U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FORM TO.
Commission file number: 0-6292
AAROW ENVIRONMENTAL GROUP, INC.
(Formerly RAIN FOREST-MOOSE, LTD.)
(Name of small business issuer in its charter)
Nevada 71-0752569
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1317 South Turner
Springdale, Arkansas 72764
(Address of principal executive offices) (Zip Code)
(501) 927-1884
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and has
been subject to such filing requirements for the past 90 days. Yes No X
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No .
Applicable only to corporate issuers
The number of outstanding of Common Stock as of November 17, was 10,380,942
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AAROW ENVIRONMENTAL GROUP, INC.
Index to Quarterly Report on Form 10-QSB
Part I - FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Income for the Three Months and Nine Months
Ended September 30, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Supplemental Information 9
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
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2
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<CAPTION>
Part I - Financial Statements
Item 1. Financial Statements
AAROW ENVIRONMENTAL GROUP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
September December
Assets 30, 1998 31, 1997
------------- --------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 0 $ 0
Accounts Receivable 5,016 1,043
Inventory 31,906 33,668
------------- --------------
TOTAL CURRENT ASSETS $ 36,922 $ 34,711
PROPERTY, PLANT AND EQUIPMENT (net of accumulated
depreciation of $ 13,937 and $ 10,001 respectively) 8,159 12,095
Other Assets
Organization Costs (net of accumulated
amortization of $ 2,811 and $ 2,475 respectively) $ 1,689 $ 2,025
Noncompete Covenant (net of accumulated
amortization of $ 2,100 and $ 750 respectively) 15,900 17,250
------------- --------------
TOTAL OTHER ASSETS $ 17,589 $ 19,275
------------- --------------
TOTAL ASSETS $ 62,670 $ 66,081
============= ==============
Liabilities and Stockholders Equity
Current Liabilities:
Bank Overdraft $ 728 $ 2,316
Accounts Payable 30,584 26,538
Payroll Taxes Payable 99,605 107,965
Accrued Interest Payable 18,354 7,700
Judgment Payable 18,370 18,370
Short Term Notes 200,212 55,000
Current Portion of Long Term Notes 60,000 60,000
------------- --------------
TOTAL CURRENT LIABILITIES $ 427,853 $ 277,889
LONG TERM LIABILITIES 0 0
------------- --------------
TOTAL LIABILITIES $ 427,853 $ 277,889
Stockholders Equity
Common Stock, $ 0.001 par value, 30,000,000 shares authorized, $ 10,381 $ 9,024
10,380,942 shares issued and outstanding
Convertible Preferred Stock, $0.001 par value, 5,000,000 shares 3,000 3,000
authorized, 3,000,000 shares issued and outstanding,
one share convertible for three shares common
Paid in Capital 220,557 189,249
Retained Earnings ( 599,121) ( 413,081)
-------------- ---------------
TOTAL STOCKHOLDERS EQUITY ($ 365,183) ($ 211,808)
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 62,670 $ 66,081
============= ==============
</TABLE>
See notes to unaudited financial statements.
