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, 1998
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)
2233 UNIVERSITY AVENUE, SUITE 225
ST. PAUL MINNESOTA 55114-1696
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number: (651) 645-5454
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: $715,278
As of December 31,1998, 2,169,130 shares of Common Stock were outstanding, and
the aggregate market value of the Common Stock of the Registrant held by
nonaffiliates was approximately $208,148.
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_
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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 Deer Repellent". Grant's Deer Repellent is
a brand name owned by Grant's a wholly owned subsidiary of Central Garden
and Pet.
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 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, 1998, TREE GUARD brand deer repellent
(and substantially the same product sold under Ferti-lome's "This 1 Works" brand
name and Grant's Deer Repellent 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.
CURRENT MARKET EMPHASIS. Throughout 1998, 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
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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
Deer Repellent.
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
growth within this segment. A commercial customer, 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 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.
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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 manufactures 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 distributors 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, Forestry Suppliers. Currently,
TREE GUARD was listed with Spring Hill Nurseries of Peoria, Illinois, Stark
Brothers Nurseries of Missouri and Gardener's Supply Company 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. TREE GUARD is
being reviewed by several additional catalog marketers.
DIRECT MAIL SUPPORT. The Company conducted a direct mail campaign to
support its sales efforts in the year ending December 31, 1998. 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.
MARKETING. The Company's sales executive and Chief Operating Officer
develop and coordinate marketing activities. The Company's 1999 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.
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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, and Philadelphia in 1999 to support retail
distributors.
The Company plans to attend fifteen dealer shows in 1999 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 formulations 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 1,650 square feet of office space in a
light industrial complex in the Saint Paul Midway area. The Company's current
lease expires November 30, 2001. Under the current lease, gross monthly rent is
$1,670 including utilities, janitorial service and property taxes.
Management believes the Company's current facility, or a similar facility,
can accommodate its needs, for the foreseeable future.
EMPLOYEES:
As of March 1999, 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
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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. 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.
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.
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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, 1997 $3.13 $ .75
June 30, 1997 $3.00 $ .88
September 30, 1997 $1.69 $ .63
December 31, 1997 $1.06 $ .63
March 31, 1998 $ .69 $ .56
June 30, 1998 $ .81 $ .44
September 30, 1998 $ .38 $ .19
December 31, 1998 $ .50 $ .19
On February 16, 1999, the high bid and low asked prices for the Company's
shares as quoted on the OTC Bulletin Board were $.25 and $.25, respectively.
As of February 16, 1999, there were 2,169,130 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 $24,000 in
exchange for 15,000 shares of Common Stock.
The Company completed an initial closing on an offering made outside the
United States in reliance upon an exemption from registration under the federal
and state securities laws provided by Regulation S, Rule 504, of the Securities
and Exchange Commission.
During May and June of 1998 proceeds of $41,071 in cash in exchange for
100,000 shares of Common Stock was received.
On May 24, 1998, as part of the Regulation S, Rule 504 offering, four
promissory notes were received. Each of the four notes were secured by 100,000
shares of Nortech Common Stock. The promissory notes were renewed on January 13,
1999. Each promissory note is for the principal sum of $30,000 or an amount
equal to 50% of the bid price per share of Company Common Stock as of the close
of business on the day said stock is sold. Whichever is the highest figure of
these amounts will be the amount paid.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS:
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.
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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, 1998, 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 (26%) 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 Deer Repellent".
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. Due
to the increased independent distributor penetration the number of sales staff
actively selling TREE GUARD increased from 18 in 1996 to 171 by the year ending
in December 31, 1998.
The Company increased its sales efforts to the commercial segment too. It
did this by making sales presentations to many 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 nineteen
percent of the Company's total sales in the year ending December 31, 1998.
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 ten percent
of sales and Grant's Deer Repellent consisted of thirteen percent of sales in
the year ending December 31, 1998.
Grant's was added as a private brand distributor in order to penetrate the
mass merchandise market. 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 and
1998.
YEAR 2000 COMPLIANCE
The Company has been advised by its independent software vendor that it
has completed its evaluation and testing of the accounting software used by the
Company and the necessary changes have been completed to achieve year 2000
compliance. The Company does not believe it will have any significant accounting
or operations impact as a result of the year 2000.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1998
Sales. Sales for the year ended December 31, 1998 were $715,278 compared
to $618,562 reported in 1997. The increased sales were a direct result of
targeting the best independent distributors and then working with them to sell
8
<PAGE>
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 offered seasonal sales discounts and dating
to traditional independent distributors.
