UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31,
2002
[ ] Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for transition period from
to .
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Commission file number 333-56552
NEBO PRODUCTS, INC.
(Name of small business issuer in its charter)
UTAH 87-0637063
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12382 Gateway Parkplace #300
Salt Lake City, Utah 84020
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (801) 495-2150
Securities registered under Section 12(b) of the Exchange Act: None
Name of each exchange on which registered: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value Per Share
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Check whether the issuer (1) filed all reports required 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 contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended December 31, 2002, were $3,572,817.
On April 14, 2003 the last reported bid price for the Company's common stock as reported by the OTCBB was $0.028 per share. The aggregate market value of the voting and non-voting common equity of the Company held by non-affiliates at April 14, 2003, was $625,525, based on the average of the bid and asked price of the Company's common stock on that date.
There were 21,777,741 shares of common stock of the registrant outstanding as of April 14, 2003.
TABLE OF CONTENTS
Item No. and Description Page No.
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PART I
Item 1. Description of Business 2
Item 2. Description of Property 11
Item 3. Legal Proceedings 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 12
Item 6. Management's Discussion and Analysis or Plan of Operation 15
Item 7. Financial Statements 24
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 24
Item 10. Executive Compensation 26
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 28
Item 12. Certain Relationships and Related Transactions 30
Item 13. Exhibits and Reports on Form 8-K 31
Item 14. Controls and Procedures 32
Signatures 33
Certifications 34
Financial Statements and Schedules F-1
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Part I
Item 1. Description of Business
Caution Regarding Forward-looking Statements
Certain statements contained in this report, which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The terms "anticipate," "believe," "estimate," "expect," "objective," "plan," "project," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to inherent risks and uncertainties that may cause actual results or events to differ materially from those contemplated by the forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with these statements, factors that may cause actual results or events to differ materially from those contemplated by the forward-looking statements include, without limitation, general economic conditions, market conditions in the Company's existing and intended markets and related industries, market acceptance of existing and new products, successful integration of acquisitions, competitive product and pricing pressures, interest rate risk, the Company's ability to access capital markets and other factors that may be referred to in the Company's reports filed with the Securities and Exchange Commission from time to time.
When used in this report, the terms "NEBO" and the "Company" refer to NEBO Products, Inc., a Utah corporation, unless the context requires otherwise.
Introduction
The Company's business commenced in 1996, operated first as a partnership and then as a limited liability company, under the name Open Sea Trading Company, LLC. In 1998, the Company was incorporated in the state of Utah as Open Sea Corporation. In July 1999, the operations of Open Sea Trading Company LLC were combined with Open Sea Corporation by an exchange of the member interests in the limited liability company for shares of common stock in the corporation. The corporate name was changed to NEBO Products, Inc., in September 2000. Since December 2000, the Company has maintained its principal offices at 12382 Gateway Parkplace #300, Draper, Utah 84020. The telephone number is (801) 495-2150. The Company also maintains worldwide websites at neboproducts.com, nebosports.com, and nebotools.com. These inactive textual references do not constitute a part of this report.
Business Overview
The Company supplies hand tools and weekend camping gear to U.S. retailers. Most of its products are manufactured in Taiwan, the People's Republic of China, and India and are imported by the Company to the United States for sale under the Company's trademark NEBO or under retailers' own private labels. The Company has established business relationships and a working history with 15 Far East manufacturers, three shipping companies, and more than 5,000 customers nationwide, including The Home Depot, Menard's, Sears, Gander Mountain, Sportsman's Warehouse, The Sportsman's Guide, and Cabela's.
In 2002, the Company acquired the assets of Straightway Tools, including primarily the patent on its expandable level products. In the third quarter of 2002 the Company completed a major balance sheet restructuring that converted over $1.1 million of debt and contingent liabilities to convertible preferred stock at a conversion price of $0.20 per share. Additionally, $461,244 of debt was restructured with longer maturities, lower interest rates and a conversion option at $0.20 per share.
In August 2001, the Company introduced the new UltraTM Socket Tool at the National Hardware Show in Chicago, Illinois, and received a Best of Show Award of Distinction for the marketing of innovative products selected by the show's Retailers' Choice Awards Committee for Do It Yourself Retailing.
In a survey conducted in May 2000 by Home Improvement Executive magazine, more home center chains cited NEBO as the number one brand driving their multi-bit screwdriver business. The Company has sold more than one million pieces of its most popular hardware tool, the 13-in-1 multi-bit ratchet
screwdriver. Beginning in October 2000, the Company started private-labeling NEBO safety glasses with the Craftsman(R) brand and promoting those glasses in all 856 Sears stores nationwide. The Company has continued to expand its customer base within the large retail segment in both its hand tool and outdoor product categories.
History and Milestones
In 1997, the Company's predecessor started importing products into the United States under the NEBO brand. The following are significant milestones in the development of the business:
o September 1997 -- Shipped first products to retail customers.
o December 1997-- Retained 1,000th U.S. customer through telesales and marketing programs.
o August 1998-- The NEBO 13-in-1 won the "Best of Show" award at the National Hardware Show in Chicago.
o October 1998 -- Rolled out the sale of the NEBO 13-in-1 to The Home Depot to realize first profitable month.
o November 1998-- NEBO safety glasses first introduced to 200 Sears stores.
o April 1999 -- Completed the nationwide rollout of the "13-in-1" screwdriver at The Home Depot.
o May 1999 -- Named number three brand in nationwide survey for multi-bit screwdrivers by the Home Improvement Executive magazine.
o July 1999-- Combined operations under the name Open Sea Corporation and added new equity owners.
o August 1999-- Completed seed round private placement of $300,000 to finance growth.
o December 1999-- Completed year with more than $4 million in sales.
o January 2000 - Sold one-millionth 13-in-1 multi-bit screwdriver.
o May 2000 -- Named number one brand in nationwide market survey for multi-bit screwdrivers by the Home Improvement Executive magazine.
o May 2000-- Awarded U.S. design patent for safety glasses.
o May 2000 -- Began selling sporting goods to Sam's Club, eventually becoming one of Sam's Club's highest volume "road shows."
o June 2000 -- First sale to Menard's, Inc.
o August 2000 -- Set record for world's largest sleeping bag (500 feet wide, holding 277 people simultaneously) at the semi-annual Outdoor Retailer's National Convention. Donated proceeds of event to charity.
o September 2000 -- Began private-label arrangement with Sears to place popular Craftsman(R) label on NEBO safety glasses.
o September 2000 -- Changed name to NEBO Products, Inc.
o October 2000-- Signed lease for new 17,000 square foot warehouse and office space.
o December 2000-- Completed year with $4.7 million in sales.
o January 2001-- Expanded sales to 148 Menard's, Inc. stores with six different hardware products.
o March 2001-- First sales of sleeping bags and camping gear to Nordic Track, a 70-store chain.
o March 2001 -- First sales of sleeping bags to Galyan's, a 25-store chain.
o March 2001 -- Filed Registration Statement on Form SB-2 with Securities and Exchange Commission.
o July 2001 -- Registration Statement declared effective by the Securities and Exchange Commission.
o August 2001 -- Introduced the new UltraTM Socket Tool at the National Hardware Show in Chicago, Illinois and received a Best of Show Award of Distinction for the marketing of innovative products selected by the show's Retailers' Choice Awards Committee for Do It Yourself Retailing.
o November 2001-- Securities of the Company began trading on the OTCBB under the symbol NEBO.
o December 2001-- Initiative to evaluate and streamline all business processes began. Information technology systems evaluated resulting in upgraded computer system hardware and the installation of software enhancements.
o April 2002-- Retained the services of Thorpe Capital, Inc., a NASD Member Investment Banking firm specializing in mergers and acquisitions and capital raising activities.
o April 2002--Began the initial production run of the new and patented 400 lbs capacity Outfitter Extra Large Cot. TM
o July 2002-- Acquired the assets of Straightway Tools(R) including patents, inventory, and contracts relating to the proprietary Straightway line of expandable construction levels marketed through Lowe's, Sears Hardware, Orchards and Menard's in the United States.
o August 2002 -- Introduced "factory direct" program to customers at the Outdoor Retailer trade show.
o October 2002-- Restructured the staff and lowered annual operating costs in excess of $300,000.
o November 2002-- Completed restructuring of $1.1 million of debt and contingent liabilities to convertible preferred stock at a conversion price of $0.20 per share. In addition, restructured $461,244 of debt with longer maturities, lower interest rates, and a conversion option at $0.20 per share.
o December 2002-- Sporting Goods division sales exceed $2.2 million for 2002.
Products
The Company believes its primary strength has been its ability to design or capitalize on modifications to common tools and camping gear to make them more attractive, more practical, or more useful by adding attractive and practical design features. This process includes considering customer feedback and conducting extended hands-on trials and tests. NEBO design and marketing teams identify enhancements that they believe will dramatically increase the usability and functionality of a product. Foreign manufacturing sources are used so that the price of the Company's products remains competitive in key markets.
Top-selling hardware products include the following:
o NEBO 13-in-1 screwdriver. This is a handheld multi-bit ratcheting screwdriver with 12 bits and a magnetic extension held in a cartridge that is stored in the handle. The NEBO 13-in-1 comes in three colors and continues to be one of the best multi-bit screwdrivers in the marketplace. This product won a "Best of Show" award at the 1998 National Hardware Show. The 13-in-1 was
responsible for approximately 70% of total sales in 1999, 28% in 2000, 15% in 2001, and 5% in 2002. Additional sets of bit kits are available as accessories to this product line.
o Speed Reader and Speed Reader PRO Tape Measures. These are rubber-grip, impact resistant tape measures. They have fractional markings to 1/32" and stud and truss markings indicated on the tape. Every 1/8" is printed with the actual fractions, making the tape easier to read. The Speed Reader PRO is an upgraded version of the Speed Reader and is designed for the professional market. The Company recently added metric markings to some tape measures to enhance the product line and make it more attractive to the international markets.
o NEBO-X Safety Glasses. This is a line of style-oriented protective eyewear with interchangeable lenses. The lenses are produced in different shades and styles to be marketed to a variety of user types. They have adjustable frames and come with a neck strap as an accessory. The Company holds U.S. Design Patent No. D425,926 on May 30, 2000, for protective eyewear for this product. These glasses comply with OSHA requirements for industrial eyewear. The Company sells these glasses under its own brand name and under private labels with the Craftsman(R) brand name for Sears.
o UltraTM Socket. This is a complete socket set in one handy tool designed with a bi-directional ratcheting drive that also adjusts for three different drive angles. This product comes packaged with seven different sockets, six of which are stored inside the handle. Built for durability and comfort, this tool's 650 kgf-cm torque capability exceeds ANSI standards by 25%. During the Ultra Socket's debut at the August 2001 National Hardware Show in Chicago, it won the prestigious Retailers' Choice Award. A metric version of the Ultra Socket is set for release in early 2003.
o Hammers. The Company has completed its line of hammers including the 24 oz. all-steel framing hammer; the 21 oz. hickory straight or curved handle framing hammers; and 20 oz., 16 oz., and 8 oz. hammers. These hammers are designed for professional users and do-it-yourselfers. Each hammer comes with a magnetic nail holder
built into the head to help hold the nail in place for the
initial strike.
o Expandable levels. In June of 2002, the Company acquired the
assets of Straightway(R)Tools and relocated the manufacturing of
these levels from the United States to China. The Company
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received its first expandable levels manufactured in China during the 3rd quarter of 2002 and has introduced the levels through its existing distribution channels. There are two levels currently available in this product line, the ComPac 4', which is a two-foot level that expands to four feet, and the ComPac 8', which is a four-foot level that expands to eight feet. The Company holds U.S. Patent No. 6,293,023 on these levels. In August 2000, these levels won the Retailers' Choice Award at the National Hardware Show in Chicago. The Company anticipates and has begun to experience increased demand for these products in the marketplace due to their unique design.