3
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<CAPTION>
AAROW ENVIRONMENTAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30, 1998, the Three Months
Ended September 30, 1997, the Nine Months Ended September 30,
1998 and the Nine Months Ended September 30, 1997
Three Months Three Months Nine Months Nine Months
9-30-98 9-30-97 9-30-98 9-30-97
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales Income $ 0 $ 6,608 $ 26,242 $ 34,898
Cost of Sales
Materials $ 0 $ 2,422 $ 18,427 $ 11,971
Freight 0 135 0 135
----------- ----------- ----------- -----------
Total Cost of Sales $ 0 $ 2,557 $ 18,427 $ 12,106
----------- ----------- ----------- -----------
GROSS PROFIT $ 0 $ 4,051 $ 7,815 $ 22,792
Operating Expenses 65,282 96,553 172,453 120,526
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS ($ 65,282) ($ 92,482) ($ 164,638) ($ 97,734)
Other Income and (Expenses)
Interest Expense ($ 3,306 $ 0 ($ 16,304) ($ 3,136)
Penalties ( 1,702) 0 ( 5,098) ( 1,549)
------------ ----------- ------------ ------------
Total Other Income and (Expenses) ($ 5,008 $ 0 ($ 21,402) ($ 4,685)
----------- ----------- ------------ ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND INCOME TAXES ($ 70,290) ($ 92,482) ($ 186,040) ($ 102,419)
Extraordinary Items and Income Taxes
Extraordinary Item-Note Receivable $ 0 $ 0 $ 0 ($ 20,455)
Extraordinary Item- Loss on Repossession 0 0 0 ( 3,298)
----------- ----------- ----------- ------------
Total Extraordinary Items $ 0 $ 0 $ 0 ($ 23,753)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ($ 70,290) ($ 92,482) ($ 186,040) ($ 126,172)
============ ============ ============ ============
WEIGHTED AVERAGE number of common stock
and common stock equivalents outstanding 19,380,942 17,867,945 19,380,942 17,867,945
=========== =========== =========== ===========
NET INCOME (LOSS) per common stock and
common stock equivalents ($ .004) ($ .005) ($ .01) ($ .008)
============ =========== =========== ============
</TABLE>
See notes to unaudited financial statements.
4
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<S> <C> <C>
AAROW ENVIRONMENTAL GROUP, INC.
STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30, 1998 and the Nine Months Ended September 30, 1997
Nine Months Nine Months
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ($186,040) ($126,172)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation 3,936 3,744
Amortization 1,686 975
Extraordinary Items 0 23,753
(Increase) decrease in:
Accounts Receivable ( 3,973) ( 2,732)
Inventory 1,762 7,060
Increase (decrease) in:
Bank Overdraft ( 1,588) 0
Accounts Payable 4,046 1,005
Payroll Taxes Payable ( 8,360) 19,484
Sales Taxes Payable 0 0
Accrued Interest Payable 10,654 3,068
--------- ---------
NET CASH PROVIDED (USED) ($177,877) ($ 69,815)
BY OPERATING ACTIVITIES
NET CASH USED BY INVESTING ACTIVITIES
Covenant Not to Complete $ 0 ($ 18,000)
CASH FLOWS FROM FINANCING ACTIVITIES
New borrowings
Long-Term $ 0 $ 0
Short-Term 162,984 4,500
Debt Reduction
Long-Term 0 ( 15,045)
Short-Term ( 17,772)
Proceeds from Sale of Common Stock 32,665 105,857
--------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES $ 177,877 $ 95,312
--------- ---------
NET INCREASE IN CASH $ 0 $ 7,497
CASH AT BEGINNING OF THE PEROID 0 2,147
--------- ---------
CASH AT END OF PERIOD $ 0 $ 9,644
========= =========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 16,304 $ 3,136
========= =========
</TABLE>
See notes to unaudited financial statements.
5
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AAROW ENVIRONMENTAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
STATEMENT OF SIGNIFICANT ACCOUNTING ASSUMPTIONS
BASIS OF ACCOUNTING
The financial statements of Aarow Environmental Group, Inc. (the "Company") at
September 30, 1998, have been prepared on the accrual basis of accounting. Using
this method, revenue and expenses are recognized when occurred.
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments which are, in the
opinion of management, necessary for a fair presentation. These financial
statements have not been audited by an independent accountant.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures are adequate.
However, these financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the annual report on
form 10-KSB for the year ended December 31, 1997. The financial data for the
interim periods presented may not necessarily reflect the results to be expected
for the full year.
INVENTORY
Inventory is carried at the lower of cost or market and consists of raw
materials and ready to sell products.
PROPERTY AND EQUIPMENT
Property and Equipment are recorded at acquisition cost. Depreciation is
computed using accelerated methods by charging against earnings amounts
sufficient to amortize the cost of the related assets over their estimated
useful lives.
