SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year ended: DECEMBER 31, 1997
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No. 33-21842-C
NORTECH FOREST TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 06-1342912
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification Number)
7600 WEST 27TH STREET, NO. B-11
ST. LOUIS PARK, MINNESOTA 55426
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number: (612) 922-2520
Securities Registered Pursuant to Section 12(b) of the Act: NONE.
Securities Registered Pursuant to Section 12(g) of the Act: NONE.
Check whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports); and (2) has been subject to such filing requirements for the past
90 days. Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: $618,562
As of March 12,1998, 1,763,109 shares of Common Stock were outstanding, and the
aggregate market value of the Common Stock of the Registrant held by
nonaffiliates was approximately $586,444.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of the
Company's: Proxy Statement for its 1998 Annual Meeting are incorporated by
reference into Items 9, 10, 11 and 12 of Part III.
Transitional Small Business Disclosure Format (check one) Yes ____ No __X__
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS:
General:
Nortech Forest Technologies, Inc. (the "Company" or "Nortech")
manufactures and markets TREE GUARD(R) brand deer repellent, and is engaged in
the development of products designed to protect plants, trees and landscaping
from damage by animals and certain acts of nature. In addition to TREE GUARD,
the Company sells a deer repellent to Voluntary Purchasing Groups (VPG) of
Bonham, Texas, under a private label agreement. Under this agreement, the TREE
GUARD formulation is sold in bulk tanker truck loads, for repackaging under the
FERTI-LOME "This 1 Works" brand name owned by VPG. Under another private label
agreement, the Company packages "Grant's Repels Deer". Grant's Repels Deer is a
brand name owned by Grant's a wholly owned subsidiary of Central Garden and Pet
(exhibit 10.12).
The Company is currently seeking new products to offer to the distribution
system it has created in the last year. The Company believes it can leverage the
distribution it has developed with independent lawn and garden distributors in
the last year. A significant cost associated with marketing TREE GUARD is dealer
and distributor shows. Most of those costs are fixed; that is the personnel and
exhibition fees are unchanged by the number of products offered. If the Company
acquires new products, it believes efficiencies could reduce the cost of sales
and marketing.
At inception, the Company's founder recognized an increasing need for a
product that would safely and efficiently prevent feeding deer from destroying
millions of dollars of valuable plants, trees and landscaping. Market research
showed that homeowners, tree and landscape producers, farmers, industry and
government agencies all suffer economic losses due to feeding (deer browse), and
the problem is aggravated by a deer population that has been growing rapidly.
The Company generated no revenue during the period from its inception
through mid-1994, when initial research and development of TREE GUARD was
completed. The Company had submitted an application for registration of TREE
GUARD with the United States Environmental Protection Agency (EPA) during 1993
and had resubmitted its application in February 1995. In July 1994, the Company
commenced limited sales of TREE GUARD under Special Local Needs Registrations
(SLNs). Individual states grant SLNs under EPA rules that allow them to grant
provisional permits pending EPA registration. From July 1994 through January
1996, the Company conducted limited sales activity under SLN registrations in 13
states. On January 30, 1996, the EPA issued the Company federal registration
number 66676-1 for TREE GUARD. Subsequently, all states except California,
Hawaii and Alaska, and the District of Columbia have accepted the Company's
federal registration of TREE GUARD; and sales are permitted in such states.
PRODUCT(S) AND TECHNOLOGY:
During the year ended December 31, 1997, TREE GUARD brand deer repellent
(and substantially the same product sold under Ferti-lome's "This 1 Works" brand
name and Grant's Repels Deer brand name) were the Company's only product
offerings. TREE GUARD is an easy-to-use, pre-formulated liquid that, when
sprayed on plant material, is effective in minimizing damage resulting from deer
browsing. The active ingredient, denatonium benzoate (Bitrex(TM)), produces an
extremely bitter, lingering taste that animals do not like. TREE GUARD is
ready-to-use, user-friendly and, unlike most competitive products, requires no
mixing. It provides effective adhesion to surfaces to which it is applied. For
these reasons, TREE GUARD remains effective, even after rain, and requires less
frequent application than many competitive products.
COMPETITIVE ADVANTAGES. The Company believes that competitive animal
repellents share a common attribute--they generally don't provide a sufficient
level of protection to satisfy customer expectations--or their effectiveness is
diminished (or eliminated) after a single exposure to rain or snow. Also,
products that compete with TREE GUARD tend to be less user-friendly. They are
generally more difficult to use because they require mixing, or are unpleasant
to work with because of foul odor. For these reasons, sales of competitive deer
repellents have been primarily limited to low-volume purchases to homeowners for
use on residential property.
The Company believes that several key attributes distinguish Nortech and
TREE GUARD from the competition, including: (1) superior efficacy by combining
the extremely bitter taste of Bitrex with an agent that allows deer to detect a
TREE GUARD treatment; (2) a proprietary formula that resists wash off in rain or
snow; (3) the convenience of a ready-to use formula that requires no mixing or
preparation; (4) an active ingredient that is considered safe for plants,
animals and the environment; and (5) a clear coat finish versus some
competitors' chalky residue.
The Company believes that TREE GUARD's performance characteristics offer a
significant competitive advantage. Because TREE GUARD demonstrates superior
efficacy, the Company believes it can be successful in expanding beyond the
consumer/residential market segment into more diverse, technology-demanding
markets. These
<PAGE>
additional market segments represent markets with potentially high volume
opportunities, and include: (1) commercial tree and shrub applicators; (2) the
forestry industry; (3) tree producers; and, (4) government agencies.
CURRENT MARKET EMPHASIS. Throughout 1997, the Company's sales efforts with
TREE GUARD have been primarily directed toward the consumer/residential and
commercial market segments. The largest market segment for TREE GUARD currently
is retail lawn and garden reached through independent lawn and garden
distributors. The Company continues to increase its sales efforts in the
commercial market via its commercial partner Lesco. The Company continues to
market "This One Works" under a private label agreement with Voluntary
Purchasing Group (VPG). To penetrate the mass merchandise market the Company
contracted with Grant's a wholly owned subsidiary of Central Garden and Pet,
Inc. Under its private label agreement with Grant's the Company produces Grant's
Repels Deer. The Company shipped two truckloads of Grant's Repels Deer December
27, 1997.
COMPETITION
The animal repellent industry is extremely competitive, and the Company
competes with many larger, more-established companies, most of which have
significantly greater financial and other resources than the Company, and many
have greater industry-specific experience.
The following partial list of competitive products includes some of the
most popular brands that compete, directly, or indirectly, with TREE GUARD.
DEER AWAY HINDER ROPEL DETOUR REPEL BYE DEER BOBBEX
XP-20 GET AWAY SHOTGUN REPEL MILORGANITE DEER OFF
No assurances can be given that the Company will be able to compete
effectively in the animal repellent market, or that one of its competitors will
not develop another type of product which would compete directly with the
Company. The Company believes its TREE GUARD deer repellent offers many
competitive advantages (see "Products and Technology").
MARKET SEGMENTS AND DISTRIBUTION CHANNELS:
Currently, the Company identifies its four primary market segments as
follows:
INDEPENDENT GARDEN CENTERS. Approximately 20,000 independent garden
centers currently serve residential customers throughout the United States.
These retail outlets provide a variety of seasonal and non-seasonal products for
"do-it-yourself" gardeners. They sell hundreds of products, including plants,
seed, chemical and organic lawn and garden supplies (including fertilizers, weed
killers, etc.); animal repellents and other products designed to limit the
effect of pests; and tools and other equipment related to residential
landscaping. Most independent garden centers emphasize a high level of service,
qualified advice on the best products and techniques, and the highest quality
plant material. Large garden centers often provide floral services and landscape
design and construction services. Independent garden centers may also be called
retail nurseries. Most customers of independent garden centers expect to pay
somewhat higher prices than discount stores, in exchange for the know-how of the
garden center personnel.
The Company's TREE GUARD is currently sold to selected distributors who
sell to a variety of independent garden centers. At the present time, the
independent garden market segment is the primary market for TREE GUARD. In
addition, sales of Ferti-lome "This 1 Works" deer repellent are sold to
independent lawn and garden centers through VPG distributors under the Company's
private label agreement with VPG.
COMMERCIAL CUSTOMERS. The commercial market primarily consists of service
organizations who resell supplies under contract. These are largely comprised of
landscape maintenance companies (or commercial applicators). Other commercial
customers purchase equipment and supplies for use by their own staff, and may
include institutional and commercial complexes, golf courses, cemeteries,
schools and municipalities. Commercial customers can be characterized as highly
knowledgeable and demanding of quality and performance in the products they use.
Although the Company has had limited exposure of its TREE GUARD within the
commercial market segment, management believes there is a high probability of
rapid growth within this segment. LESCO, Inc. is the Company's largest customer.
FORESTRY. The forestry segment is largely comprised of commercial tree
producers, public and private reforestation and soil conservation agencies,
federal, state and local governments, and producers of wood and paper products.
Commercial nurseries sell to forestry customers.
Forestry customers purchase products like the Company's TREE GUARD from a
variety of sources, including distributors and catalogs specializing in
equipment and supplies for the forestry industry. TREE GUARD is currently
available to forestry customers by catalog and through selected distributors who
serve the forestry industry. Forestry
<PAGE>
professionals are generally well-versed in technology and demand the highest
quality and performance in the products they use.
Because of the lengthy adoption cycle inherent with TREE GUARD and the
need for customer trial, the Company believes the forestry market segment will
take longer than other market segments to achieve broad acceptance of its TREE
GUARD.
MASS MERCHANDISERS - DISCOUNT RETAILERS. During the past two decades,
high-volume, national and mass merchandisers have expanded significantly
throughout the country. Most are either regional or national chains. The largest
mass merchandisers are discount department stores that sell everything from
clothing housewares and pharmaceuticals to automotive products and services,
electronics and even grocery items. Such stores often utilize the "store within
a store" layout. Others are referred to as "superstores" and concentrate on
specialty products and services, including electronics, home improvements, or
pet supplies. There are many chains that operate in the farm and home category.
Most mass merchandisers operate lawn and garden centers with their stores
and expand floor and shelf space during eight-week seasonal sales "windows"
during both the spring and fall. Instead of emphasizing customer service, they
generally promote low prices. These stores generally operate on low gross profit
margins in exchange for very high volume. Accordingly, they demand high
inventory turns, and manage their inventory on a "just-in-time basis."
Although mass merchandisers use their own distribution centers for
stocking most inventories, they do not warehouse chemicals, including animal
repellents. Accordingly, mass merchandisers will purchase these products from
distributors who warehouse chemicals and drop ship to individual store locations
on a just-in-time basis, or expect manufactures of these products to accomplish
these tasks. In addition to their requirements of high inventory turn rates, low
inventory levels, and just-in-time order fulfillment, mass merchandisers
typically expect aggressive advertising and promotional programs from
manufacturers, return privileges (or guaranteed sales) and extended payment
terms. Also, they frequently require manufacturers to purchase certain kinds of
premium shelf space.
After evaluating the relationship between high volume sales mass
merchandisers offer and offsetting factors such as pricing pressures (and
resulting pressures on gross profit margins) as well as the additional costs of
inventory, granting extended terms the Company decided to private label for
Grant's. The relationship with Grant's allows the Company to partake of mass
merchandise sales without the offsetting factors mentioned above. Gross profit
margins are reduced in comparison to the independent lawn and garden
distributors. The negatives associated with mass merchandisers are reduced too.
SALES AND MARKETING:
SALES. Currently, the majority of the Company's sales activities are
managed by one experienced sales professional who develops distribution sources
and key account relationships. Due to the sales practices of the independent
lawn and garden industry and, to a large degree, the commercial market segment,
a considerable level of sales effort is performed by distributors and dealers.
Therefore, the Company's sales efforts in these market segments largely involve
training, including helping distributor and dealers understand the TREE GUARD
product adoption cycle, identifying the most common customer objections (and
providing the answers to those objections), and providing customer testimonials
and test results.
The Company is operating under a non-exclusive agreement with
Reforestation Technologies, Inc. (RTI) in connection with sales of TREE GUARD to
the forestry industry. RTI, which maintains staff on the west coast and in
Canada, has served in both a distributor and sales agent capacity, primarily in
the forestry segment.
