Stock Option Plan (the "Plan") for its
officers and key employees under which options may be granted at the discretion
of the Board of Directors. The Company has reserved 850,000 shares of its
Common Stock for issuance upon the exercise of options granted under the Plan.
Under the Plan, options to purchase an aggregate of 518,000 shares are
outstanding as of December 15, 2000. These options vest one-third on each of
the second, third and fourth anniversaries of the date of grant and expire on
the fifth anniversary of the date of grant. The Company grants options for the
Plan at exercise prices equal to or greater than the fair market value of the
Common Stock on the date of grant.
The following table sets forth the number of individual stock option grants
made to each Executive Officer during 1999 and 2000.
<TABLE>
<CAPTION>
Percent of
Total
Number of Options/SARs
Securities Granted to Exercise
Underlying Employees in or Base
Options/SARs 1999 and Price Expiration
Name Granted(#) 2000(1) ($/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.................. 50,000 74.6% $ 1.00 01/26/05
</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 and
an aggregate of 67,000 shares of Common Stock during 2000.
The following table sets forth information (on an aggregate basis)
concerning exercises of stock options during 1999 and 2000 by each of the
Executive Officers and the final December 15,2000 value of unexercised options.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying unexercised "In-the-Money"
Options/SARs Options/SARs at Year-
Shares at Year-End(#) End($)(1)
Acquired or Value --------------------------- --------------------------
Name Exercise(#) Realized ($) Exerciseable Unexerciseable Exercisable Unexerciseable
---- ----------- ------------ ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Steven Tsengas...... -- -- -- 200,000 -- $85,000
Konstantine S. Tsengas.. -- -- -- 150,000 -- $75,000
Glenn R. Godley......... -- -- -- 100,000 -- $50,000
John G. Murchie......... -- -- -- 50,000 -- $12,500
</TABLE>
--------
(1) Calculated based upon the difference between the exercise price and the
estimated fair market value of $1.25 a share on December 15, 2000.
Compensation of Directors
In 1999 and 2000, 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.
14
<PAGE>
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.
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 $29,200
earned in 1999 and $53,633 was earned in the first eleven months of 2000.
O'Rourke, through Macke International Trade, Inc., also provided sales
consulting services for which $1,000 was expensed in 1999. 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 September 30, 2000, the current monthly rental was $11,247 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 an additional five year term, with the possibility of four
additional extensions of five years each. Lease expense before the cancellation
of accrued rent described in the Extraordinary Item Note to Consolidated
Financial Statements was $138,795 for Fiscal 1999 and $47,512 for the nine
months ended September 30, 2000, net of amounts received from a sublease for
six months.
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 April 30, 2002. In March 2000, DKKS, LP
exercised their 100,000 warrants for the cash purchase of Common Stock.
In connection with the 1998 Private Placement of Common Stock and warrants
for the purchase of Common Stock which expire on April 30, 2002 (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, which were exercised in March 2000 for
the cash purchase of 50,000 shares of Common Stock; (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. The 100,000 warrants were exercised in March 2000 upon the conversion of
the initial Note described above.
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.
15
<PAGE>
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 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. On January
26, 2000, Mr. Murchie was granted an option to purchase 50,000 shares of Common
Stock at an exercise price of $1.00. 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.
On July 21, 2000, the Company borrowed $50,000 from Dr. Steven Tsengas, on
August 1, 2000, it borrowed $25,000 from Joseph T. Aveni, and on August 2,
2000, it borrowed $150,000 from Beachcraft Limited Partnership, a firm for
which Dr. James W. McCourt serves as Trustee for its general partner for
working capital purposes. The notes have an annual interest rate of 10% and are
due on July 31, 2002 for Dr. Tsengas and Mr. Aveni and on February 1, 2001 for
Beachcraft Limited Partnership. In connection with these loans, the Company
issued 50,000 warrants for the purchase of Common Stock at $1.25 a share to
Dr. Tsengas, warrants to purchase 25,000 shares at the same price to Mr. Aveni
and warrants to purchase 37,500 shares at the same price to Beachcraft Limited
Partnership. These warrants all expire on July 31, 2003.
