U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
NORTECH FOREST TECHNOLOGIES, INC.
(Name of Small Business Issuer in its Charter)
Delaware 06-1342912
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2233 University Avenue, Suite 225
St. Paul, Minnesota 55114-1696
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (651) 645-5454
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class to be so registered
Common Stock
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 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
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
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 amendments to this Form 10-KSB. [ ]
The issuer's revenues for the Fiscal Year ended December 31, 1999 were $789,119
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the issuer as of December
31, 1999 computed by reference to the close price as at December 31, 1999 of
4,474,130 of the registrant's Common Stock as quoted on the OTC Bulletin
Board service on such date, was approximately $2,818,701.
As at December 31, 1999, there were 4,474,130 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
----- -----
PART 1
- ------
Statements contained in the annual report that are not historical facts are
forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
are subject to risks and uncertainties, which could cause actual results to
differ materially from estimated results. Such risks and uncertainties are
detailed in filings with the Securities and Exchange Commission, including
without limitation in Item 1. "BUSINESS" and Item 6 "MANAGEMENT'S
DISCUSSION AND DESCRIPTION OR PLAN OF OPERATION" below.
TABLE OF CONTENTS
PART I
------
Item 1 Description of Business
................................................................. 1
Item 2 Description of Property
................................................................. 20
Item 3 Legal Proceedings
................................................................. 20
Item 4 Submission of Matters to a Vote of Security Holders... 20
PART II
Item 5 Market for Common Equity and Related Stockholder Matters .... 22
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 23
Item 7 Financial Statements and Supplementary Data .......... 35
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 61
PART III
Item 9 Directors and Executive Officers of the Registrant ... 61
Item 10 Executive Compensation ............................... 61
Item 11 Security Ownership of Certain Beneficial Owners and
Management
Item 12 Certain Relationships and Related Transactions ....... 61
Item 13 Exhibits and Reports on Form 8-K
......................................... 61
SIGNATURES .........................................................63
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT AND HISTORY
CORPORATE HISTORY
Through February 2, 2000, Nortech Forest Technologies, Inc. ("Nortech") was
engaged in the business of manufacturing and marketing TREE GUARD (R) brand
deer repellent and the development of products designed to protect plants,
trees and landscaping from damage by animals and certain acts of nature. On
February 3, 2000, Nortech entered into a stock sale agreement to purchase
all of the outstanding stock of Floral Inc. and FL Flowers, Inc., in
exchange for 3,206,245 shares of common stock, plus an additional 6,412,474
shares of common stock contingent upon achieving certain annual gross sales
targets, and changed its business focus to retail flower sales.
As a result of the stock sale agreement, Nortech acquires an ongoing floral
business with 12 florist shops located in the Minneapolis/St. Paul
metropolitan area, operating under the names FL Floral, Inc. and FL Flowers,
Inc., d.b.a. Stems and Vines, including equipment, inventory and goodwill.
On February 3, 2000, in a move to effectuate the change of the principal
business of Nortech from animal repellent sales to floral sales, Nortech
sold all of the assets associated with its animal repellent business to
Becker Underwood, Inc. for the sum of $850,000, subject to adjustment to
equal the actual 1999 sales of Nortech, reduced dollar for dollar in the
event Nortech's independent auditors determine that gross sales for 1999 are
less than $789,119.
Prior to the 1999 Annual Meeting of Stockholders, a proposal to increase the
authorized capital of Nortech from 3,750,000 to 15,000,000 common shares was
approved by a majority of the stockholders.
THE FLORAL SALES BUSINESS
IN GENERAL
Nortech is an integrated retailer and marketer of flowers, plants, and
complementary gifts and decorative accessories. It operates the largest
chain of floral specialty retail stores in the Minneapolis/St. Paul
metropolitan area. The Company's plan is to build brand name recognition in
the North Central United States, and then attempt to expand that brand name
recognition nationally. Nortech has sought to accomplish this by
integrating its operations throughout the floral supply chain, from product
sourcing to delivery, and by managing every interaction with the customer,
from order generation to order fulfillment. Nortech ultimately intends to
provide all of its retail customers with a unique and enhanced shopping
experience under the Stems and Vines brand.
Nortech's retail locations all utilize the brand name, Stems and Vines, and
a common advertising theme. The design focus for each location centers on a
European garden look. This common theme allows for the inter-company
exchange of products and services among Nortech's retail locations. The
inter-company computer system allows for the centralized location and
location-targeted production of arrangements, thereby reducing or
eliminating significant cross-location delivery issues.
Nortech serves customers who do not visit or phone our retail stores through
its Internet web site, www.stemsandvines.com. Nortech currently promotes
its web site on leading Internet properties, including Yahoo! To ensure
superior customer service and efficient order processing, Nortech operates a
central call center. To distribute orders in markets where Nortech does not
have its own stores, Nortech uses several flowers-by-wire services,
including FTD, Florafax and American Floral Services (AFS).
Management believes that the execution of this integrated operating model
will make the stems and vines brand synonymous with superior service,
quality and value.
Nortech operates twelve floral retail stores and one central production/call
center. Each store sells fresh cut flowers, green plants, blooming plant,
dried floral arrangements, silk flowers and gifts. Nortech provides a wide
array of traditional and contemporary designs for over 150 weddings
annually. Nortech also performs plant maintenance for corporate customers.
THE FLORAL INDUSTRY.
Supply Chain
The majority of cut flowers sold at retail in the United States are grown
outside of the United States, principally in Colombia, Mexico, Ecuador and
the Netherlands. Flowers grown outside of the United States are shipped from
the farms to importers in the United States. The majority of European
products arrive in New York while most Central American and South American
products arrive in Miami. After clearing customs and inspections, floral
importers divide the flowers into smaller lot sizes and repack the flowers
for shipment to wholesalers or bouquet companies. Wholesalers then market
the flowers to retail florists, supermarkets, other mass market outlets, and
bouquet companies. Flowers sold to bouquet companies are usually arranged
and packaged for the consumer market and the bouquets are then sold in bulk
by the bouquet companies to supermarkets and mass-market retailers. In
aggregate, the supply chain typically delivers a flower to the retailer
approximately 10 to 12 days after the flower is first cut. Moreover, the
extensive handling of the product and the temperature fluctuations to which
it is subjected adversely affect the life of the flower.
Order Generation
Order generators market and advertise in various media to generate floral
orders via dial-up numbers, the Internet or direct mail. As order generators
typically lack fulfillment capabilities, they forward these orders through a
wire service to a retail florist for delivery. Order generators typically
receive a fee equal to 20% of the order for their services. Some order
generators also impose a service charge on the customer for handling the
order. Large order generators typically receive rebates from wire services
for sending orders through their services.
Wire Services
Wire services establish networks of retail florists and
facilitate the transmission and financial settlement of floral orders among the
network members. Wire services publish a membership directory that enables
florists to select which florist will deliver an arrangement outside the
sending
florist's own delivery area. Alternatively, florists can allow the wire service
to choose which florist will deliver an arrangement. Some wire services also
supply various goods, including vases and other materials, that florists may
use in the ordinary course of business.
Wire services typically collect a fee of approximately 7% of the value of
an order exchanged via the wire service; however, the fee collected from larger
florists and order generators is often offset by a rebate. Wire services also
typically charge a monthly membership fee to member florists. Since wire
services generally do not own their member florists, they have little control
over the quality of the product and service of the delivering florist.
Retail
Retailers sell flowers, plants and, in certain cases, complementary
gifts and decorative accessories to customers. Retailers include floral shops,
supermarkets, garden centers, discount warehouses and lawn and garden centers.
Floral shops also receive orders for out-of-town delivery that they forward,
typically through wire services, to other floral shops for fulfillment and
local
delivery.
THE FLORAL INDUSTRY'S SIZE AND OPPORTUNITY.
Size
The domestic retail floral industry is a large and growing industry
with attractive business economics. According to industry sources:
- Retail floral industry revenue was approximately $15 billion in
1998.
- When added to the complementary gifts and accessories market, the
combined industry exceeds $60 billion.
- Sales by florists grew by 5.5% in 1998.
- Gross margins for retailers average approximately 60%.
Opportunity to Create a National Network
Management believes that the domestic
retail floral industry presents opportunities for innovation, differentiation
and the creation of a national brand due to the following industry
characteristics:
- Highly fragmented, with the top ten floral chains accounting
for less than 5% of total retail sales.
- Absence of a national retail brand.
- Unique customer purchasing characteristics, with 40% of product
orders placed outside of a retail location, approximately 90% of
which are local calls made to local florists.
- Inefficient and decentralized supply chain, with transactions among
growers, importers, wholesalers and retailers creating substantial
incremental costs but providing little additional value to the end
user.
- Lack of integrated order generation and fulfillment companies.
- Under-marketed, with marketing expenditures typically less than
3% of
sales.
- Large, under-marketed customer lists.
Opportunity to Grow the Market
We believe the retail floral industry also presents opportunities to expand
floral consumption as a result of the following factors:
- The United States is not among the top ten countries in the world in
per capita consumption of flowers; per capita spending in the United
States is significantly less than that of most western European
countries, according to the Floral Council of Holland.
- Favorable customer demographics and lifestyle trends should generate
additional industry growth.
- Customers value an extended vase life for flowers, which can be
achieved by streamlining the supply chain.
- Retail florists have focused on the gift-giving customer, largely
ignoring the opportunity to increase self-consumption.