CATALOG/MAIL ORDER SALES. TREE GUARD is currently listed in the dominant
catalog being mailed to forestry professionals. Currently, TREE GUARD was listed
with Spring Hill Nurseries of Peoria, Illinois for inclusion in certain mailings
in 1998. Spring Hill reports mailing 2 million catalogs per year.
TREE GUARD was listed with Gardener's Supply Co. of Burlington, Vermont
for inclusion in certain mailings in 1998. Gardener's Supply has strong Internet
presence and mails catalogs to 500,000 homes annually.
DIRECT MAIL SUPPORT. The Company conducted a direct mail campaign to
support its sales efforts in the year ending December 31, 1997. A four color
glossy brochure was developed and mailed to garden centers across the United
States. The Company plans to continue to mail directly to independent lawn and
garden centers in the future.
CO-OP ADVERTISING. The Company offers a co-op advertising allowance to
qualifying distributors, based on a percentage of purchases.
BOOKING PROGRAMS AND SALES INCENTIVE PROGRAMS. The Company offers
distributors special booking programs during the spring and fall which offer
either extended terms or a discount on distributor invoice. This practice is
customary in the industry. The Company offered sales incentives to distributor
sales personnel for in season sales. In season sales incentives ensure retail
garden centers are supported and the shelves well stocked.
<PAGE>
MARKETING. The Company's sales executive, Chief Executive Officer and
Chief Operating Officer develop and coordinate marketing activities. The
Company's 1998 marketing plan integrates the following activities (1) publicity;
(2) trade advertising and limited consumer advertising; (3) direct mail to
dealers, with supporting facsimile and telemarketing activities; and (4) a site
on the worldwide web (www.nortechforest.com). The publicity, advertising and
direct mail marketing components are directed toward consumers, independent
garden centers, distributors and buyers in the commercial segment.
TRADE SHOWS. The Company also attends trade shows and conventions that
attract potential customers, distributors, and personnel who influence the
industry. Conventions and regional trade shows exhibit new products. Members of
the trade attend to see what's new and to "catch" new trends. The National Lawn
& Garden Distributors Association Convention and Mid-America Horticultural Trade
Show are examples of conventions. The Company plans to attend regional trade
shows in Boston, Chicago, Portland, Philadelphia and Atlanta in 1998 to support
retail distributors.
The Company plans to attend seventeen dealer shows in 1998 to support each
of the Company's distributors. Dealer shows are selling shows for each
distributor. The distributor invites all of their dealer (retail customers) to
attend. The Company then books sales of TREE GUARD for the next season.
PATENT AND TRADE SECRETS
Nortech believes that the technology used in TREE GUARD is unique and
provides a significant advantage over competitive products in the animal
repellent marketplace. The Company took steps to protect this technology through
patent protection of the basic TREE GUARD formulation (chemical and foliage
coating techniques) and through agreement with Macfarlan Smith, the manufacturer
of denatonium benzoate. Nortech filed a patent application in the U.S. and
Canada on all potential commercial formulation of a nasty tasting substance such
as denatonium benzoate coupled with a broad range of chemicals to bond to leaves
and resist wash-off.
The Company withdrew its patent application during the first quarter
of 1997.
MANUFACTURING AND WAREHOUSING:
During 1996, the Company engaged the services of Iowa-based Imperial Inc.
("Imperial") to formulate and package TREE GUARD, and to perform shipping, as
well as limited warehousing and fulfillment services. Imperial is a high-volume
formulator of chemicals for a variety of manufacturers. In connection with its
formulation, packaging and shipping services for the Company, Imperial also
warehouses certain raw materials associated with TREE GUARD, which the Company
purchases from outside suppliers and arranges for shipment to Imperial. Certain
packaging components are taken from Imperial's inventory. Depending on the
Company's need to stage orders, Imperial will maintain TREE GUARD inventory as
either raw materials, work in progress, finished goods inventory or a
combination thereof.
The Company commenced its relationship with Imperial during the summer of
1996, with the objectives of securing high-volume (truckload) capacity, reliable
turnaround, and consistently high quality. These objectives have been achieved.
Prior to engaging the services of Imperial, the Company performed product
packaging activities in its warehouse adjacent to the Company's principal
offices. In April 1994, the Company entered into a manufacturing and packaging
agreement with Dyno Minnesota of Virginia, Minnesota ("Dyno"). Under this
agreement, Dyno had exclusive worldwide manufacturing and packaging rights for
TREE GUARD. Dyno formulated TREE GUARD and shipped it to the Company in 275
gallon mini-bulk containers for bottling by the Company. During January 1996,
the Company requested written release from the manufacturing and packaging
contract when Dyno was sold to Georgia-Pacific. Prior to, and in connection with
the Company's request for release from this contract, the Company had submitted
a termination notice to Dyno, under contract termination provisions. Late in
1996, the Company settled its account with Dyno. Although management of Georgia
Pacific has verbally agreed to release the Company from the agreement, the
Company has not received written verification from Dyno of such release.
FACILITIES:
The Company leases approximately 2,096 square feet of office space in a
light industrial complex in suburban Minneapolis. The Company's current lease
expires September 30, 1998, and is a one-year renewal of an initial lease that
commenced January 1, 1994. Under the current lease, gross monthly rent is $2,095
plus utilities and a prorated portion of operating expenses and property taxes.
During September 1996 and in conjunction with renewing the initial lease,
the Company reduced its square footage from 5,430 square feet to the current
2,096 sq. ft., and reduced its monthly base rent from $3,250 per month to
<PAGE>
its current monthly base rent of $2,040 per month. The warehouse space that the
Company vacated was less costly than the office space that it maintained under
the one-year renewal. The decrease in facilities was implemented because the
Company was operating with fewer employees and its relationship with Imperial
eliminated the need for warehouse space.
Management believes the Company's current facility, or a similar facility,
can accommodate its needs, for the foreseeable future.
EMPLOYEES:
As of March 1998, the Company had three permanent, full-time employees and
one part-time accountant and financial advisor. The full-time employees are
engaged in activities primarily related to management and administration,
research and development, marketing and sales. The part-time accountant serves
as financial controller.
SEASONALITY:
Management believes that the Company has and will experience seasonal
demand for its TREE GUARD deer repellent. Peak sales are most likely to occur
just prior to customers' applications during the Spring and Fall. The sales
cycle for independent lawn and garden center distributors tends to be weighted
toward the year end. The Company made forty percent of its sales in 1997 in the
last quarter. Management believes this seasonal demand will continue. Other
factors likely to influence seasonality are weather conditions in areas which
freeze, the unique needs of commercial customers, and long lead-times in certain
distribution channels.
The Company's product diversification plans are, in part, intended to
reduce the impact of off-season sales on cash flows. There is no assurance that
such product diversification plans, if successful, will have a meaningful effect
on cash flows.
CORPORATE HISTORY
At the Company's 1996 Annual Meeting of Stockholders held on April 30,
1996, the Company's stockholders approved, among other proposals, a proposal to
effect a one-for-four reverse stock split of the Company's issued and
outstanding Common Stock and an amendment to the Company's Certificate of
Incorporation to reduce the post-split authorized shares of Common Stock from
15,000,000 to 3,750,000 and the Preferred Stock from 2,000,000 shares to 500,000
shares. The effective date of the one-for-four reverse split of the Company's
Common Stock was May 24, 1996, and the unaudited financial statements enclosed
herewith reflect said adjustment for the number of shares of outstanding Common
Stock.
In October 1995, the Company merged the business and operations of its
former wholly owned subsidiary, Nortech Forest Products (NFP) with and into
Nortech Forest Technologies, Inc. This merger was effected to simplify
administration, record-keeping and accounting matters. Management of the Company
believes various operating and administrative efficiencies should result from
this corporate consolidation.
At the Company's 1995 Annual Meeting of Stockholders on June 21, 1995,
stockholders approved, among other items, a proposal to change the corporate
domicile of the Company from Colorado to Delaware. One result of this change in
corporate domicile was that the Company's capital structure changed from no par
value to $.01 par value per share on both common and preferred stock.
On June 11, 1993, the Company (then known as Emerald Eagle Corp.) acquired
all of the issued and outstanding shares of NFP in exchange for 2,800,000
post-split shares of the Company's Common Stock. The Company was originally
organized under the laws of Colorado in January 1986 under the name Service
Finders, Inc. Company's name was changed to Emerald Eagle Corp. in September
1987 and its business was changed to that of a blank-check company seeking
business opportunities. Immediately following the tax-free reorganization
between the Company and NFP, approximately 77.8% of the Company's Common Stock
was held by the former shareholders of NFP.
For financial statement purposes, the acquisition of NFP was accounted for
as a "reverse acquisition," and thus, treated as if NFP had acquired the
Company. As a result, the financial statements of the Company have presented the
operations of NFP from inception and include the Company's operations from the
date of the consummation of such tax-free reorganization. Historical combined
pro forma financial information for the 'Company and for NFP for the periods
prior to the reorganization are not provided by the Company because such
information is not material to an understanding of the current or future
operations of the Company. The historical results of operations of the Company
include transactions and activities that are not expected to recur subsequent to
such reorganization.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION.
The Company's Common Stock is traded in the over-the-counter market, is
quoted in the "pink sheets" published by the National Quotation Bureau and is
listed on the OTC Bulletin Board under the symbol "NRTC". The market for the
Company's Common Stock must be characterized as a limited market due to the
relatively low trading volume and the small number of brokerage firms trading in
the Company's Common Stock and acting as market makers. No assurance can be
given that the over-the-counter market for the Company's securities will
continue or that the prices in such market will be maintained at their present
levels.
The following table sets forth, for the periods indicated, certain
information with respect to the high and low bid quotations Company's shares of
Common Stock. The quotations reflect the effect of the 1-for-4 reverse split
which was effective on May 24, 1996 represent inter-dealer quotations without
retail markups, markdowns or commissions and may not represent actual
transactions.
Bid
--------------------------
Quarter Ended High Low
------------- --------------------------
March 31, 1996 Not available through the
National Association of Securities Dealers
June 30, 1996 $2.875 $2.00
September 30, 1996 $2.625 $1.00
December 31, 1996 $2.50 $ .75
March 31, 1997 $3.125 $ .75
June 30, 1997 $3 $.875
September 30, 1997 $1.6875 $.625
December 31, 1997 $1.0625 $.625
On March 18, 1998, the high bid and low asked prices for the Company's
shares as quoted on the OTC Bulletin Board were $.56 and $.66, respectively.
As of March 12, 1998, there were 1,763,109 shares of the Company's Common
Stock issued and outstanding held by approximately 280 holders of record. This
number does not include shareholders whose shares are held of record by
brokerage houses and clearing corporations on behalf of their customers.
The Company has not paid cash dividends with respect to its Common Stock
and does not intend to pay cash dividends on its Common Stock in the foreseeable
future.
(b) RECENT SALE OF UNREGISTERED STOCK.
Each of the following issuances by the Company of the securities sold in
the transactions referred to below were not registered under the Securities Act
of 1933, as amended, pursuant to the exemption provided under Section 4 (2)
thereof for transactions not involving a public offering.
During January 1997, the Company completed an initial closing on a private
equity placement, receiving cash proceeds of $200,000 in exchange for 125,000
shares of Common Stock. In connection with this investment, the Company issued
this investor a three-year warrant to purchase 40,000 shares of Common Stock at
$1.60 per share. During April of 1997 the Company completed another closing on
its private equity placement, receiving cash proceeds of $150,000 in exchange
for 93,750 shares of Common Stock. In connection with this investment the
Company issued this investor a three-year warrant to purchase 30,000 shares of
Common Stock at $1.60 per share. During July, 1997 the Company completed another
closing on its private equity placement, receiving cash proceeds of $25,000 in
exchange for 15,625 shares of Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS:
<PAGE>
The following discussion and analysis provides information that management
of the Company believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the accompanying audited financial statements and
footnotes.