Top-selling outdoor products include the following:
o The Company's sleeping bag lines accounted for approximately 49% of its total sales in 2002 compared with approximately 34% of total sales in 2001.
o The Bear and Moose sleeping bag lines. These sleeping bags are rectangular in shape, but come with a "mummy" style hood. This unusual design experienced immediate sales success and garnered industry attention. Consequently, other sleeping bag companies have incorporated this design combination. These sleeping bag lines are intended to fulfill the mid-range camping market and have recently been sold into several large chains, catalog companies, and in various sporting and specialty stores throughout the United States. They are produced in various temperature ratings, colors, and fabrics.
o The Wasatch and Teton sleeping bag lines. These lines are designed in the classic "mummy" style. The target market for these products is the mid-range backpacking and sporting consumer. The Teton utilizes an unusual curved zipper designed to facilitate zipping from inside the sleeping bag. Styles from both lines have recently sold into the same markets mentioned in the
preceding paragraph. They are manufactured in an assortment of colors, temperature ratings, and fabrics.
o The Sandstone sleeping bag line. Like the Moose and Bear lines, the Sandstone is square at the bottom for a roomier feel and it incorporates many of the extra features of the mummy bag design. Crafted for the rugged outdoorsman, the Sandstone has a full-length zipper baffle, shoulder baffles, and dual layer construction with offset quilt seams, which the Company believes successfully keeps warm air inside the bag from escaping, while blocking cold outside air from penetrating the bag. The cotton canvas shell and brushed flannel lining are intended to cater to hunters by blending durability and comfort. The Company has already received strong interest in both the -30 and 0-degree models in its existing distribution channel.
o The Mammoth line. The Mammoth is an extra large (100" x 60") sleeping bag, originally designed to be an oversized single bag but adaptable to be a double. The Mammoth sleeping bag has incorporated the same components as a single bag, such as a mummy hood, zipper and shoulder baffles, with additional features such as a second zipper - one for each side.
o Value Grade line. To serve those that desire a less expensive line of sleeping bags, the Company has formalized a line of sleeping bags for the budget-minded customer. This Value Grade program is composed of five styles of sleeping bags, built less expensively, yet still with good quality. This program will serve the high-volume, low-price, and family camping market.
o The camping equipment line accounted for 11% of total sales in 2002 compared with 4% of total sales in 2001.
o Camping Tents. The Company has developed two tents, the Arch VII and the Arch IX. They are designed with modular rain flies that can be changed according to the user's needs. They are nicknamed "8-in-1" tents because of the capability of being pitched eight different ways. The Arch IX has nine square feet of living space while the Arch VII has seven square feet of living space. Both have a full rain fly that extends lengthwise a total of 18 feet and 14 feet respectively. If the user desires, a vestibule section of the rain fly can be removed to save space and reduce carrying weight. The rain fly can even be pitched on its own, separately from the tent. Due to disappointing sales levels of the existing tent line, the Company intends to improve and reintroduce the line later this year or during the first quarter of 2004.
o Camping Cots and Chairs. The Company produces cots and camping
chairs in various sizes and styles. The most notable are an
oversized patent pending cot measuring 84"x 40"x19" and an
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oversized camp chair that measures 22"x24"x38". The large size of these items is not typically seen in the industry and is an important feature used to differentiate the Company's products. The extra large cot was designed to compliment the oversized sleeping bag models and boasts a 400-pound weight capacity, with tests of nearly 1,500 pounds. The Company's cots and chairs come with a carry bag.
o Backpacks. The Company offers three different styles and sizes of internal frame backpacks and a daypack that are being incorporated into existing distribution channels. These backpacks are lightweight and are made of durable material. Active distribution to three of the Company's largest sporting goods customers is already in place for all four packs. One of the backpacks is made for entry-level backpackers or for the more budget conscious consumer, while the other backpacks are designed for the high-tech consumer and include adjustable shoulder straps, contoured shoulder, lumbar support, hip pads, and a rain fly. All three backpacks and the daypack are water bladder ready.
Customers
The Company has three general types of customers for hardware and camping products. These include:
o Small and Medium Sized Retailers. Smaller stores used to rule the hardware and sporting goods industries, and there are still more than 20,000 of these stores nationwide, according to The National Hardware Retailers Association. In some instances, these storeowners and managers have formed buying co-operatives. According to the National Hardware Retailers Association, hardware wholesale cooperatives such as TruServ Corporation and Ace Hardware Corporation combine to purchase more than $7 billion a year in products, with distribution to more than 15,000 retailers. The Company believes it is necessary for small retailers to rely on careful product selection, personal service, and liberal return policies to compete with the national chains. The Company markets directly to over 4,000 smaller retailers with an internal sales force of five individuals and numerous manufacturers' representatives. The Company attends several cooperative trades shows annually, in both hardware and sporting goods, to sell and show its products. The small and medium size retailers accounted for approximately 36% of total sales in 1999, approximately 52% in 2000, approximately 43% in 2001, and approximately 20% in 2002.
o National Chains. The Home Depot, Lowes, Menard's, Costco, Wal-Mart, Sears, Gander Mountain, Sportsman's Warehouse, The Sportsman's Guide, and Cabela's accounted for more than $105 billion a year in consumer hardware and sporting goods sales in 2001 and 2002. These national chains generally have long approval cycles when acquiring new products. Only products that sell quickly get reordered. Those that remain on the shelves too long or that experience high return rates are dropped. The Company believes that these national chains rely on enormous selection and branding to compete. The Company uses approximately 50 manufacturers' representatives and an internal sales force of five individuals to sell and service the inventory in national chain stores. Manufacturers' representatives are independent contractors that represent products of a like type manufactured by one or more manufacturers in a particular industry or market. The national chains accounted for approximately 64% of total sales in 1999, approximately 48% in 2000, approximately 57% in 2001,and approximately 78% in 2002.
o Private-label Partners. Makers of well-known brands, such as Craftsman(R)and NordicTrack(R)often select products from other manufacturers and private-label them as their own. Only products that are a direct fit in quality, price, and packaging are considered for private label, and manufacturing relationships and stability are also determining factors. In the future, the Company expects to expand its private labeling business to take advantage of the closer relationships with the retailer and longer exposure and life for its products that frequently result from these arrangements. The Company began private-label sales in 2000 and they accounted for approximately 2% of net sales in that year, approximately 4% in 2001, and approximately 2% in 2002.
The Company services all three of these different customer groups for several reasons. It minimizes the risk that a single large customer will dominate the revenue forecast at any one time. Selling to a cross-section of the market also allows the Company to achieve greater brand recognition and allows it to capitalize more widely on its high-loyalty features.
Competition
The Company competes in both the hardware and the sporting goods industries. Primary competition in these industries originates from several large tool and sleeping bag manufacturing and import companies. Principal competitors in the sporting goods industry are Coleman and Slumberjack. Primary hardware competition is Alltrade, Stanley Works, Olympia Tools, and Allied. Large retail chains like Menard's and The Home Depot sometimes import products under their own private labels that also compete directly with the Company's products.
The Company competes with these larger wholesale and manufacturing companies in several ways. First, the Company identifies unique products or product features that do not yet have significant market saturation. For
example, the Company designed the Moose sleeping bag line to combine a "mummy" style hood with a common rectangular bag shape. Another example is the 13-in-1 screwdriver that combines a reversible ratchet screwdriver and 12 screw bits plus a magnetic extension on a tool that is the same size as a standard single-bit screwdriver. More recent is the patented expandable level coming in two-foot and four-foot models expanding to four and eight feet respectively. The Company identifies unusual product features or designs through customer or employee suggestions, or from suggestions made by manufacturing partners. Second, the Company attempts to sell its products at a price that is competitive with, in many cases less than, the prices charged by the competition. The Company conducts market research by having sales personnel regularly visit hardware and sporting goods retailers and note prices and features of competing products. Third, the Company tries to provide more personal service to customers. The Company believes that its smaller size allows it to maintain personal contacts with key personnel at customers and manufacturers. The Company responds promptly to customer special requests and in most cases can ship product within one business day of receipt of an order. Fourth, the Company attempts to help retail customers successfully merchandise products. For example, the Company packages its top-selling hardware products in point-of-purchase boxes of one dozen units, which can be placed by the retail customer at high traffic areas such as check stands. The Company believes its extra attention to packaging helps its products maintain better visibility and makes them more attractive to potential purchasers. The Company's sales personnel and representatives also visit larger customers regularly to arrange, clean and restock products at the customers' stores. This also allows the Company to ensure that its products enjoy favorable placement and appearance for the patrons of these customers.
Market Opportunity
The Company has identified several trends that affect its primary markets. These include the following:
o Consolidation of hardware stores and emergence of national chains and large wholesale buying groups. A relatively recent trend in the hardware industry is the consolidation of hardware stores and the emergence of national chains and large buyer groups. Home center chains now capture more than $83 billion in volume representing more than 51% of the market. The Company believes that the number of retail outlets has decreased over the last ten years, while the total volume of sales has more than doubled.
o Continued steady demand in home remodeling and construction industries. The National Retail Hardware Association estimated that total industry sales for the home remodeling and construction industries are expected to increase at an annual rate of 4.6% through 2003. In addition, hardware stores, home centers, and lumber outlets report that hardware tools of the type provided by the Company are their highest or second-highest productivity items, with a better gross margin return on inventory than power tools, plumbing, paint and home decor, lawn and garden, and lumber.
o Increased participation in outdoor activities and greater emphasis on healthy lifestyle. Wholesale sales of camping equipment have increased at a steady rate from 1995 through 2002. The Company expects that trend to continue.
o Growth by acquisition. In recent years, several companies in the hardware and sporting goods industries have successfully grown through acquisition. For example, Direct Focus, Inc. has acquired Bowflex, Nautilus, Schwinn, and Stairmaster.
The Company plans to capitalize on these industry trends as follows:
o Increasing the number of programs available in our product line. By expanding product programs, the Company believes it increases the likelihood of selling directly to the larger chain stores and co-op warehouses. A product program is a program that expands the number of products of a similar type or line of products that can be marketed to the same group or similar type of customers. The customer has a wider selection of similar products with varied features to choose from and to pass along to its patrons. This strategy involves an investment of capital into inventory; however, the Company believes that the volume of sales will greatly increase.
o Designing consistent, highly recognizable packaging of both outdoor gear and tools. The Company plans to continue providing attractive, consistent color themes and bold name branding on all packaging. By brand building, the Company helps customers merchandise the Company's products to the end-user, thus increasing sales and customer loyalty. NEBO products are targeted to take advantage of impulse buying.
o Increasing sales efforts to chain stores and wholesale buying groups. The Company intends to capitalize on the emergence of chain stores and the market consolidation by designing custom programs that work within the chain's existing line of products and clientele, and by specifically targeting those stores for sales and marketing efforts. Depending on the specific store, the Company will propose these programs directly to the customer or approach the chain through manufacturer's representatives. In all cases, the Company offers incentives to customers who buy volume and receive product shipments directly from any of the Company's overseas factories.
o Identifying strategic acquisitions. The Company plans to evaluate acquisition candidates such as its Straightway acquisition that fit compatibly within the Company's existing distribution channels. The Company has engaged the services of an investment banking firm to assist it in this effort.