- The Internet allows for visual merchandising and targeted marketing
of flowers.
BUSINESS STRATEGY
Nortech's goal is to become a primary floral and gift retailer and
marketer in the United States. It intends to accomplish this by selling a broad
selection of floral and floral-related products, providing superior customer
service and building strong customer loyalty. Because of our management team's
extensive experience in floral sales, and the expansion of Nortech's retail
presence, we have become the second largest retail floral chain in the
Minneapolis/St. Paul metropolitan area. Nortech believes its management has
the skills and experience necessary to establish Stems and Vines as a
prominent brand in the floral industry. Key elements of its strategy include:
BUILD A REGIONAL NETWORK OF RETAIL STORES.
Nortech plans to expand its retail operations in order to increase its
market share in existing markets and to open and/or acquire stores in new
markets where the opportunity exists to become a leading floral retailer,
such as Nortech has done in the Minneapolis/St. Paul market. Over the next
five years, Nortech's strategy is to develop an expanded retail network in
the areas where Nortech has identified a significant market and opportunity
to acquire smaller retail operations and integrate them with Nortech's
operations.
Nortech's retailing network is based on a "hub-and-satellite" system, which
Nortech's management believes is the most efficient operating structure for
the retail floral industry based upon the success of the leading floral
retail chains. A hub facility serves as a distribution center and warehouse
for surrounding satellite stores within a market. Nortech currently operates
one hub facility in one market, and it plans to have at least one hub in
each of the
the major markets in which we will operate, either through acquisition or
construction. Management believes that a hub facility will eliminate cost
redundancies and delivery inefficiencies resulting from the typically
decentralized floral supply chain.
Nortech has developed a concept store that is designed to maximize revenue
within the hub-and-satellite network by catering to the walk-in customer.
This store will create a unique and enhanced shopping experience through an
expanded product mix, innovative merchandising and store design, a
knowledgeable staff of professional florists and exceptional customer
service. Each of Nortech's retail stores follow this concept store plan, use
Nortech's brand name, Stems and Vines, and follow a European garden theme.
BUILD THE ORDER-GENERATION BUSINESSES.
Nortech has developed a customer base which allows it to serve customers who
do not visit its retail stores, in order to target Nortech's advertising and
promotions. Through the use of more sophisticated database marketing
techniques, our strategy is to use our order-generation capabilities to
increase non-holiday and advance sales to customers in all channels. Where
possible, we expect to distribute orders generated by these businesses
through our retail store network, assuring our customers of high-quality
products and superior customer service. Most order generators lack
fulfillment capabilities and transmit their orders through wire services to
independent local florists for production and delivery. We believe our
retail stores will provide us with a significant competitive advantage over
order generators who lack fulfillment capabilities, particularly at holidays
and other peak times.
Nortech intends to promote its e-commerce operations. Similar to traditional
order-generation businesses, we believe that online flower order generation
must
be coupled with an owned or affiliated local delivery network. This approach
provides the greatest ability to manage all aspects of an order, from order
taking to delivery confirmation, and ensures product quality and customer
service consistency. Our e-commerce strategy is to position Nortech as a
premier online floral and related gift marketer through a multi-branded
strategy
targeted at specific audiences. To promote its web site, Nortech has marketing
contracts with major online portals, including Yahoo! We also intend to
continually upgrade our website offerings in order to provide existing and new
customers with broad product offerings and convenient ordering processes.
IMPROVED INFORMATION SYSTEMS.
Nortech's plan is to develop information systems that will give us a
competitive
advantage. Improved information systems will allow us to enhance the
customer's overall experience across our retail network and throughout our
order-generation businesses. By combining enhanced information systems with
sophisticated merchandising, database and supply chain management
techniques, we believe these information systems will improve our
profitability.
THE MARKET
In general, the geographic market area for walk-in traffic for each store
extends approximately to a six mile radius. Telephone sales and long terms
relationships have created an extended customer base for Nortech. Wire
service orders account for approximately 20% of Nortech's business.
PRODUCTS AND SERVICES
Retail Stores
Nortech owns twelve retail flower stores in the Minneapolis/St. Paul
metropolitan area, and one production/call center, which receives and
distributes inventory to each of the stores. Each location sells fresh cut
flowers, green plants, blooming plants, dried floral arrangements, silk
flowers,balloon bouquets,and gifts. Each store draws walk-in traffic from
an approximate six mile radius. The stores also each have established a
customer base which extends beyond the six mile area. These customers place
telephone sales with Nortech for flower deliveries. The central production
facility is located at 2509 West County Road B, Roseville, MN 55113. The
locations of the retail stores are:
Stems and Vines on Grand
949 Grand Avenue
St. Paul, MN 55105
JDB Florist
515 Owens
Stillwater, MN 55082
Holm & Olson
Carriage Hill Plaza-Holm & Olson
Lowry Medical Building
350 St. Peter Street
St. Paul, MN 55102
Holm & Olson
2100 North Snelling
Roseville, MN 55113
Rossi's Floral Shop
386 West Bernard Street
West St. Paul, MN 55118
Lake Elmo Floral
3479 Lake Elmo Blvd.
Lake Elmo, MN 55042
Northfield Floral
640 South Water Street
Riverpark Mall
Northfield, MN 55057
Stems and Vines of White Bear Lake
1971 Whitaker Street
White Bear Lake, MN 55110
Julie's Stems and Vines on 50th
813 West 50th Street
Minneapolis, MN 55419
Cedar Lake Floral
1822 East Lake Street
Minneapolis, MN 55419
Rosacker's Flowers and Gifts
2315 18th Avenue NE
Minneapolis, MN 55418
Valerie's Fresh Flowers
582 Prarie Center Drive
Eden Prarie, MN 55344
Nortech's retail stores follow a European garden theme and creates a
unique and enhanced shopping experience for our customers. Our stores
feature specially designed fixtures, are divided into easy-to-shop
categories and
feature professionals demonstrating the art of flower arranging. The store
design is intended to give customers a warm, inviting place to browse and learn
about Nortech's products.
In our stores, customers will find fresh-cut flowers and bouquets displayed
creatively and in abundance, with informational tags and signage to guide the
customer through the store. The traffic pattern of Nortech's stores
draws customers through the store in a logical progression, exposing the
customer
to the breadth of available floral products and gift items. In addition to
flowers and plants, our stores carry a number of complementary gifts and
decorative accessories, gourmet confections, gift baskets, decorative
accessories, collectibles and seasonal/holiday decorations. We believe that
expanding the product mix of our stores to include these products is a
natural extension of our floral product offerings since these products, like
flowers, are commonly used as gifts to communicate personal expressions to
others and for
self-consumption to create a warm and friendly home environment. We believe
that
offering gifts and decorative accessories will not only enable us to meet the
needs of our existing customers who currently purchase these products at
competing specialty retailers, but will also allow us to attract new customers
who do not normally purchase flowers or plants.
In addition to providing our customers with a unique and enhanced in-store
experience and a broader array of merchandise, we are committed to providing
superior customer service. We intend to provide same-day delivery on a regional
scale from all distribution points, and expanded hours through our call center,
and to offer customers the opportunity to place orders 24 hours a day, 7
days a
week.
WIRE SALES
Nortech receives and forwards wire orders and fills wire orders for flowers.
Nortech is a member of all three major wire services; FTD, American Floral
Service (AFS) and Teleflora.
WEDDINGS
Nortech provides a wide array of traditional and contemporary wedding floral
designs for approximately 150 weddings annually.
RAW MATERIALS AND SUPPLIERS
Nortech obtains fresh cut flowers from many different suppliers; primarily
Everflora and Koehler-Dramm, Inc.
PATENTS AND TRADEMARKS
Nortech is the owner of the domain name, www.stemsandvines.com. Nortech
applied in March, 2000 for federal registration of the trademark, "Stems and
Vines."
EMPLOYEES
Nortech currently has 140 employees; primarily retailers and florists.
Nortech is not subject to any collective bargaining agreements and believes
that its labor relations are good.
COMPETITION
Nortech faces intense competition throughout the retail floral industry. Our
retail stores compete with traditional floral shops, supermarkets, garden
centers,vendors and other retailers based upon price, credit terms, breadth
of product offering, product quality, customer service and location. We also
compete with gift and other specialty retailers with our non-floral
products. Nortech's Internet order-generation businesses faces significant
competition from many other companies whose financial resources are superior
to that of Nortech, who provide similar services, such as Bachman's.
GOVERNMENT REGULATION
Nortech is subject to laws and regulations that are applicable to various
Internet activities. There are many legislative and regulatory proposals under
consideration by federal, state, local and foreign governments and agencies,
including matters relating to online content, Internet privacy, Internet
taxation, access charges, liability for information retrieved from or
transmitted over the Internet, domain names, database protection, unsolicited
commercial e-mail messages and jurisdiction. New regulations may increase our
costs of compliance and doing business, decrease the growth in Internet use,
decrease the demand for our services or otherwise have a material adverse
effect
on our business.
Nortech is also subject to federal, state and local environmental, health and
safety laws and regulations. Under environmental laws, we may be responsible
for
investigating and remediating environmental conditions relating to
conditions at
the numerous real properties at which we operate. These obligations could arise
whether we own or lease the property. We are not aware of any pending federal
environmental legislation that we expect to have a material adverse impact on
our company.