Certain statements contained herein are forward-looking statements within
the meaning of the Securities Act of 1933 and the Securities and exchange Act of
1934 that involve a number of risks and uncertainties. Such forward-looking
information may be indicated by words such as will, maybe, expects or
anticipates. In addition to the factors discussed herein, among the other
factors that could cause the Company's actual results to differ materially from
current expectations are the following: business conditions and growth in the
plant protection industry and the general economy; competitive factors such as
rival manufacturers and sellers of plant and tree protection products and price
pressures; availability of product component chemicals at reasonable prices;
inventory risks due to shifts in market demand; and risks presented from time to
time in reports filed by the Company with the Securities and Exchange
Commission, including, but not limited to the Company's audited financial
statements for the year ended December 31, 1997, enclosed herein.
GENERAL
The Company has developed, introduced and marketed a ready to use deer
repellent called TREE GUARD. It is formulated to discourage animals from
browsing on plants such as flowers, shrubs and trees. The Company believes based
on it own testing and experience that TREE GUARD fills a significant niche in
the commercial as well as lawn and garden repellent market.
TREE GUARD sales occur primarily among independent lawn and garden centers
(51%). The second largest segment is commercial (35%) which consists of forestry
and professional accounts. The TREE GUARD formula is sold and marketed under two
alternate brand names commonly referred to as private brands. They are "This One
Works" and "Grants Repels Deer".
The largest market segment is retail lawn and garden centers served by
independent lawn and garden distributors. The Company's independent distributors
sell to lawn and garden retailers. Bachman's is an example of the lawn and
garden retailer in the Minneapolis area.
Nortech increased its presence to retailers like Bachman's through its
increased penetration of independent lawn and garden distributors in 1997. The
Company increased the number of distributors purchasing TREE GUARD in 1997. Due
to the increased independent distributors the number of sales staff of
distributors offering TREE GUARD increased from 18 in 1996 to 171 by the year
ending in December 31, 1997.
The Company increased its sales efforts to the commercial segment too. It
did this by making sales presentations at 130 of the LESCO Service Centers. The
Company concentrated its commercial sales efforts on LESCO because it is the
largest national manufacturer and marketer of turf care products and equipment
for the professional segment of the "green industry". LESCO constituted
twenty-four percent of the Company's total sales in the year ending December 31,
1997.
Besides TREE GUARD sales, the Company sells private brand products to
Voluntary Purchasing Group and Grant's. Voluntary Purchasing Group sells to
independent lawn and garden markets. "This One Works" consisted of five percent
of sales and Grant's Repels Deer consisted of thirteen percent of sales in the
year ending December 31, 1997.
Grant's was added as a private brand distributor in order to penetrate the
mass merchandise market. Exhibit 10.12 Grant's is a wholly owned subsidiary of
Central Garden and Pet, a major distributor in the green industry. Central
Garden & Pet Company is headquartered in Lafayette, California. It has 28
regional offices across the United States with three hundred salesmen. Grant's
was selected as a partner because it markets to mass merchandisers like
Wal-Mart. The Company has not been successful in penetrating the mass
merchandise market. The arrangement with Grant's allowed the company to begin
participating in the mass merchandise market without the usual exposure to mass
merchandiser performance and pricing policies. Sales to Grants constituted
thirteen percent of sales in 1997.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1997
Sales. Sales for the year ended December 31, 1997 were $618,562 compared
to $205,154 reported in 1996. Sales tripled in 1997 compared to 1996. The
increased sales were a direct result of targeting the best independent
distributors and then working with them to sell TREE GUARD. The Company attended
an increased number of distributors shows and regional trade shows. Nortech
conducted a limited direct mail campaign to garden centers and garden writers.
Nortech started working with a public relation firm, Media Relations, very early
in 1997. Nortech offered seasonal sales discounts and dating to traditional
independent distributors.
Gross Profit and Gross Profit Margin. Gross profit for the year ended
December 31, 1997 was $400,612 or 65% of sales. The increase in margin is a
result of increased sales of TREE GUARD rather than sales of private brands,
<PAGE>
such as "This One Works", and production efficiencies associated with increased
volume. Management recently negotiated a production rebate with the companies
contract manufacturer. Should sales continue to increase as anticipated reduced
production costs are anticipated.
Sales and Marketing Expense. Sales and marketing expense increased to
$312,755 during the year ended December 31, 1997 compared to $145,020 during
1996. The increase is made up almost entirely of advertising, public relations
and increased expenses related to trade show activity. The Company spent $64,632
on advertising in 1997. The Company spent $43,783 on public relations in 1997.
Due to lack of funding the Company spent little on advertising in 1996 and
nothing on public relations.
Each distributor requires the Company to participate in a distributor
show. The Company increased the number of distributors and the sales expense
increase is due in part to the distributor increase.
Administrative Expense. Administrative Expense increased to $354,827
during the year ended December 31, 1997, compared to $249,277 during 1996. The
increase may be attributed in part to management and personnel changes and
severance arrangements. Salary attributed to research and development by the
general manager was also reallocated to administrative expenses to more
accurately portray the actual costs and activities.
Research and Development. Research and Development expense decreased to
$13,185 during the year ended December 31, 1997, from $41,826 during 1996. Fewer
studies were conducted and some of the salary expense of the general manager was
reallocated to administrative expense.
Interest Expense. Interest expense was $9,390 in the year ended December
31, 1997, down from $41,101 during 1996.
Net Loss. For the reasons discussed above, the Company incurred a net loss
of $333,867, or $.20 per share, for the year ended December 31, 1997, compared
to a net loss of $163,795, or $.14 per share, during 1996. The Company incurred
a loss on operations of $280,155 for the year ended December 31, 1997, compared
to a loss on operations of $314,810 during 1996. The Company's decreased loss in
1996 may be attributed to selling the European license rights for $150,000 in
1996.
Liquidity and Capital Resources. At December 31, 1997, the Company had
current assets of $316,097 and current liabilities of $241,883, resulting in
working capital of $74,214, compared to current assets of $76,455, current
liabilities of $126,714 and negative working capital of $50,259 on December 31,
1996. The increase in working capital is primarily attributable to sales of a
private offering with proceeds totaling $375,000 in the year ended December 31,
1997.
The Company's primary source of financing has been proceeds from sales of
equity and receivable financing. The Company continues to pursue an equity
infusion from a private offering of its common stock.
During the first half of 1998, the Company intends to raise additional
capital through a private offering or debt financing. Furthermore, the Company
believes that, in order to achieve aggressive market penetration objectives it
may be required to raise additional capital during 1999. No assurances can be
given that the Company will be successful in acquiring short-term or long-term
financing necessary for operations, or that such a sales program will be
successful. Failure to obtain the necessary financing will materially adversely
affect the Company's ability to continue operations.
ITEM 7. FINANCIAL STATEMENTS:
The Company's financial statements for the years ended December 31, 1997
and 1996 are included on pages F-1 through F-18.
PART III
ITEM 8. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.:
The information required by Item 8 is incorporated by reference to the
Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders
under the caption "Election of Directors" and the information required by Item 8
concerning compliance with Section 16(a) of the Exchange Act.
On January 2, 1998 Samuel Garst resigned as President and Chief Executive
Office of the Company. Mr. Garst resigned as a member of the board of directors
at the same time.
Mr. Gary Borglund is acting as President and Chief Executive Officer. Mr.
Borglund is not compensated as an employee.
During May 1996, Robert H. Gilbertson, the Company's founder, Chairman of
the Board and former Chief Executive Officer, retired. Mr. Gilbertson served as
Chief Executive Officer from inception until EPA registration was granted on
January 30, 1996
<PAGE>
ITEM 9. EXECUTIVE COMPENSATION:
The information required by Item 9 is incorporated by reference to the
Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders
under the caption "Executive Compensation."
ITEM 10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by Item 10 is incorporated by reference to the
Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders
under the caption "Principal Stockholders; Management Shareholdings."
ITEM 11. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS:
The information required by Item 11 is incorporated by reference to the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
under the caption "Certain Relationships, Transactions."
ITEM 12. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits.
The following Exhibits are included in this report: See "Exhibit Index" on
page E-1 immediately following the Financial Statements of this Form 10-KSB.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the year ended
December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Company has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NORTECH FOREST TECHNOLOGIES, INC.
("Company")
Dated: March 24, 1998 /s/Gary Borglund
-----------------------------------------
Gary Borglund, Acting President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company,
in the capacities, and on the dates, indicated.
Each person whose signature appears below constitutes and appoints Gary
Borglund as his true and lawful attorney-in-fact and agent, acting alone, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any or all amendments to the
Annual Report on Form 10-KSB and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming said
attorney-in-fact and agent, each or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Signature and Title Date
- ------------------- ----
/s/Gary Borglund March 24, 1998
- ---------------------------------------------------- --------------
Gary Borglund , Acting President, Chief Executive
Officer and Director (Principal Executive Officer
and Principal Financial and Accounting Officer)
/s/ Robert H. Gilbertson March 24, 1998
- ---------------------------------------------------- --------------
Robert H. Gilbertson, Chairman
/s/ Calvin E. Blanchard March 24, 1998
- ---------------------------------------------------- --------------
Calvin E. Blanchard, Chief Operating Officer
and Director
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
TABLE OF CONTENTS
-----------------
Page
----
Independent Auditors' Report 1
Financial Statements:
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Equity (Deficit) 4
Statements of Cash Flows 5
Notes to Financial Statements 6
<PAGE>
To The Board of Directors
NORTECH FOREST TECHNOLOGIES, INC.
Minneapolis, Minnesota
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying balance sheets of Nortech Forest Technologies,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nortech Forest Technologies,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that Nortech
Forest Technologies, Inc. will continue as a going concern. As discussed in Note
20 to the financial statements, the Company's accumulated deficit and lack of
profitable operations raise substantial doubt as to the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 20. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Stirtz Bernards Boyden Surdel & Larter, P.A.