Gross Profit and Gross Profit Margin. Gross profit for the year ended
December 31, 1998 was $478,165 or 67% of sales as compared to $400,612 or 65%
for 1997. The increase in margin is a result of increased direct sales of TREE
GUARD and production efficiencies associated with increased volume.
Sales and Marketing Expense. Sales and marketing expense decreased to
$115,663 during the year ended December 31, 1998 compared to $312,755 during
1997. The decrease is made up almost entirely of advertising, and public
relations. Advertising expenditures for the year ended December 31, 1998 were
$35,250 compared to $64,632 on advertising in 1997. Public relations
expenditures for the year ended December 31, 1998 were $3,405 compared to
$43,783 in 1997. Each distributor requires the Company to participate in a
distributor show. The Company increased the number of distributors and the sales
expense is due in large part to the distributor show costs.
Administrative Expense. Administrative Expense decreased to $317,950
during the year ended December 31, 1998, compared to $354,827 during 1997. The
decrease is attributable to management and personnel changes.
Research and Development. Research and Development expense decreased to $0
during the year ended December 31, 1998, from $13,185 during 1997. No studies
were conducted.
Interest Expense. Interest expense increased to $31,682 in the year ended
December 31, 1998, up from $9,390 during 1997. Interest expense increased for
two reasons. First, a settlement with a former officer of the Company requires
the Company to pay 9.5% interest on the unpaid balance of $157,500. See Note 16,
of the notes to financial statements. Secondly, the line of credit with Itasca
Business Credit LLC began in July, 1997. Interest charges from the line of
credit accrued for the entire year of 1998 instead of July through December.
Net Income (Loss). For the reasons discussed above, the Company incurred a
net gain of $13,538, or $.007 per share, for the year ended December 31, 1998,
compared to a net loss of $(333,867), or $(.195) per share, during 1997.
Liquidity and Capital Resources. At December 31, 1998, the Company had
current assets of $238,907 and current liabilities of $224,867, resulting in
working capital of $14,040, compared to current assets of $316,097, current
liabilities of $241,883 and working capital of $74,214 on December 31, 1997. The
decrease in working capital is primarily attributable to the current portion of
long-term debt related to the litigation settlement with a former officer of the
Company.
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 1999, 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 2000. 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, 1998 and
1997 are included on pages F-1 through F-16.
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 "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
9
<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, 1998.
10
<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 22, 1999 /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 22, 1999
- ---------------------------------------------------- --------------
Gary Borglund , Acting President, Chief Executive
Officer and Director (Principal Executive Officer
and Principal Financial and Accounting Officer)
/s/ Robert H. Gilbertson March 22, 1999
- ---------------------------------------------------- --------------
Robert H. Gilbertson, Chairman
/s/ Calvin E. Blanchard March 22, 1999
- ---------------------------------------------------- --------------
Calvin E. Blanchard, Chief Operating Officer
and Director
/s/ Guy W. Miller March 22, 1999
- ---------------------------------------------------- --------------
Guy W. Miller, Director
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
<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 1/2/98 Exhibit 10.3 to the Company's Form
with Calvin E. Blanchard 10-KSB for the fiscal year ended 12/31/95
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 dated 7/30/97 ----
between Nortech Forest Technologies, Inc.