RISK FACTORS
Our business, financial condition, results of operations and prospects, and the
prevailing market price and performance of our common stock, may be adversely
affected by a number of factors, including the matters discussed below.
Our Potential Inability to Implement Our Growth Strategy. Our business
strategy will focus on growing our revenue and operations internally by opening
new retail locations and expanding sales through other order-generation
businesses, including our websites on the Internet, as well as by making
acquisitions of floral and gift businesses. The success of our growth strategy
will depend on a number of factors including our ability to:
- assess the value, strengths and weaknesses of acquisition
candidates;
- evaluate the costs and projected returns of expanding our
operations;
- expand our customer base;
- market our products and services effectively over the Internet
and in traditional media;
- lease desirable store locations on suitable terms and complete
construction on a timely basis;
- promptly and successfully integrate acquired businesses and new
retail locations with existing operations; and
- obtain financing to support this growth.
We may not be able to identify suitable acquisition candidates or
locations
for new stores. If we are not able to identify suitable acquisition candidates
or if acquisitions of suitable candidates are prohibitively expensive, we
may be
forced to alter our growth strategy. Our growth strategy may affect short-term
cash flow and net income as we increase our indebtedness and incur additional
expenses. As a result, our operating results may fluctuate and our growth
strategy may not result in improving our profitability. If we fail to implement
our growth strategy successfully, the market price of our common stock may
decline. In addition, we may not be able to retain a sufficient portion of the
customers of the retail stores that we acquire.
We may expand our operations not only within our current lines of
business,
but also into other related and complementary businesses. Our entry into any
new
lines of business may not be successful, as we may lack the understanding and
experience to operate profitably in new lines of business.
Demands on Our Resources Due to Growth. Our anticipated growth could place
significant demands on our management and our operational, financial and
marketing resources. These demands are due to our plans to:
- acquire and integrate numerous floral and gift retailers;
- open new locations;
- increase the number of our employees;
- expand the scope of our operating and financial systems;
- broaden the geographic area of our operations;
- increase the complexity of our operations;
- increase the level of responsibility of management personnel; and
- continue to train and manage our employee base.
Our management and resources, now and in the future, may not be
adequate to
meet the demands resulting from our expected growth.
Continued Net Losses Could Hinder Our Growth Strategy. Nortech has
experienced losses since its inception; as has its predecessor in the floral
business. If Nortech continues to incur net losses in future periods, we
may
not be able to implement our growth strategy in accordance with our present
plans and our stock price may decline.
Our Financial Results May Not Be Indicative of Future Results. The
financial statements included in this report cover periods when Nortech was
not in the retail floral business. These financial statements may not be
indicative of our future financial condition, operating results, growth
trends or prospects.
You must evaluate our prospects in light of the risks, expenses and
difficulties frequently encountered by companies in the early stages of a new
growth strategy. Our strategy of building a nationally branded floral and gift
retailer and marketer may not lead to growth, profitability or increased market
prices for our common stock.
We Need to Improve Our Information Systems. We need to make
improvements to
and integrate our information systems. We may experience delays, disruptions
and
unanticipated expenses in implementing, integrating and operating our
information systems. Failure to fully integrate and enhance our information
systems or hire additional personnel could have a material adverse effect on
our
business, financial condition, results of operations and growth prospects.
We May Incur Unexpected Liabilities When We Acquire Businesses. During the
acquisition process, we may not discover some of the liabilities of businesses
we acquire. These liabilities may result from a prior owner's non-compliance
with applicable federal, state or local laws. For example, we may be liable
after an acquisition of a business for the prior owner's failure to pay
taxes or
comply with environmental regulations. Environmental liabilities could arise
regardless of whether we own or lease our properties. While we will try to
minimize our potential exposure by conducting investigations during the
acquisition process, we will not be able to identify all existing or potential
liabilities. We also generally will require each seller of an acquired business
to indemnify us against undisclosed liabilities. In most cases, this
indemnification obligation will be supported by deferring payment of a portion
of the purchase price or other appropriate security. However, this
indemnification may not be adequate to fully offset any undisclosed liabilities
associated with the business acquired.
Goodwill Resulting from Acquisitions May Adversely Affect Our Results.
Goodwill and related amortization are expected to increase principally as a
result of future retail floral business acquisitions, and the amortization of
goodwill and other intangible assets could adversely affect our financial
condition and results of operations. We have considered various factors,
including projected future cash flows, in determining the purchase prices of
our
acquired retail floral businesses, and we do not believe that any material
portion of the goodwill related to any of these acquisitions will dissipate
over
a period shorter than 40 years. However, our earnings in future years could be
significantly adversely affected if management later determines either that the
remaining balance of goodwill is impaired or that a shorter amortization period
is applicable.
We Will Depend on Additional Capital for Our Growth. Our ability to remain
competitive, sustain our expected growth and expand our operations largely
depends on our access to capital. We anticipate making numerous acquisitions of
floral businesses, which will require ongoing capital expenditures. We also
expect to make expenditures to continue integrating the acquired floral
businesses with our existing businesses. To date, we have financed capital
expenditures and acquisitions primarily through private equity. In addition,
to execute our growth strategy and meet our capital needs, we plan to issue
additional equity securities as part of the purchase price of future
acquisitions, which may have a dilutive effect on the interests of our
stockholders. However, additional capital may not be available on terms
acceptable to us. Our failure to obtain sufficient additional capital could
curtail or alter our growth strategy or delay capital expenditures.
Our Quarterly Operating Results Will Fluctuate Due to Seasonality. Unit
sales of floral products have historically been seasonal, concentrated
primarily
in quarters with holidays such as Valentine's Day, Easter and Mother's Day.
Negative fluctuations have been particularly pronounced
and net losses have been incurred in quarters lacking holidays associated
with flowers and gifts. We expect to experience, quarterly variations in
revenue and cash flows. Other factors that could cause quarterly variations
include additional selling, general and administrative expenses to acquire
and support new business and the timing and magnitude of capital
expenditures. We intend to plan our operating expenditures based on revenue
forecasts. Any revenue shortfall below these forecasts in any quarter would
likely decrease our operating results for that quarter.
Customers May Reduce Discretionary Purchases of Flowers and Gifts. We
believe that the floral and gift industry is influenced by general economic
conditions and particularly by the level of personal discretionary spending by
customers. As a result, the floral and gift industry could experience
periods of
decline and recession during economic downturns. The industry may experience
sustained periods of decline in sales in the future. Any material decline in
personal discretionary spending could have a negative effect on our business,
financial condition, results of operations or prospects.
Competition May Adversely Impact Our Performance. The floral and gift
industry is highly competitive. Competition exists in each segment of the
industry. We expect competition from:
- flower growers, importers, wholesalers and bouquet companies,
including Dole Food Company, Inc. and USA Floral Products, Inc.;
- floral wire services, including FTD, Teleflora and AFS;
- retailers including traditional floral and gift shops, supermarkets,
mass merchandisers and garden centers; and
- traditional and online order generators of floral and gift products,
including 1-800-FLOWERS.
In many of our markets, our competitors are larger and have greater
financial resources than we do. The Stems and Vines brand is new, and may
not be
marketed effectively by us. We may not be able to compete successfully against
our existing competitors and any future competitors.
Political and Economic Events in Foreign Countries May Limit Supply of
Flowers. Flowers are imported principally from countries in South America and
Central America. The political and economic climate in several of these
countries from time to time has been volatile. In some of these countries, this
volatility has adversely affected many aspects of the economy, including flower
production. At times, this volatility has also impacted trade relations with
the
United States. As a result, future political and economic events in these
flower-growing countries may reduce the production or export of flowers. Any
adverse changes in the production or export of flowers from flower-producing
countries could have a material impact on our business, financial condition,
results of operations or prospects.
Potential Adverse Effects of Bad Weather in Flower-Growing Regions. The
supply of perishable floral products depends significantly on weather
conditions
where the products are grown. Severe weather, including unexpected cold
weather,
may have an adverse effect on the available supply of flowers, especially at
times of peak demand. For example, in order for a sufficient supply of roses to
be available for sale on Valentine's Day, rose-growing regions must not
suffer a
freeze or other harsh conditions in the weeks leading up to the holiday. Any
shortages or disruptions in the supply of fresh flowers, or any inability on
our
part to procure our flower supply from alternate sources at acceptable
prices in
a timely manner, could lead to the inability to fulfill orders during
periods of
high demand, and the loss of customers.
We May Have Difficulties Transporting Flowers. The perishable nature of
flowers requires the floral industry to have a transportation network that can
move products quickly from the farm to the retailer. Flowers grown in South
America and Central America are typically transported via charter flights to
the
United States. After flowers arrive in ports of entry, they are distributed
throughout the United States primarily via refrigerated trucks. There may be
disruptions in service at airports, fuel shortages, work stoppages in the
air charter or trucking industries or other problems encountered in
transporting
flowers.
Problems with Order-Transmission Networks and the Compatibility of Our
Systems. A large percentage of floral industry revenue is dependent upon the
ability of the party taking an order from a customer to transmit the order
to a
delivering florist outside the immediate geographic market. Over the past
several years, this process has increasingly relied on electronic
communications
and computers to create networks that serve as the transmission medium for
orders. We believe that a substantial number of floral industry participants
use
one or more of these networks, particularly FTD's Mercury network. In the event
that one or more of these networks were to become disabled, or our systems were
unable to communicate with the network or any other transmission medium, or one
or more of our businesses were not permitted to use such network or medium, we
may not be able to use our normal computer-based methods for communicating
orders. In this event, we would either need to route orders via alternative
wire
services, requiring reconfiguration of the existing wire interfaces and
programming logic, or be required to make individual telephone calls or send
faxes to florists. Conducting business primarily through telephone and fax
orders would cause us to operate in a slower and more costly manner. Any of
these situations could have a negative impact on our business, financial
condition, results of operations or prospects.