Manufacturing
Substantially all of the Company's hardware and outdoor products are manufactured in Asia. Over the last five years, the Company has carefully selected the most suitable manufacturers and has obtained product-specific exclusive arrangements from several different manufacturers. Under these arrangements, NEBO manufacturers may not manufacture competing or similar products for others.
Unlike many import companies, the Company's approach to manufacturer relationships is very hands-on. NEBO executives travel to the Far East several times a year, spending valuable one-on-one time gathering ideas from manufacturers and inventors and communicating strict quality and feature requirements. The Company also works with manufacturers' representatives in some instances to help ensure efficient and open communication. The Company has sufficiently strong relationships with some of these manufacturers that more than half of them provide the Company with favorable credit terms. Most products are manufactured on a 30- to 75-day cycle.
The Company understands that working in the international arena involves risks caused by geographical, political and cultural differences. The Company has made efforts to minimize its vulnerability to these risks. These efforts include:
o Increasing the number of countries where manufacturing is performed. The Company currently has manufacturing arrangements in Taiwan, China, Vietnam, and India. Future locations may include South Korea, Thailand, Sri Lanka, and Mexico. Moving into these other countries will allow the Company to more easily and quickly shift a manufacturing order to a different country should a geopolitical or other problem arise.
o Increasing the number of factories within countries. The Company has the ability to "overlap" the making of each product. In other words, a different foreign manufacturing company can make the same or similar products at comparable pricing. The Company meets regularly with many foreign factory representatives, which it believes increases the likelihood of maintaining acceptable product quality and pricing. For initial orders, the Company obtains quotes from multiple suppliers and then accepts the best offer, considering price, quality, speed, terms, and perceived value-added services.
o Maintaining ongoing and consistent communication with suppliers. The Company communicates daily with most suppliers either by telephone, fax, or e-mail. Face-to-face meetings are scheduled whenever possible and occur approximately twice a year with each factory. The Company works closely with three freight-forwarding companies that have local offices in Utah and in major cities in Asia.
o Quality assurance. The Company only accepts orders that meet the quality standards requested from a supplier. NEBO product development personnel sample several items from each shipment to
perform in-house product testing. Sub-standard or defective goods are returned or reported to the supplier for credit.
Shipping, Warehousing, and Distribution
Products are shipped from Asia, taking about 25 days from port to port, via common carrier to various port cities and from there directly to the Company's warehouse in Draper, Utah or directly to customers across North America. Company employees receive the product inventory, inspect it for quality, and log it into the warehouse inventory storage system. Customer orders generally are shipped from the Company's warehouse within 24 hours of receipt, which helps maintain our reputation for high availability. The Company has implemented a direct shipment method with certain customers who require large shipments of product. This enables the Company to create certain cost efficiencies, which can then be passed on to these customers who receive drop shipments of product directly from the Company's manufacturing facilities. The Company orders product every 15-30 days in order to carefully manage cash flow while staying ahead of the average customer order cycle, which generally is every 45-60 days. Having a sufficient volume of best selling products "in stock" means that the Company has product available to fill customer orders without back-ordering product. The Company has had to back-order some product due to working capital challenges.
On July 1, 2002, the labor contract between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) expired. This contract affects all of the ports on the western coast of the United States. The members of the ILWU are primarily responsible for the removal of cargo from container loaded shipping vessels. The members had been working under a daily extension of the contract; however, on September 27, 2002 the ILWU began a work slowdown, which resulted in a PMA lockout of the longshoremen. On October 8, 2002, a federal court judge imposed an 80-day cooling-off period, which temporarily reopened the west coast ports. Many of our shipments from Asia move through these ports. On November 23, 2002,during the cooling-off period, a tentative 6-year agreement was reached between union negotiators of the ILWU and the PMA. On January 22, 2003 members from both the ILWU and PMA overwhelmingly approved the 6-year contract. The new 6-year contract is retroactive to November 23, 2002 and runs through June 30, 2008. The Company's operations were adversely affected by the lockout especially during the fourth quarter of 2002 and first quarter of 2003. The closure created a significant backlog at port, subsequent transportation delays, and increased freight costs. Product delivery delays of up to two months were not unusual. These delivery delays affected the timing of revenues, profit margins, and resulted in some orders being cancelled.
Accounts Receivable Management
The Company generally bills customers on "Net 30" terms, and most accounts receivable are collected within 60 days. The Company maintains a credit line with Summit Financial that is collateralized by inventory and accounts receivable. Under the terms of this credit line, the Company sells its accounts receivable to Summit Financial. The Company receives 90% of the face value of receivables sold and the Company is required to repurchase receivables at face value upon request of Summit Financial. At December 31, 2002, the uncollected receivable balance that the Company may be required to repurchase totaled $487,780.
Product Liability
The Company believes that it retains sufficient product liability insurance to protect against potential claims that can occur in hardware and sporting goods manufacturing. The Company seeks to ensure rigorous quality testing in both manufacturing and product design and places appropriate warning and usage labels on each product. To date the Company has not had any product liability claims. The American National Standard Institute (ANSI) certifies several products sold by the Company. ANSI is an organization that formally conveys levels of quality and safety by product category. NEBO's suppliers have represented to the Company that their products meet these requirements.
Patents, Licenses, and Proprietary Technology
The Company relies upon a combination of patents, copyright protection, trade secrets, know-how, continuing technological innovation, and licensing opportunities to develop and maintain its competitive position. The Company
believes that its future prospects depend in part on its ability to obtain patent protection for products and formulations. The Company believes it needs to preserve its copyrights, trademarks and trade secrets. The Company also believes that it needs to operate without infringing the proprietary rights of third parties. Various patents are in place to protect the Company's products. The Company owns US Patent No. D425,926 for the protective eyewear and US Patent No. 6,293,023 for the expandable levels. The Company also has a patent pending for the UltraTM Socket tool. The Company is the exclusive licensee of the patent pending Outfitter XL cot.
The Company owns one registered trademark, the word and logo NEBO(R). In addition, the Company uses a number of unregistered marks for which the Company claims or believes it may be entitled to common law trademark or trade name and service mark protection. These include many of the Company's product names and other marks identified in this report by the symbol (TM).
Employees
Following a reduction in force during the fourth quarter of 2002, as of December 31, 2002, the Company had nine full-time employees in management, sales, operations, administrative, and technical positions. Of these full-time employees, three are in management, four are in sales, marketing and product development, and two in operations, administration, and support. The Company considers relations with its employees to be satisfactory. None of the Company's employees are covered by a collective bargaining agreement and the Company has not experienced any business interruption as a result of any labor disputes.
Dependence on Major Customers
During 2002 sales in the outdoor division outpaced sales in the hardware division. In 2002, outdoor division customer Gander Mountain was the Company's leading customer. Sales to this customer totaled approximately $619,499 (approximately 17% of net sales). Sportsman's Warehouse was second in sales with approximately $438,091 (approximately 12% of net sales). The Sportsman's Guide was third in 2002 sales with approximately $345,481 (approximately 10% of net sales). In 2001 one customer, The Home Depot, accounted for approximately 15% of sales. The Company does not have written contracts or other agreements with these or other customers that would require them to continue to do business with the Company. Therefore, they are free to choose at will among suppliers of products like those sold by the Company. The loss of any of these customers could materially and adversely affect the Company's business, results of operations and financial condition. During 2002, sales to The Home Depot declined, but this decline was partially offset by increases in sales to Gander Mountain, Sportsman's Warehouse, The Sportsman's Guide, Menard's, Cabela's, Worldwide Distributors, and various small and medium size hardware and outdoor products retailers.
Dependence on Major Suppliers
The Company's products are manufactured under contract by manufacturers in China, Taiwan and other Asian countries. The Company does not have written agreements with these manufacturers or with the suppliers of the raw materials used in the production of its products. If any significant manufacturers or suppliers were to cease providing product or services, as the case may be, to the Company, the Company would be required to seek alternative sources. There is no assurance that alternate sources could be located or that the delay or additional expense associated with locating alternative sources for these products or services would not materially and adversely affect the Company's business and financial condition. The Company believes that there are a significant number of alternative suppliers that could be utilized if required.
Item 2. Description of Property
The Company's corporate headquarters are located in approximately 17,000 square feet at 12382 Gateway Parkplace #300, Draper, Utah. The space includes office and adjacent warehouse and showroom space in a newly constructed industrial park. Lease payments total approximately $8,585 per month. The lease expires on October 30, 2005. Due to cash flow problems in the fourth quarter of 2002, we were delinquent in the payment of rent under the lease. We entered into an agreement with the lessor under the terms of which we agreed to pay $5,000 per month during the months of January through June 2003, with the balance accruing to be paid plus interest at 7% per annum. During July through December
2003 we will pay the rent stated in the lease each month, plus 1/6th of the accrued amount plus accrued interest.
Item 3. Legal Proceedings
The Company is a party to the following legal proceedings as of December 31, 2002, which, in the opinion of management, are not likely to have a material adverse impact on its financial condition, results of operations or cash flows.
Kenton Lee v. NEBO Products, Inc. (Civil No. 020913478, Third Judicial District Court, Salt Lake County, State of Utah). Kenton Lee filed this action to collect $20,000 under a promissory note.
Jay Christensen v. NEBO Products, Inc. (Civil No. 030905078, Third Judicial District Court, Salt Lake County, State of Utah). Jay Christensen filed this action to collect $25,000 under a promissory note.
Alpha Cit v. NEBO Products, Inc. (Civil No. 020913477, Third Judicial District Court, Salt Lake County, State of Utah). The Company purchased certain product from a supplier between October 2001 and November 2001; however, the Company believed that some of the product failed to meet quality control specifications. Consequently, NEBO refused to make payments to the supplier, TNC Outdoor Products Enterprise CO., LTD, on several purchase orders and paid for one order of products that never shipped. The Company believes it was damaged by the high volume of returns on the poor quality products sold and was further damaged by a cancelled order that resulted directly from the supplier's refusal to ship after the dispute developed. Andrew Peterson, a former employee of NEBO, purchased the unpaid invoices and has sued in the name of Alpha Cit for collection of a total of $106,520 plus interest. The Company intends to vigorously defend itself against this claim.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market. The Company's common stock began trading in the over-the-counter ("OTC") market in November 2001. Its stock is included on the OTC Electronic Bulletin Board under the symbol "NEBO". The following table summarizes data from the OTC Electronic Bulletin Board indicating the high and low sale prices for a share of common stock during the fourth quarter of 2001, and each quarter of 2002 during which the shares were traded. These prices reflect inter-dealer prices without retail markup, markdown or commission, are not necessarily representative of actual transactions, or of the value of the Company's securities, and are, in all likelihood, not based upon any recognized criteria of securities valuation as used in the investment banking community.
Sales Price
Year Calendar Period High Low
2001 Fourth Quarter $0.800 $0.250
2002 First Quarter $0.770 $0.300
Second Quarter $0.660 $0.105
Third Quarter $0.150 $0.053
Fourth Quarter $0.065 $0.020
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Holders. As of December 31, 2002, there were approximately 98 holders of record of the Company's common stock and 19,627,471 shares are issued and outstanding. A substantial number of shares of common stock, approximately 50%, are held in "street name" and the company believes that the ultimate beneficial owners of those shares exceed 1,000 in number. As of December 31, 2002, the Company had one series of convertible preferred stock outstanding, Series A Convertible Preferred Stock. There were 5,521,565 shares outstanding, held by 24 shareholders. On November 1, 2003 and 2004, the Company is required to redeem a total of 62,365 and 251,648 shares of convertible preferred stock at $0.20 per share, respectively.