INCOME TAXES
For income tax reporting and financial statement reporting at September 30,
1998, the Company is using depreciation methods that are the same and therefore
there is no accrual for deferred income taxes at this time. However, because of
various elections available at the time of filing the income tax returns, there
may be future differences between income tax depreciation expense and financial
statement depreciation expense giving rise to accrual of deferred income taxes
Note 1: Property, Plant and Equipment
All assets are recorded at original cost. Depreciation is calculated using
accelerated methods, lives are five years for office equipment, seven years for
manufacturing equipment and furniture, and 10 years for Leasehold Improvements.
6
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AAROW ENVIRONMENTAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Note 2: Noncompete Covenant
On July 29, 1997 the Company entered into an agreement with Evergreen
BioServices, Inc. whereby Evergreen grants Aarow the right to use Evergreen's
name and reputation to exclusively market remediation throughout the U.S. and
Mexican markets. Additionally, Evergreen agrees to work exclusively through
Aarow and Evergreen agrees not to compete with Aarow. Evergreen will supply the
engineering and technical support and will be responsible to accept or reject
all proposals concerning remediation through Aarow. This agreement begins on
July 29, 1997 and remains in effect for ten years at which time Aarow can renew
one time for an additional ten years
Sept. 30, Dec. 31,
1998 1997
---------- ----------
Noncompete Covenant $ 18,000 $ 18,000
Accumulated Amortization ( 2,100) ( 750)
---------- ----------
Net Noncompete Covenant $ 15,900 $ 17,250
========== ==========
Note 3: Judgment Payable
On October 2, 1997 a judgment was entered in the Washington County Court,
Fayetteville, AR, against the Company. This judgment is in the amount of
$18,370 and accrues interest at the rate of 10 %.
Note 4: Short-Term Notes
On September 15, 1997 the Company issued a series of short term notes in the
amount of $ 5,000 each for a total of $ 55,000. Each note accrues interest at
the rate of 8 % and is a single pay note due September 15, 1998. In addition
20,000 shares of common stock and 100,000 common stock warrants were issued to
each note holder. In case of default the note agreements call for the issuance
of an additional 40,000 shares of common stock to each note holder. As of
September 30, 1998 these notes have not been paid and the note holders have not
called the notes. Therefore, the 40,000 shares per note in case of default have
not been issued.
Four of the shareholders who are also Directors and Officers loaned the Company
$ 139,162. These are unsecured non interest demand notes.
On April 3, 1998 the Company borrowed $ 15,000 from Shawn T. Hartsock. This note
is a non interest baring note due and payable on July 3, 1998. An additional
250,000 shares of common stock have been pledged as collateral for this loan. As
of September 30, 1998 there is a remaining balance due of $ 6,050.
Note 5: The company's Long Term debt consists of the following:
Sept. 30, Dec. 31,
1998 1997
---------- ----------
Springdale Bank & Trust, 10.25%, Monthly Int. Only $ 60,000 $ 60,000
Maturity Date 6-21-97
Secured by Inventory and A/R
Current Portion of Long Term debt ( 60,000) ( 60,000)
---------- -----------
Long Term debt, less current portion $ 0 $ 0
========== ==========
The following is a summary of principal maturities of long term debt during the
next five years:
1998 60,000 60,000
7
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AAROW ENVIRONMENTAL GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Note 6: Stockholders' Equity
Common Stock: At September 30, 1998 there were 30,000,000 shares authorized,
10,380,942 issued and outstanding at $ 0.001 per share par value. At December
31, 1997 there were 30,000,000 shares authorized, 9,024,045 issued and
outstanding at $ 0.001 per share par value. The Company trades it's stock on the
over the counter bulletin board using the stock symbol of AARO.