On October 20, 2000, the Company borrowed an additional $40,000 from Dr.
Tsengas for working capital purposes. This note is due on demand and has an
annual interest rate of 10%. The Company repaid Dr. Tsengas $5,000 on this note
on October 25, 2000, $5,000 on November 17, 2000, $10,000 on December 21, 2000
and $10,000 on December 29, 2000.
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 10,644,687 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 2,331,706 warrants and 518,000 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
16
<PAGE>
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.
17
<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 April 30, 2002, 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 December 15, 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) 2,331,706 warrants to purchase an
aggregate of 2,331,706 shares of Common Stock at exercise prices ranging from
$0.50 to $1.50 per share; and (iii) options to purchase an aggregate of 518,000
shares of Common Stock at exercise prices ranging from $0.75 to $1.00 per
share.
As of December 15, 2000, the number of holders of the Company's Common Stock
is 199.
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 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 Akon Plastics Enterprises, Inc.
("Akon"), the purchaser of the assets of a discontinued Company subsidiary,
Sanar. (See Item 1 of Part I.) The supplier sought payment of unpaid invoices
in the amount of $79,339.60 plus interest. A judgment was entered against Sanar
upon Southern Polymer's motion for summary judgment. Southern Polymer is
currently pursuing this matter against the Company as well in an attempt to
pierce the corporate veil by claiming shareholder liability. The action is
currently in the discovery stage.
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 Akon, as the purchaser of
Sanar's assets. The supplier sought payment of unpaid invoices in the amount of
$117,189.41 plus interest and costs. Judgment was rendered against Sanar. The
Company and Sanar filed a Leave to File an Answer and a Crossclaim against
Akon. Settlement discussions are currently underway and a settlement for a
minimal amount is likely in the near future.
On or about May 30, 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. An amended complaint
was
18
<PAGE>
filed on July 9, 2000. 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 claims that Defendants' failed to satisfy their
obligations under the agreement and committed numerous unlawful acts which
caused the Company damages in excess of $125,000.00. Defendant, Bennett
Plastics, Inc., filed a counterclaim against the Company and its subsidiary,
Virtu, claiming breach of contract and requesting $38,600.00 in damages. The
case is currently in the discovery stage with a trial date possible in the
spring of this year.
On November 13, 2000 litigation was commenced against Sanar in the
Painesville Municipal Court by Victory Packaging. A longtime supplier of the
Company and its subsidiary, Sanar, Victory brought the suit under an obsolete
business name, "Napro, Inc. dba Sanar Manufacturing." Victory alleges that it
sold $4,724.13 in product to Sanar in September 2000. Sanar filed an answer to
the complaint and also filed a third party complaint against Akon, alleging
that the product was purchased by Akon under the auspices of Sanar, after Akon
entered into a purchase agreement for Sanar's assets. That purchase agreement
was subsequently breached by Akon at the end of September 2000. Sanar has
alleged claims against Akon for quantum meruit, fraud and violation of Ohio's
Deceptive Trade Practices Act for its purchase and use of Victory Packaging's
product under Sanar's name.
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.
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 April 30, 2002, 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
19
<PAGE>
on April 30, 2002, 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 reasonably 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 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
20
<PAGE>
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 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 December 15, 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
21
<PAGE>
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:
. Audited consolidated financial statements for the nine months ended
September 30, 2000 and the year ended December 31, 1999.
22
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
FAIRPORT HARBOR, OHIO
FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
and
DECEMBER 31, 1999
23
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Auditors.......................................... 25
Consolidated Balance Sheets as of September 30, 2000 and December 31,
1999 .................................................................. 26
Consolidated Statements of Operations for the nine months ended
September 30, 2000 and September 30, 1999 and the year ended December
31, 1999 .............................................................. 27
Consolidated Statements of Stockholders' Equity for the nine months
ended September 30, 2000 and the year ended December 31, 1999.......... 28
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and September 30, 1999 and the year ended December
31, 1999............................................................... 29
Notes to Consolidated Financial Statements.............................. 30-40
</TABLE>
24
<PAGE>
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 September 30, 2000 and
December 31, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the nine months and year then ended,
respectively. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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.