Dividends. Since its incorporation, the Company has not declared any dividend on its common stock. The Company does not anticipate declaring a dividend on its common or convertible preferred stock for the foreseeable future. The Series A Convertible Preferred accrues dividends of 6% per annum. At December 31, 2002, dividends in arrears totaled approximately $5,500. The Company does not anticipate paying a cash or other dividend on the Series A Convertible Preferred for the foreseeable future.
Dilution. The Company has a large number of shares of common stock authorized in comparison to the number of shares issued and outstanding. The board of directors determines when and under what conditions and at what prices to issue the Company's stock. In addition, a significant number of shares of common stock of the Company are reserved for issuance upon exercise of purchase rights under stock options and warrants and upon conversion of the Series A Convertible Preferred.
The issuance of any shares of common stock, whether in connection with new equity offerings, acquisitions, or the exercise of options, warrants, or conversion rights will result in dilution of the equity and voting interests of existing shareholders.
Transfer Agent and Registrar. The transfer agent and registrar for the Company's common stock is Colonial Stock Transfer Company, 66 Exchange Place, Salt Lake City, Utah 84111.
Recent Sales of Unregistered Securities
The following information sets forth certain information for all securities sold by the Company during the past three years without registration under the Securities Act of 1933, as amended (the "Securities Act").
2000
During the year ended December 31, 2000, the Company did not sell any shares of common stock or other securities for cash. However, the Company did issue shares as follows:
On January 30, 2000, the Company purchased a 50-acre parcel of undeveloped real property for 147,800 shares of common stock from an entity owned by Scott Holmes, an officer and director, and Mr. Holmes' brother-in-law. The real property was recorded at the historical cost of the property, $20,000, as required by GAAP. The land had an MAI appraisal value of $82,000. The purchase price at historical carrying value is $0.135 per share and $0.555 per share at the MAI appraisal value.
On February 29, 2000, the Company issued 20,000 shares of common stock to two of its employees as part of a compensation agreement. These shares were valued at $0.65 per share.
On December 16, 2000, the Company converted debt to equity and issued a total of 436,115 shares of common stock to Finance Management International, one of its creditors at a price of $0.45 per share, in satisfaction of an obligation totaling $198,157.
2001
On February 13, 2001, the Company sold 13,333 shares of common stock to a single investor in a private transaction for $0.75 per share.
On November 15, 2001, the Company issued 60,000 shares of common stock to certain note holders in conjunction with the renegotiation of debt. On November 15, 2001, the Company issued 2,500 shares of common stock to an employee for a commission bonus earned.
2002
During the year ended December 31, 2002, the Company issued 5,521,566 shares of Series A Convertible Preferred stock with a liquidation preference of $1,104,313 and warrants for the purchase of 1,278,189 shares of common stock to various individuals and entities as a result of restructuring certain debt obligations. The Company is obligated to redeem 62,365 shares of convertible
preferred stock on November 1, 2003 and an additional 251,648 shares of Series A convertible preferred on November 1, 2004, all at a price of $0.20 per share.
Holders of the Series A Convertible Preferred are entitled to one vote per share on all matters upon which holders of the common stock are entitled to vote. Each share of Series A Convertible Preferred is convertible at any time into fully paid and nonassessable shares of common stock at a conversion price of $0.20 per share, subject to adjustment under certain circumstances. The Series A Convertible Preferred is automatically converted into shares of common stock at the then effective conversion rate upon the closing a firm commitment underwritten public offering by the Company in which the initial offering price to the public is not less than $0.20 per share. The holders of Series A Convertible Preferred are entitled to receive a dividend prior and in preference to any declaration or payment of any dividend on the common stock, at the rate of 6% of the stated value of the Series A Convertible Preferred. Dividends will be paid either in cash or in additional shares of Series A Convertible Preferred at the discretion of the Company's board of directors. Dividends are fully cumulative and accrue from the date declared by the board of directors until paid in full. At December 31, 2002, dividends in arrears totaled approximately $5,500. Once dividends are paid on the Series A Convertible Preferred, holders of Series A Convertible Preferred will not participate in dividends paid to holders of common stock. No dividends may be paid or declared and set apart for payment on any class or series of shares that are junior to the Series A Convertible Preferred for any period unless full cumulative dividends have been paid or contemporaneously are declared and paid or set apart for payment on the Series A Convertible Preferred. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Series A Convertible Preferred are entitled to receive out of the assets of the Company available for distribution to shareholders before any distribution or payment is made to holders of the common stock, or to holders of any other shares of the Company ranking junior upon liquidation to the Series A Convertible Preferred, a liquidation distribution in the amount of $0.50 per share, plus all accrued and unpaid dividends, if any, before any payment is made to holders of shares of the Company's equity securities that are junior to the Series A Convertible Preferred. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, its assets are insufficient to pay in full the liquidation preference of the Series A Convertible Preferred and any other class of shares ranking on a parity with the Series A Convertible Preferred upon liquidation, then the holders of the Series A Convertible Preferred and any such other class of shares will share ratably in any distribution of assets in proportion to the full respective distributable amounts to which they are entitled.
No underwriters were engaged in connection with the issuance of securities in any of the foregoing transactions. Unless otherwise stated, all of the foregoing offers and sales of securities were made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act as transactions not involving any public offering, including Regulation D under the Securities Act. Issuance of options to employees, officers and directors of the Company were made pursuant to Rule 701 under the Securities Act.
Information under Item 701 of Regulation S-B "Use of Proceeds"
The Company filed a registration statement on Form SB-2 with the Securities and Exchange Commission on March 5, 2001. The registration statement was declared effective by order of the Commission on July 16, 2001. Under the registration statement the Company registered the offer and sale of up to 4,000,000 shares of common stock at a price of $0.75 per share. The Company subsequently filed Post-effective Amendment No. 1 to update information in the Registration Statement made public in the Company's Quarterly Report for the quarter ending June 30, 2001.
On October 10, 2001, the Company closed the offering. On November 8, 2001, the Company filed Post-effective Amendment No. 2 to the Registration Statement to terminate the Registration Statement and to deregister all shares of common stock registered pursuant to the Registration Statement but not sold pursuant to the Registration Statement.
The results of the offering were as follows:
o A total of 2,387,697 shares were originally sold in the offering at a price of $0.75 per share for cash, services and subscriptions receivable.
o Because the offering was "self-underwritten" and offers and sales were effected by an officer and director of the Company on the Company's behalf, there were no underwriting fees, discounts or other commissions or fees related to the offering of the securities and no direct or indirect payments were made to the officer and director who assisted in these transactions.
o The Company incurred approximately $127,000 of offering costs consisting primarily of legal, accounting, and other fees related to the registration statement. These deferred offering costs have been offset against the proceeds received from the sale of the securities.
o Proceeds to the Company were expected to be approximately $1,664,000, net of offering costs. Subsequent to the offering a total of approximately $966,000 in subscriptions receivable were written off.
A significant portion of the proceeds in the offering were subscriptions receivable, consisting of promissory notes. Of these subscriptions receivable, approximately $717,600 was received in connection with the sale of approximately 957,000 shares of common stock to relatives of the Company's president and CEO. The subscriptions had a due date of June 30, 2002. Due to the declining market prices of the common stock, a substantial portion of those notes remains unpaid at December 31, 2002. Consequently, the Company has determined that approximately $48,500 of these receivables remains collectible. The Company has cancelled 246,666 shares of common stock originally issued upon receipt of the impaired portion of the subscriptions receivable. The remaining subscriptions receivable are now due between August 15, 2008 and November 1, 2010, including interest at the rate of 8% per annum. See, "Item 12. Certain Relationships and Related Transactions."
Net proceeds will be used for debt reduction, sales and marketing and working capital.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following description of the Company's financial condition and results of operations should be read in conjunction with the audited financial statements and the notes thereto included elsewhere in this report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Actual results and the timing of important or material events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause a discrepancy include, but are not limited to, those discussed in "Risk Factors" in this section.
Outlook
Cash requirements through the end of 2003 will vary based upon a number of factors including, but not limited to, increased market development activities, additional personnel, travel, and other expenses related to projected growth. In the future, the Company may consider additional financing methods, such as the issuance of equity or debt securities, including debt securities convertible into equity securities, all of which may result in substantial dilution to stockholders. The Company expects that additional cash funding will be needed during 2003.
Product research and development is an ongoing process. Existing products are continuously being refined and new technology developed to solve unmet market needs. The Company does not anticipate any material capital expenditures in the next 12 months. Existing facilities and equipment are projected to be sufficient to meet the needs of the Company during that period.
An in-house team of respected, results-oriented marketing, sales, product development, and operations professionals has been assembled and developed by the Company, and product innovation is emphasized in pursuing the Company's business strategy.
Critical Accounting Policies
In Note #2 to the financial statements attached to this Form 10-KSB, we discuss those accounting policies that are considered to be significant in determining the results of operations and the Company's financial position. In
all material respects, the accounting principles utilized by the Company conform with accounting principles generally accepted in the United States of America.
The preparation of consolidated financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. The Company bases its estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.
With respect to concentration of credit risk, inventory, revenue recognition, stock-based compensation, and impairment of long-lived assets, and the use of estimates, the Company applies the following critical accounting policies in the preparation of its financial statements:
o Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade receivables. In the normal course of business, the Company provides on-going credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management's expectations. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on cash and cash equivalents.
o Inventory. Inventory is stated at the lower of cost or market and is valued on an average cost basis. The inventory consists entirely of finished goods.
o Revenue Recognition. Revenue is recognized when a valid purchase order has been received, product has been shipped, the selling price is fixed or determinable, and collectibility is reasonably assured.
o Stock-based Compensation. The Company accounts for stock options granted to employees under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized in the financial statements on options issued to employees, as all options granted to employees had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant.
o Impairment of Long-lived Assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through undiscounted future cash flows. If it is determined that an impairment loss has occurred based on expected cash flows, such loss is recognized in the statement of operations.
Results of Operations
Year ended December 31, 2002, compared to the year ended December 31, 2001
During the year ended December 31, 2002, the Company had net sales of $3,572,817 reflecting a decrease of $353,179, or 9.0%, compared to net sales of $3,925,996 for 2001. Net sales in both years were derived from the sale of products. This decrease was due primarily to a $937,910 decrease in sales of the Company's hardware division, partially offset by a $585,067 increase in sales of the outdoor products division. The Company believes that the decrease in hardware sales is mainly attributable to product lifecycles, particularly the 13-in-1 screwdriver, which saw declining sales in 2002, which were partially offset by an increase in sales of the Ultra Socket and expandable levels. The Company's results of operations have also been adversely affected by a downturn in general economic conditions affecting its primary customers in the United States.
Cost of goods sold decreased $192,496 or 8.7% from $2,217,362 for the year ended December 31, 2001, to $2,024,866 for 2002. This decrease was due primarily to lower sales in 2002. Gross profit decreased $160,683 or 9.4% from $1,708,634 for the year ended December 31, 2001 to $1,547,951 in 2002. Gross margin percentages decreased from 44% for the year ended December 31, 2001 to 43.3% in 2002, primarily as a result of the shift in sales mix from higher margin hardware to lower margin sporting goods products.