Relationships with Floral Wire Service Businesses May Deteriorate. The
retail floral industry has traditionally relied upon floral wire services,
including FTD, Teleflora, and AFS, to act as intermediaries to effectively
manage, among other things, financial settlement among florists and serve as
a clearinghouse for orders. To our knowledge, these intermediaries do not
currently operate retail stores but do engage in other marketing and floral
order-generation activities. One or more of these wire services may seek to
prohibit our order-generation business or our retail operations from
settling orders through their wire services, or using their technology to
transmit orders. These actions may have a short-term material adverse impact
on our business, financial condition, results of operations or prospects.
Wire service intermediaries also provide financial rebates or
incentives to
those florists, order generators and other parties that transmit and/or
financially settle a large number of orders through their system. These rebates
and incentives provide a significant portion of our operating profit. Any
change
in the industry's rebate or incentive structure may have a short-term material
impact on our business, financial condition, results of operations or
prospects.
Uncertainty of Internet Use and its Impact on Our Business. We believe
that
the Internet and electronic commerce will play an increasingly important
role in
floral and gift-related merchandising and order taking over the coming
years. As
such, we intend to devote significant financial resources to our Internet
operations. However, the use of the Internet and e-commerce by customers to
purchase flowers and gifts may not increase as rapidly as we expect, and other
purchasing mediums may replace the Internet. Additionally, there are few
barriers to entry on the Internet. Our competitors may be better funded or have
other proprietary technologies or approaches to e-commerce that may make it
difficult for us to compete on the Internet. In any of these instances, our
business, financial condition, results of operations or prospects may be
materially adversely impacted.
In addition, if the use of the Internet for direct-from-grower sales does
rapidly increase and such sales replace locally delivered floral arrangements,
then the revenue we plan to generate by owning and operating numerous retail
stores may be materially adversely affected. Also, as e-commerce becomes more
prevalent and the use of Internet phone directories increases, the value we
receive from advertisements in traditional phone books may decrease.
We May Face Increased Government Regulation of the Internet. There are an
increasing number of federal, state, local and foreign laws and regulations
pertaining to the Internet. In addition, a number of federal, state, local and
foreign legislative and regulatory proposals are under consideration. Laws or
regulations may be adopted with respect to the Internet relating to liability
for information retrieved from or transmitted over the Internet, online
content,
user privacy and quality of services. Changes in tax laws relating to
electronic
commerce could adversely affect our business. The applicability to the Internet
of existing laws covering issues such as intellectual property, libel, personal
privacy and other areas is uncertain and developing. New legislation or
regulations could decrease growth in the use of the Internet, impose additional
burdens on e-commerce or alter how we do business. This could decrease demand
for our online product offerings, increase our cost of doing business, increase
the costs of products sold on the Internet or otherwise have an adverse effect
on our business, financial condition, results of operations and prospects.
We Depend Heavily on Our Senior Management. We believe that our success
will depend to a significant extent upon the efforts and abilities of our
executive officers. While we have entered into employment agreements with our
executive officers and the senior management of some companies we have
acquired,
these individuals may not remain with us throughout the term of the agreements
or thereafter. We do not have "key person" life insurance policies covering
any of our employees. We will likely also depend on the senior management of
any significant business that we acquire in the future. If we lose the
services of one or more of these key employees before we are able to attract
qualified replacement personnel, our business could be adversely affected.
Our Stock Price May Be Volatile. The market price for our common stock has
been volatile and may be affected by a number of factors, including the
announcement of acquisitions or other developments by us or our competitors,
quarterly variations in our or other industry participants' results of
operations, changes in earnings estimates or recommendations by securities
analysts, developments in the floral and gift industry, sales of a substantial
number of shares of our common stock in the public market, general market
conditions, general economic conditions and other factors. Some of these
factors
may be beyond our control or may be unrelated to our results of operations or
financial condition. Such factors may lead to further volatility in the market
price of our common stock.
Possible Depressing Effect of Shares Eligible for Future Sale. We have
issued a substantial number of shares of our common stock pursuant to our
acquisition program, and we expect to issue additional shares of common
stock as
part of the purchase price for future acquisitions. The shares of common stock
issued pursuant to our acquisition program will be registered with the SEC
periodically, making them immediately available for resale. We have issued to
our employees, officers and directors options to purchase shares of our common
stock. The shares issuable upon exercise of the options have been registered
with the SEC. Any actual sales or any perception that sales of a substantial
number of shares may occur could adversely affect the market price of our
common
stock and could impair our ability to raise capital through an offering of
equity securities.
Possible Dilution in Value of Common Stock and Voting Power. If we issue
additional shares of common stock, including shares that may be issued pursuant
to option grants, earn-out arrangements and future acquisitions, purchasers of
common stock may experience dilution in the net tangible book values per
share of the common stock. In addition, because our stockholders do not have
any
preemptive right to purchase additional shares in the future, their voting
power
will be diluted by any issuance of shares.
THE ANIMAL REPELLENT BUSINESS
GENERAL:
Up until it sold the animal repellent assets and changed its focus on
February 4, 2000, Nortech manufactured and marketed TREE GUARD(R) brand deer
repellent, and was 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, Nortech sold a deer repellent to Voluntary
Purchasing Groups (VPG) of Bonham, Texas, under a private label agreement.
Under
this agreement, the TREE GUARD formulation was 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, Nortech packaged "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.
PRODUCT(S) AND TECHNOLOGY:
During the year ended December 31, 1999, 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 Nortech'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.
Nortech's management believes that several key attributes distinguish
TREE GUARD from competitor's products, 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 1999, Nortech'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. Throughout the past fiscal year, Nortech has continued
to increase its sales efforts in the commercial market through its
commercial partner, Lesco. Nortech also continued to market "This One Works"
under a private label agreement with Voluntary Purchasing Group (VPG). To
penetrate the mass merchandise market Nortech contracted with Grant's a
wholly owned subsidiary of Central Garden and Pet, Inc. Under its private
label agreement with Grant's Nortech produced Grant's
Deer Repellent.
COMPETITION
The animal repellent industry is extremely competitive, and Nortech
competed with many larger, more-established companies, most of which have
significantly greater financial and other resources than Nortech, 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 TREE GUARD 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.
MARKET SEGMENTS AND DISTRIBUTION CHANNELS:
During the past fiscal year, Nortech identified 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.
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 Nortech 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., was Nortech's
largest customer during the time it was in the animal repellent business.
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 Nortech'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, Nortech believes the forestry market segment will
take longer than other market segments to achieve broad acceptance of its TREE
GUARD.
MASS MERCHANDISERS - DISCOUNT RETAILERS. Mass merchandisers who
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 often use their own distribution centers for
stocking most inventories, they usually do not warehouse chemicals,
including animal
repellents. Accordingly, many 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 Nortech decided to market its products
exclusively through Grant's, under Grant's private label. The relationship
with Grant's allowed Nortech to partake of mass
merchandise sales without the offsetting factors mentioned above.
SALES AND MARKETING:
During 1999, the majority of Nortech's sales activities of animal
repellent products were 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, Nortech's sales efforts in these
market segments largely involved 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.
Nortech's sales executive and Chief Operating Officer continued to develop
and coordinate Nortech's market activities during 1999. Nortech's 1999
marketing plan integrated 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.
Nortech operated 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. Nortech conducted a direct mail campaign to
support its sales efforts in the year ending December 31, 1999. A four color
glossy brochure was developed and mailed to garden centers across the United
States.
CO-OP ADVERTISING. Nortech offered a co-op advertising allowance to
qualifying distributors, based on a percentage of purchases.
BOOKING PROGRAMS AND SALES INCENTIVE PROGRAMS. Nortech offered
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. Nortech 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.
TRADE SHOWS. Nortech also attended 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.
PATENT AND TRADE SECRETS
Nortech's management believes that the technology used in TREE GUARD is
unique and
provides a significant advantage over competitive products in the animal
repellent marketplace. Nortech 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. Nortech withdrew its patent application during
the first quarter of 1997.
MANUFACTURING AND WAREHOUSING:
During 1999, Nortech 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 Nortech, Imperial also
warehouses certain raw materials associated with TREE GUARD, which Nortech
purchased 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.
Nortech 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.
SEASONALITY:
Management believes that Nortech has experienced 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.
ITEM 2. DESCRIPTION OF PROPERTY
Nortech leases approximately 1,650 square feet of office space in a
light industrial complex in the Saint Paul Midway area. Nortech's current
lease expires October 30, 2001. Under the current lease, gross monthly rent is
$1,700 including utilities, janitorial service and property taxes.
Management believes Nortech's current facility, or a similar facility,
can accommodate its needs, for the foreseeable future.
Nortech leases a central production facility is located at 2509 West County
Road B, Roseville, MN 55113, consisting of 10,701 square feet of warehouse
space and 512 square feet of office space, for a 36 month term which expires
on October 31, 2001, at a monthly rental of $4,616.02. The monthly rent
will increase to $4800.66 on November 1, 2000.