Stock Warrants: There are 1,100,000 common stock warrants issued. Each common
stock warrant permits the holder to purchase at any time from September 15, 1997
until September 15, 2002 one share of the Company's common stock at the initial
exercise price of $ 0.50 per share. The common stock warrants are redeemable by
the Company upon thirty days written notice to the holder, at $ 0.001 per
warrant, conditioned upon the price of the common stock of the Company closing
for fourteen consecutive business days above $ 2.00 per share.
Convertible Preferred Stock: At September 30, 1998 and December 31, 1997 there
were 5,000,000 shares authorized, 3,000,000 shares issued and outstanding. Each
share has a $ 0.001 par value and is convertible for three shares of common
stock.
Note 7: Going Concern
As shown in the accompanying financial statements, the Company has incurred a
loss for the period ended September 30, 1998 and has a deficit in working
capital. Management has a continuing plan to recapitalize the Company,
reestablish the relationship with the distributors and develop new products.
There can be no assurance that the Company will be successful in its efforts to
implement this plan. If the Company is unsuccessful in its efforts, it may be
necessary to undertake such other actions as may be appropriate to preserve
asset value. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 7: Earnings Per Share of Common Stock
Earnings per common share were computed using the weighted average number of
common shares outstanding after adding the dilutive effect of the conversion of
the preferred stock.
8
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AAROW ENVIRONMENTAL GROUP, INC.
SUPPLEMENTAL INFORMATION TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
SUPPLEMENTAL INFORMATION
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Expenses
Accounting $ 3,025 $ 10,559 $ 18,085 $ 12,019
Advertising 727 0 727 400
Amortization 562 225 1,686 975
Auto & Truck 2,658 1,018 3,409 2,660
Bank Charges 68 14 7,596 130
Depreciation 1,968 792 3,936 3,744
Dues & Subscriptions 0 0 65 0
Equipment Rental 0 0 224 0
Insurance 0 0 0 222
Legal Fees 240 0 5,132 6,200
Miscellaneous 0 320 196 380
Office Expense 2,818 6,699 4,327 10,199
Office Salaries 35,466 36,997 69,241 42,997
Other Salaries 0 7,699 0 7,699
Payroll Tax Expense 2,713 3,419 5,297 3,878
Postage 418 22 832 22
Professional Fees 673 0 2,375 0
Rent 4,500 3,529 13,500 4,591
Supplies 1,339 9,002 1,703 9,882
Taxes & Licenses 0 0 326 0
Telephone 4,351 6,503 14,497 6,956
Travel 3,256 1,706 17,553 6,197
Unemployment Taxes 500 1,129 1,746 1,375
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES $ 65,282 $ 89,633 $ 172,453 $ 120,526
=========== =========== =========== ===========
</TABLE>
See notes to unaudited financial statements.
9
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Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto appearing
elsewhere in this Report.
Rendezvous Trails of America, Inc. (formerly Holiday Resorts
International, Inc.) ("RTA"), the former parent of Aarow Environmental (formerly
Rain Forest - Moose, Ltd.), was incorporated in April 1970. The name of the
Company was changed from Rain Forest - Moose, Ltd., to Aarow Environmental
Group, Inc., on June 13, 1997. Since 1986, RTA became inactive and did not
conduct any operations or activities through 1995 and, as of December 31, 1995,
did not have any assets. Pursuant to an Agreement and Plan of Merger, dated
February 23, 1996, RTA merged with and into Aarow Environmental as the surviving
corporation. The merger of RTA with and into Aarow Environmental effectively
changed the state of domicile of RTA to Nevada as a result of Aarow
Environmental being the surviving corporation and was accounted for as a
reorganization of entities under common control which was recorded at historical
cost. Rain Forest - Moose, Ltd., an Arkansas corporation ("RFM Arkansas"), was
formed on March 15, 1994. Pursuant to a Plan of Reorganization and Agreement of
Merger, dated March 5, 1996, RFM Arkansas merged with a wholly-owned subsidiary
of the Company, and as the surviving corporation, RFM Arkansas became a
wholly-owned subsidiary of the Company which was accounted for as a reverse
acquisition of the Company by RFM Arkansas under the purchase method of
accounting (the "RFM Arkansas Acquisition").