Selling, general, and administrative expenses were $3,552,528 and $2,315,353 for the years ended December 31, 2002 and 2001, respectively, representing an increase of $1,237,175 or approximately 53.4%. The increase over the prior year is due primarily to increased expenses related to professional and consulting fees, which were $1,982,259 and $484,948 for the years ended December 31, 2002 and 2001, respectively, representing an increase of $1,497,311. Professional and consulting fees of $1,756,811 were paid in the form of equity, including options valued at $155,227, which were not exercised and which have since expired. The professional fees relate largely to investor relations, mergers and acquisitions advisory fees and the costs associated with the restructuring during the fourth quarter. By and large, these activities are not required to support the sourcing and distribution of the Company's products or other of its operations. The Company intends to substantially reduce spending on professional services in 2003.
NEBO's resulting operating loss widened from $606,719 in 2001 to $2,004,577 in 2002. Interest expense was $291,433 and $609,328 for the years ended December 31, 2002 and 2001, respectively. This represents a decrease of $317,895 or 52.1% and is due primarily to the reduced availability on the line of credit for the year ended December 31, 2002, compared to 2001, the shift from borrowing against receivables to the sale of receivables under a factoring arrangement with the costs reflected as "loss on sales of receivables, as well as the result of lower rates of interest negotiated with creditors in the third and fourth quarters of 2002.
The Company had a net loss for the year ended December 31, 2002 of $2,391,958 or approximately $0.14 per share, compared to a net loss of $1,240,455, or approximately $0.11 per share in 2001. This increase in net loss is mainly attributable to the higher professional and consulting fees previously discussed, which were paid primarily with the issuance of equity securities rather than cash, and that are expected to be reduced substantially in 2003.
Liquidity and Capital Resources
The Company had cash of $77,712 at December 31, 2002, compared to cash of $50,793 at December 31, 2001. The working capital deficit as of December 31, 2002, of $926,757, was virtually unchanged from the working capital deficit of $922,076 at December 31, 2001. As of December 31, 2001, the Company had total short-term debt and current portion of long-term debt of $681,290. At December 31, 2002, short-term and current portion of long-term debt totaled $655,053 and bore interest at rates ranging from 5% to 24% per year. Long-term debt obligations to unrelated parties at December 31, 2002, excluding current maturities, totaled $471,704. This debt bears interest at rates ranging from 5% to 24%. Long-term debt to related parties at December 31, 2002, excluding current maturities, totaled $213,442. This debt bears interest at rates of 10.75% to 15%. Included in current maturities of long-term debt is $81,922, which bears interest at 6% to 24%. During the year ended December 31, 2002, the Company refinanced or renegotiated and extended obligations totaling approximately $461,000.
The Company had an accumulated deficit of $5,696,230 at December 31, 2002, compared to a deficit of $3,304,272 at December 31, 2001. This deficit is attributed to accumulated losses since inception.
Historically, the Company has financed operations principally through loans, sales of equity and debt securities, and product sales. The Company's operating activities used $717,905 in cash during the year ended December 31, 2002. Decreased cash flow was the result primarily of lower sales and margins and a reduction in accounts payable.
On November 9, 2001, the Company finalized an agreement with Summit Financial Resources, LLP ("Summit") pursuant to which the Company repaid in full a loan with Wells Fargo. The Summit financing agreement is a two-year renewable arrangement with a maximum credit line of $1,000,000. The availability on the credit line is based on advance rates on accounts receivable and inventory. The accounts receivable component is based on a factoring arrangement and the inventory component is based on eligible inventory not to exceed the lesser of $250,000 or a ratio of 2:1 eligible accounts receivable to eligible inventory. Interest is calculated on the daily outstanding balance and charged monthly in
arrears based on the prime rate plus 4% for the accounts receivable component and the prime rate plus 5% on the inventory component. The Company requires additional financing. There is no assurance that such financing will be available to the Company. At December 31, 2002, the balance outstanding on the loan with Summit was $243,890 after adjustment for that portion of receivables for which title had been transferred to Summit under the agreement. The Company has also negotiated a $300,000 line of credit with a relative of an officer of the Company to facilitate the cash flow requirements of letter of credit payments to some vendors. At December 31, 2002, the balance outstanding on this line of credit was $281,451. Of the remaining balance on the line of credit at December 31, 2002, $18,549 was reserved for the settlement of issued letters of credit. In the future, the Company may consider additional financing methods, such as the issuance of equity or debt securities, including debt securities convertible into equity securities, all of which may result in substantial dilution to stockholders.
The ability of the Company to continue as a going concern is dependent on the Company generating cash from the sale of its common stock, reducing debt and attaining future profitable operations. Management's plans include expanding market share through the introduction of new products, whether developed internally or through acquisition and obtaining equity financing through the sale of its common stock. However, there can be no assurance the Company will continue as a going concern.
The following chart includes principal balances and interest rates applicable to short-term and long-term borrowings as of December 31, 2001 and December 31, 2002.
12.00% 15.00% 19.00% Prime
------- ------- ------- -----
6.00% to 5.00% to and to to plus 4%
--------- --------- ---- --- --- -------
Debt as of 2.90% 8.00% 10.75% 12.00% 15.00% 18.00% 24.00% 24.00% 24.00% 24.00% to 6.5%
---------- ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ -------
12/31/2001 $ - $ - $5,844 $1,118,576 $202,207 $221,000 $ - $ - $ - $57,506 $ 143,836
12/31/2002 $36,065 $333,898 $5,359 $ - $208,083 $ 56,317 $127,346 $281,451 $47,790 $ - $ 243,890
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During the year ended December 31, 2002, the Company refinanced several loan agreements to resolve or cure defaults. Also at December 31, 2002, the Company was in default under two notes totaling $45,000. See, "Item 3. Legal Proceedings" at page 12.
Recent Developments
After the year ended December 31, 2002, specifically on March 15, 2003, the Company entered into a revised promissory note payable by KC Holmes for the $17,500 balance owing on the subscription receivable executed by XKX, LLC. The note provides for increasing payments of principal and interest at 8% per annum over 5 1/2 years. Mr. Holmes is the brother of the Company's president.
In addition, on February 1, 2003, the Company entered into a revised promissory note payable by Mendelssohn, LLC for the $31,000 balance owing on its subscription receivable. The note provides for increasing payments of principal and interest at an annual rate of 8% payable over 7 1/2 years.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. This statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. Management does not expect the adoption of this statement will have a material impact on the Company's results of operations, financial position or liquidity.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business," for the disposal of segments of a business. This statement requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. This statement also broadens the reporting of discontinued operations. The Company adopted the provisions of this statement on January 1, 2002. Management does not expect the adoption of this statement to have a material impact on the Company's results of operations, financial position or liquidity.
In April 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement requires the classification of gains or losses from the extinguishments of debt to meet the criteria of Accounting Principles Board Opinion No. 30 before they can be classified as extraordinary in the income statement. As a result, companies that use debt extinguishment as part of their risk management cannot classify the gain or loss from that extinguishment as extraordinary. The statement also requires sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The Company does not expect the adoption of SFAS No. 145 to have a material impact on its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This standard, which is effective for exit or disposal activities initiated after December 31, 2002, provides new guidance on the recognition, measurement and reporting of costs associated with these activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date the Company commits to an exit or disposal plan. The adoption of SFAS No. 146 by the Company is not expected to have a material impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123," which is effective for all fiscal years ending after December 15, 2002. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation under SFAS No. 123 from the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25. SFAS 128 also changes the disclosure requirements of SFAS 123, requiring a more prominent disclosure of the pro-forma effect of the fair value based method of accounting for stock-based compensation. The adoption of SFAS No. 148 by the Company did not have a material impact on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45). FIN No. 45 requires certain guarantees to be recorded at fair value, which is different from current practice to record a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. FIN No. 45 also requires the Company to make significant new disclosures about guarantees. The disclosure requirements of FIN No. 45 are effective for the Company in the first quarter of fiscal year 2003. FIN No. 45's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company's previous accounting for guarantees issued prior to the date of the initial application of FIN No. 45 will not be revised or restated to reflect the provisions of FIN No 45. The Company does not expect the adoption of FIN No. 45 to have a material impact on its consolidated financial position, results of operations or cash flows.
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46), which addresses consolidation by business enterprises of variable interest entities. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not expect to identify any variable interest entities that must be consolidated. In the event a variable interest entity is identified, the Company does not expect the requirements of FIN No. 46 to have a material impact on its financial condition or results of operations.
Risk Factors
This report contains forward-looking statements, which may be affected by risks and uncertainties including many that are outside the Company's control. The Company's actual operating results could differ materially as a result of certain factors, including those set forth below and elsewhere in this report.
The audited financial statements that accompany this report have been prepared on the assumption that the Company will continue as a going concern. If the Company fails to continue in business, you could lose your investment in the Company.
The financial statements of the Company that are included in this report have been prepared on the assumption that the Company will continue as a going concern. The Company's deficit in working capital, stockholders' deficit and recurring net losses raise substantial doubt about its ability to continue as a going concern. If the Company is not successful in generating additional sales, reducing expenses, or obtaining additional financing, it may be required to scale back or discontinue operations, in which case its investors could lose all or substantially all of their investment.
The Company faces intense competition from larger and better-established companies that may prevent it from ever becoming a significant market leader.
The market for products is intensely competitive and highly fragmented. The Company may experience competition from potential customers or partners to the extent that they manufacture or market their own competing product lines. Many of these competitors may have longer operating histories, greater financial, technical and marketing resources, and enjoy existing name recognition and customer bases. New competitors may emerge and rapidly acquire significant market share. In addition, new technologies likely will increase the competitive pressures the Company faces. Competitors may be able to respond more quickly to technological change, competitive pressures, or changes in consumer demand. As a result of their advantages, the Company's competitors may be able to limit or curtail its ability to compete successfully. These competitive pressures could materially adversely affect the Company's business, financial condition, and results of operations.
If the Company is to continue to be competitive, it will need to retain key personnel.
The Company's future success depends significantly on the continued service of senior management. The familiarity of these individuals with the industry makes them especially critical to the Company's success. The loss of the services of one or more of the Company's key employees could have a material adverse effect on its business. The Company does not currently have key man insurance on any of its employees. The Company's future success also depends on its ability to attract and retain highly qualified design, technical, sales, marketing, customer service, and management personnel. Competition for these personnel is intense, and the Company cannot guarantee that it will be able to attract or retain a sufficient number of highly qualified employees in the future. The lack of qualified management personnel could limit the Company's ability to grow the business and may limit its ability to effectively compete in certain markets.
If the Company is not successful in effectively managing growth, the cost of doing business may increase or could result in inefficiencies that would reduce cash available for growth and prevent the Company from becoming profitable.
To execute its business plan, the Company must grow significantly. This growth will place a significant strain on personnel, management systems, and resources. The Company expects that the number of employees, including management-level employees, will continue to increase for the foreseeable future, and that it may need additional office space and expanded technology infrastructure. Failure to manage growth effectively will materially adversely affect the Company's business, results of operations, and financial condition.
In 2002, a significant portion of the Company's net sales were to large customers. The loss of any one of these customers could materially and adversely affect the Company's business, results of operations and financial condition.