Edina, Minnesota
February 5, 1998, except for Note 17 as to which the date is March 6, 1998
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 14,298 $ 34,578
Accounts receivable (no allowance for doubtful accounts
deemed necessary) 215,419 --
Inventories 81,024 36,949
Prepaid expenses 5,356 4,928
----------- -----------
Total current assets 316,097 76,455
----------- -----------
Property and equipment 66,019 78,155
Less accumulated depreciation (34,075) (37,750)
----------- -----------
31,944 40,405
----------- -----------
Organization costs, net of accumulated amortization of $628 in
1997 and $587 in 1996 -- 41
Patent and trade secret costs, net of accumulated amortization
of $-0- in 1997 and 1996 -- 38,409
Other assets 5,149 3,250
----------- -----------
5,149 41,700
----------- -----------
$ 353,190 $ 158,560
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line-of-credit 151,880 $ --
Accounts payable -Trade 70,847 76,958
Notes payable - Other -- 30,000
Accrued expenses 19,156 19,756
----------- -----------
Total current liabilities 241,883 126,714
----------- -----------
Stockholders' equity (deficit):
Preferred stock; par value $.01 per share; 500,000 shares
authorized, none issued -- --
Common stock; par value $.01 per share; 3,750,000 shares
authorized; issued and outstanding, 1,762,880 shares at
December 31, 1997 and 1,509,900 shares at December
31, 1996 17,629 15,099
Paid-in capital 1,842,907 1,432,109
Accumulated deficit (1,749,229) (1,415,362)
----------- -----------
Total stockholders' equity (deficit) 111,307 31,846
----------- -----------
$ 353,190 $ 158,560
=========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Sales $ 618,562 $ 205,154
Cost of sales 217,950 83,841
----------- -----------
Gross profit 400,612 121,313
----------- -----------
Expenses:
Administrative expenses 354,827 249,277
Sales and marketing 312,755 145,020
Research and development expenses 13,185 41,826
----------- -----------
680,767 436,123
----------- -----------
Net loss from operations (280,155) (314,810)
Write-off of patent costs (38,409) --
Interest expense (9,390) (41,101)
Loss on disposal of assets (6,776) --
Sale of license rights -- 150,000
Other income 863 42,116
----------- -----------
Net loss $ (333,867) $ (163,795)
=========== ===========
Net loss per common share $ (.20) $ (.14)
=========== ===========
Weighted average number of common shares outstanding 1,708,008 1,194,253
=========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 1,065,375 $ 10,654 $ 982,526 $(1,251,567) $ (258,387)
----------- ----------- ----------- ----------- -----------
Issuance of stock to former warrant holders 30,833 308 (308) -- --
Debt conversion to equity 123,077 1,231 158,769 -- 160,000
Sale of stock for cash 284,615 2,846 337,154 -- 340,000
Offering costs -- -- (52,472) -- (52,472)
Issuance of stock in exchange for accounts payable 6,000 60 6,440 -- 6,500
Net loss -- -- -- (163,795) (163,795)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996 1,509,900 15,099 1,432,109 (1,415,362) 31,846
Debt conversion to equity 19,230 192 24,808 -- 25,000
Sale of stock for cash 233,750 2,338 371,662 -- 374,000
Offering costs -- -- (38,172) -- (38,172)
Issuance of stock options and warrants in exchange
for services -- -- 52,500 -- 52,500
Net loss -- -- -- (333,867) (333,867)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 1,762,880 $ 17,629 $ 1,842,907 $(1,749,229) $ 111,307
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) In Cash
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(333,867) $(163,795)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Loss on sale of equipment 6,776 --
Issuance of stock options in exchange for services 52,500 --
Write-off of patent costs 38,409 --
Depreciation 12,036 14,237
Amortization 41 127
Accounts receivable (215,419) 3,104
Inventories (44,075) (11,224)
Accounts payable - trade (6,111) (77,510)
Accrued expenses (600) (1,153)
Prepaid expenses and other assets (2,328) 1,572
--------- ---------
Net cash flows from operating activities (492,638) (234,642)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (10,920) --
Patent and trade secret costs -- (4,052)
Proceeds from sale of equipment 570 --
--------- ---------
Net cash flows from investing activities (10,350) (4,052)
--------- ---------
Cash flows from financing activities:
Sale of stock/exercise of warrants for cash 374,000 340,000
Offering costs (38,172) (52,472)
Line-of-credit 151,880 (97,000)
Advances from related parties/others -- 226,000
Payments of notes to related parties/others (5,000) (167,000)
Payments of long-term debt -- (7,175)
--------- ---------
Net cash flows from financing activities 482,708 242,353
--------- ---------
Net increase (decrease) in cash (20,280) 3,659
Cash, beginning of year 34,578 30,919
--------- ---------
Cash, end of year $ 14,298 $ 34,578
========= =========
</TABLE>
See Notes to Financial Statements
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Nortech Forest Technologies, Inc. (the Company), manufacturers and markets
Tree Guard(r) brand deer repellent, and is engaged in the development of
products designed to protect plants, trees and landscaping from damage by
animals and certain acts of nature. In addition to Tree Guard, the Company
sells a deer repellent to Voluntary Purchasing Groups (VPG) of Bonham,
Texas, under a private label agreement. Under this agreement, the Tree
Guard formulation is sold in bulk, tanker truckloads, for repacking under
the Ferti-lome "This 1 Works" brand name owned by VPG. The Company is
currently in the preliminary stages of developing two new products that are
each derived from the proprietary technology of Tree Guard. Management
believes such technology can serve as the foundation for additional
products in the future.
On January 30, 1996, the Company received federal registration from the
U.S. Environmental Protection Agency (EPA) for its product, Tree Guard. The
issuance of such federal registration for Tree Guard by the EPA permits the
Company to expand its sales efforts nationally. Although such federal
registration has been granted for Tree Guard, the Company must comply with
all requirements of the EPA on an ongoing basis. If the Company fails to
comply with federal EPA regulations, it may be penalized, fined, or may
have its EPA registration revoked. Prior to January 30, 1996, the Company
had received approval under Special Local Needs (SLN) registrations to sell
Tree Guard in 13 states. As a result, the Company was able to establish
limited sales through a small group of distributors.
Concentration of Credit Risks
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of trade accounts
receivable. The Company performs ongoing credit evaluations of its
customers to minimize the credit risk, and collateral is generally not
required. The Company has not experienced any significant losses related to
their trade accounts receivable.
During 1997, three customers accounted for 46.2% of the Company's sales.
Pervasiveness 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 sales and expenses during
the reporting period. Actual results could differ from those estimates.
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Merger
Effective October 17, 1995, the Company merged the operations of its sole
wholly-owned subsidiary, Nortech Forest Products, Inc., a Minnesota
corporation, with and into Nortech Forest Technologies, Inc. This merger
was effected to simplify record keeping and accounting matters.
Reverse Stock Split
On April 30, 1996, the Company's stockholders approved, among other
proposals, a proposal to effect a one-for-four reverse stock split of the
Company's issued and outstanding Common Stock and an amendment to the
Company's Certificate of Incorporation to reduce the post-split authorized
shares of Common Stock from 15,000,000 to 3,750,000 and the Preferred Stock
from 2,000,000 to 500,000. The effective date of the one-for-four reverse
split of the Company's Common Stock was May 24, 1996, which is reflected in
the audited financial statements.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. The Company currently accounts for its stock-based
compensation plans using the accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (see
Note 9). Since the Company is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 123, it has elected only
to comply with the disclosure requirements set forth in the statement,
which includes disclosing pro forma net income as if the fair value based
method of accounting had been applied (see Note 9).
Advertising
The Company expenses advertising costs as incurred. Advertising costs
charged to operations were $104,743 in 1997 and $11,958 in 1996.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided for on a
straight-line basis over the assets' estimated useful lives of three to
seven years.
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Patent and Trade Secret Costs
The costs associated with the patent application process were capitalized
with the intent of amortizing them on a straight-line basis over the life
of the patent, once the patent was obtained. During 1997, the Company
received notification that it's patent application was denied. These costs
associated with the patent application were written off during the first
quarter of 1997.
Organization Costs
Organization costs are being amortized on a straight-line basis over a
60-month period.
Net Loss Per Common Share
Net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Fully diluted and
primary earnings per common share are the same amounts for each of the
periods presented. In loss periods, dilutive common equivalent shares are
excluded as the effect would be anti-dilutive.
Income Taxes
The Company has implemented Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes".
2. INVENTORIES
Inventories at December 31 consisted of the following:
1997 1996
------- -------
Raw materials $57,361 $32,178
Finished goods 23,663 4,771
------- -------
$81,024 $36,949
======= =======
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
1997 1996
------- -------
Furniture and fixtures $33,355 $33,355
Office equipment 22,683 33,317
Warehouse equipment 6,639 7,641
Leasehold improvements 3,342 3,842
------- -------
$66,019 $78,155
======= =======
4. LINE-OF-CREDIT
Effective July 1997, the Company secured a $200,000 revolving
line-of-credit with Itasca Business Credit LLC. Under this agreement 75% of
amounts invoiced are advanced up to a maximum of $200,000. This
line-of-credit is secured by the Company's accounts receivable,
inventories, and substantially all assets of the Company and accrues
interest at 10% over the prime rate, with a minimum monthly interest charge
of $1,000 (18% at December 31, 1997). The outstanding principle at December
31, 1997 was $151,880, with $7,757 available.
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable consisted of the following:
1997 1996
--------- -------
12% unsecured convertible subordinated notes
payable issued to outside investors $ -- $30,000
========= =======
During 1997, $25,000 of the subordinated debt was converted to equity and the
balance of $5,000 was repaid.
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
6. INCOME TAXES
At December 31, 1997, the Company has operating loss carryforwards for tax
purposes of approximately $1,725,700, which expire through 2012. The
Company has fully reserved the tax benefit of the operating loss
carryforwards and the temporary difference related to deferred costs,
amounting to approximately $684,900, because the likelihood of realization
of the benefit cannot be established.
The Internal Revenue Code contains provisions that may limit the operating
loss carryforwards available if significant changes in stockholder
ownership of the Company occur.
7. RELATED PARTY TRANSACTIONS
Effective June 30, 1995, the Company acquired from Nordic National Group
("Nordic") all of the assets and proprietary rights with respect to three
product formulas and product lines for $14,001. The former chairman of the
Company controls Nordic. As of December 31, 1996, the Company sold back the
proprietary rights to Nordic National for the original purchase price.
During October 1996, holders of convertible promissory notes converted
$160,000 of the debt to common stock at a conversion price of $1.30 per
share, including $100,000 owed to stockholders and directors of the
Company.
During March 1997, holders of convertible promissory notes converted
$25,000 of the debt to common stock at a conversion price of $1.30 per
share.
8. LEASE
Effective January 1, 1994, the Company entered into a non-cancelable lease
agreement for office space, which was renewed through September 30, 1998.
Under the current lease, gross monthly rent was $3,250 per month through
September 30, 1996, and $2,095 per month through September 30, 1998, plus
utilities and a prorated portion of operating expenses and property taxes.
Rent expense was $25,140 in 1997 and $35,100 in 1996.
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
9. EQUITY
Warrants
During 1996, outside investors were issued three-year warrants to acquire
100,250 shares at a price of $1.30 per share of the Company's common stock
in connection with the initial closing on the Company's $1.5 million
pending private placement. Under the terms of a management consulting
agreement between the Company and Red Oak Management, warrants to purchase
28,462 shares of the Company's common stock at $1.31 per share were also
issued. In addition, a director/stockholder was issued five-year warrants
to acquire 3,750 shares of common stock at an exercise price of $4.00 per
share in connection with the unsecured debt financing in Note 5.
During 1997, the Company completed a second closing on its pending private
equity placement, receiving cash proceeds of $374,000, including $150,000
from an investor who became CEO and a Director of the Company, in exchange
for 233,750 shares of its common stock at $1.60 per share. In connection
with these sales of common stock, the Company issued some of the investors
three-year warrants to purchase 70,000 shares of common stock at an
exercise price of $1.60 per share. Under the terms of the 1996 management
consulting agreement, warrants to purchase 21,875 shares of the Company's
common stock at $1.76 per share were also issued. In addition, the Company
issued warrants to purchase 100,000 shares of common stock at an exercise
price of $1.00 per share for consulting services rendered, of which 50,000
shares were cancelled during 1998.
During 1997, in connection with a two-year employment agreement with an
investor to serve as chief executive officer, the Company granted
three-year warrants to purchase 30,000 shares at $1.60 per share (included
with the 74,800 shares related to the private equity placement), which were
cancelled during 1998 (see Note 17).
Following is a summary of transactions:
WARRANTS
---------------------
1997 1996
------- -------
Outstanding, beginning of year 137,213 4,751
Issued during the year 191,875 132,462
Exercised during the year -- --
Forfeited during the year (80,000) --
------- -------
Outstanding, end of year 249,088 137,213
======= =======
Stock Option Plan
During 1996, the Company issued options to outside directors to purchase
7,500 shares of common stock at $4 per share, through the year 2006, all of
which were cancelled during 1997. In addition, the Company issued options
to directors/employees of the Company to purchase 88,750 shares of common
stock at $1.60 per share, through the year 2006.
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
9. EQUITY (CONTINUED)
Stock Option Plan (Continued)
During 1997, in connection with a two-year employment agreement with an
investor to serve as chief executive officer (CEO), the Company granted a
ten-year option to purchase 75,000 shares of common stock at $1.50 per
share. Subsequent to year-end the CEO was terminated and the deferred
compensation relating to the option was written-off as of December 31, 1997
(see Note 17). The Company also granted a director/employee of the Company
a ten-year option to purchase 75,000 shares of common stock at $1.50 per
share. In addition, the Company granted a former CEO, a ten-year option to
purchase 15,000 shares of common stock at $1.60 per share in connection
with a severance agreement and a ten-year option to purchase 3,750 shares
of common stock at $4.00 per share to a director and chairman.
The Company's stock option plan authorizes the granting of options to its
qualified and unqualified employees, investors, and outside directors for
up to 200,000 shares of common stock. Under the plan, the exercise price of
each option equals the market price of the Company's stock on the grant
date, and an option's maximum term is ten years and they vest at the end of
3 years.