Results of Operations
The following table sets forth selected results of operations for the
three months and nine months ended September 30, 1998 and 1997 which are derived
from the unaudited consolidated financial statements of the Company. The results
of operations for the periods presented are not necessarily indicative of the
Company's future operations.
<TABLE>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------------- -------------------------------------
1998 1997 1998 1997
--------------- ------------------ ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Income $ 0 n/a $ 6,608 100.0% $ 26,242 100.0% $ 34,898 100.0%
--- --------- ----- ----- --------- ------
Cost of Sales
Materials $ 0 n/a $ 2,422 36.7% $ 18,427 70.2% $ 11,971 34.3%
Freight 0 n/a 135 2.0% 0 0.0% 135 .4%
-------- --- --------- ------ --------- ------ --------- ------
Total Cost of Sales $ 0 n/a $ 2,557 38.7% $ 18,427 70.2% $ 12,106 34.7%
-------- --- --------- ------ --------- ------ --------- ------
Gross Profit $ 0 n/a $ 4,051 61.3% $ 7,815 29.8% $ 22,792 65.3%
Operating Expenses 65,282 n/a 96,533 1,460.9% 172,453 657.2% $ 120,526 345.4%
-------- --- --------- ------- --------- ------ --------- ------
Income or (Loss) from Operations ($65,282) n/a ($ 92,482)1,399.5% ($164,638) 627.4% ($ 97,734) 280.1%
Other Income and (Expenses)
Interest Expense ($ 3,306) n/a ($ 0) 0.0% ($ 16,304) 62.1% ($ 3,136) 9.0%
Penalties ( 1,702) n/a ( 0) 0.0% ( 5,098) 19.4% ( 1,549) 4.4%
-------- --- --------- ------ --------- ------ --------- ------
Total Other Income and (Expense) ($ 5,008) n/a ($ 0) 0.0% ($ 21,402) 81.5% ($ 4,685) 13.4%
-------- --- --------- ------- --------- ---- --------- ------
Income (Loss) before extraordinary
Items ($ 5,008) n/a ($ 92,482)1,399.5% ($186,040) 708.9% ($102,419) 293.5%
-------- --- --------- -------- --------- ------ --------- ------
Extraordinary Items
Loss on Note Receivable $ 0 n/a $ 0 0.0% $ 0 0.0% ($ 20,455) 58.6%
Loss on Repossession 0 n/a 0 0.0% 0 0.0% ( 3,298) 9.5%
-------- --- --------- ----- --------- ---- --------- ------
Total Extraordinary Item $ 0 n/a $ 0 0.0% $ 0 0.0% ($ 23,753) 68.1%
-------- --- --------- ----- --------- --- --------- ------
Net Income or (Loss) ($70,290) n/a ($ 92,482) 1,399.5% ($186,040) 708.9% ($126,172) 361.5%
======== === ========= ======== ========= ===== ========= =======
</TABLE>
10
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Comparison of the Nine Months Ended September 30, 1998 and 1997
Sales income decreased to $ 26,242 in the nine months ended September
30, 1998 (the "1998 Nine Month Period") from $ 34,898 for the nine months ended
September 30, 1997 (the "1997 Nine Month Period"), a decrease of $8,656 (a
decrease of 24.8 percent). The decrease in sales income was due to the
concentration of the business on the installation and set up of the first
Aarowaste processor. The first processor was installed in Mid June. Most of the
third quarter was spent configuring and testing the processor. Negotiations are
underway for the first sale of the processor, which should take place before
November 30, 1998. The cost of sales increased to $ 18,427 for the 1998 Nine
Month Period from $ 12,106 for the 1997 Nine Month Period, an increase of $
6,321 (an increase of 152.2 percent). The increase in the cost of materials is
mainly due to the Company paying outside contractors to process and bag
absorbent products. All of the product sold in the 1998 Nine Month Period was
product manufactured using outside contractors to process and bag the product,
whereas, the materials sold in the 1997 Nine Month Period was from the inventory
on hand that was processed by the Company itself.