Nortech owns office equipment, computer systems, and leasehold improvements
on its retail floral stores. It holds leases on each of its locations,
which are all entered into with unrelated parties, with the exception of
1822 East Lake Street, Minneapolis, MN, which is leased to Nortech by FL
Properties, LLC, a Minnesota limited liability company beneficially owned by
C.E.O. Donald Lindstedt and president Steve Fahrner. A schedule of the
leases is as follows:
Location Term Monthly Rent
Stems and Vines on Grand Exp. 11/30/03 $1,250 plus taxes
949 Grand Avenue
St. Paul, MN 55105
JDB Florist Exp. 1/31/01 $1,525
515 Owens
Stillwater, MN 55082
Holm & Olson Month to Month $1,750 plus taxes
Carriage Hill Plaza-Holm&Olson
Lowry Medical Building
350 St. Peter Street
St. Paul, MN 55102
(1000 square feet)
Holm & Olson Expires 2000 $2,315.33 plus taxes
2100 North Snelling and 7% gross sales
Roseville, MN 55113
Rossi's Floral Shop Expires 8/31/2004 $1,255.00 plus
common area
386 West Bernard Street
West St. Paul, MN 55118
1,250 square feet
Lake Elmo Floral Month to Month $1,500
3479 Lake Elmo Blvd.
Lake Elmo, MN 55042
Northfield Floral Month to Month $2,000
640 South Water Street
Riverpark Mall
Northfield, MN 55057
Stems and Vines of
White Bear Lake Exp. 6/20/02 $1,673
1971 Whitaker Street
White Bear Lake, MN 55110
Julie's Stems and Vines on 50th Exp. 8/31/2001 $1,765 plus common
813 West 50th Street area charges
Minneapolis, MN 55419
1,253 square feet
Cedar Lake Floral Exp. 3/31/2004 $3,183 plus taxes
1822 East Lake Street
Minneapolis, MN 55419
Rosacker's Flowers and Gifts Exp. 10/31/2003 $5,462.08
2315 18th Avenue NE With option to
Minneapolis, MN 55418 triple net
6013 square feet
Valerie's Fresh Flowers Exp.12/31/00 $2,698
582 Prarie Center Drive
Eden Prarie, MN 55344
ITEM 3. LEGAL PROCEEDINGS
Nortech is not a party to any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
- -------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Nortech's Common Stock is traded in the over-the-counter market, and is
quoted on the NASD OTC Bulletin Board ("Bulletin Board"), under the trading
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 Nortech's Common Stock
and acting as market makers. No assurance can be given that the
over-the-counter market for Nortech'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 of Company's
shares of Common Stock. The quotations represent inter-dealer quotations
without
retail markups, markdowns or commissions and may not represent actual
transactions.
Bid
--------------------------
Quarter Ended High Low
- ------------- ----- -----
March 31, 1999 $.56 $.44
June 30, 1999 $.38 $.19
September 30, 1999 $.44 $.25
December 31, 1999 $.63 $.13
On March 1, 2000, the high bid and low asked prices for Nortech's shares
quoted on the Bulletin Board were $.69 and $.63, respectively.
As of December 31, 1999, there were 4,474,130 shares of Nortech
Common Stock issued and outstanding held by approximately 300 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.
RECENT SALE OF UNREGISTERED STOCK.
Each of the following issuances by Nortech 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 1998, Nortech completed an offshore offering of common stock for $.30
per share. Nortech issued 400,000 shares in this offering and received
subscriptions totaling $120,000. During 1999, Nortech completed an
additional offshore offering of common stock for $.50 per share. In this
offering, Nortech issued 1,350,000 shares of common stock and received
subscriptions of $675,000. All of the subscriptions are still outstanding
and accrue interest at 10%, mature on various dates, and are secured by the
underlying stock. Due to the uncertainly of collecting interest due on the
subscriptions, interest has not been accrued at December 31, 1999 and 1998.
During 1998, Nortech sold 100,000 shares of its common stock and received
proceeds of $107,460, net of issuance costs. During 1999, Nortech sold
units consisting of Nortech's common stock and warrants to purchase common
stock. Nortech issued 675,000 shares of common stock and 135,000 warrants to
purchase common stock and received proceeds of $39,960, net of issuance
costs. The warrants are exercisable for three years.
PENNY STOCK STATUS
Nortech's common stock is a "penny stock," as the term is defined by Rule
3a51(1)of the Securities Exchange Act of 1934. This makes it subject to
reporting, disclosure and other rules imposed on broker_dealers by the
Securities and Exchange Commission requiring brokers and dealers to do the
following in connection with transactions in penny stocks:
1. Prior to the transaction, to approve the person's account for
transactions in penny stocks by obtaining information from the person regarding
his or her financial situation, investment experience and objectives, to
reasonably determine based on that information that transactions in penny
stocks are suitable for the person, and that the person has sufficient
knowledge and experience in financial matters that the person or his or her
independent advisor reasonably may be expected to be capable of evaluating the
risks of transactions in penny stocks. In addition, the broker or dealer must
deliver to the person a written statement setting forth the basis for the
determination and advising in highlighted format that it is unlawful for the
broker or dealer to effect a transaction in a penny stock unless the broker or
dealer has received, prior to the transaction, a written agreement from the
person. Further, the broker or dealer must receive a manually signed and dated
written agreement from the person in order to effectuate any transactions is a
penny stock.
2. Prior to the transaction, the broker or dealer must disclose to the
customer the inside bid quotation for the penny stock and, if there is no
inside bid quotation or inside offer quotation, he or she must disclose the
offer price for the security transacted for a customer on a principal basis
unless exempt from doing so under the rules.
3. Prior to the transaction, the broker or dealer must disclose the
aggregate amount of compensation received or to be received by the broker or
dealer in connection with the transaction, and the aggregate amount of cash
compensation received or to be received by any associated person of the broker
dealer, other than a person whose function in solely clerical or ministerial.
4. The broker or dealer who has effected sales of penny stock to a
customer, unless exempted by the rules, is required to send to the customer a
written statement containing the identity and number of shares or units of each
such security and the estimated market value of the security. The imposition
of these reporting and disclosure requirements on a broker or dealer make it
unlawful for the broker or dealer to effect transactions in penny stocks on
behalf of customers. Brokers or dealers may be discouraged from dealing in
penny stocks, due to the additional time, responsibility involved, and, as a
result, this may have a deleterious effect on the market for Nortech's
stock.
(1) The above quotations reflect inter-dealer prices, without retail mark up,
mark down or commission and may not represent actual transactions.
(2) Source of information: Stockmaster Stock Quotation Service
(Stockmaster.com) and Freerealtime.com, NASD Bulletin Board.
SECURITY HOLDERS
The approximate number of record holders of shares of the common stock of
Nortech outstanding as of December 31, 1999 was 300.
DIVIDENDS
No dividends have been declared or paid on Nortech's common stock, and
Nortech does not intend to pay dividends in the near future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS:
The following discussion and analysis provides information that management
of Nortech 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.
FORWARD LOOKING STATEMENTS
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 Nortech'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 Nortech with the Securities and Exchange
Commission, including, but not limited to Nortech's audited financial
statements for the year ended December 31, 1999, enclosed herein.
GENERAL
Nortech 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. Nortech 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. Nortech's independent distributors
sell to lawn and garden retailers. Bachman's is an example of the lawn and
garden retailer in the Minneapolis area.
Besides TREE GUARD sales, Nortech marketed 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 eighteen percent of sales in
the year ending December 31, 1999.
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. Nortech has not been
successful in penetrating the mass merchandise market. The arrangement with
Grant's allowed Nortech 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 1998 and
1999.
On February 3, 2000, Nortech purchased all of the outstanding stock of FL
Floral, Inc. and Floral, Inc., and began operating a chain of "Stems and
Vines" retail floral stores along with a floral sales Internet web site.
Simultaneously with the acquisition of FL Floral, Inc. and Floral, Inc.,
Nortech sold all of the assets and goodwill associated with its animal
repellent business, and began to focus on operating the floral stores and
expanding the commerce on its Internet site.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1999
Sales for the year ended December 31, 1999 were $789,119 compared
to $712,461 reported in 1997. The increased sales were a direct result of
targeting the best independent distributors and then working with them to sell
TREE GUARD. Nortech 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 for the year ended December 31, 1999 was $531,255 or 67.5% of
sales as compared to $475,348 or 66% for 1998. 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 increased to $197,096 during the year ended
December 31, 1999, compared to $160,066 during 1998. The increase is made
up almost entirely of advertising and public relations.
Administrative Expense decreased to $235,553 during the year ended December
31, 1999, compared to $273,546 during 1998.
Interest expense decreased to $22,230 for the year ended December 31, 1999,
down from $31,682 during 1998.
Nortech incurred a net loss of $28,832 or $(.01) per share, for the year
ended December 31, 1999, compared to a net income of $13,538 or $.01 per
share, for the year ended December 31, 1998. Although income from
operations contributed $98,607 a one time write-off of a failed acquisition
of $109,445 created the net loss for 1999.
Liquidity and Capital Resources
At December 31, 1998, Nortech had current assets of $238,907 and current
liabilities of $224,867, resulting in a working capital surplus of $14,040,
compared to current assets of $275,071 and current liabilities of $189,045,
resulting in a working capital surplus of $86,026. The increase in working
capital is primarily attributable to the sale of common stock.