and Itasca Business Credit
10.6 Security Agreement dated 3/6/98 ----
between Nortech 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
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
E-1
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
TABLE OF CONTENTS
-----------------
Page
----
Independent Auditors' Report 1
Financial Statements:
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Equity 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, 1998 and 1997, and the related statements of operations,
stockholders' equity 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nortech Forest Technologies,
Inc. as of December 31, 1998 and 1997, 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
17 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 17. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Edina, Minnesota
January 21, 1999
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash $ 30,874 $ 14,298
Accounts receivable (no allowance for doubtful accounts
deemed necessary) 126,014 215,419
Inventories 77,269 81,024
Prepaid expenses 4,750 5,356
----------- -----------
Total current assets 238,907 316,097
----------- -----------
Property and equipment 62,678 66,019
Less accumulated depreciation (41,580) (34,075)
----------- -----------
21,098 31,944
----------- -----------
Other assets 1,665 5,149
----------- -----------
$ 261,670 $ 353,190
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 77,392 $ --
Line-of-credit 58,522 151,880
Accounts payable - trade 67,659 70,847
Accrued expenses 21,294 19,156
----------- -----------
Total current liabilities 224,867 241,883
----------- -----------
Long-term debt 27,031 --
----------- -----------
Stockholders' equity:
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, 2,169,130 shares at
December 31, 1998, and 1,762,880 shares at December
31, 1997 21,691 17,629
Paid-in capital 1,843,772 1,842,907
Subscription receivable (120,000) --
Accumulated deficit (1,735,691) (1,749,229)
----------- -----------
Total stockholders' equity 9,772 111,307
----------- -----------
$ 261,670 $ 353,190
=========== ===========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales $ 715,278 $ 618,562
Cost of sales 237,113 217,950
----------- -----------
Gross profit 478,165 400,612
----------- -----------
Expenses:
Administrative expenses 317,950 354,827
Sales and marketing 115,663 312,755
Research and development expenses -- 13,185
----------- -----------
433,613 680,767
----------- -----------
Net income (loss) from operations 44,552 (280,155)
Write-off of patent costs -- (38,409)
Interest expense (31,682) (9,390)
Loss on disposal of assets -- (6,776)
Other income 668 863
----------- -----------
Net income (loss) $ 13,538 $ (333,867)
=========== ===========
Basic earnings (loss) per share $ .007 $ (.195)
=========== ===========
Weighted average number of common shares outstanding 2,022,255 1,708,008
=========== ===========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID-IN SUBSCRIPTION ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
--------- -------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
Retirement of stock (93,750) (938) (149,062) -- -- (150,000)
Sale of stock for cash 100,000 1,000 40,071 -- -- 41,071
Offering costs -- -- (6,144) -- -- (6,144)
Stock subscriptions 400,000 4,000 116,000 (120,000) -- --
Net income -- -- -- -- 13,538 13,538
--------- -------- ----------- ----------- ----------- ---------
BALANCE, December 31, 1998 2,169,130 $ 21,691 $ 1,843,772 $ (120,000) $(1,735,691) $ 9,772
========= ======== =========== =========== =========== =========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) In Cash
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 13,538 $(333,867)
Adjustments to reconcile net income (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
Note payable for services 7,500 --
Depreciation 10,846 12,036
Amortization -- 41
Accounts receivable 89,405 (215,419)
Inventories 3,755 (44,075)
Accounts payable - trade (3,188) (6,111)
Accrued expenses 2,138 (600)
Prepaid expenses and other assets 4,090 (2,328)
--------- ---------
Net cash flows from operating activities 128,084 (492,638)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment -- (10,920)
Proceeds from sale of equipment -- 570
--------- ---------
Net cash flows from investing activities -- (10,350)
--------- ---------
Cash flows from financing activities:
Sale of stock/exercise of warrants for cash 41,071 374,000
Offering costs (6,144) (38,172)
Line-of-credit (93,358) 151,880
Payments of notes to related parties/others -- (5,000)
Payments of long-term debt (53,077) --
--------- ---------
Net cash flows from financing activities (111,508) 482,708
--------- ---------
Net increase (decrease) in cash 16,576 (20,280)
Cash, beginning of year 14,298 34,578
--------- ---------
Cash, end of year $ 30,874 $ 14,298
========= =========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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(R), the
Company sells a deer repellent to Voluntary Purchasing Groups (VPG) of
Bonham, Texas, and Grant Laboratories of San Leandro, California, under
private label agreements. Under these agreements, the Tree Guard(R)
formulation is sold in bulk, tanker truckloads, for repacking under the
Ferti-lome "This 1 Works" brand name owned by VPG and "Grants Deer
Repellent" brand name owned by Grant Laboratories.
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.
Major Customers
During 1998 and 1997, three customers accounted for 42.4% and 46.2% of the
Company's sales, respectively.
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.
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 (loss) as if
the fair value based method of accounting had been applied (see Note 9).
(Continued)
6
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Advertising
The Company expenses advertising costs as incurred. Advertising costs
charged to operations were $27,557 in 1998, and $104,743 in 1997.