During 2002 sales in the outdoor division outpaced sales in the hardware division. In 2002, outdoor division customer Gander Mountain was the Company's leading customer. Sales to this customer totaled approximately $619,499 (approximately 17% of net sales). Sportsman's Warehouse was second in sales with approximately $438,091 (approximately 12% of net sales). The Sportsman's Guide was third in 2002 sales with approximately $345,481 (approximately 10% of net sales). The Company does not have written contracts or other agreements with these or other customers that would require them to continue to do business with the Company. Therefore, they are free to choose at will among suppliers of products like those sold by the Company. The loss of any of these customers could materially and adversely affect the Company's business, results of operations and financial condition.
The Company's earnings fluctuate seasonally, which may affect financial results.
Because the Company's products are sold in retail outlets, its business is subject to seasonal fluctuations that affect retail business generally. The Company's inability to manage any potential fluctuations in revenues could materially adversely affect its business, financial condition and results of operations.
The Company may not be able to protect its proprietary rights and it may infringe the proprietary rights of others, which would require the Company to incur substantial costs or could result in payment of money damages to the owners of those rights it infringes.
The Company regards its copyrights, service marks, trademarks, trade secrets, and similar intellectual property as critical to its success and competitive position. The Company relies on trademark and copyright law, trade secret protection, and confidentiality and license agreements with employees, strategic partners, and others to protect these rights. Although the Company seeks to protect its proprietary rights, these actions may be inadequate to protect any trademarks and other proprietary rights or to prevent others from claiming violations of their trademarks and other proprietary rights. Unauthorized parties may improperly obtain and use information that the Company regards as proprietary. Third parties may infringe or misappropriate the Company's proprietary rights. Any of these events would likely cause the Company to incur substantial expense, could result in loss of important competitive advantage or result in an inability to continue to sell products that are based on these proprietary rights.
Patents issued to the Company or to its strategic partners may not provide a basis for commercially viable products or may not provide any competitive advantages. Third parties could challenge these patents. The patents of others could limit the Company's ability to use protected processes or technologies. Any of these situations could have a material adverse effect on the Company's ability to do business. The Company cannot prevent others from independently developing similar or alternative technologies, duplicating any of its technologies, or, if patents are issued to the Company, designing around its patented technologies. The Company could incur substantial costs in litigation if required to defend itself in patent suits brought by third parties or if it initiates patent suits.
Others may have filed or in the future may file patent applications that are similar or identical to those the Company relies upon by license or otherwise. To determine the priority of inventions, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office. These proceedings could result in substantial cost to us. The Company cannot ensure that any third-party patent application will not have priority over ours. Additionally, it is possible that the laws of some foreign countries may not protect the Company's patent and other intellectual property rights to the same extent as the laws of the United States.
The Company's future prospects also depend in part on it neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to its technologies and products. The Company cannot guarantee that it will not infringe the patents, licenses or other proprietary rights of third parties. The Company could in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents. Any legal action against the Company or its strategic
partners that claims damages and seeks to enjoin commercial activities relating to the affected products and processes could subject the Company to potential liability for damages. These legal actions could also require the Company or its strategic partners to obtain a license in order to continue to manufacture or market the affected products and processes. The Company cannot ensure that its strategic partners or the Company would prevail in any of these actions. The Company cannot ensure that any license, including licenses proposed by third parties, required under a patent would be available on terms that are commercially acceptable, if at all. The Company have not conducted an exhaustive patent search and the Company cannot ensure that patents do not exist or could not be filed that would have a material adverse effect on its ability to develop and market products. If the Company becomes involved in patent litigation, it could consume a substantial portion of managerial and financial resources, which could have a material adverse effect on its business, financial condition, results of operations, and relationships with corporate partners.
The Company attempts to control the disclosure and use of its proprietary technology, know-how and trade secrets under agreements with the parties involved. However, the Company cannot ensure that others will honor all confidentiality agreements. The Company cannot prevent others from independently developing similar or superior technology, nor can the Company prevent disputes that could arise concerning the ownership of intellectual property.
There is no assurance that the Company's future products will be accepted in the market.
Although the Company has had success with several of its products, future products may not be accepted in the market. For the Company to be profitable, retail customers must accept its products as beneficial and worthwhile. Market acceptance will require substantial education about the benefits of the Company's products. If consumers do not accept the Company's products or acceptance takes a long time, revenues and profits will be reduced. The Company can provide no assurance that there will be a favorable market for its products or that it will realize a profitable rate of return.
The Company may be subjected to claims under product liability law, which could cause it to incur significant expense to defend and that might require that the Company pay high damage awards.
Although the Company insures against possible liability for injury or damages resulting from the misuse of or defects in its products, there is no assurance that the Company will continue to maintain that insurance or that it will be available on reasonable terms. The Company may incur liability to consumers based on claims that its products are harmful or ineffective. Those claims, even if unfounded, could cause damage to the Company's reputation, result in expensive product recalls, or result in high litigation expense.
The Company's business is subject to risks related to doing business in China, which could result in its inability to meet manufacturing requirements or delivery deadlines for products and cause the Company to lose market share.
The Company obtains much of its manufacturing in the People's Republic of China (also referred to as the PRC) from contract manufacturers. The Company's business relationships in the PRC could be adversely affected by internal political, economic, and social uncertainties. Any change in policy by the Chinese government could adversely affect investments in or business relationships with Chinese businesses. Changes in policy could result in imposition of restrictions on currency conversion, imports, or the source of suppliers, as well as new laws affecting joint ventures and foreign-owned enterprises doing business in the PRC. Although the PRC has been pursuing economic reforms for the past two decades, events such as a change in leadership or social disruptions that may occur upon the proposed privatization of state-owned industries could significantly affect the government's ability to continue with its reform.
As a developing nation, the PRC's economy is more volatile than that of developed Western industrial economies. The PRC's economy differs significantly from that of the United States or a Western European country in structure, level of development, capital reinvestment, resource allocation, and self-sufficiency. There can be no assurance that under some circumstances, the PRC government's pursuit of economic reforms will be restrained or curtailed. Actions by the central government of the PRC could have a significant adverse effect on economic conditions in the country as a whole and on the economic prospects for the Company's Chinese operations.
Although the Company believes that contract manufacturers outside the PRC could meet supply needs if it were unable to continue to use Chinese manufacturers within the PRC, this might result in delays in meeting orders or in higher expense than current relationships.
The Chinese legal system embodies uncertainties, which could limit the legal protections available to us.
The Chinese legal system is a civil law system based on written statutes. Unlike common law systems such as the United States and the United Kingdom, the Chinese legal system is a system in which decided legal cases have little precedential value. In 1979, the Chinese government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past 20 years has significantly enhanced the protections afforded to various forms of foreign investment in Mainland China. Recent legal and political changes in China have resulted in reforms. However, these laws, regulations, and legal requirements are relatively recent, and there is little, if any, precedence in their interpretation and enforcement. This lack of experience with these new laws creates uncertainties that could limit the Company's ability to accurately predict the exact legal protections available to it and other foreign investors. In addition, the Company cannot predict the effect of future developments in the Chinese legal system, particularly with regard to the Internet, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.
The Company relies on third parties to manufacture its products. Therefore, the Company does not have direct control over the quality or other aspects of the manufacturing process, which could result in a loss of customer acceptance of its products and increased expense related to warranty claims or defective product returns.
The Company does not directly control the manufacturing facilities where its products are made and the Company must depend on third parties to make its products according to standards for quality and reliability. The Company does not own any manufacturing facilities or equipment and do not employ any manufacturing personnel. The Company uses third parties to manufacture its products on a contract basis. The Company cannot assure you that the Company will be able to obtain qualified contract manufacturing services on reasonable terms. In addition, the manufacture of the Company's products involves complex and precise processes. Changes in the Company's manufacturing processes or those of its suppliers, or the use of defective components or materials, could significantly reduce its manufacturing yields and product reliability. The Company's manufacturing costs are relatively fixed, and, thus, manufacturing yields are critical to its results of operations. This may also cause delayed product shipments and impaired gross margins. In some cases, existing manufacturing techniques involve substantial manual labor. To improve gross margins, the Company may need to develop new, more cost-effective manufacturing processes and techniques, and if the Company fails to do so, its gross margins may be adversely affected.
The Company may experience adverse economic and political risks associated with companies that operate in Taiwan.
In addition to the Company's contract manufacturing performed in the PRC, the Company uses manufacturers in Taiwan. Relations between Taiwan and the PRC, and other factors affecting the political or economic conditions of Taiwan in the future could affect the Company's business and the market price and liquidity of the Company's shares. The PRC asserts sovereignty over all of China, including Taiwan and other neighboring islands and all of mainland China. The PRC government does not recognize the legitimacy of the Taiwanese government. Although significant economic and cultural relations have been established during recent years between Taiwan and the PRC, the PRC government has indicated that it may use military force to gain control over Taiwan if Taiwan were to declare its independence or take other actions China deems to be offensive to its claims of sovereignty. Relations between Taiwan and the PRC have on occasion adversely affected the market value of Taiwanese companies and could negatively affect the operations of the Company's manufacturers in Taiwan in the future, which could have a materially adverse effect on its business, financial condition or results of operations.
The location of the Company's manufacturing facilities subjects it to increased risk that a natural disaster could disrupt operations.
Substantially all of the Company's products are manufactured by contract manufacturers in China, Taiwan, and India. These countries are in regions that are prone to natural disasters, including the risk of earthquakes due to the proximity of major earthquake fault lines. In September 1999, major earthquakes in Taiwan affected the facilities of the Company's manufacturers, causing power and communications outages and disruptions that impaired production capacity. In early 2001, a major earthquake caused significant damage and loss of life in India. In 2003, the PRC was the location of an outbreak of a
new deadly disease known as severe acute respiratory syndrome (SARS). The spread of SARS has been rapid and is reaching epidemic proportions. The occurrence of an earthquake, epidemic or other natural disaster in these countries could result in the disruption of work at the Company's manufacturing facilities, which could cause significant delays in the production or shipment of products until the Company is able to shift production to different facilities or arrange for third parties to manufacture its products. The Company may not be able to obtain alternate capacity on favorable terms or at all.
The Company may experience adverse economic risks associated with the terrorist attacks of September 11, 2001 and subsequent counter terrorism initiatives.
The terrorist attacks in New York and Washington, D.C. on September 11, 2001, and the subsequent anthrax attacks on the East Coast of the United States appear to have had an adverse effect on business, financial and general economic conditions in the United States. These conditions have continued through the year ended December 31, 2002. In addition, the war in Iraq that commenced in March 2003 and the outbreak of the SARS epidemic in Asia in the first quarter of 2003 have adversely affected international markets, including travel and transportation. These effects also appear, in turn, to have had an adverse effect on our business and on the results of our operations, as orders for products have not returned to pre-September 11, 2001 levels. At this time we cannot predict the nature, extent, or duration of these effects on overall economic conditions generally, or on our business and operations specifically.
The Company's business is subject to risks related to importing products through ports that may be associated with labor problems, which could result in its inability to meet manufacturing requirements or delivery deadlines for products and cause the Company to lose market share.
The Company's operations have also apparently been adversely affected by the labor problems experienced at ports on the west coast of the United States, through which most of its products are shipped or received. Future lockouts or work slow-downs could affect the timely delivery of our products, which could negatively impact our sales.
Item 7. Financial Statements
The Company's audited financial statements and associated notes are included and set forth on pages F-1 through F-25 of this report.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.