A summary of the status of the Company's stock option plan as of December
31, 1997 and 1996, and the changes during the year ending December 31, 1997
and 1996 are as follows:
WEIGHTED-
AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
- ----------------------------------------------- ------ --------------
January 1, 1996 2,500 $1.00
Granted 96,250 1.79
Exercised -- --
Forfeited -- --
------- -----
December 31, 1996 98,750 1.77
------- -----
Exercisable at December 31, 1996 46,875
=======
Weighted-average fair value of options granted
during the year $ .70
=======
January 1, 1997 98,750 1.77
Granted 168,750 1.56
Exercised -- --
Forfeited (113,562) 1.69
------- -----
December 31, 1997 153,938 1.60
------- -----
Exercisable at December 31, 1997 153,938
=======
Weighted-average fair value of options granted
during the year $ .79
=======
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
9. EQUITY (CONTINUED)
Stock Option Plan (Continued)
The following table summarizes information about fixed options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------ ------------------------------
WEIGHTED
NUMBER OF AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 31 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.00 to 4.00 153,938 9.5 years $ 1.60 153,938 $ 1.60
</TABLE>
The Company applies APB Opinion 25 in accounting for its fixed stock
compensation plan. Compensation cost charged to operations for the
intrinsic value of stock options was $15,000 in 1997 and $-0- in 1996. Had
compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, net loss and loss per share would have been
increased as follows:
1997 1996
------------ ------------
Net loss
As reported $ (333,867) $ (163,795)
============ ============
Pro forma $ (451,955) $ (241,007)
============ ============
Primary earnings per share
As reported $ (.20) $ (.14)
============ ============
Pro forma $ (.26) $ (.20)
============ ============
10. MANUFACTURING AND PACKAGING AGREEMENT
Prior to engaging the services of Imperial, the Company performed product
packaging activities in its warehouse adjacent to the Company's principal
offices. In April 1994, the Company entered into a manufacturing and packaging
agreement with Dyno Minnesota of Virginia, Minnesota ("Dyno"). Under this
agreement, Dyno had exclusive worldwide manufacturing and packaging rights for
TREE GUARD. Dyno formulated TREE GUARD and shipped it to the Company in 275
gallon mini-bulk containers for bottling by the Company. During January 1996,
the Company requested written release from the manufacturing and packaging
contract when Dyno was sold to Georgia-Pacific. Prior to, and in connection with
the Company's request for release from this contract, the Company had submitted
a termination notice to Dyno, under contract termination provisions. Late in
1996, the Company settled its account with Dyno. Although management of Georgia
Pacific has verbally agreed to release the Company from the agreement, the
Company has not received written verification from Dyno of such release.
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
11. MACFARLAN SMITH AGREEMENTS
European License Agreements
During November, 1996, the Company completed negotiations with a U. K.
based entity, Macfarlan Smith Limited (Macfarlan) in connection with the
grant of a ten-year distribution and manufacturing license agreement for
the Company's Tree Guard product in Europe. Terms of the agreement include
a lump-sum payment of $150,000 that has been paid to the Company, as well
as a 7% royalty on European sales of the Tree Guard product. Because sales
of Tree Guard in Europe cannot commence until the appropriate regulatory
approvals have been obtained, the Company does not anticipate royalty
revenue from this agreement for several years.
Supply Agreement
In connection with the license agreement, a supply agreement was also
entered into between the Company and Macfarlan. The agreement is for a term
of five years and covers the Company's supply of denotonium benzoate, as
sold under Macfarlan's trademark "Bitrex" for the United States and Canada.
Under this agreement, Macfarlan has become the Company's exclusive supplier
of denotonium benzoate. There are alternative sources to "Bitrex", and
therefore a disruption in the supply from Macfarlan would have a minimal
impact on operations. The agreement also grants from Macfarlan to the
Company, the right to use the "Bitrex" trademarks in connection with
purchases of "Bitrex" under the Supply Agreement. The agreement contains no
minimum purchase provision.
12. DISTRIBUTION AND REPACKAGING AGREEMENT
During 1996, the Company entered into a three-year commercial distribution
agreement with LESCO, Inc., a manufacturer and marketer of supplies and
equipment for the commercial segment of the green industry.
The Company also entered into a three-year sub-registration and repackaging
agreement with Voluntary Purchasing Groups (VPG). The agreement contains no
minimum purchase provision.
13. EMPLOYEE BENEFIT PLAN
Effective April 1997, the Company adopted an employee benefit plan which
qualifies under Internal Revenue Code 401(k). The Savings Incentive Match
Plan for Employees (SIMPLE IRA) covers employees who have earned $5,000
during the preceding year.
For calendar year 1998, the Company will make matching contributions in an
amount equal to 100% of the employees elective deferral not to exceed 1% of
salary.
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
14. FEDERAL REGISTRATION
During 1996, the Company received federal registration from the U.S.
Environmental Protection Agency (EPA) for its product, Tree Guard. The
issuance of such federal registration for Tree Guard by the EPA permits the
Company to expand its sales efforts nationally. Although such federal
registration has been granted for Tree Guard, the Company must comply with
all requirements of the EPA on an ongoing basis. If the Company fails to
comply with federal EPA regulations, it may be penalized, fined, or may
have its EPA registration revoked.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1997 and 1996, and the methods and assumptions used to
estimate such fair values, are as follows:
Cash and Accounts Receivable
The Fair values of cash and accounts receivable approximate the
carrying amounts because of the short maturity of those financial
instruments.
Notes Payable
The fair values of the notes payable approximate the carrying amounts,
as the variable interest rates on these notes approximate the current
interest rates for similar notes payable and because of the short
maturity of the notes.
16. SEASONAL NATURE OF SALES
Although the Company has insignificant sales history, management believes
that, under normal circumstances, the Company will experience seasonal
demand for its products. The Company's best estimates are that peak sales
are most likely to occur just prior to customers' applications of the
Company's Tree Guard during the Spring and Fall. Other factors likely to
influence seasonality are weather conditions in areas which freeze, the
unique needs of commercial customers, and long lead-times for orders in
certain distribution channels.
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
17. LITIGATION
The Company entered into a two-year employment agreement effective April
17, 1997, with an investor who was appointed Chief Executive Officer and
Board member, with a base salary of $65,000 per year. In connection with
the employment agreement, the Company granted an option to purchase 75,000
shares of common stock at $1.50 per share for a ten-year period and
warrants to purchase 30,000 shares of stock in connection with the purchase
of 93,750 shares at $1.60 per share. Subsequent to year end, the Company
terminated the employee and the options were cancelled in accordance with
the employment agreement.
Subsequent to year end, the former employee brought an action against the
Company in an employment-related lawsuit. The lawsuit was settled March 6,
1998, and resulted in the Company buying back 93,750 shares of common stock
and related warrants for $157,500, plus interest at 9.5% through March
2002.
18. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has incurred
losses of $333,867 in 1997 and $163,795 in 1996 and has incurred losses
since inception of $1,749,229.
The continuation of the Company as a going concern is dependent upon a
variety of factors including, but not limited to, increasing sales,
obtaining profitable operations and raising significant short and long-term
working capital. Management intends to continue to pursue various short and
long-term financing arrangements, and the procuring of working capital
through the private or public placement of the Company's debt or equity
securities. No assurance can be given, however, that any such funds will be
available to the Company when needed or will be available on terms and
conditions favorable or acceptable to the Company. The financial statements
do not include any adjustments related to the recoverability or
reclassification of assets or the amounts of liabilities that might result
should the Company be unable to continue as a going concern.
(Continued)
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
19. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1997 1996
-------- --------
Cash payments for interest $ 9,390 $ 42,259
======== ========
Non-cash investing and financing activities:
Conversion of 12% unsecured convertible
subordinated promissory notes to equity 25,000 $160,000
======== ========
Write-off of trade secret costs $ 38,409 $ 14,001
======== ========
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PAGE NUMBER IN SEQUENTIALLY
NUMBERED FORM 10-KSB OR
ITEM NO. ITEM INCORPORATION BY REFERENCE TO
- -------- ---- -----------------------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Exhibit 3.1 to the Company's Form
Company, as amended 10-KSB for the fiscal year ended 12/31/95
3.2 Bylaws of the Company, as amended Exhibit 3-2 to the Company's Form
10-KSB for the fiscal year ended 12/31/93
10.1* 1995-1996 Incentive Stock Option Exhibit 10-1 to the Company's Form
Plan and form of Agreement 10-KSB for the fiscal year ended 12/31/95
10.2* 1995-1996 Nonqualified Stock Exhibit 10-2 to the Company's Form
Option Plan and form of Agreement 10-KSB for the fiscal year ended 12/31/95
10.3* Employment Agreement dated 1/6/98 Exhibit 10.3 to the Company's Form
with Calvin E. Blanchard 10-KSB for the fiscal year ended 12/31/97
10.4 Toll Manufacturing and Packaging Exhibit 10-3 to the Company's Form
Agreement with Dyno Polymers 10-KSB for the fiscal year ended 12/31/94
Minnesota Incorporated dated 4/5/94
10.5 Security agreement with Itasca Business Exhibit 10.16 to the Company's Form 10-QSB
Credit, LLC, July 30, 1997 for the quarterly period ended June 30, 1997
10.6 Security agreement, subordination agreement, Exhibit 10.6 to the Company's Form 10-KSB
Settlement and Release, Escrow agreement for the fiscal year ended 12/31/97
between Northech Forest Technologies, Inc.
and Samuel D. Garst.
10.7 Repackaging Agreement dated 7/3/96 with Voluntary ----
Purchasing Groups (VPG)
10.8** Distribution/Repackaging Agreement dated 8/1/96 ----
with LESCO, Inc.
10.9 Technology Licensing Agreement dated 11/1/96 with ----
Macfarlan Smith Ltd.
10.10** Supply Agreement dated 11/1/96 with Macfarlan ----
Smith Ltd.
10.11 Investment Agreement dated 10/9/96 with Richard ----
Neslund
10.12 Distribution/Packaging Agreement dated 10/7/97 ----
27 Financial Data Schedule (filed with electronic version ----
only)
</TABLE>
- ----------------------------
* Management agreement or compensatory plan or arrangement.
** Confidential Treatment has been requested on certain information pertaining
to these exhibits
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of this sixth day of
January, 1998, by and between CALVIN E. BLANCHARD (the "Employee") and NORTECH
FOREST TECHNOLOGIES, INC., a Delaware corporation (the "Company").
WHEREAS, the Company desires to employ the Employee to render services to
the Company on the terms and conditions set forth in this Agreement, and the
Employee desires to be employed by the Company on such terms and conditions.
NOW, THEREFORE, the parties agree as follows:
1. Hiring of Employee: Duties. The Company hereby employs the Employee, and
the Employee hereby accepts such employment and agrees to perform services for
the Company, upon the terms and conditions set forth in this Agreement. During
the term of this Agreement, Employee agrees to serve as a Chief Operating
Officer ("COO") of the Company, to manage the day-to-day business and affairs of
the Company, to carry out the decisions of the Chief Executive Officer ("CEO")
of the Company and to perform such reasonable employment duties as the CEO shall
assign to him from time to time. The Employee agrees to serve the Company
faithfully and to the best of his ability and to devote his full time, attention
and effort to the business and affairs of the Company.
2. Term. Unless terminated at an earlier date in accordance with Section 6
of this Agreement, the term of the Employee's employment shall be for three (3)
years commencing January 6, 1998. Thereafter, the term of this Agreement may be
extended by the Company, at its option, for successive one (1) year periods by
written
<PAGE>
notice to the Employee at least ninety (90) days prior to the end of the initial
term or any extension term.
3. Compensation.
3.1 Base Salary. As compensation for the Employee's services
rendered under this Agreement, the Company shall pay the Employee a base salary
of Sixty Five Thousand Dollars ($65,000.00) per year, payable in accordance with
the Company's normal payroll procedures and policies.
3.2 Bonus. The Employee shall also be eligible for a bonus in an
amount determined by the Executive Committee of the Board of Directors of the
Company in its sole and absolute discretion.
4. Benefits.
4.1 Insurance. As additional compensation, Employer provides to
Employee insurance coverage substantially comparable to the insurance provided
to Employee by his immediately previous Employer, the State of Minnesota.
4.2 Vacation. Employee shall be entitled to three weeks of paid
vacation during each of the next three years of employment.