Nortech's primary source of financing has been proceeds from sales of
equity and receivable financing. Nortech continues to pursue an equity
infusion from a private offering of its common stock.
During the first half of 2000, Nortech intends to raise additional
capital through private offerings or debt financing. Furthermore, Nortech
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 Nortech 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 Nortech's ability to continue operations.
PLAN OF OPERATIONS
Nortech is engaged in the business of retail sales of flowers and gifts
through its twelve retail locations in the Minneapolis/St. Paul metropolitan
area, telephone sales, and e commerce sales through its Internet web site.
Nortech has recently shifted its business emphasis to retail floral sales.
Nortech has financed its operations to date through the sale of its
securities.
Nortech's plan of operations over the next 12 months to expand its retail
presence and to promote Internet sales from its e-commerce web site. This
will require the raising of additional capital, and there can be no
assurance that Nortech will be able to raise the capital required to
accomplish these goals.
The predecessor to the floral business, FL Floral, Inc. and FL Flowers,
Inc., generated $2,702,285 in net sales in the year ended December 31, 1999,
which resulted in a gross profit of $1,883,818. Management predicts that
Nortech's cash flow will be equal to or surpass these figures for the
current fiscal year. Nortech will rely on this pro forma cash flow, and
additional equity financing to satisfy its cash requirements during the next
twelve months. There can be no assurance that Nortech will be successful in
raising additional equity financing. Nortech intends to undertake a
subsequent private placement of its common stock in order to raise future
development and operating capital. Nortech depends upon capital to be
derived from future financing activities such as subsequent offerings of its
stock. Nortech anticipates no research and development costs over the next
twelve months. Nortech does not expect the purchase or sale of plant or any
significant equipment, and it does not anticipate any change in the number
of its employees. Nortech has no current material commitments, except for
its employment contracts with management.
ITEM 7. FINANCIAL STATEMENTS:
Nortech's financial statements for the years ended December 31, 1999 and
1998 are included on pages F-1 through F-16 under Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The former accountant, Stirtz, Bernards, Boyden,Surdel & Larter, did not
resign, or decline to stand for re election. It was dismissed by the Company
in June, 1999. The decision to change accountants was approved by the
Board of Directors. There were no disagreements with the former accountant
on any matter
of accounting principle, or practice, financial statements disclosure or
auditing scope or procedure. The former accountant has indicated its
agreement with the statements made by the Company concerning the change in
the Company's independent accountant. The Company has fully authorized the
former accountant to respond fully to the inquiries of the successor
accountant concerning all of the Company's financial reports and audits. The
new accountant, Lund Koehler Cox & Arkema LLP was engaged in June, 1999.
PART III.
- ---------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Directors are elected by the shareholders to terms of one year. Officers
serve at the pleasure of the Board of Directors, and serve one year terms
unless removed by the Board prior to their terms. On February 3, 2000,
pursuant to the share purchase agreement with FL Floral and Floral, Inc.,
the Board of Directors of Nortech appointed Don Lindstedt and Steven Fahrner
as the provisional Board of Directors, to serve until the next election.
The Executive Officers of Nortech and their ages are as follows:
Name Age Position
__________ ___ ________
Don Lindstedt 47 Director, CEO
Gary L. Borglund 52 Chairman
Steven Fahrner 47 President, Director,
Operating Officer
Calvin E. Blanchard 47 Chief Operating Officer,
Secretary, Director
Don Lindstedt. Mr. Lindstedt is the Director, and Chief Executive Officer
of Nortech since February 3, 2000. Prior to February 3, 2000, he was the
Chief Executive Officer of FL Flowers, Inc. and FL Floral, Inc., from
December 1, 1998 through February 3, 2000. From 1996 through May, 1999 he
was a partner in REM Rehabilitation, a rehabilitation company, where he was
Chief Operating Officer of an $8 million four state operation with nearly
200 employees. From 1994 through 1996, he was owner and Chief Financial
Officer of Comprehension Rehabilitation, Inc. From 1995 though 1998 he was
Co-founder and owner of Infinite Health, L.L.C. From 1993 through 1995, he
was Vice President/Operations of Express Systems, Inc. From 1990 through
1993, he was General Manager for River Ridge Rehabilitation, Inc. From 1988
through 1996, he also acted as an independent business consultant, providing
management and financial consulting services, as President of CityView
Financial Services, Inc. Mr. Lindstedt holds a Bachelor of Arts degree in
Accounting from Metropolitan University, 1993.
Steve Fahrner. Mr. Fahrner is the President and Director of Nortech since
February 3, 2000. He was the President of FL Flowers, Inc. and FL Floral,
Inc., from December, 1998 through February 3, 2000. From 1997 through May,
1999, he was the head of the Physical Therapy Division of REM Rehabilitation
and the Company's clinical administrator. From 1984 through 1997, he owned
and operated Renew Rehabilitation, which he sold to his partner upon joining
REM. Mr. Fahrner holds a Bachelor of Science degree in Physical Therapy
from the University of Wisconsin, 1976.
Gary L. Borglund. Mr. Borglund is Chairman and Director of Nortech, since
February 3, 2000, and formerly served as President and Chief Executive
Officer of Nortech, from January 3, 1998 to February 3, 2000. He also
serves as President, Director and Chief Executive Officer of Global Games,
Inc., since August 21, 1997. He also serves as a Director of Red Oak
Management Company. From 1990 through 1996, Mr. Borglund was Executive Vice
President of Northern Financial Partners, a direct mail contractor. From
1988 through 1990, he was Vice President of Sales for Greenhaven Marketing
Corp., a direct mail/insurance company. Prior to that time, Mr. Borglund
was a self employed management consultant. Mr. Borglund attended the
University of Minnesota, where he majored in Business.
Calvin E. Blanchard. Mr. Blanchard is the Chief Operating Officer and
director of Nortech, and has been since January, 1997. He served as
Nortech's Chief Operating Officer and General Manager since April 1994.
Prior to this, from 1988 to 1994, he served as a Pesticide Registration
Supervisor with the Minnesota Department of Agriculture. From 1986 to 1988,
he served as the supervisor of technical services for CENEX. Prior to this,
from 1977 through 1979, he was employed as a crop consultant with Servi-Tech
in Kansas. Mr. Blanchard created Treeguard, the original Nortech product,
and guided Nortech through its developmental stages. He graduated in 1977
from Iowa State with a double-major in Plant Pathology and Pest Management.
He received his M.S. in Entomology from Texas A&M in 1981. He received an
M.B.A. from Carlson School of Business, University of Minnesota in 1986.
FAMILY RELATIONSHIPS.
There are no family relationships among directors, executive officers or
other persons nominated or chosen by Nortech to become officers or
executive officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
Nortech is not aware of any material legal proceedings involving any
director, director nominee, promoter or control person including criminal
convictions, pending criminal matters, pending or concluded administrative
or civil proceedings limiting one's participation in the securities or
banking industries, or findings of securities or commodities law
violations.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934 requires Nortech's
officers and directors, and persons who own more than ten percent of a
registered class of Nortech's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than ten percent
shareholders are required by SEC regulation to furnish Nortech with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, Nortech
believes that, during the fiscal year ended Dec.31, 1999, all filing
requirements applicable to its officers, directors and greater than ten
percent beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
Nortech has written employment agreements with its officers. The only
non_cash compensation paid by Nortech is reflected in the following table of
shares and warrants granted to executive officers. There were no grants of
options or SAR grants given to any executive officers during the last fiscal
year.
The salaries of Nortech's officers are set forth in the table below:
Name Position Salary Bonus
Don Lindstedt CEO $87,500 0
Steve Fahrner President $87,500 0
Gary Borglund Chairman $30,000 0
Calvin Blanchard COO $87,500 0
The salaries paid to management during the past fiscal year ended December
31, 1999 were:
Name Position Salary Bonus
Calvin Blanchard COO $87,500 0
ITEM 10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The following table sets forth certain information regarding the beneficial
ownership of the shares of Common Stock of Nortech as of the date of this
disclosure(1), by (I) each person who is known by Nortech to be the
beneficial owner of more than five percent (5%) of the issued and outstanding
shares of common stock, (ii) each of Nortech's directors and executive
officers, and (iii) all directors and executive officers as a group.
Name and Address Number of Shares Percentage Owned
________________ ________________ ________________
Don Lindstedt 1,522,967 18.835%
Post Office Box 15103
Minneapolis, MN 55145
Steve Fahrner 1,522,966 18.835%
Post Office Box 15103
Minneapolis, MN 55145
Gary Borglund 100,000 1.24%
400 South 4th Street
Minneapolis, MN 55415
Calvin Blanchard 100,000 1.24%
Post Office Box 15103
Minneapolis, MN 55145
Richard Neslund 561,315 7%
15210 Wayzata Blvd.
Wayzata, MN 55391
All directors and
officers as a group 3,305,933 40.15%
_____________
Based on 8,084,354 shares outstanding as of May 24, 2000
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition of the assets of FL Floral, Inc and Fl
Flowers, Inc. on February 3, 2000, Don Lindstedt was issued 1,552,967 shares
of common stock of Nortech; Steve Fahrner was issued 1,552,966 shares of
common stock, and Gary Borglund was issued 100,000 shares of common stock.
No other persons are known to Management that would be deemed to be promoters.