Gross profit declined to $ 7,815 in the 1998 Nine Month Period, from $
22,792 during the 1997 Nine Month Period. As a percent of sales income, gross
profit decreased to 29.8 percent during the 1998 Nine Month Period from 65.3
percent during the 1997 Nine Month Period, which was attributable to the
increased cost of materials as a percent of sale, the cost of materials as a
percent of sales income increased from 34.3 percent during the 1997 Nine Month
Period to 70.2 percent during the 1998 Nine Month Period. Since the casualty
loss in August 1996, the Company has been required to obtain its peat-moss
absorbent materials from third-party providers which has resulted in increased
costs of materials, while during the 1997 Interim Period these materials were
sold from the small amount of remaining inventory.
Operating expenses increased to $ 172,453 (657.2 percent of sales
income) in the 1998 Nine Month Period from $ 120,526 (345.4 percent of sales
income) in the 1997 Nine Month Period, which was principally due to the increase
in office salaries from $ 35,298 during the 1997 Nine Month Period to $ 69,241
during the 1998 Nine Month Period, an increase of 196.2 percent. Also,
accounting expenses increased from $ 12,019 in the 1997 Nine Month Period to $
18,085 in the 1998 Nine Month Period an increase of 150.5 percent. The
accounting expense increased because the former management failed to maintain
the books and records of the company. Legal expenses decreased from $ 6,200 in
the 1997 Nine Month Period to $ 5,132 in the 1998 Nine Month Period a decrease
of $ 17.2 percent. Bank charges increased from $ 130 in the 1997 Nine Month
Period to $ 7,596 in the 1998 Nine Month Period an increase of 584.3 percent.
Rent expense increased from $ 4,591 in the 1997 Nine Month Period to $ 13,500 in
the 1998 Nine Month Period an increase of 294.1 percent. Telephone expense
increased from $ 6,956 in the 1997 Nine Month Period to $ 14,497 in the 1998
Nine Month Period an increase of 208.4 percent. Travel expense increased from $
6,197 in the 1997 Nine Month Period to $ 17,553 in the 1998 Nine Month Period an
increase of 283.2 percent. These increases were attributable to the resumption
of business activities in the 1998 Nine Month Period, while during the 1997 Nine
Month Period the Company's business activities were curtailed due to the August
1996 casualty loss and the disappearance of the Company president. The new
management has focused on the replacement of distributors lost by the previous
management and developing new products such as the Aarowaste processor. The
operating expenses incurred during the 1997 Nine Month Period were incurred in
an attempt to preserve asset value, both tangible and intangible, and to
reestablish channels of product distribution and sales following the August 1996
casualty loss and former management's inabilities or absence.
The Company experienced a loss from operations of $ 164,638 during the
1998 Nine Month Period compared to a loss from operations of $ 97,734 in the
1997 Nine Month Period. The loss from operations in the 1998 Nine Month Period
was 627.4 percent of sales income and 280.1 percent of sales income in the 1997
Nine Month Period.
During the 1998 Nine Month Period the Company was engaged in the
development of the sales and marketing plan for an animal waste processor unit
for which the Company has secured exclusive worldwide marketing rights. The
Aarowaste processor, as it is called, is completed and ready for market as of
November 1, 1998.
11
<PAGE>
During the 1997 Nine Month Period, the Company incurred a loss on the
repossession of a Company vehicle as a result of the default on a note to
Springdale Bank and Trust
A net loss was sustained during the 1998 Nine Month Period of $ 186,040
compared to a loss of $ 126,172 during the 1997 Nine Month Period. During the
1998 Nine Month Period, the Company issued 1,356,897 shares of common stock in
the amount of $ 32,665, which was accounted for as a source of cash from
financing activities.