The executive officers and directors of NEBO, as well as employees expected by the Company to make a significant contribution to its business were as follows as of March 31, 2003:
Name, Age Office Scott Holmes, 36 Director, President, CEO Jerry Mika, 38 Vice President Sales John Larsen, 37 Vice President Marketing and Product Development |
Mr. Scott Holmes has been with the Company and its predecessors since August 1997 and became CEO in December 1998. From November 1995 to August 1997, he was a sales manager with United Staffing Alliance, a professional employer organization. Prior to that he co-owned Liberty Loan, a retail lending company. From January 1993 until December 1994, Mr. Holmes worked for Ostler International d.b.a. Interstate Auto Supply where he gained extensive international trade and business experience.
Mr. Jerry Mika joined the Company on July 1, 2001 as Vice President of Sporting Goods. Mr. Mika has over 16 years of experience in sales to retail, wholesale, and commercial customers. From 1998 to 2001 he worked as a national sales representative for Utility Trailer Sales of Utah. Prior to that he held the position of Sales Manager for Tire World in Salt Lake City, Utah, managing their technical staff and selling to retail and commercial customers. In addition to his extensive sales experience, Mr. Mika has worked as a hunting and fishing guide for the last 14 years.
Mr. John Larsen joined the Company on March 28, 2002, as Vice President Marketing and Product Development. From June 1994 to March 2002, he was employed with Aetna, Inc. in Dallas, Texas and Tulsa, Oklahoma. His most recent position after several promotions was Network Manager & Director of Provider Relations in the Tulsa office. He gained international business experience working from 1988 to 1991 for Teiki Kanko, Inc., a Los Angeles-based tourism company. Mr. Larsen holds an MBA degree from Texas Tech University and a BA degree in Japanese Literature from Brigham Young University.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, directors and persons who beneficially own more than 10 percent of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10 percent shareholders are required by regulation of the Securities and Exchange Commission to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon its review of the copies of such forms furnished to it, and representations made by certain persons subject to this obligation that such filings were not required to be made, the Company believes that all reports required to be filed by these individuals and persons under Section 16(a) have been filed.
The Board of Directors
Directors hold office until the next annual meeting of the shareholders and until their successors have been elected or appointed and duly qualified. Executive officers are elected by the board of directors and hold office until their successors are elected or appointed and duly qualified. Vacancies on the board which are created by the retirement, resignation or removal of a director may be filled by the vote of the remaining members of the board, with such new director serving the remainder of the term or until his successor shall be elected and qualify. The Company had one director at December 31, 2002.
Meetings and Committees
There were four regular meetings of the board of directors held during the year ended December 31, 2002. No director attended fewer than 75 percent of the meetings during the fiscal year. The board also acted during 2002 by unanimous written consent in lieu of a meeting, as permitted by Utah law and the Company's bylaws. Utah law requires the Company to have a minimum of three directors. The Company intends to appoint directors to fill the vacancies currently existing on the board during the next six months. Because it has only one director at this time, the board has no audit committee and no independent directors. The Company has not yet adopted a code of ethics for its executive officers, but intends to do so during 2003.
Remuneration
As of December 31, 2002, the Company has only one director, R. Scott Holmes, who also serves as the Company's Chief Executive Officer and President. While he is compensated for his role as CEO as disclosed in Item 10 of this report, Mr. Holmes receives no additional compensation for his services as director of the Company. No policy has been established regarding the compensation of any independent directors who may join the Company in the future.
Item 10. Executive Compensation
The following table sets forth the compensation paid in each of the past three fiscal years to the only individual who served as the Company's chief executive officer during the year ended December 31, 2002 (the "Named Executive Officer"). None of the Company's executive officers or key employees is paid more than $100,000 annually.
Long-Term
Compensation
Awards
Annual Compensation
Name and Other Annual Securities
Principal Salary Bonus Compensation Underlying
Position Year ($) ($) ($) (1) Options (#)
Scott Holmes, CEO 2002 $96,000 $0 $ 840 0
2001 $96,000 $0 $1,427 0
2000 $96,000 $0 $1,164 0
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(1) Includes approximate amount of employer matching contribution to 401(k) plan.
Employment Agreements
In August 2002, the Company entered into an employment agreement with R. Scott Holmes, its president and CEO. The term of the agreement provides for an annual salary of $96,000, participation in employee benefit plans and severance pay. The agreement expires August 20, 2007, subject to termination by the Company. If employment is terminated by the Company without cause prior to the expiration of the term and prior to repayment of any debt or obligation of the Company personally guaranteed by the officer or the removal of the officer from personal liability under such a guarantee, the Company is obligated to continue payment of the salary and other benefits provided for under the Agreement through the shorter of the remainder of the unexpired term of the agreement or such date as the release of personal liability is obtained as described above. If terminated by the Company prior to the expiration date without cause but after repayment of the guaranteed debt or release of the officer from personal liability under all such guarantees, the Company must pay the officer his salary and benefits required by the agreement for a period of 12 months following the date of termination; provided, however, that if during such 12-month period the market price of the company's common stock exceeds $1.00 per share, no additional payment shall be required to be made to the officer. The officer is bound by covenants against solicitation of employees or customers of the Company and against competing with the company during the term of the agreement and for a period of one year following the termination of employment or expiration of the agreement. The employee is also subject to restrictions on the use of employee inventions and Company proprietary and confidential data and information. A copy of the agreement is filed as an exhibit to this annual report on Form 10-KSB.
Stock Option Plan
Effective January 1, 2001, the board of directors adopted a Stock
Option Plan. The shareholders of the Company have not yet approved the Plan. The
Plan authorizes the granting of awards of up to 7,000,000 shares of voting
common stock to key employees, officers, directors, consultants, advisors, and
sales representatives. Awards consist of stock options (both non-qualified
options and options intended to qualify as "incentive" stock options under
Section 422 of the Internal Revenue Code of 1986, as amended), restricted stock
awards, deferred stock awards, stock appreciation rights, and other stock-based
awards, as described in the Plan. Incentive stock options granted under the Plan
may not be exercisable after the expiration of five years after the grant date
and any non-qualified stock options granted under the Plan may have an exercise
date that is more than ten years after the grant date.
The Plan is administered by the board of directors, which determines the persons to whom awards will be granted, the number of awards to be granted, and the specific terms of each grant, including the vesting thereof, subject to the provisions of the Plan. The exercise price of qualified options may not be less than 100% of the fair market value of the common stock on the date of grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the Company's outstanding stock). The aggregate fair market value (determined at the date of grant) of shares for which qualified stock options are exercisable for the first time by that employee during any calendar year may not exceed $100,000. If the value of the stock subject to options exceeds this amount, the excess is considered to be a non-qualified option, with the result that the beneficial tax treatment of the incentive stock option will be lost as to the excess amount. This does not limit the amount of options that an employee can exercise.
Non-qualified stock options granted under the Plan may be granted at a price determined by the board of directors, but generally not to be less than the fair market value of the common stock on the date of grant. The board has the discretion to grant options with exercise prices less than the fair market value of the common stock on the date of grant if it determines that circumstances justify a below market price. If options or other awards are made under the plan with exercise prices below the fair market value of the common stock on the date of the grant, NEBO will incur a related expense for the beneficial conversion feature of the below-market grant, which will reduce NEBO's earnings, if any, or increase the amount of its loss, if any, for the period in which the grant is made. However, the board does not anticipate granting options with prices below the fair market value of the common stock in the foreseeable future and has not granted options with below market exercise prices at any time in the past.
Options granted to employees under the Plan may not be exercised after the termination of the employment of the holder except under circumstances enumerated in the Plan. Those circumstances include termination of employment resulting from retirement, disability and death of the holder. If termination results from the retirement of the holder of the option, the option may be exercised within three months after the retirement for all of the shares covered by the grant. The Plan defines retirement to mean any termination of employment after the completion of at least ten years of service. If employment is terminated because of disability, the options may be exercised within three months after the termination of the employment. If an employee dies while employed and while holding vested but unexercised options under the Plan, the personal representative of the deceased employee may exercise the options for one year after the date of death. If the holder of the option dies within three months after termination of employment for a reason other than retirement or disability, the options granted under the Plan may be exercised within one year after the date of death, but the options may not be exercised for more than the number of shares, if any, as to which they were exercisable by the employee immediately prior to his death.
Options granted under the Plan may be exercised within three months after the involuntary termination of employment as to the number of shares that may be purchased immediately prior to the termination of employment. "Involuntary termination of employment" means any termination of employment with NEBO by reason of the discharge, firing or other involuntary termination of employment by action of NEBO, other than an involuntary termination for cause. Termination for cause can result by the employee's theft or embezzlement from NEBO, the violation of a material term or condition of his or her employment, the disclosure of confidential information, conviction of a crime involving moral turpitude, stealing trade secrets or intellectual property, any act in competition with NEBO or any other act, activity or conduct, which in the opinion of the committee is adverse to the best interests of NEBO. In these circumstances, all unexercised options become null and void effective as of the date of the occurrence of the event that results in the termination for cause.
The Plan also contains change in control provisions, which could cause options and other awards to become immediately exercisable and restrictions and deferral limitations applicable to other awards to lapse in the event any person or group of persons owning more than 10% of the Company's outstanding common stock, excepting broker-dealers, banks, insurance companies, investment companies, employee benefit plans, parent holding Company or control person, savings associations, church plans or groups comprised of these types of shareholders, becomes the beneficial owner of more than 30% of the Company's outstanding shares of common stock.
During the year ended December 31, 2001, the Company granted options to purchase a total of 1,422,000 shares under the Plan to 23 option holders. Of these awards, 219,500 options expired during 2001, options to purchase 154,500 shares carry an exercise price of $0.70 per share, options to purchase 520,000
shares carry an exercise price of $0.77 per share, options to purchase 128,000 shares carry an exercise price of $0.75 per share, and options to purchase 400,000 shares carry an exercise price of $0.60 per share. These options vest over periods ranging from immediately to four years from the date of grant. In addition, on October 31, 2001, the Company issued 65,000 warrants to purchase stock at $0.75 per share to certain creditors. These warrants expire October 31, 2004.
The following table contains certain information, including the fiscal year-end value of unexercised stock options held by the Named Executive Officer of the Company as of December 31, 2002.
Number of
Securities Value of
Underlying Unexercised
Unexercised In the-Money
Options Options At
12/31/2002 (#) 12/31/2002 ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
-------------- --------------- -------------- -------------- ---------------
Scott Holmes - $ - 90,000/70,000 n/a
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Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of December 31, 2002 with respect to shares of common stock to be issued upon the exercise, and the weighted-average exercise price, of all outstanding options and rights granted under our equity compensation plans, as well as the number of shares available for future issuance under those plans.
Number of Securities Weighted-Average Number of Securities Remaining
Issued Upon Exercise Exercise Price Available for Fuiture Issuance Under
Outstanding Options Outstanding Option Equity Compensation Plans (Excluding
Plan Category Warrants and Rights Warrants and Rights Securities Reflected in Column A)
2001 Stock
Option Plan 1,338,000 $0.65 None
--------------------- ------------------- ------------------------------------
Total 1,338,000 $0.65 None
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During the year ended December 31, 2002, the Company granted options to purchase a total of 7,211,692 shares under the 2001 Stock Option Plan (the "Plan") to 18 option and warrant holders as follows:
o 100,000 shares at an exercise price of $0.70 per share
o 4,546,962 shares at an exercise price of $0.00 per share
o 110,000 shares at an exercise price of $0.50 per share
o 220,000 shares at an exercise price of $0.35 per share
o 200,000 shares at an exercise price of $0.23 per share
o 800,000 shares at an exercise price of $0.60 per share
o 1,090,000 shares at an exercise price of $0.10 per share
o 65,000 shares at an exercise price of $0.20 per share
o 30,000 shares at an exercise price of $0.55 per share, and
o 50,000 shares at an exercise price of $0.50 per share.