ITEM 13. INDEX TO EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements (included in Part II of this Report):
Report of Independent Certified Public Accountant
Financial Statements
Balance Sheets
Statement of Loss And Accumulated Deficit
Statements of Cash Flows
Statements of Stockholder's Equity
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K:
March 31, 2000
April 13, 2000 (amended)
(c) Exhibits
[CAPTION]
Item 13. FINANCIAL STATEMENTS
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
F- 2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows
F-5 5
Notes to Financial Statements F-6
[CAPTION]
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, 1999 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 audit. The financial statements of Nortech Forest Technologies, Inc. as
of December 31, 1998, were audited by other auditors whose report dated
January 21, 1999, expressed an unqualified opinion.
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, 1999, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/LUND KOEHLER COX & ARKEMA, LLP
- ---------------------------------
Lund Koehler Cox & Arkema, LLP
Minneapolis, Minnesota
January 11, 2000
<PAGE>F-1
NORTECH FOREST TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
DECEMBER 31,
- -----------------------------
1999
1998
- ----------- -----------
<S> <C>
<C>
ASSETS
------
Current assets:
Cash $
10,812 $ 30,874
Accounts receivable
203,992 126,014
Inventories
51,847 77,269
Prepaid expenses
8,490 4,750
- ----------- -----------
Total current assets
275,071 238,907
- ----------- -----------
Furniture and equipment, net
12,896 21,098
Other assets:
Deferred offering costs
37,500 0
Security Deposit
1,665 1,665
Total other assets
39,165 1,665
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $
100,637 $ 58,522
Line-of-credit
27,256 77,392
Accounts payable
42,625 67,659
Accrued expenses
18,527 21,294
- ----------- -----------
Total current liabilities
189,045 224,867
- ----------- -----------
Long-term debt, net of current portion
0 27,031
- ----------- -----------
Total liabilities
189,045 251,898
- ----------- -----------
Stockholders' equity:
Preferred stock, par value $.01 per share, 500,000 shares
authorized; none issued and outstanding
0 0
Common stock, par value $.01 per share, 15,000,000 shares
authorized, 4,474,130 and 2,169,130 shares issued
and outstanding
44,741 21,691
Additional paid-in capital
2,585,369 1,843,772
Subscriptions receivable
(727,500) (120,000) Accumulated deficit
(1,764,523) (1,735,691) (1,735,691)
- ----------- -----------
Total stockholders' equity
138,087 9,772
- ----------- -----------
$
327,132 $ 261,670
=========== ===========
<FN> See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>F-2
[CAPTION]
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
YEARS
ENDED DECEMBER 31,
- -----------------------------
1999
1998
-----------
-----------
<S> <C>
<C>
Sales $ 789,119
$ 712,461
Cost of sales 257,863
237,113
-----------
-----------
Gross profit 531,256
475,348
-----------
-----------
Operating expenses:
Administrative expenses 235,553
273,546
Sales and marketing 197,096
160,066
-----------
-----------
Total operating expenses 432,649
433,612
-----------
-----------
Income from operations 98,607
41,736
Other income (expense): (22,230)
(31,682)
Interest expense
Other income 4,236
3,484
Write-off of failed acquisition costs (109,445)
0
-----------
-----------
Total other income (expense) $ (127,439)
$ (28,198)
===========
===========
Net income (loss) before income taxes (28,832)
13,538
Provision for income taxes 0
0
Net income (loss) $ (28,832)
$ (13,538)
===========
===========
Basic and diluted earnings (loss) per common share $ (0.01)
$ .01
diluted earnings (loss) per common share 3,234,711
2,022,255
===========
===========
<FN> See Notes to Financial Statements
<PAGE>F-3
</TABLE>
[CAPTION]
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
COMMON STOCK
----------------- PAID-IN
SUBSCRIPTION ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
TOTAL
------ ------
- --------- ----------- ----------- ---------
<S> <C> <C> <C>
<C> <C> <C>
BALANCE, December 31, 1997 1,762,880 $ 17,629
$1,842,907 $ -- $(1,749,229) $ 111,307
Redemption of common stock 93,750 (938)
(149,062) -- -- ( 150,000)
Issuance of common stock, net of
issuance costs 500,000 5,000 149,927
(120,000) - 34,927
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
Issuance of common stock, net
of issuance costs 2,025,000 20,250
694,710 (607,500) -- 107,460
Shares issued for services
Rendered 280,000 2,800
46,887 -- -- 49,687
Net loss -- -- --
-- (28,832) (28,832)
------ ------
- --------- ----------- ----------- -----------
BALANCE, December 31, 1999 4,474,130 $ 44,741 $
2,585,369 $(727,500) $(1,764,523) $ 138,087
========= ========
========= =========== =========== ===========
</TABLE>
[FN] See accompanying notes to
financial statements
<PAGE>F-4
[CAPTION]
NORTECH FOREST TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) In Cash
<TABLE>
YEARS
ENDED DECEMBER 31,
- -------------------------
1999 1998
- --------- ---------
<S>
<C> <C>
Cash flows from operating activities:
Net income (loss)
$(28,832) $(13,538)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation
9,807 10,846
Issuance of common stock for services rendered
12,187 0
Issuance of notes payable for services rendered
0 7,500
Changes in operating assets and liabilities:
Accounts receivable
(77,908) 89,405
Inventories
25,422 3,755
Prepaid expenses
(3,740) 606
Other assets
0 3,484
Accounts payable
(25,034) (3,188)
Accrued expenses
2,676 2,138
Cash flows from operating activities
(90,865) (128,084)
- --------- ---------
Cash flows from investing activities:
Purchase of furniture and equipment
(1,605) 0
Net cash flows from investing activities
(1,605) 0
- --------- ---------
Cash flows from financing activities:
Net increase (decrease in lien of credit
42,115 (93,358)
Payments of long-term debt
(77,167) (53,077)
Proceeds from issuance of common stock, net
of issuance costs
(107,460) 34,927
- -------- ----------
Cash flows from financing activities
72,408 (111,508)
- -------- ---------
Increase (decrease in cash
(20,062) 16,576
Cash, beginning of year
30,874 14,298
Cash, beginning of year $
10,812 $ 30,874
========= =========
Supplemental cash flows information:
Cash paid for interest $
22,829 $ 30,910
Cash paid for income taxes
0 0
Non-cash investing and financing activities:
Stock subscriptions receivable received from
issuance of common stock, net of issuance costs $
607,500 $ 120,000
Issuance of common stock for deferred offering costs $
37,500 $ 0
Redemption of common stock and reimbursement for
services rendered through issuance of common stock $
0 $ 157,500
========= =========
<FN> See accompanying notes to financial statements
</TABLE>
<PAGE>F-5
[CAPTION]
NORTECH FOREST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business-
Nortech Forest Technologies, Inc. (Nortech), 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 (see note 9)
Accounts receivable - The Company considers all accounts receivable to be
fully collectible, accordingly, no allowance for uncollectible accounts has
been established. If accounts became uncollectible, they are charged to
operations when that determination is made. The Company extends unsecured
credit to customers in the normal course of business.
Inventories - Inventories are recorded at the lower of cost (first-in, first
out) or market value.
Depreciation - Property and equipment are recorded at cost. Depreciation is
provided for using straight-line method over periods ranging from three to
seven years. Maintenance, repairs and minor renewals are expensed when
incurred.
Advertising costs - Advertising costs are charged to expense as incurred.
Advertising expense for the years ended December 31, 1999 and 1998 was
$59,877 and $27,557.
Earnings per common share - During 1999, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (Statement 128).
Statement 128 requires disclosures of basic earnings (loss) per share (EPS)
and diluted EPS. Basic EPS is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the
year. Diluted EPS is computed by dividing net income by the weighted
average common shares outstanding and dilutive common equivalent shares
assumed to be outstanding during each period. Dilutive common stock
equivalents are not included in computations of diluted EPS if their
inclusion would be antidilutive. Antidilutive common equivalent shares
issuable based on future exercise of stock options and warrants could
potentially dilute EPS in future years.
Management's use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of
<PAGE>F-6
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair value of financial instruments - The carrying amounts for all financial
instruments approximates fair value. The carrying amounts for cash,
accounts receivable, accounts payable and accrued expenses approximate fair
value because of the short maturity of these instruments. The fair value of
debt approximates the current rates at which the Company could borrow funds
with similar remaining maturities.
Reclassifications - Certain accounts in the prior year financial statements
have been reclassified for comparative purposes to conform with the
presentation in the current year financial statements. These
reclassifications had no effect on net income or stockholders' equity.
(2) INVENTORIES
Inventories consisted of the following at December 31:
1999 1998
----------------------
Raw materials $ 37,123 $ 55,638
Finished goods 14,724 21,631
-----------------------
Total inventories $ 51,847 $ 77,269
-----------------------
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1999 1998
-----------------------
Furniture and fixtures $ 33,356 $ 33,356
Office equipment 24,288 22,683
Warehouse equipment 6,639 6,639
Less: accumulated depreciation (51,387) (41,580)
-----------------------
Total property and equipment $ 12,896 $ 21,098
-----------------------
(4) LINE OF CREDIT
The Company has a $200,000 revolving line of credit with Itasca Business
Credit, LLC, which is due on demand. The Company can obtain advances of up
to 75% of accounts receivable to a maximum of $200,000. Borrowings under
the revolving line of credit bear interest at prime plus 9% (17.5% at
December 31, 1999) and are secured by substantially all of the Company's
assets. Outstanding Borrowings were $100,637 and $58,522 at December 31,
1999 and 1998.