Quarterly Results of Operations
The Company's operations are affected by seasonal trends principally
based upon weather conditions. Also, for the 1998 Three Month Period sales were
slow due to the time devoted to the Aarowaste processor and continued slow
recovery from the difficulties created by the prior management. In the Company's
experience, sales volume tends to be higher in the second, third and fourth
calendar quarters and lower in the first quarter. The Company expects to show
significantly larger sales beginning in the fourth quarter with the placement of
the first Aarowaste processor. Because the general and administrative expenses
associated with maintaining and adding to the Company's manufacturing and
product distribution work force are relatively fixed over the short term, the
Company's margins tend to increase in periods of higher sales volume and
decrease in periods of lower sales volume. These effects are not always apparent
because of the impact and timing of factors which are beyond the control of the
Company. Nevertheless, the Company's results of operations for a particular
calendar quarter may not be indicative of the results to be expected during
other quarters.
Income Taxes
For income tax reporting and financial statement reporting at September
30, 1998 and 1997, the Company is using depreciation methods that are the same
and therefore there is no accrual for deferred income taxes at this time.
However, because of various elections available at the time of filing the income
tax returns, there may be future differences between income tax depreciation
expense and financial statement expense giving rise to accrual of deferred
income tax.
Because of continuing losses the Company has not incurred any income
tax expense.
Liquidity and Capital Resources
The Company incurred a loss for the nine months ended September 30,
1998 and had a deficit in working capital of $ 390,931. Due to inadequate
management in the last calendar quarter of 1996 and the first calendar quarter
of 1997, there was a reduction in the number of distributors and channels of
distribution for the Company's products which resulted in a substantial
reduction in product sales. On March 31, 1997, the former President of the
Company was removed and new officers and directors were elected. Under new
management, the Company began a plan to recapitalize the Company and to
reestablish the relationships with its former distributors and channels of
product distribution. However, there can be no assurance that future cash flows
from operations and availability of credit from vendors will be sufficient to
implement management's business plan or that the Company will be successful in
its efforts to implement such plan. If the Company is unsuccessful in its
efforts, it may be necessary to undertake such other actions as may be
appropriate to preserve asset value.
Due to the Company's relatively short operating history under new
management, its lack of substantial equity, its working capital deficit and
volume of sales, traditional bank lending facilities are not currently
available. Historically, the Company financed its growth from borrowings and
shareholder contributions and depended in part upon credit terms from its
various vendors as a source of financing. Arrangements with such vendors have
generally been informal, without specific agreements as to terms and payments.
The availability of credit from vendors, or the terms of any such credit, cannot
be assured. Because future cash flows and the availability of vendor credit or
other financing are subject to a number of variables, there can be no assurance
that the Company's cash flows and capital resources will be sufficient to enable
the Company to service its outstanding debt and liabilities or to maintain
currently planned levels of sales and product distribution.
12
<PAGE>
Net cash used by operating activities totaled $ 177,877 in the 1998
Nine Month Period, while net cash used by operating activities totaled $ 69,815
in the 1997 Nine Month Period. During the 1997 Nine Month Period the Company
experienced operating difficulties as a result of the lack of working capital
following the August 8, 1996, casualty loss and the resulting operational
decline and inactivity of the Company during the first calendar quarter of 1997.
The Company also experienced inadequate management until the election of new
management for the Company in March 1997. The new management for the Company
began a plan to augment the capital of the Company and to resume full
operations. However, there is no assurance that the Company will be successful
in its efforts to implement its capital augmentation plan and the resumption of
full business operations, including the reestablishment of its former channels
of product distribution. During the 1998 Nine Month Period, net cash flows
provided by financing activities totaled $ 177,877, while, in comparison net
cash flows used by financing activities totaled $ 95,312 during the 1997 Nine
Month Period. During the 1998 Nine Month Period, the Company had no investing
activities.
On February 24, 1997, Springdale Bank and Trust called a note in the
amount of $9,372 which was in default and obtained possession of the collateral,
a company vehicle.