In our opinion, the accompanying balance sheets presents fairly, in all
material respects, the consolidated financial position of OurPet's Company and
Subsidiaries as of September 30, 2000 and December 31, 1999, and the
consolidated results of their operations and cash flows for the nine months
ended September 30, 2000 and the year ended December 31, 1999 in conformity
with generally accepted accounting principles.
S. R. Snodgrass, A. C.
Certified Public Accountants
Mentor, Ohio
December 1, 2000
25
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, Decmber 31,
2000 1999
------------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................... $ 45,652 $ 108,324
Accounts receivable--trade, less allowance for
doubtful accounts of $17,063 and
$30,768 ......................................... 307,976 771,885
Inventories....................................... 2,263,425 1,019,616
Prepaid expenses.................................. 65,671 34,848
----------- -----------
Total current assets............................ 2,682,724 1,934,673
----------- -----------
PROPERTY AND EQUIPMENT
Machinery and equipment........................... -- 1,729,031
Furniture and fixtures............................ 88,161 79,358
Vehicles.......................................... 5,649 5,649
Leasehold improvements............................ 22,443 48,843
Tooling........................................... 1,134,772 727,977
Property held under capital leases................ 52,143 70,061
Construction in progress.......................... 53,173 252,788
----------- -----------
Total........................................... 1,356,341 2,913,707
Less accumulated depreciation..................... 407,486 1,318,810
----------- -----------
Net property and equipment...................... 948,855 1,594,897
----------- -----------
OTHER ASSETS
Property and equipment held for sale at estimated
disposal value................................... 375,000 --
Deposits.......................................... 6,086 44,083
Loan acquisition costs, less amortization of
$10,086 and $9,971 .............................. 6,566 17,783
Patents, less amortization of $9,871 and $6,519 .. 58,621 48,212
----------- -----------
Total other assets.............................. 446,273 110,078
----------- -----------
Total assets.................................... $ 4,077,852 $ 3,639,648
=========== ===========
LIABILITIES
CURRENT LIABILITIES
Notes payable..................................... $ 1,267,704 $ 623,938
Current maturities of long-term debt.............. 542,930 153,981
Current portion of capital lease obligations...... 13,420 11,131
Accounts payable--trade........................... 889,479 775,357
Accrued expenses.................................. 135,537 155,428
----------- -----------
Total current liabilities....................... 2,849,070 1,719,835
----------- -----------
LONG-TERM DEBT
Long-term debt--less current portion above........ 125,000 690,893
Capital lease obligations--less current portion
above............................................ 22,789 34,258
----------- -----------
Total long-term debt............................ 147,789 725,151
----------- -----------
Total liabilities............................... 2,996,859 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................................... 107,240 107,240
ACCUMULATED DEFICIT............................... (2,054,857) (1,728,688)
----------- -----------
Total stockholders' equity...................... 1,080,993 1,194,662
----------- -----------
Total liabilities and stockholders' equity...... $ 4,077,852 $ 3,639,648
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months
Ended
September 30,
-----------------------
For the Year
Ended
December 31,
2000 1999 1999
---------- ----------- ------------
(Audited) (Unaudited) (Audited)
<S> <C> <C> <C>
Net revenue............................. $3,262,943 $2,042,255 $3,063,144
Cost of goods sold...................... 2,422,046 1,581,270 2,425,203
---------- ---------- ----------
Gross profit on sales................... 840,897 460,985 637,941
Selling, general and administrative
expenses............................... 879,270 641,359 975,653
---------- ---------- ----------
Loss from operations.................... (38,373) (180,374) (337,712)
Interest and other income............... 2,432 22,060 41,459
Litigation expense...................... (26,692) -- (3,297)
Interest expense........................ (87,289) (49,692) (74,357)
---------- ---------- ----------
Loss from continuing operations......... (149,922) (208,006) (373,907)
Loss from operations of discontinued
subsidiary............................. (53,650) (230,207) (359,473)
Loss on disposition of discontinued
subsidiary............................. (122,597) -- --
---------- ---------- ----------
Loss before extraordinary item.......... (326,169) (438,213) (733,380)
Extraordinary item--gain on
extinguishment of debt................. -- -- 390,667
---------- ---------- ----------
Net loss................................ (326,169) (438,213) (342,713)
Preferred Stock dividends............... (91,530) -- --
---------- ---------- ----------