<PAGE>F-7
(5) LONG-TERM DEBT
Long-term debt consists of a note payable issued to a former employee as
part of a lawsuit settlement. The note is payable in monthly installments
of $7,000, bears interest at 9.5%, matures in 2000 and is secured
substantially all of the Company's assets. The outstanding balance was
$27,256 and $104,423 at December 31, 1999 and 1998.
(6) INCOME TAXES
The Company has incurred net operating losses for both financial reporting
and income tax purposes. As of December 31, 1999, the Company had net
operating loss carryforwards of approximately $1,763,000, which, if not
used, will begin to expire in 2007. Future changes in the ownership of the
Company may place limitations on the use of these net operating loss
carryforwards. The Company has recorded a full valuation allowance against
the net deferred tax asset due to the uncertainty of realizing the related
benefits.
1999 1998
--------- ---------
Net operating loss carry-forwards $ 705,000 $ 684,400
Less: valuation allowance (705,000) (684,400)
---------- ---------
Net deferred taxes $ 0 $ 0
(7) STOCKHOLDER'S EQUITY
Regulation S offerings-During 1998, the Company completed an offering of
common stock for $.30 a share. The Company issued 400,000 shares of common
stock and received stock subscription agreements totaling $120,000. During
1999, the Company completed an additional offering of common stock for $.50
a share. The Company issued 1,350,000 shares of common stock and received
stock subscription agreements totaling $675,000 and incurred $67,500 of
issuance costs. These costs will be paid as proceeds from collection of the
stock subscriptions are received. All of the outstanding stock subscription
agreements accrue interest at 10%, mature at various dates through July 2000
and are secured by the underlying common stock. Due to the uncertainty of
collecting interest on the notes, interest has not been accrued at December
31, 1999 and 1998.
Sales of common stock-During 1998, the Company sold 100,000 shares of its
common stock and received proceeds of $34,927, net of issuance costs.
During 1999, the Company sold units consisting of the Company's common stock
and warrants to purchase common stock. The Company issued 675,000 shares of
common stock and 135,000 warrants to purchase stock at $.80 per share and
received proceeds of $107,460, net of issuance costs. The warrants are
exercisable for three years.
<PAGE>F-7
Stock warrants-Outstanding stock warrants consisted of the following:
Number of Per share
Warrants Price
----------- -----------
Outstanding-December 31, 1997 249,088 $1.50-$4.00
Granted 0 .00
Canceled or expired (50,000) 1.00
----------- ------------
Outstanding-December 31, 1998 199,088 $1.50-$4.00
Granted 135,000 .80
Canceled or expired (100,000) 1.30
----------- ------------
Outstanding-December 31, 1999 234,088 $ .80-$4.00
Stock option plan - The Company has a qualified stock option plan, which
authorizes a maximum of 200,000 shares of common stock for issuance under
the plan. The Board of Directors may grant options at their discretion,
provided the purchase price of the option equals the market price of the
Company's stock on the date of the grant. In addition, the Company has
nonqualified stock option plan that allows for issuance of 200,000 shares of
common stock under the plan under terms outlined in the agreement. The
options under both plans are exercisable for a period of ten years from the
date of grant and vest over various periods.
Information regarding the Company's stock options is summarized below:
<TABLE>
Weighted
Range of
Number of Average
Option
Options Exercise Price
Exercise Price
- -----------------------------------------------
<S> <C> <C>
<C>
Options outstanding - December 31, 1997 153,938 $ 1.60
$ 1.50-4.00
Granted 75,000 1.60
1.60
Canceled or expired (2,500) 1.00
1.00
Exercised 0
-------- ----------
- ------------
Options outstanding - December 31, 1998 226,438 1.61
1.50-4.00
Granted 0 -
-
Canceled or expired 0 -
-
Exercised 0 -
-
-------- ----------
- ------------
Options outstanding - December 31, 1999 226,438 1.61
1.50-4.00
-------- ----------
- ------------
Options exercisable - December 31, 1999 226,438 1.61
1.50-4.00
Weighted average fair value of options granted
during the year ended December 31, 1999. $ .00
</TABLE>
<PAGE>F-8
Options outstanding at December 31, 1999 have a weighted average remaining
contractual life of 7.56 years.
The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its stock options.
Accordingly, no compensation cost has been recognized for its stock options.
Had compensation cost for the Company's stock options been determined based
on the fair value at the grant dates consistent with the method of Statement
of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" (Statement 123), the Company's net income (loss) and EPS would
not have changed.
In determining the compensation cost of the options granted during 1998, as
specified by Statement 123, the fair value of each option grant has been
estimated on the date of grant using the Black-Scholes option pricing model
and the weighted average assumptions used in these calculations are
summarized below:
Risk free interest rate 6.50%
Expected life of the options granted 10 years
Expected volatility of options granted 25%
Expected dividend yield 0.00%
(8) COMMITMENTS AND CONTINGENCIES
Operating leases - The Company leases office space under a lease
expiring October 2001. Base rent is $1,700 per month, increasing to $1,734
during the term of the lease. In addition, the lease requires the Company
to pay its pro rata share of real estate taxes. Rent expense was $20,770
and $24,000 for the years ended December 31, 1999 and 1998.
Future minimum rental payments are as follows for the years ending December 31:
2000 $ 20,465
2001 17,344
---- ------
Total $ 37,809
Major customers - The Company had sales to two customers representing
approximately 26% of total sales for the year ended December 31, 1998. The
Company had accounts receivable from five customers representing
approximately 66% of total accounts receivable at December 31, 1999 and
accounts receivable from four customers representing approximately 76% of
total accounts receivable at December 31, 1998.
Employment agreement - The Company has an employment agreement with one of
its officers. The agreement requires minimum annual compensation of $65,000
through December 2000.
(9) SUBSEQUENT EVENTS (UNAUDITED)
Sale of Tree Guard(R) Assets - On February 3, 2000, the Company sold all of
the assets, net of certain liabilities associates with its Tree Guard brand
deer repellant, including accounts receivable, inventories and certain
prepaid expenses for $850,000.
<PAGE>F-9
Acquisition of FL Floral, Inc. and FL Flowers, Inc. - On February 4, 2000,
the Company acquired 100% of the outstanding stock of FL Floral, Inc. and FL
Flowers, Inc. The Company issued 3,206,245 shares of common stock for these
acquisitions. The purchase agreement contains stock incentives based on
future sales up to a maximum of 6,412,474 shares of common stock. In
conjunction with the purchase, the Company entered into employment
agreements with the two previous owners of the Fl Floral, Inc. and FL
Flowers, Inc. and a current officer of the Company. The agreements require
annual compensation ranging between $36,000 and $87,500 expiring through
December 2002.
<PAGE>F-10
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, there unto duly authorized.
NORTECH FOREST TECHNOLOGIES, INC.
("Company")
Don Lindstedt
______________________________________
Don Lindstedt, Chief Executive Officer
Dated: May 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------- ------ ----
Don Lindstedt CEO, Director May 24, 2000
Steve Fahrner President, Director May 24, 2000
Gary Borglund Chairman, Director May 24, 2000
Calvin E. Blanchard COO, Director May 24, 2000
[CAPTION]
NORTECH FOREST TECHNOLOGIES, INC.
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
<TABLE>
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 Nortech's Form
Company, as amended 10-KSB for
the fiscal year ended
12/31/95
3.2 Bylaws of Nortech, as amended Exhibit
3-2 to Nortech's Form
10-KSB for
the fiscal year ended
12/31/93
10.1* 1995-1996 Incentive Stock Option Exhibit
10-1 to Nortech'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 Nortech'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 Nortech'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 Nortech'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
10.12 Employment agreement of Don Lindstedt dated Janaury 1, 2000
Exhibit 1 to Form 8-K
Filed April 13, 2000
10.13 Employment agreement of Steven Fahrner dated January 1, 2000
Exhibit 2 to Form 8-K
Filed April 13, 2000
10.14 Employment agreement of Gary Borglund dated February 3, 2000
Exhibit 3 to Form 8-K
Filed April 13, 2000
16 Letter on change in certifying accountant
(To be filed within 10 business days of the filing of this report)
27 Financial Data Schedule (filed with electronic version
----
only)
--------------------
* Management agreement or compensatory plan or arrangement.
** Confidential Treatment has been requested on certain information pertaining
to these exhibits
</TABLE>
[TYPE]EX-27
<SEQUENCE>2
[DESCRIPTION]FINANCIAL DATA SCHEDULE
[ARTICLE] 5
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-END] DEC-31-1999
[CASH] 10,812
[SECURITIES] 0
[RECEIVABLES] 203,922
[ALLOWANCES] 0
[INVENTORY] 51,847
[CURRENT-ASSETS] 275,071
[PP&E]
[DEPRECIATION]
[TOTAL-ASSETS] 327,132
[CURRENT-LIABILITIES] 189,045
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 44,741
[OTHER-SE] 0
[TOTAL-LIABILITY-AND-EQUITY] 327,132
[SALES] 789,119
[TOTAL-REVENUES] 789,119
[CGS] 257,863
[TOTAL-COSTS] 257,863
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] (22,230)
[INCOME-PRETAX] (28,332)
[INCOME-TAX] 0
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (28,832)
[EPS-BASIC] (0.01)
[EPS-DILUTED] 0