Currently cash flows from operations are not sufficient to service its
obligations under the various financing arrangements and maintain operations of
the Company. Management of the Company has developed a plan to augment its
capitalization in order to resume full manufacturing and marketing operations.
However, there is no assurance that the Company will be successful in its
efforts to implement its plan for additional capitalization and the resumption
of full business operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this Report constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Certain, but not necessarily all, of such forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should" or "anticipates" or other
variations thereon, or by discussions of strategies that involve risks and
uncertainties. The actual results of the Company or industry results may be
materially different from any future results expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include general economic and business conditions; the ability of the
Company to implement its business plan and strategy; industry changes; changes
in customer preferences; product competition; availability of key personnel;
increasing operating costs; unsuccessful advertising and promotional efforts;
changes in brand awareness and preferences; acceptance of new product offerings;
and changes in, or the failure to comply with, government regulations
(especially environmental protection laws and regulations); the ability of the
Company to obtain vendor credit or other financing; and other factors.
13
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the period
covered by this report.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger between Rendezvous Trails of
America, Inc. and Rain Forest - Moose, Ltd., dated February 23,
1996.*
2.2 Certificate and Articles of Merger of Rendezvous Trails of
America, Inc. with and into Rain Forest - Moose, Ltd.*
2.3 Plan of Reorganization and Agreement of Merger between Rain
Forest - Moose, Ltd., a Nevada corporation, RFM Acquisition
Corporation of Oklahoma, Inc., an Oklahoma corporation, Rain
Forest - Moose, Ltd., an Arkansas corporation, Dan Pilkington,
Jeff Martin, Stan Sisemore, Jim Anderson and Bill Hooten, dated
March 5, 1996.**
2.4 Certificate of Merger of RFM Acquisition Corporation of Oklahoma,
Inc. with and into Rain Forest - Moose, Ltd.**
4.1 Agreement and Plan of Merger between Rendezvous Trails of
America, Inc. and Rain Forest - Moose, Ltd., dated February 23,
1996.*
4.2 Plan of Reorganization and Agreement of Merger between Rain
Forest - Moose, Ltd., a Nevada corporation, RFM Acquisition
Corporation of Oklahoma, Inc., an Oklahoma corporation, Rain
Forest - Moose, Ltd., an Arkansas corporation, Dan Pilkington,
Jeff Martin, Stan Sisemore, Jim Anderson and Bill Hooten, dated
March 5, 1996**.
4.2 Certificate of the Powers Designation, Rights and Preferences for
the Series I Convertible Preferred Stock of Rain Forest - Moose,
Ltd., dated March 5, 1996.**
4.3 Registration Rights Agreement between Rain Forest - Moose, Ltd.
and Dan Pilkington, dated March 5, 1996.**
14
<PAGE>
10.1 Plan of Reorganization and Agreement of Merger between Rain
Forest - Moose, Ltd., a Nevada corporation, RFM Acquisition
Corporation of Oklahoma, Inc., an Oklahoma corporation, Rain
Forest - Moose, Ltd., an Arkansas corporation, Dan Pilkington,
Jeff Martin, Stan Sisemore, Jim Anderson and Bill Hooten, dated
March 5, 1996.**
10.2 Registration Rights Agreement between Rain Forest - Moose, Ltd.
and Dan Pilkington, dated March 5, 1996.**
27 Financial Data Schedule.
- -------------
* Incorporated by reference to Form 8-K, dated March 5, 1996, filed with the
Commission on March 20, 1996. ** Incorporated by reference to Form 8-K, dated
March 7, 1996, filed with the Commission on March 22, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
SIGNATURES
In accordance with the Exchange Act, the Registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
AAROW ENVIRONMENTAL GROUP, INC.,
(Registrant)
By: /s/ Stanley L. Sisemore
------------------------------
Stanley L. Sisemore, President
Date: November 19, 1998
15
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