Net loss applicable to Common Stock..... $ (417,699) $ (438,213) $ (342,713)
========== ========== ==========
Basic Loss Per Common Share:
Loss from continuing operations....... $ (0.02) $ (0.02) $ (0.04)
Loss from operations of discontinued
subsidiary........................... (0.01) (0.02) (0.03)
Loss on disposition of discontinued
subsidiary........................... (0.01) -- --
---------- ---------- ----------
Loss before extraordinary item........ (0.04) (0.04) (0.07)
Extraordinary item.................... -- -- 0.04
---------- ---------- ----------
Net loss.............................. $ (0.04) $ (0.04) $ (0.03)
========== ========== ==========
Weighted average number of common shares
outstanding............................ 10,477,351 10,253,203 10,263,659
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2000 and the Year Ended December 31,
1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ ---------------------- Total
Number 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,
1999................... -- $ -- 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 for the year... -- -- -- -- -- (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
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
Net loss for the nine
months................. -- -- -- -- -- (326,169) (326,169)
------- -------- ---------- ----------- -------- ----------- ----------
Balance at September 30,
2000................... 100,000 $913,150 10,544,687 $ 2,115,460 $107,240 $(2,054,857) $1,080,993
======= ======== ========== =========== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended For the Year
September 30, Ended
----------------------- December 31,
2000 1999 1999
---------- ----------- ------------
(Audited) (Unaudited) (Audited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations.......... $ (149,922) $(208,006) $(373,907)
Loss from discontinued operations........ (53,650) (230,207) (359,473)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense..................... 166,100 221,012 311,822
Amortization expense..................... 8,401 28,573 31,120
Common Stock issued for services......... -- 51,169 51,169
Extraordinary item....................... -- -- 390,667
(Increase) decrease in assets:
Accounts receivable..................... 202,847 (135,094) (122,002)
Deposits................................ 21,497 (43,608) (19,727)
Inventories............................. (1,489,889) (318,781) (288,505)
Patent costs............................ (13,761) (16,364) (17,504)
Prepaid expenses........................ (31,268) 16,503 30,343
Increase (decrease) in liabilities:
Accounts payable........................ 564,191 165,344 108,480
Accrued expenses........................ (51,653) 27,564 (127,032)
---------- --------- ---------
Net cash used in operating activities.. (827,107) (441,895) (384,549)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment.... (215,982) (303,385) (483,149)
Proceeds from disposition of discontinued
subsidiary.............................. 21,012 -- --
---------- --------- ---------
Net cash used in investing activities.. (194,970) (303,385) (483,149)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt..... (42,175) (112,958) (150,949)
Issuance of notes payable to
shareholders............................ 275,000 360,000 360,000
Payment and cancellation of notes payable
to shareholders......................... -- (25,000) (225,000)
Issuance of notes payable................ 620,812 443,212 25,151
Principal payments under capital lease
obligations............................. (6,732) (9,011) (14,759)
Issuance of Common Stock, net of offering
costs................................... 112,500 -- --
Issuance of Preferred Stock, net of
offering costs.......................... -- 507,400 878,150
---------- --------- ---------
Net cash provided by financing
activities............................ 959,405 1,163,643 872,593
---------- --------- ---------
Net increase (decrease) in cash........ (62,672) 418,363 4,895
CASH AT BEGINNING OF PERIOD............... 108,324 103,429 103,429
---------- --------- ---------
CASH AT END OF PERIOD..................... $ 45,652 $ 521,792 $ 108,324
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid............................ $ 98,833 $ 137,663 $ 184,010
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF NON CASH
TRANSACTIONS
Purchase of equipment through capital
lease agreements........................ $ -- $ -- $ 17,077
========== ========= =========
Notes payable converted into Preferred
Stock................................... $ -- $ 35,000 $ 35,000
========== ========= =========
Notes payable converted into Common
Stock................................... $ 100,000 $ -- $ --
========== ========= =========
Reclassification of property and
equipment to property and equipment held
for sale................................ $ 375,000 $ -- $ --
========== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Organization and Nature of Operations--OurPet's Company (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. 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 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.