5. Expenses. The Company shall reimburse the Employee for all reasonable
and deductible out-of-pocket expenses which are incurred by the Employee in
connection with the performance by him of his duties during the term of this
Agreement. The Employee shall keep detailed and accurate records of expenses
incurred in connection with the performance of his duties, and provide the same
to the Company when seeking reimbursement.
<PAGE>
6. Intellectual Property.
6.1 Disclosure and Assignment. The Employee will promptly disclose
in writing to the Company complete information concerning each and every
invention, discovery, improvement, device, design, apparatus, practice, process,
method or product, whether patentable or copyrightable or not, made, developed,
perfected, devised, conceived or first reduced to practice by the Employee,
either solely or in collaboration with others, during the period of the
Employee's employment, or within six months thereafter, whether or not during
regular working hours, relating either directly or indirectly to the business,
products, practices or techniques of the Company (hereinafter referred to as
"Developments"). The Employee hereby acknowledges that any and all of such
Developments are the property of the Company and hereby assigns and agrees to
assign to the Company with formal documentationany and all of the Employee's
right, title and interest in and to any and all of such Developments.
6.2 Limitation. The provisions of Section 6.1 shall not apply to
any Development meeting all of the following conditions:
(a) such Development was developed entirely on the Employee's
own time; and
(b) such Development was made without the use of any Company
equipment, supplies, facility or trade secret information; and
(c) such Development does not relate
(i) directly or indirectly to the business of the
Company, or
<PAGE>
(ii)to the Company's actual research or development
engaged in by the Company during the term of this
Agreement or at any time prior thereto; and
(d) such Development does not result from any work performed
by the Employee for the Company.
6.3 Assistance of the Employee. Upon request and without further
compensation (other than reimbursement for all reasonable expenses) the Employee
will do all lawful acts, including, but not limited to, the execution of papers
and lawful oaths and the giving of testimony, that in the opinion of the
Company, its successors and assigns, may be necessary or desirable in obtaining,
sustaining, reissuing, extending and enforcing United States and foreign letters
patent, including, not limited to, design patents, or other applicable
registrations, on any and all of such Developments, and for perfecting,
affirming and recording the Company's complete ownership and title, and to
cooperate otherwise in all proceedings and matters.
6.4 Records. The Employee will keep reasonably complete accounts,
notes, data and records of all Developments in the manner and form requested by
the Company. Such items shall be the property of the Company, and, upon its
request, the Employee will promptly surrender same to it or, if not previously
surrendered upon its request or otherwise, the Employee will surrender the same,
and all but one copy, to the Company upon the conclusion of his employment.
<PAGE>
7. Termination.
7.1 By Death. The Employee's employment shall terminate
automatically upon his death. The Company shall pay to the Employee's
beneficiaries or estate the base salary to which he is entitled pursuant to
Section 3.l through the end of the month in which such death occurs.
7.2 By Disability. If, in the sole opinion of the Board of
Directors, the Employee has been prevented from properly performing his duties
by reason of any physical or mental incapacity by being absent from work for a
period of more than eighty (80) days in the aggregate or sixty (60) consecutive
days in any twelve (12)- month period, then the Employee's employment shall
terminate on, and the base salary to which the Employee is entitled pursuant to
Section 3.1 shall be paid through, the last day of the month in which the Board
of Directors determines that the Employee is disabled, as specified above, and
thereafter the Company's obligations shall terminate. Nothing in this Section
shall affect the Employee's rights under any Company sponsored disability plan
in which he is a participant.
7.3 By Company for Cause. The Company may terminate the Employee's
employment immediately for Cause (as defined below) at any time by giving
written notice to the Employee. The Company shall pay Employee the base salary
to which he is entitled pursuant to section 3.1 through the end of the day of
such termination, and thereafter the Company's obligations shall terminate.
Termination shall be for Cause if:
(a) the Employee embezzles funds of the Company, is
convicted of a felony or any criminal activity
involving dishonesty, fraud, breach of trust
involving money or property of the Company, or
<PAGE>
(b) the Employee violates any of the provisions of this
Agreement; provided, however, that the Company shall
first have given the Employee written notice of the
Employee's violation of the terms of this Agreement
and the Employee shall have failed to remedy such
violation within thirty (30) days of the date of such
notice (other than the provisions of Section 7.3(a),
for which there shall be no notice and cure).
(c) Employee uses activities or words which bring
significant discredit to the reputation of the
Company.
7.4 By Company Without Cause. The Company may, upon ninety (90)
days' advance written notice to the Employee, terminate the Employee's
employment at any time effective after January 1, 2001 without any Cause and
without any liability to the Employee other than to pay to the Employee his base
salary through the effective date of termination. Notwithstanding the foregoing,
if the Employee breaches any part of Section 6, 7.5, 8 or 9 following the
delivery of notice of his termination under this Section 7.4, the termination
shall, without further action by any party, be immediately effective as of the
date of such breach, and the Company shall have no obligation to make any
further payments of base salary to the Employee other than base salary for the
period ending on the date of such breach. The Employee agrees that the Company
may dismiss him under this Section 7.4 without regard to
(a) any general or specific policies (whether written
or oral) of the Company relating to the
employment or termination of its employees, or
<PAGE>
(b) any statements made to the Employee, whether made
orally or in writing, that pertain to the
Employee's relationship with the Company.
7.5 Surrender of Records and Property. Upon termination of his
employment with the Company for any reason, the employee shall deliver promptly
to the Company all records, manuals, books, blank forms, documents, letters,
memoranda, notes, notebooks, reports, data, tables, calculations either as
originals or copies, which are the property of the Company or which relate in
any way to the business, products, practices or techniques of the Company, and
all other property, trade secrets and confidential information of the Company,
including, but not limited to, all documents which in whole or in part contain
any trade secrets or confidential information of the Company, which in any of
these cases are in his possession or under his control.
7.6 Resignation. Upon termination of employment, the Employee
shall be deemed to have resigned from all offices and directorships then held
with the Company or any affiliated company.
7.7 Survival. Notwithstanding any termination of the Employee's
employment, in consideration of his employment to the date of such termination,
the Employee shall remain bound by the provisions of this Agreement which
specifically relate to periods, activities or obligations upon or subsequent to
the termination of the Employee's employment.
8. Noncompetition Covenant.
8.1 Agreement Not to Compete. The Employee agrees that, during the
term of his employment by the Company and for a period of twelve (12) months
thereafter,
<PAGE>
the Employee shall not, directly or indirectly, engage or be interested in any
business which offers, markets or sells any repellant service or repellant
product which competes directly with any repellant service or repellant product
of the company in the United states and such other geographic areas as the
Company conducts business. The Employee shall be deemed to be interested in a
business if the Employee is engaged or interested in that business as a
stockholder, director, officer, employee, salesman, sales representative, agent,
partner, individual proprietor, principal, lender, consultant or otherwise, but
not if such interest is limited solely to the ownership of five percent (5%) or
less of the equity or debt securities of any class of a corporation whose shares
are listed for trading on a national securities exchange or traded in the
over-the-counter market.
8.2 Indirect Competition. The Employee agrees that during the term
of his employment by the Company and for a period of twelve (12) months
thereafter, the Employee will not, directly or indirectly, assist or encourage
any other person in carrying out, directly or indirectly, any activity that
would be prohibited by the provisions of Section 8.1 if such activity were
carried out by the Employee either directly or indirectly. Without limiting the
generality of the foregoing, the Employee agrees that he will not, directly or
indirectly, induce any employee of the Company to carry out, directly or
indirectly, any such activity, solicit, assist, entice, induce or encourage (or
attempt to do so) any person employed by the Company to leave the employment of
the Company, direct or advise any person against becoming an employee of the
Company or recruit or employ any person that the Company is actively recruiting
for employment.
<PAGE>
8.3 Necessary and Reasonable. The employee agrees that the
covenants provided for in Sections 8.1 and 8.2, including the term and
geographic area encompassed therein, are necessary and reasonable in order to
protect the Company in the conduct of its business and to protect the Company in
the utilization of the assets, tangible and intangible, including the goodwill
of the Company.
8.4 Null and Void. The noncompete covenant hereunder is null
and void if:
(a) The Company files, voluntarily or involuntarily, for
the protection of the bankruptcy courts either
through a reorganization or a bankruptcy; or
(b) The Company is acquired by or merged into another
company; or
(c) Employee is involuntarily terminated except if the
termination was for embezzlement from the Company,
criminal activity involving dishonesty, fraud, or
breach of trust involving money or property of the
Company.
9. Nondisclosure Covenant. Except as permitted or directed by the
Company, during the term of this Agreement and all times thereafter, the
Employee shall not, directly or indirectly, divulge, furnish or make accessible
to anyone or use in any way (other than in the ordinary course of the business
of the Company), any trade secret information of the Company which he has
acquired or become acquainted with during any period of his employment or
retention by the Company, whether developed by him or others. Trade secret
information means information, including a formula, pattern, a compilation,
program, device, method, technique, or process, that:
<PAGE>
(a) Derives independent economic value, actual or
potential, from not being generally known to, and not
being readily ascertainable by proper means by, other
persons who can obtain economic value from its
disclosure or use, and
(b) It is the subject of efforts that are reasonable
under the circumstances to maintain its secrecy.
The employee acknowledges that the Company's trade secrets are a unique and
valuable asset of the Company and represent a substantial investment by the
Company, and that any disclosure or use of such knowledge or information other
than for the sole benefit of the Company would be wrongful and would cause
irreparable harm to the Company. The Employee will refrain from any acts or
omissions that would reduce the value of such trade secret information to the
Company.
10. Injunctive Relief. The Employee agrees that it would be
difficult to compensate the Company fully for damages for any violation of the
provisions of Sections 6, 8 or 9 of this Agreement. Accordingly, the Employee
specifically agrees that the Company shall be entitled to temporary and
permanent injunctive relief to enforce the provisions of this Agreement and that
such relief may be granted without the necessity of proving actual damages. This
provision with respect to injunctive relief shall not diminish the right of the
Company to claim and recover damages in addition to injunctive relief.
11. Breach. The Company and the Employee separately agree that any
breach by either of them of this Agreement shall, in addition to any other
remedies available to such party, enable the Employee or the Company, as
applicable to recover
<PAGE>
costs of litigation or mediation and reasonable attorney fees incurred in
enforcing this Agreement.
12. Severability. To the extent that any provision of this
Agreement shall be determined to be invalid or unenforceable, the invalid or
unenforceable portion of such provision shall be deleted from this Agreement,
and the validity and enforceability of the remainder of such provision and of
this Agreement shall be unaffected. In furtherance of and not in limitation of
the foregoing, it is expressly agreed that should the duration of or geographic
extent of, or business activities covered by, the provisions in Section 8 be
determined to be in excess of that which is valid or enforceable under
applicable law, then such provision shall be construed to cover only that
duration, geographic extent or those activities which may validly or enforceably
be covered. The Employee acknowledges the uncertainty of the law in this respect
and expressly stipulates that this Agreement shall be construed in a manner
which renders its provisions valid and enforceable to the maximum extent
possible under applicable law (not exceeding its express terms).
13. Entire Agreement. This agreement contains the entire agreement
between the parties relating to the retention of the Employee by the Company and
supersedes all prior agreements and understandings, whether written or oral,
between the parties relating to such employment. This Agreement may not be
amended or changed except in writing executed by both parties.
14. Assignment. The rights and obligations of the Employee cannot
be assigned or delegated by the Employee.
<PAGE>
15. Governing Law. This Agreement has been entered into by the
parties in the State of Minnesota and shall be construed and enforced in
accordance with the laws of the State of Minnesota.
16. Notice. Any notice required or permitted to be given under
this Agreement shall be deemed to have been delivered on the date following the
day the notice is deposited in the United States mail, certified or registered,
postage prepaid, return receipt requested, and addressed as follows:
If to Employee: Calvin E. Blanchard
668 Howell St. S.
St. Paul, MN 55116
If to the Company: Nortech Forest Technologies, Inc.
7600 West 27th Street
Suite B11
St. Louis Park, MN 55426
or such other address as a party elects by giving the other party not less than
thirty (30) days advance written notice.