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 are stated at cost. Depreciation is provided for on
a straight-line basis over the assets' estimated useful lives of three to
seven years.
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 its patent application was denied. These costs
associated with the patent application were written off during the first
quarter of 1997.
Basic Earnings Per Common Share
Basic earnings per common share were computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the year. Diluted earnings per share are not presented
because the effects of the Company's options and warrants are
anti-dilutive.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due, if any, and
deferred taxes related primarily to net operating loss carryforwards
reduced by a valuation allowance.
(Continued)
7
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
2. INVENTORIES
Inventories consisted of the following:
1998 1997
------- -------
Raw materials $55,638 $57,361
Finished goods 21,631 23,663
------- -------
$77,269 $81,024
======= =======
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
1998 1997
------- -------
Furniture and fixtures $33,356 $33,355
Office equipment 22,683 22,683
Warehouse equipment 6,639 6,639
Leasehold improvements -- 3,342
------- -------
$62,678 $66,019
======= =======
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, 1998). The outstanding principal at
December 31, 1998 and 1997, was $58,522 and $151,880, respectively, with
$35,978 available at December 31, 1998.
(Continued)
8
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
5. LONG-TERM DEBT
Long-term debt consisted of the following:
1998 1997
--------- ----
9.5% note payable issued to former employee,
matures 2000, secured by the assets of the
Company $ 104,423 $ --
Less current maturities (77,392) --
--------- ====
$ 27,031 $ --
========= ====
Following are maturities of long-term debt:
1999 $ 77,392
2000 27,031
---------
$ 104,423
=========
6. INCOME TAXES
At December 31, 1998, the Company has operating loss carryforwards for tax
purposes of approximately $1,711,000, which expire through 2013. During
1998, approximately $15,000 of operating loss carryforwards was utilized
to offset taxable income. The Company has fully reserved the tax benefit
of the operating loss carryforwards and the temporary difference related
to deferred costs, amounting to approximately $684,400, 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
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.
(Continued)
9
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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.
Rent expense was $24,400 in 1998 and $25,140 in 1997.
Effective November 1, 1998, the Company entered into a three-year,
non-cancelable lease agreement for replacement office space.
Minimum future lease payments under non-cancelable operating leases are as
follows:
1999 $ 20,049
2000 20,466
2001 17,344
--------
$ 57,859
========
9. EQUITY
Warrants
During 1997, 70,000 warrants exercisable at $1.60 per share for three
years were issued in connection with the issuance of common stock, 21,875
warrants exercisable at $1.60 per share for four years were issued under a
management consulting agreement, and 100,000 warrants exercisable at $1.00
per share for two years were issued for consulting services rendered.
During 1997, in connection with the termination of a CEO, 30,000 warrants
were canceled (see Note 16). In addition, 50,000 warrants exercisable at
$1.00 per share for two years related to 1997 consulting services rendered
were canceled.
During 1998, 50,000 warrants exercisable at $1.00 per share expired.
Following is a summary of transactions:
WARRANTS
-----------------------
1998 1997
-------- --------
Outstanding, beginning of year 249,088 137,213
Issued during the year -- 191,875
Expired during the year (50,000) --
Canceled during the year -- (80,000)
-------- --------
Outstanding, end of year 199,088 249,088
======== ========
(Continued)
10
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
9. EQUITY (CONTINUED)
Stock Option Plan
During 1997, 3,750 stock options exercisable at $4.00 per share for ten
years were granted to a director of the Company. In addition, stock
options granted to employees consisted of the following:
NUMBER OF OPTIONS EXERCISE PRICE TERM
----------------- -------------- --------
150,000 $1.50 10 years
15,000 $1.60 10 years
During 1997, 106,062 stock options to former employees were canceled along
with 7,500 stock options to outside directors.
During 1998, 75,000 stock options exercisable at $1.60 per share for ten
years were granted to a director of the Company.
During 1998, 2,500 stock options to a former employee expired.
The Company's 1995-1996 Incentive Stock Option Plan and its 1995-1996
Non-Qualified Stock Option Plan each authorized the granting of up to
200,000 stock options. Under the Incentive Stock Option 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 with vesting at the
end of three years.