Sanar manufactured custom blow molded products 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 September 30, 2000 and December 31, 1999
consist of:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Finished goods.................................... $2,040,381 $ 875,278
Raw materials..................................... 223,044 119,868
Production supplies............................... -- 24,470
---------- ----------
Total........................................... $2,263,425 $1,019,616
========== ==========
</TABLE>
All inventories are pledged as collateral for bank and small business
administration loans.
Impairments--Assets are evaluated for impairment when events change or
change in circumstances indicates that the carrying amounts of the assets may
not be recoverable. When any such impairment exists, the related assets are
written down to fair value.
30
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 nine months ended September
30, 2000 and 1999 (unaudited) and the year ended December 31, 1999 was
$166,100, $221,012 and $311,822, respectively.
As of March 31, 2000, the Company sold the property and equipment of Sanar
as part of the sale of its business. When the purchaser renounced and breached
the contract on September 29, 2000 and ceased its operations, the property and
equipment were returned to the Company. Since these idle assets are subject to
a first lien by the secured creditors, the Company and the lenders decided to
dispose of all of these idle assets, the lenders repossessed the assets and the
Company and the lenders are actively searching for a buyer. Pursuant to FAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be disposed of" the Company has adjusted these assets to their estimated net
realizable value resulting in an estimated disposal value of $375,000, which
has been classified as held for sale on the accompanying consolidated balance
sheet at September 30, 2000.
Loan Acquisition Costs--Loan acquisition costs are being amortized on the
straight-line method over the term of the respective loans.
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 nine months ended September 30, 2000, 60.4% of the Company's revenue
was derived from two major customers. Revenue generated from each of these
customers amounted to $1,281,714 and $693,484, which represents 39.2% and 21.2%
of total revenue, respectively.
For the nine months ended September 30, 1999 (unaudited), 29.5% of the
Company's revenue was derived from one major customer. Revenue generated from
this customer amounted to $606,719.
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.
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 nine months ended September 30, 2000 and 1999 (unaudited) and
the year ended December 31, 1999 was $40,631, $25,524 and $52,385,
respectively.
Advertising Costs--Advertising costs are charged to operations when the
advertising first takes place. Advertising expense for the nine months ended
September 30, 2000 and 1999 (unaudited) and the year ended December 31, 1999
was $91,865, $48,591 and $90,182, respectively.
31
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Loss Per Common Share--Basic net loss per Common Share is based on the
net loss attributable to common stockholders for the period, divided by the
weighted average number of common shares outstanding during the period.
Potential common shares have not been included since their effect would be
antidilutive. Common shares that could be potentially dilutive include 522,000
stock options, 2,331,706 warrants and 1,000,000 shares underlying the Preferred
Stock at September 30, 2000.
Fair Value of Financial Instruments--Fair value estimates discussed herein
are based upon certain market assumptions and pertinent information available
to management as of September 30, 2000. 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.
Income Taxes--Deferred income tax assets and liabilities are recorded for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
32
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Notes Payable and Long-Term Debt
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Note payable--Bank, open $1,000,000 line of credit
with interest at prime plus 2% (11.5% at September
30, 2000 and 10.5% at December 31, 1999). The note
is secured by accounts receivable, equipment, in-
ventory, trademark, patents and the personal guar-
antee of a stockholder............................ $ 838,181 $ 244,969
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........................... 100,158 122,608
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........ 98,181 111,016
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% (11.75% at
September 30, 2000 and 10.75% at December 31,
1999). This note is secured by a blanket lien on
all assets and the personal guarantee of a
stockholder....................................... 344,591 411,250
Note payable--director, due on August 31, 2001,
interest at 10% payable at maturity. This note is
subordinated to the bank loans.................... 200,000 200,000
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--director and shareholder, due on
February 1, 2001. Interest at 10% payable at
maturity. This note is subordinated to the bank
loans............................................. 150,000 --
Notes payable--officer, directors, shareholders and
investors, due on July 31, 2002. Interest is
payable quarterly at 10%. These notes are
subordinated to the bank loans.................... 125,000 --
---------- ----------
1,935,634 1,468,812
Less current portion of long-term debt............. 1,810,634 777,919
---------- ----------
$ 125,000 $ 690,893
========== ==========
</TABLE>
33
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
September 30, Amount
------------- ----------
<S> <C>
2001.......................................................... $1,810,634
2002.......................................................... 125,000
2003.......................................................... --
2004.......................................................... --
2005.......................................................... --
----------
$1,935,634
==========
</TABLE>
Subsequent to September 30, 2000, the Company was in violation of certain
loan covenants and was in default in payment of principal and interest related
to Sanar debt included above, and as a result, all of the Sanar debt has been
classified as a current liability at September 30, 2000.