The parties have executed this Agreement effective January 6, 1998.
NORTECH FOREST TECHNOLOGIES, INC.
By /s/ Gary Borglund
Its CEO
EMPLOYEE
/s/ Calvin E. Blanchard
Calvin E. Blanchard
STATE OF MINNESOTA
UCC-1 FINANCING STATEMENT
This statement is presented for filing pursuant to Minnesota Uniform Commercial
Code Minnesota Statutes Chapter 336.9-402 (Type in Black Ink)
1. Individual Debtor - Last Name First Name Middle I.
Social Security # Mailing Address
City State Zip Code
2. Individual Debtor - Last Name First Name Middle I.
Social Security # Mailing Address
City State Zip Code
3. Business Debtor - Name
Nortech Forest Technologies, Inc.
Fed. ID # Mailing Address
06-1342912 7600 West 27th Street #B11
City State Zip Code
St. Louis Park MN 55426
4. Secured Party Name 5. Assignee of Secured Party
Samuel D. Garst
Mailing Address Mailing Address
5500 Yorktown Lane N.
City State Zip Code City State Zip Code
Plymouth MN 55442
6. This financing statement covers the following types or items of property. (If
crops are covered describe the real estate and list the name of record owner.)
Inventory
Accounts
Equipment
General / Intangible
Debtor is a transmitting utility as defined by Minnesota Statutes Chapter
336.9-105
RETURN ACKNOWLEDGEMENT COPY TO: (name and address)
/s/ Gary Borglund
Debtor's Signature
(Required in Most Cases see instructions)
Debtor's Signature
/s/ (signature illegibile)
Secured Party's Signature
<PAGE>
SUBORDINATION AGREEMENT
This Subordination Agreement ("Agreement"), made this 6th day of March,
1998, by and between NORTECH FOREST TECHNOLOGIES, INC. ("Nortech"), and SAMUEL
D. GARST ("Garst"),
WHEREAS, the parties hereto have settled a lawsuit brought by Garst against
Nortech, wherein Nortech has agreed to pay Garst $161,688 plus interest over a
period of approximately two years ("Debt"); and
WHEREAS, as part of security for the payment of the Debt, Nortech has
granted Garst a security interest in all of its assets subject to a working
capital line of Nortech; and
WHEREAS, the parties wish to define herein the various rights and duties of
the parties with respect to Garst's agreement to subordinate his security
interest to the working capital line of Nortech;
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. Garst hereby subordinates his security interest to the security
interest of ITASCA BUSINESS CREDIT LLC ("Itasca").
2. Garst undertakes to subordinate his security interest to any other
financial institution which:
(a) Replaces Itasca as the provider of working capital; and
(b) Agrees to provide Nortech a working capital credit line, which
financial institution shall be known as "Lender Bank".
<PAGE>
3. If Nortech wishes to invoke its rights under paragraph 2 hereof, it
will give Garst written notice of intention to engage Lender Bank to
provide a working capital line of credit, which notice shall include a
proposed subordination of Garst's security interest to Lender Bank.
Within five business days, Garst will execute and deliver to Lender
Bank the proposed subordination agreement or, within such time, give
written objections to Nortech in what respects the subordination
exceeds Garst's undertaking under this agreement.
4. In the event of a dispute, Nortech may apply to the Hennepin County
District Court requiring Garst to comply with this agreement. If
application is so made, the prevailing party shall be entitled to
reasonable attorneys fees in addition to any other relief or damages
awarded therein.
IN WITNESS WHEREOF, the parties hereto have executed this agreement the
date first above written.
NORTECH FOREST /s/ Samuel D. Garst
TECHNOLOGIES, INC. SAMUEL D. GARST
By /s/ Gary Borglund
Its CEO
<PAGE>
SETTLEMENT AGREEMENT
AND
RELEASE
This Agreement, made this 6th day of March, 1998, by and between SAMUEL D.
GARST ("Garst") and NORTECH FOREST TECHNOLOGIES, INC. ("Nortech"),
WHEREAS, Garst brought an action against Nortech in Hennepin County
District Court entitled Samuel D. Garst vs. Nortech Forest Technologies, Inc.,
by complaint dated February 9, 1998 ("Action"); and
WHEREAS, the parties desire to settle all claims that have been made or
could have been made in the Action;
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. Nortech will pay Garst $157,500, plus interest on the outstanding
balance from time to time remaining at the rate of nine and one-half percent per
annum, in consecutive monthly installments of $7,000 commencing April 1, 1998.
Interest shall accrue from and after March 1, 1998, and shall continue during
any period of default until paid.
2. Nortech will pay Garst $349 per month for twelve months to cover his
medical insurance costs. The first payment will be made in March 1998 when
payment on such insurance is due.
<PAGE>
3. The payments under paragraphs 1 and 2 above will be secured by a
security interest in the assets of Nortech, subject to its working capital line,
and in the Garst Stock and Warrants (as defined below). The terms and conditions
of the security interest are delineated in Security Agreement, Subordination
Agreement and Escrow Agreement executed in connection with the execution of this
Agreement.
4. By Subscription Agreement dated April 17, 1997, Garst purchased 93,750
shares of common stock of Nortech ("Garst Stock") and 30,000 warrants dated
April 18, 1997 ("Garst Warrants"). Garst hereby warrants to Nortech that he owns
the Garst Stock and the Garst Warrants free and clear of any lien or encumbrance
and that he has full right and authority to transfer them in connection with
Agreement. Garst hereby transfers and assigns all his right, title and interest
in the Garst Stock and the Garst Warrants to Steven E. Rau as escrow under
Escrow Agreement of even date. Garst hereby retains a security interest therein
subject to the terms and conditions specified in the Escrow Agreement.
5. By Employment Agreement dated April 17, 1997, Nortech hired Garst as its
chief executive officer ("Employment Agreement"). The parties hereto hereby
agree that the terms and conditions of the Employment Agreement have been
fulfilled by Nortech to date and that the Employment Agreement is hereby
terminated except that Garst shall continue to be bound by Articles 6, 9, 10 and
11 and paragraphs 7.4 and 7.6 of Article 7.
6. By Stock Option Agreement dated April 18, 1997, Garst was granted the
right to purchase 75,000 shares of common stock of Nortech. Such Stock Option
Agreement is hereby terminated.
<PAGE>
7. Garst hereby resigns as an employee, officer and director of Nortech
effective January 2, 1998.
8. Upon execution of this Agreement, Garst shall cause his counsel to
deliver a Dismissal with Prejudice in the Action.
9. A. Garst, as an individual and as an employee, officer, director and
shareholder of Nortech, does hereby release, acquit and forever discharge
Nortech from any and all demands, claims, causes of action, rights and remedies
of any kind, whether based on contract, tort, statute or regulation or any other
source of law, at law or in equity, whether direct or indirect, whether fixed or
contingent, whether known or unknown, that have been made or asserted, could
have been made or asserted, or could at any time be made or asserted in the
Action, except Garst does not release Nortech from any obligations assumed in
this Agreement or the Security Agreement, Subordination Agreement or Escrow
Agreement executed in connection herewith.
B. Nortech does hereby release, acquit and forever discharge Garst from any
and all demands, claims, causes of action, rights and remedies of any kind,
whether based on contract, tort, statute or regulation or any other source of
law, at law or in equity, whether direct or indirect, whether fixed or
contingent, whether known or unknown, that have been made or asserted, could
have been made or asserted, or could at any time be made or asserted in the
Action, except Nortech does not release Garst from any obligations excepted
under paragraph 5 or assumed in this Agreement or the Security Agreement,
Subordination Agreement or Escrow Agreement executed in connection herewith.
<PAGE>
10. This Agreement is not an agreement for the sale of stock from Garst to
Nortech, but is merely a payment of money for the settlement of a legal dispute.
Garst has no interest in, and no control over, how the payment will be reported
by Nortech. Moreover, Nortech has been seeking capital to fund its operations
and entering into this agreement may facilitate attracting needed capital.
Accordingly, Garst hereby waives any rights he now has, or in the future may
have, to rescind or revoke this Agreement by reason of any pending or imminent
sale of stock of Nortech, or other financial arrangement, to raise capital for
Nortech.
11. The parties hereto acknowledge and understand that this Agreement is a
compromise of disputed claims and their willingness to enter into this Agreement
does not constitute and should not be construed as an admission of liability.
12. The parties hereto acknowledge that there are not covenants, promises,
undertakings or understandings outside of this Agreement and the Security
Agreement, Subordination Agreement and Escrow Agreement. Any modification of, or
addition to, this Agreement must be in writing and signed by both parties.
13. The parties hereto acknowledge that they have entered into this
Agreement knowingly and voluntarily and with advice of counsel.
14. The parties hereto agree that they will keep strictly confidential the
terms of this Agreement, except as may be necessary to comply with security or
auditing disclosure requirements, applicable tax or other laws, and/or court or
administrative orders. If asked, the parties will respond simply that the
settlement was on an amicable basis.
<PAGE>
From the date hereof Garst's communications with Nortech shareholders shall
make no reference to any actions taken by or inaction of Nortech or its
officers, employees or agents prior to the date hereof.
Each party agrees that any communication hereafter with reference to the
other party will refrain from any negative characterization of any action taken
by the other party, and specifically will refrain from any disparaging,
defamatory or slanderous remarks.
15. Nortech warrants to Garst that it is fully authorized to enter into and
execute this Agreement.
16. If for any reason resort to court action is required to enforce any of
the terms of this Agreement or the Security Agreement, Subordination Agreement
or Escrow Agreement, the prevailing party shall be entitled to reasonable
attorneys fees in addition to any other damages or relief sought therein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
date first above written.
NORTECH FOREST /s/ Samuel D. Garst
TECHNOLOGIES, INC. SAMUEL D. GARST
By Gary Borglund
Its CEO
<PAGE>
ESCROW AGREEMENT
This Escrow Agreement ("Agreement"), made this 6th day of March, 1998, by
and between SAMUEL D. GARST ("Garst"), NORTECH FOREST TECHNOLOGIES, INC.
("Nortech"), and STEVEN E. RAU ("Escrow"),
WHEREAS, Garst and Nortech entered into Settlement Agreement and Release of
even date ("Settlement Agreement");
WHEREAS, therein Garst assigned the Garst Stock and Garst Warrants to
Escrow; and
WHEREAS, the parties wish to specify the terms and conditions upon which
Escrow will hold such Stock and Warrants;
NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. Escrow acknowledges receipt of the Garst Stock as evidenced by stock
certificate number ___________, duly endorsed, and receipt of the Garst Warrants
by delivery of warrant agreement duly executed by Garst.
2. Upon payment in full pursuant to paragraphs 1 and 2 of the Settlement
Agreement, Escrow shall deliver the Garst Stock and Garst Warrants in accordance
with written instructions from Nortech.
3. At any time prior to full payment pursuant to paragraphs 1 and 2 of the
Settlement Agreement, Escrow, upon receipt of evidence of good funds in the
amount of $70,000 payable to Garst, shall deliver the Garst Stock and the Garst
Warrants pursuant to the instructions of Nortech, and deliver the $70,000 item
to Garst.
<PAGE>
4. Upon delivery of the Garst Stock and the Garst Warrants pursuant to
either paragraph 2 or 3 above, this Escrow Agreement will be complete and the
Escrow will be discharged without further action of either party.
5. If Nortech shall fail to make payment pursuant to paragraphs 1 and 2 of
the Settlement Agreement, Garst shall give written notice to Escrow with a copy
thereof to Nortech. If Nortech does not cure the default within twenty days of
receipt of such notice by Nortech, Escrow shall deliver the Garst Stock and the
Garst Warrants to Garst.
6. In the event of any dispute with respect to the terms of this agreement,
any party may apply to the Hennepin County District Court for resolution of the
dispute, and the prevailing party shall be entitled to reasonable attorneys fees
in addition to other relief or damages sought therein.
IN WITNESS WHEREOF, the parties hereto have executed this agreement the
date first above written.
NORTECH FOREST /s/ Samuel D. Garst
TECHNOLOGIES, INC. SAMUEL D. GARST
By Gary Borglund
Its CEO
/s/ Steven E. Rau
STEVEN E. RAU
DISTRIBUTION/REPACKAGING AGREEMENT
This Agreement is entered into between NORTECH Forest Technologies, Inc.