(Continued)
11
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
9. EQUITY (CONTINUED)
Stock Option Plan (Continued)
A summary of the status of the Company's stock option plan as of December
31, 1998 and 1997, and the changes during the years ending December 31,
1998 and 1997, are as follows:
WEIGHTED-
AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
---------------------------------------------- --------- --------------
Outstanding at January 1, 1997 98,750 1.77
Granted 168,750 1.56
Exercised -- --
Canceled (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 1997 $ .79
=========
Outstanding at January 1, 1998 153,938 1.60
Granted 75,000 1.60
Exercised -- --
Expired (2,500) 1.00
--------- ----
December 31, 1998 226,438 1.61
========= ====
Exercisable at December 31, 1998 226,438
=========
Weighted-average fair value of options granted
during 1998 $ --
=========
The fair value of each option granted is estimated using the Black-Scholes
model. The following assumptions were made in estimating fair value:
1998 1997
-------- --------
Dividend yield 0.00% 0.00%
Risk-free rate of return 6.50% 6.50%
Expected life 10 years 10 years
Expected volatility 25.00% 9.00%
(Continued)
12
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
9. EQUITY (CONTINUED)
Stock Option Plan (Continued)
The following table summarizes information about fixed options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------------------- -------------------------------------
NUMBER OF WEIGHTED AVERAGE
RANGE OF OUTSTANDING AT REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31 CONTRACTUAL LIFE EXERCISE PRICE AT DECEMBER 31 EXERCISE PRICE
--------------- -------------- ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$1.50 to 4.00 226,438 10 years $1.61 226,438 $1.61
</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 $-0- in 1998, and $15,000 in 1997.
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:
1998 1997
-------- ----------
Net income (loss)
As reported $ 13,538 $ (333,867)
======== ===========
Pro forma $ 13,538 $ (451,955)
======== ===========
Basic earnings (loss) per share
As reported $ .007 $ (.195)
======== ===========
Pro forma $ .007 $ (.265)
======== ===========
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(R). Dyno formulated Tree Guard(R) 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)
13
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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(R) 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(R) product.
Because sales of Tree Guard(R) 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. 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.
The Company has not yet elected to make matching contributions related to
this plan.
13. FEDERAL REGISTRATION
During 1996, the Company received federal registration from the U.S.
Environmental Protection Agency (EPA) for its product, Tree Guard(R). The
issuance of such federal registration for Tree Guard(R) by the EPA permits
the Company to expand its sales efforts nationally. Although such federal
registration has been granted for Tree Guard(R), 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. 14.
(Continued)
14
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997, 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.
15. SEASONAL NATURE OF SALES
Although the Company does not have significant 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(R) 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.
16. LITIGATION SETTLEMENT
The Company entered into a two-year employment agreement effective April
17, 1997, with an investor who was appointed CEO 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. During 1998, the Company terminated the
employee. The options and warrants were canceled as of December 31, 1997.
Subsequent to being terminated, 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 reimbursing the former
employee for services rendered and buying back 93,750 shares of common
stock and related warrants for $157,500, plus interest at 9.5% through
March 2000.
(Continued)
15
<PAGE>
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
17. 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 since inception of $1,735,691.
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.
18. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1998 1997
--------- ---------
Cash payments for interest $ 30,910 $ 9,390
========= =========
Non-cash investing and financing activities:
Conversion of 12% unsecured convertible
subordinated promissory notes to equity $ -- $ 25,000
========= =========
Write-off of trade secret costs $ -- $ 38,409
========= =========
Issued a long-term note for repurchasing
common stock and reimbursement for
services rendered $ 157,500 $ --
========= =========
Issued subscription receivable for common stock $ 120,000 $ --
========= =========
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 30,874
<SECURITIES> 0
<RECEIVABLES> 126,014
<ALLOWANCES> 0
<INVENTORY> 77,269
<CURRENT-ASSETS> 238,907
<PP&E> 62,678
<DEPRECIATION> 41,580
<TOTAL-ASSETS> 261,670
<CURRENT-LIABILITIES> 224,867
<BONDS> 0
0
0
<COMMON> 21,691
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 261,670
<SALES> 715,278
<TOTAL-REVENUES> 715,278
<CGS> 237,113
<TOTAL-COSTS> 433,613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,682
<INCOME-PRETAX> 13,538
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,538
<EPS-PRIMARY> .007
<EPS-DILUTED> 0
</TABLE>