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. The note
and accrued interest were paid on March 21, 2000 with the principal amount of
$100,000 being converted into 100,000 shares of Common Stock upon the exercise
of 100,000 warrants.
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.
In July and August of 2000, the Company borrowed a total of $275,000 from an
officer, directors, stockholders and investor for working capital purposes at
an annual interest rate of 10%. A note for $150,000 is due with accrued
interest on February 1, 2001 and the other notes for $125,000 are due on July
31, 2002 with interest payable quarterly. In addition, the lenders received
162,500 warrants for the purchase of Common Stock at $1.25 per share.
34
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Related Party Transactions
The Company leases production, warehouse and office facilities from a
related entity, Senk Properties. Current monthly rentals are $11,247 with
annual increases of approximately 3% plus real estate taxes. The initial term
of the lease was for five years ending on May 31, 1998 and it has been extended
for five additional five-year terms for a total possible term of twenty-five
years. Lease expense for the nine months ended September 30, 2000 and 1999
(unaudited), net of amounts received from a sublease in 2000 for six months,
and the year ended December 31, 1999 was $47,512, $96,927 and $138,795,
respectively.
Extraordinary Item
During December 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 extra-ordinary gain of
$390,667 or $0.04 per share.
Capital Stock
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.
In March of 2000, the Company issued 250,000 shares of Common Stock upon the
exercise of 150,000 warrants at an exercise price of $0.75 per share in cash
and 100,000 warrants at an exercise price of $1.00 per share for cancellation
of debt as consideration for the Common Stock. These transactions were with two
significant directors and stockholders of the Company.
Warrants
At September 30, 2000, the Company had the following Common Stock purchase
warrants outstanding, all of which were exercisable:
<TABLE>
<CAPTION>
Number Exercise
of Shares Price Expiration Date
--------- -------- ---------------
<S> <C> <C> <C>
1998 Private Placement:
Subscribers........................ 1,226,298 $1.500 April 30, 2002
Brokers or dealers................. 113,208 0.825 April 30, 2002
Lenders' financing................. 127,500 0.750 April 30, 2002
Others............................. 35,000 0.500 April 30, 2002
1999 Private Placement to brokers or
dealers............................. 77,200 1.100 October 31, 2004
1999 Notes payable to Director....... 50,000 0.750 July 31, 2001
1999 Issuance to related parties..... 500,000 1.000 December 14, 2004
2000 Director for services........... 40,000 1.000 December 31,2001
2000 Notes payable to Directors and
Officer............................. 112,500 1.250 July 31, 2003
2000 Notes payable to investors...... 50,000 1.250 August 9, 2003 and
August 28, 2003
---------
Total................................ 2,331,706
=========
</TABLE>
35
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 1,226,298 warrants issued to subscribers in the 1998 private placement
may be redeemed by the Company on thirty days notice at a redemption price of
$0.01 per warrant share, at such time as the common shares are trading on a
public exchange at a closing bid price (or the last sale price) of $3.00 or
above for a period of ten consecutive business days.