("NORTECH") and Grant Laboratories, Inc. ("GLI"), and is effective as of October
7, 1997.
RECITALS
A. Whereas, NORTECH owns and seeks to protect by trade secret its deer
repellent product named "Tree Guard"; and
B. Whereas, NORTECH sub-license the same deer repellent product for the
retail market under the name "This 1 Works" for Voluntary Purchasing Groups,
Inc.; and
G. Whereas, Grant seeks the exclusive right to market and sell said
deer repellent product produced by NORTECH for the retail market with the
exception of Tree Guard and This 1 Works;
Now, therefore, it is agreed as follows:
NORTECH will sell to GLI, and GLI will purchase, the deer repellent product
specified on the attached Exhibit A (the "Product") in prepackaged, finished
form. The Product is identical in formulation to NORTECH's Tree Guard and will,
as outlined in Schedule A attached and when used as directed, effectively deter
deer from browsing.
NORTECH grants to GLI the exclusive right to distribute and sell the Product as
packaged by NORTECH, pursuant to this agreement, to the retail market, under
NORTECH's United States Environmental Protection Agency (EPA) registered
label(s) for the term of this Agreement, except for the rights referred to in
Recitals A and B above.
NORTECH undertakes with GLI not to sell, transfer, license or in any other
fashion grant product manufacture or distribution privileges to any person or
entity that would sell, consign or otherwise distribute the product to any
retailers whatsoever, or any other party, except NORTECH may sell and distribute
Tree Guard and one other deer repellent product to the retail market during the
term of this Agreement, so long as GLI purchases a minimum of 5,000 cases of
Product in each calendar year commencing January 1, 1998. (Any purchases made in
1997 will be applied to 1998.)
Neither party may use in any way the name or trademarks of the other party other
than by agreement of the parties or as may be required by law.
I. TERMS OF SALE/PURCHASE. Price, discounts, rebates and terms of payment
for the term of this Agreement are specified in Exhibit B. GLI shall
have the option at any time during the term of this Agreement,
subsequent to negotiations between the parties, to purchase the Product
in bulk form. Any such bulk form agreement shall continue Grant's
exclusivity in accordance with the terms of this Agreement.
<PAGE>
TAXES. If NORTECH is required to pay any sales, use, value-added or
other taxes based on transactions subject to this Agreement (other than
taxes based on NORTECH's income) such taxes shall be billed to and paid
by GLI.
FINANCIAL CONDITION. NORTECH may defer shipments, alter payment terms,
or terminate this Agreement if GLI fails to pay any invoice in
accordance with the terms of the Agreement. If GLI's financial
condition becomes reasonably unsatisfactory to NORTECH, in addition to
remedies provided elsewhere herein, NORTECH may require cash payments
or satisfactory security for future deliveries.
WARRANTY. NORTECH warrants that in the performance of this Agreement,
it will comply with all applicable federal, state, and local laws and
regulations; NORTECH warrants that the Products shipped hereunder shall
conform to the specifications therefor and to the chemical description
on the label and such label conforms to the EPA registered label
therefor; that the Product will perform in accordance with the
representations specified in Schedule A and NORTECH has no reason to
believe the Product is not efficacious throughout the United States;
that good title, free from any lawful encumbrance shall be transferred
by NORTECH hereunder; that the Products sold by NORTECH to GLI will not
infringe any United States patent; and that the Products sold to GLI
hereunder comply with all governmental regulations. This is a guaranty
under ss. 12(b)(1) of Federal Insecticide, Fungicide and Rodenticide
Act ("FIFRA"), 7 U.S.C. ss. 136(j)(b)(1). GLI warrants that in the
performance of this Agreement, it will comply with all applicable
federal, state and local laws and regulations. NORTECH MAKES NO OTHER
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE, NOR IS
THERE ANY OTHER EXPRESS OR IMPLIED WARRANTY ON PRODUCTS SUBJECT HERETO.
NORTECH SHALL NOT BE LIABLE FOR CONSEQUENTIAL DAMAGES EXCEPT FOR ACTS
OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
INDEMNIFICATION. NORTECH shall defend and indemnify GLI against all
claims for property damage, personal injury, costs and expenses
(including reasonable attorney's fees) suffered by third persons
arising out of purchase, storage or use of, or any action taken or
brought by the U.S. EPA or other governmental authority/agency against
GLI arising out of, Products supplied to GLI hereunder whether arising
in warranty, negligence or otherwise, except to the extent such claims
arise out of GLI's negligence.
GLI shall indemnify NORTECH against all claims for property damage,
personal injury, costs and expenses (including reasonable attorney's
fees) arising out of GLI's negligence in its storage, transportation
and distribution of the Products it purchases including sales practices
not in compliance with NORTECH's label specifications, except to the
extent such claims arise out of NORTECH's negligence, provided,
however, GLI shall not be liable for consequential damages except for
acts of gross negligence or willful misconduct.
<PAGE>
TITLE AND RISK OF LOSS. Title and risk of loss of the Products shall
pass to GLI under NORTECH's delivery to carrier, FOB Shenandoah, Iowa.
FORCE MAJEURE. Deliveries may be suspended by either party in the event
of war, fire, flood, labor trouble, breakage of equipment, accident,
riot, act of governmental authority (including but not limited to the
U.S. Environmental Protection Agency ["EPA"] or similar state
agencies), acts of God, or contingencies beyond the reasonable control
of such party, interfering with the production, supply, transportation,
or sale of any of the Product covered by this Agreement, or in the
event of inability to obtain on terms deemed by NORTECH to be
practicable any raw material (including energy). Quantities so affected
shall be eliminated from this Agreement without liability, or if by the
mutual written agreement of both parties, may be deferred, but this
Agreement shall otherwise remain unaffected.
II. NORTECH EFFORTS
FORMULATION. NORTECH will formulate the Product in accordance with the
specifications outlined on Exhibit A and it will not change or alter
the specification without notifying GLI. No such change will be made
which adversely affects the efficacy of the Product.
PACKAGE SIZE. NORTECH represents that it will not market its Tree Guard
product in 24 ounce or half gallon containers.
III. GLI EFFORTS
PROMOTIONAL MATERIALS. GLI shall prepare and pay for all promotional
materials for the Product, but all such materials must be approved in
writing by NORTECH prior to their use, which shall not be unreasonably
withheld. If such approval is not given within 10 working days, it
shall be deemed approved.
PRODUCTS STEWARDSHIP. GLI will use commercially reasonable best efforts
ensure that each of its facilities that stocks, handles and ships
Product shall be properly equipped to do so safely, in compliance with
federal, state, and local regulations.
CONTAINER APPROVAL. Containers used by GLI for repackaged Product shall
be approved by NORTECH.
IV. EPA REGISTRATION
REGISTRATION. NORTECH shall exercise its best efforts (i) to maintain
EPA registration number 66676-1 and (ii) to sub-register "Grant's
Repels Deer" for the Product under FIFRA.
MODIFICATION OF LABEL. NORTECH will use best efforts to obtain EPA
approval of the following words on its label: Latex formulation, dries
clear, leaves a nasty
<PAGE>
taste, pleasant odor, can be used on flowers, shrubs and trees. Upon
EPA approval of these words, only GLI and NORTECH will have rights to
use these words on labels intended for retail distribution.
TESTING. NORTECH will conduct tests and use best efforts to obtain EPA
approval of "rain resistant" and "lasts a full growing season" for
label use. NORTECH will use its best efforts for such approval for two
years. Upon EPA approval of these words, only GLI and NORTECH will have
rights to use these words on labels intended for retail distribution.
OTHER ANIMALS. NORTECH will pursue testing and approval to add other
animals.
V. STATE REGISTRATION
NORTECH shall maintain and pay the cost of the license of Tree Guard in
each state presently licensing Tree Guard. (Tree Guard is presently
licensed in each state except California, Hawaii and Alaska.)
NORTECH will use its best efforts for a period of two years to obtain
registration for the Product in the State of California. NORTECH will
bear all costs of registering Tree Guard in California.
GLI will maintain and pay the costs of the registration of the Product
in each state in which the Product is sold.
VI. OTHER PROVISIONS
TERM. This Agreement is effective as of the date specified above and
shall continue in effect through December 31, 2003. Six months prior to
the end of the initial term, the parties hereto shall negotiate in good
faith an extension of this Agreement.
TERMINATION. Either party may terminate this Agreement upon the other
party's continuing breach of this Agreement after written notice by the
non breaching party to the breaching party and a thirty (30) day
opportunity to cure.
GLI shall have the right to terminate this Agreement upon six (6)
months written notice, provided, however, that upon giving of such
notice GLI shall have the right to sell out its inventory into the
marketplace and this Agreement shall continue in those aspects
necessary to accommodate such sales. Moreover, GLI shall have the right
to terminate this Agreement for cause if NORTECH fails (a) to obtain
EPA and all other required federal registrations and sub-registrations,
(b) deliver Product in accordance with the specifications and
warranties contained herein. If the Agreement is terminated for cause,
NORTECH will repurchase all of GLI Product inventory at cost.
<PAGE>
Paragraphs of this Agreement regarding warranties and Indemnification
will survive the termination under all circumstances.
EPA CANCELLATION. In the event that any Product is suspended and later
canceled by EPA under Section 6 (7 U.S.C. ss. 136d) of the FIFRA,
NORTECH hereby agrees to (i) accept return of GLI's inventory of the
canceled Product and to credit GLI with the net invoice price of such
inventory, and (ii) reimburse GLI or its parent corporation, Central
Garden & Pet Company, for the cost of recall of Product, including
without limitation, the cost of shelf and consumer recall.
TERMS AND CONDITIONS. NORTECH standard terms and conditions outlined on
Exhibit C will apply to each transaction hereunder.
NON-ASSIGNABILITY. The rights and duties of GLI under this Agreement
are not assignable or transferable to any other party, other than to a
party controlling, controlled by, or under common control of GLI,
without the prior written consent NORTECH, which consent shall not be
unreasonably withheld.
NON-WAIVER. Failure of either party to exercise any right under this
Agreement on any occasion shall not in any way waive or reduce its
right to exercise any right on any other occasion.
AMENDMENTS. The terms and conditions herein may only be modified or
added to by an amendment, expressly identified as such, signed by
authorized representatives of both parties.
ARBITRATION. Both parties agree that any disputes arising out of the
performance of this Agreement will be resolved by arbitration conducted
in accordance with the commercial rules of the American Arbitration
Association.
ENTIRETY. This Agreement, with the attached Schedule A and Exhibits A,
B, and C constitutes the entire understanding between NORTECH and GLI
regarding the Product. It supersedes all previous agreements and
understanding and therefore represents the total current relationship.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in
duplicate by their duly authorized representatives as of the day and year first
above written.
NORTECH Forest Technologies Inc. Grant Laboratories, Inc.
By: /s/ Samuel D. Garst By: /s/ Louis Antonali
Name: Samuel D. Garst Name: Louis Antonali
Title: CEO & President Title: President
Date: Oct. 7, 1997 Date: Oct. 16, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,298
<SECURITIES> 0
<RECEIVABLES> 215,419
<ALLOWANCES> 10,505
<INVENTORY> 81,024
<CURRENT-ASSETS> 321,246
<PP&E> 66,019
<DEPRECIATION> (34,075)
<TOTAL-ASSETS> 353,190
<CURRENT-LIABILITIES> 241,883
<BONDS> 0
0
0
<COMMON> 17,629
<OTHER-SE> 93,678
<TOTAL-LIABILITY-AND-EQUITY> 353,190
<SALES> 618,562
<TOTAL-REVENUES> 618,562
<CGS> 217,950
<TOTAL-COSTS> 217,950
<OTHER-EXPENSES> 680,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,527
<INCOME-PRETAX> (288,682)
<INCOME-TAX> 0
<INCOME-CONTINUING> (288,682)
<DISCONTINUED> 0
<EXTRAORDINARY> 45,185
<CHANGES> 0
<NET-INCOME> (333,867)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> 0
</TABLE>