Stock Options
On December 4, 1999, the Board of Directors approved the 1999 Stock Option
Plan, which was approved by the shareholders on August 5, 2000. 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>
Number
of Weighted Average
Shares Exercise Price
------- ----------------
<S> <C> <C>
Outstanding at January 1, 1999...................... 590,000 $ .75
Granted........................................... 170,000 .84
Exercised......................................... -- --
Forfeited......................................... 160,000 .75
-------
Outstanding at December 31, 1999.................... 600,000 .78
Granted........................................... 67,000 1.00
Exercised......................................... -- --
Forfeited......................................... 145,000 .85
-------
Outstanding at September 30, 2000................... 522,000 .81
=======
</TABLE>
The following table summarizes options outstanding at September 30, 2000:
<TABLE>
<CAPTION>
Weighted
Number Weighted Average Average Remaining
Range of Shares Exercise Price Contractual Life
----- --------- ---------------- -----------------
<S> <C> <C> <C>
$0.75-$1.00 522,000 $0.81 4.2 Years
</TABLE>
There were no options exercisable at September 30, 2000.
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 for the nine
months ended September 30, 2000 and 1999 (unaudited) and the year ended
December 31, 1999 was $7,671, $8,639 and $11,554, respectively.
36
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of property held under capital leases, included in property, plant
and equipment, is as follows as of September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Office equipment.................................. $ 17,077 $ 17,077
Production equipment.............................. 18,443 36,361
Vehicle........................................... 16,623 16,623
-------- --------
52,143 70,061
Less: accumulated amortization.................... (22,062) (25,910)
-------- --------
Total........................................... $ 30,081 $ 44,151
======== ========
</TABLE>
Minimum future lease payments under operating leases, together with the
present value of the net minimum lease payments for capitalized leases as of
September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
----------- ---------
<S> <C> <C>
2000................................................... $ 2,841 $ 44,275
2001................................................... 15,510 146,606
2002................................................... 7,944 150,519
2003................................................... 12,276 63,354
2004................................................... 4,114 --
------- --------
Total minimum lease payments......................... 42,685 $404,754
========
Less: Amount representing interest..................... (6,476)
-------
Present value of net minimum lease payments.......... $36,209
=======
</TABLE>
Interest rates on capitalized leases vary from 9.1% to 11.9% 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 nine months ended September 30,
2000 and 1999 (unaudited) and the year ended December 31, 1999 was $126,136,
$156,553 and $224,736 respectively.
Income Taxes
There was no income tax expense/benefit for the Company for the nine months
ended September 30, 2000 and 1999 (unaudited) and the year ended December 31,
1999.
Following is a reconciliation of the expected income tax benefit to the
amount based on the U.S. statutory rate of 34% for the nine months ended
September 30, 2000 and 1999 (unaudited) and the year ended December 31, 1999:
<TABLE>
<CAPTION>
September 30,
------------------- December 31,
2000 1999 1999
-------- --------- ------------
<S> <C> <C> <C>
Income tax benefit based on US statutory
rate.................................... $(24,930) $(146,897) $(148,949)
Current period addition to the valuation
allowance............................... 24,930 146,897 148,949
-------- --------- ---------
Provision for income taxes............... $ -- $ -- $ --
======== ========= =========
</TABLE>
37
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................. $ 598,490 $ 573,560
Valuation allowances............................ (598,490) (573,560)
--------- ---------
Net deferred tax assets........................... $ -- $ --
========= =========
</TABLE>
The Company's valuation allowance increased by approximately $24,930 for the
nine months ended September 30, 2000, which represents the effect of net
operating losses. The Company has recorded a valuation allowance to state its
deferred tax assets at estimated net realizable value due to the uncertainty of
realization of these assets through future taxable income.
The Company has available at September 30, 2000, unused operating loss
carryforwards that may be applied against future taxable income and that expire
as follows:
<TABLE>
<CAPTION>
Amount of Unused Expiration
Operating Loss During Year
Year of Loss Carryforwards Ending
------------ ---------------- -----------
<S> <C> <C>
1995............................................ $ 374,001 2010
1996............................................ 259,811 2011
1997............................................ 464,680 2012
1998............................................ 150,362 2018
1999............................................ 438,086 2019
2000............................................ 73,325 2020
----------
$1,760,265
==========
</TABLE>
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 sought damages in excess of $1,050,000. The competitor served an
answer alleging affirmative defenses and counterclaimed against the Company for
unfair competition and deceptive trade practices. The competitor sought to
recover lost profits and statutory damages and for injunctions prohibiting the
Company from continuing to market and sell their product. Upon mutual
agreement, this litigation was dismissed with prejudice in October 2000 with
each party dismissing its claims against the other.
In May and June 2000, litigation was commenced against the Company in the
Summit County Common Pleas Court, State of Ohio, by two suppliers seeking
payment of unpaid invoices plus interest and costs totaling in excess of
$196,529 for purchases made by the Company's discontinued subsidiary. The
Plaintiffs obtained judgments against the discontinued subsidiary, however, all
of the discontinued subsidiary's remaining assets have been repossessed by its
lenders in an attempt to satisfy their senior liens. Management and its legal
representatives do not believe as a result of this litigation that the Company
will have any judgments or fines against it.
In May 2000, the Company commenced litigation in the Cuyahoga County Common
Pleas Court, State of Ohio, against a mold supplier and its related entities.
The Company alleged against the Defendants breach of contract, negligence,
unjust enrichment and breach of warranty, which caused damages in excess of
$125,000. One of the Defendants filed a counterclaim against the Company for
breach of contract for $38,600 in damages. Discovery is set to be completed in
January 2001, with trial expected in April 2001.
38
<PAGE>
OURPET'S COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to the above matters 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.
Discontinued Operations
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 was escrowed
pending the purchaser's refinancing of the long-term debt. The selling price
was $100,000 in the form of cash and notes. The purchaser failed to obtain
refinancing of the long-term debt and notified the Company on September 29,
2000 of its intent to rescind the agreement and to wind down its operations and
go out of business.
As a result of the purchaser renouncing and breaching the contract, the
remaining assets of Sanar, which are subject to a first lien by the secured
creditors, were returned to the Company on September 29, 2000 and repossessed
by its lenders on October 3, 2000. The Company has guaranteed the debt of Sanar
and should the sale of Sanar's assets not realize sufficient amounts to satisfy
its obligations to the lenders, the Company would be liable for any deficiency.
At September 30, 2000, the amount owed to the lenders including accrued
interest was $622,453. Based upon appraisals of the assets to be sold,
management believes that the proceeds to be realized will not be adequate to
satisfy the obligations to its lenders with approximately $220,000 remaining
unpaid including interest to the estimated date of sale.
Operating results of the business of Sanar for the nine months ended
September 30, 2000 and 1999 (unaudited) and the year ended December 31, 1999
are shown separately in the accompanying consolidated statements of operations.
Net revenue of the business of Sanar for the nine months ended September 30,
2000 and 1999 (unaudited) and the year ended December 31, 1999 were $560,412,
$1,799,526 and $2,254,880 excluding intercompany transactions. These amounts
are not included in net revenue in the accompanying consolidated statements of
operations.
Net assets to be disposed of, at their expected net realizable values, have
been separately classified in the accompanying balance sheet at September 30,
2000. The December 31, 1999 balance sheet has not been restated.
Assets of the business of Sanar that were sold consisted of the following at
their face amounts at March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Accounts receivable.................................. $ 262,620 $ 239,279
Inventories.......................................... 246,525 222,590
Property and equipment............................... 695,925 743,708
---------- ----------
Total assets....................................... $1,205,070 $1,205,577
========== ==========
</TABLE>
39
<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: January 12, 2001 OurPet's Company
/s/ Steven Tsengas
By: _________________________________
Steven Tsengas
Chairman, President and Chief
Executive Officer
40
<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--None.
(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 "OurPet's 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 OurPet's Company.
6.2 Lease Agreement dated March 17, 1993, with Addendums, between Senk
Properties and GPI Division, NAPRO, Inc.
6.3 Letter dated February 14, 1998, to Anthony O'Rourke from Konstantine
("Dean") Tsengas and Steve Tsengas regarding sales commission, sales
consulting and Board participation.
6.4 Letter from Company to Greg Johnson dated October 12, 1999 regarding
consulting services.
6.5 1999 Stock Option Plan.
6.6 Standard Option Agreement.
6.7 Standard Common Stock Purchase Warrant.
27 Financial Data Schedule
</TABLE>
41