These options and warrants vest over periods ranging from immediately to four years from the date of grant. At December 31, 2002, the Company had granted 504,692 options in excess of the number of shares registered under the Plan. Options for the purchase of 974,500 shares expired during 2002.
In addition, during 2002, the Company issued warrants to certain creditors for the purchase of 1,278,189 shares of common stock at prices ranging between $0.20 per share and $0.55 per share. These warrants expire on various dates between October 2005 and October 2012.
The following table sets forth information with respect to the
beneficial ownership of the Company's voting securities as of March 31, 2003 by
(1) each person, or group of affiliated persons, who is known by the Company to
own beneficially more than five percent of the voting securities; (2) each
director; (3) each executive officer; and (4) all directors and executive
officers as a group. Unless otherwise noted, the address of each beneficial
owner listed below is c/o the Company at its corporate offices.
Percentage
of Shares
Name of Shareholder Number of Shares (1) Owned (2)
------------------- -------------------- ---------
5% or more Shareholders:
Durham Jones & Pinegar
111 East Broadway, Suite 900
Salt Lake City, UT 84111 1,500,000(3) 5.5%
Jason Crowe 1,500,000(4) 5.5%
1201 S.W. 12th Avenue, Suite 222
Portland, Oregon 97205
Officers and Directors
Scott Holmes 2,009,800(5) 7.3%
Jerry Mika 93,750(6) *
John Larsen 76,000(7) *
All directors and officers as a group (3 Persons) 2,179,550 7.9%
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* Less than one percent.
(1) Based on a total of 21,777,741shares of common stock and 5,521,565 shares of voting convertible preferred stock outstanding at March 31, 2003.
(2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are exercisable or convertible within 60 days of the date of this report, are deemed outstanding. Those shares, however, are not deemed outstanding for purposes of computing the ownership of any other person.
(3) All shares indicated are common shares. Excludes 2,000,000 shares pledged by the Company as security for a note payable to this shareholder, the voting rights to which have been retained by the Company; subject, however, to vesting in the shareholder upon the default of the Company under the note.
(4) Includes 1,000,000 convertible preferred shares and 500,000 common shares.
(5) Includes 1,919,800 common shares and options to purchase 90,000 common shares that are or become exercisable within 60 days of the date of this report. Excludes 2,000,000 shares for which the shareholder exercises sole voting power pursuant to a pledge and security agreement and secured promissory note. See footnote (3) above.
(6) Includes 75,000 common shares and options to purchase 18,750 common shares that are or become exercisable within 60 days of the date of this report.
(7) Includes 31,000 common shares and options to purchase 45,000 shares that are or become exercisable within 60 days of the date of this report.
Item 12. Certain Relationships and Related Transactions
2001
On August 21, 2001, the Company sold land for $20,800 to the Company's president, Scott Holmes under a written sale agreement and promissory note, payable upon demand. The Company has the right to repurchase the property from Mr. Holmes at any time by cancellation of the promissory note. Mr. Holmes used the property to borrow $27,000 which was advanced to the company. If the Company repays the bank loan directly to the bank, Mr. Holmes is required to reconvey the property to the Company. The Company intends to reacquire the property and is currently making payments directly to the bank. The loan bears interest at prime plus 4.5% and matures on September 1, 2016.
Also, the Company issued 226,285 shares of common stock in exchange for a reduction of debt and accrued interest of $169,714 payable to former affiliates; of which 29,749 shares were issued to Steve Holmes, the brother of the Company's president, for debt and accrued interest totaling $22,312.
The Company entered into a line of credit arrangement with Jeff Holmes, the brother of the Company's president, pursuant to which the lender agreed to provide up to $300,000 to facilitate the opening of letters of credit for the purpose of purchasing product from the Company's suppliers.
2002
During the year ended December 31, 2002, the Company cancelled subscriptions receivable of $488,151 to purchase approximately 650,867 shares of the Companies' common stock due from relatives of the Company's President and an employee of the Company as follows (all shares had been previously issued to these shareholders in 2001 and have since been cancelled):
o Jeff Holmes, the brother of the president/CEO, $57,585 for the purchase of 76,780 shares
o Jo Land and Cattle, owned by Kara Jo Holmes, sister-in-law of the Company's president/CEO, $304,680 to purchase 406,240 shares owed by an entity owned or controlled by Mrs. Holmes
o Sam Bushman, an employee of the Company, $125,886 to purchase 167,847 shares owed by Mr. Bushman and entities owned or controlled by Mr. Bushman.
The Company continues to maintain the line of credit arrangement with Jeff Holmes, the brother of the Company's President under which the Company may borrow a maximum of $300,000 at 12% (24% on advances on letters of credit outstanding over 90 days). At December 31, 2002, the line of credit had a balance of $281,451, which is due November 2003. The remaining amount available under the line of credit totaling $18,549 is reserved for outstanding letters of credit.
At December 31, 2002, the Company had a note payable to the President totaling $208,083. The unsecured note payable is due January 2005 with interest at 15% per annum.
During the year ended December 31, 2002, Jeff Holmes, the brother of the Company's president/CEO, received 500,000 shares of Series A Convertible Preferred stock in exchange for the cancellation of 76,780 common shares and canceling notes payable and accrued interest due to him totaling approximately $66,000.
Item 13. Exhibits and Reports on Form 8-K
The following exhibits are filed herewith pursuant to Rule 601 of Regulation S-B or are incorporated by reference to previous filings.
Exhibit # Description
3.1 Articles of Incorporation (1)
3.2 Amended Articles of Incorporation (1)
3.3 Amendment to Articles of Incorporation (2)
3.4 Bylaws (1)
4.1 Specimen of Common Stock Certificate (1)
4.2 Form of Employee Incentive Stock Option Agreement (3)
10.1 Credit and Security Agreement dated September 1, 2000 with
Wells Fargo (1)
10.2 First Amendment dated July 26, 2000 to Credit and Security
Agreement (1)
10.3 Second Amendment dated September 20, 2000 to Credit and
Security Agreement (1)
10.4 Third Amendment dated November 22, 2000 to Credit and Security
Agreement (1)
10.5 Lease for Draper, Utah corporate offices and warehouse
facility (1)
10.6 Exclusive Agreement for Manufacture of 13-in-1 (1)
10.7 SK Management Trust Note (1)
10.8 Feather River Trust Note (1)
10.9 Meyers Note (1)
10.10 Christensen Note (1)
10.11 Branch Note (1)
10.12 S&L Family Trust Note and Agreement (1)
10.13 New SK Management Trust Note dated September 30, 2001 (2)
10.14 New Branch Note dated September 1, 2001 (2)
10.15 New Meyers Note dated September 1, 2001 (2)
10.16 New Feather River Trust Note dated September 4, 2001 (2)
10.17 New S&L Family Trust Note dated September 30, 2001 (2)
10.18 Set-Off and Release Agreement between NEBO Products, Inc.
and Pete Chandler dated as of December 28, 2001 filed
herewith (4)
10.19 Set-Off and Release Agreement between NEBO Products, Inc.
and Suzanne Heaton dated as of December 28, 2001 filed
herewith (4)
10.20 Set-Off and Release Agreement between NEBO Products, Inc.
and Rodger Smith dated as of December 28, 2001 filed
herewith (4)
10.21 Management Agreement dated September 20, 2002 (5)
10.22 Termination Agreement dated October 17, 2002 (6)
10.23 Press Release of October 18, 2002 (6)
10.24.1.1 Press Release of November 14, 2002 (7)
10.24.1.2 Press Release of November 26, 2002 (7)
10.25 Employment Agreement dated August 21, 2002, between the
Company and its president/CEO
10.26 Secured promissory note payable to Durham Jones & Pinegar
99.1 2001 Stock Option Plan (1)
99.2 Certification under Sarbanes-Oxley Act
-------------------
(1) Incorporated by reference to the same-numbered exhibit to the Company's
registration statement on Form SB-2, filed with the Securities and
Exchange Commission on March 5, 2001.
|
(2) Incorporated by reference to the same-numbered exhibit to the Company's quarterly report on Form 10-QSB for the quarter ended September 30, 2001.
(3) Incorporated by reference to the same-numbered exhibit to the Company's report on Form S-8 filed with the Securities and Exchange Commission on January 18, 2002.
(4) Incorporated by reference to the same-numbered exhibit to the Company's annual report on Form 10-KSB for the year ended December 31, 2001, previously filed with the Securities and Exchange Commission.
(5) Incorporated by reference to the same-numbered exhibit to the Company's report on Form 8-K filed with the Securities and Exchange Commission on September 23, 2002.
(6) Incorporated by reference to the same-numbered exhibit to the Company's report on Form 8-K filed with the Securities and Exchange Commission on October 18, 2002.
(7) Incorporated by reference to the same-numbered exhibit to the Company's report on Form 8-K filed with the Securities and Exchange Commission on November 26, 2002.
(b) Reports on Form 8-K
During the fourth quarter of 2002, specifically on October 17, 2002, the Company filed a Current Report on Form 8-K to report the termination of the proposed acquisition of Naviset Holding Corp. In addition, on November 26, 2002, the Company filed a Current Report on Form 8-K to report the conversion of certain debt and contingent liabilities in exchange for shares of the Company's Series A Convertible Preferred Stock.
Item 14. Controls and Procedures
Our Chief Executive Officer and Principal Accounting Officer (collectively, the "Certifying Officers") are responsible for establishing and maintaining our disclosure controls and procedures. These officers have concluded (based on their evaluation of these controls and procedures as of a date within 90 days of the filing of this report) that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to management, including its principal executive officers as appropriate, to allow timely decisions regarding required disclosure. The Certifying Officers also have indicated that there were no significant changes in the internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses.
SIGNATURES
In accordance with Section 13 and/or 15(d) of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEBO Products, Inc.
By: /s/ Scott Holmes
--------------------------------------
Scott Holmes, Chief Executive Officer
Dated: April 15, 2003
-------------------------------------
|
In accordance with the Exchange Act, 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 Name and Title Date /s/ Scott Holmes April 15, 2003 ----------------------------------------------------- ------------------ Scott Holmes Chief Executive Officer (Principal Executive Officer), President and Director /s/ Paul Larsen April 15, 2003 ----------------------------------------------------- ------------------ Paul Larsen Controller (Principal Financial and Accounting Officer) |
CERTIFICATIONS
I, Scott Holmes, certify that:
1. I have reviewed this annual report on Form 10-KSB of NEBO Products, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 15, 2003 /s/ Scott Holmes Scott Holmes, Chief Executive Officer |
I, Paul Larsen, certify that:
1. I have reviewed this annual report on Form 10-KSB of NEBO Products, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 15, 2003 /s/ Paul Larsen ----------------------------------------------------- Paul Larsen, Principal Accounting and Financial Officer |
NEBO PRODUCTS
Financial Statements
December 31, 2002 and 2001
NEBO PRODUCTS, INC.
Index to Financial Statements
Page
Independent auditors' report F-1 Balance sheet F-2 Statement of operations F-3 Statement of stockholders' deficit F-4 Statement of cash flows F-5 Notes to financial statements F-6 |
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of NEBO Products, Inc.
We have audited the accompanying balance sheet of NEBO Products, Inc. as of December 31, 2002, and the related statements of operations, stockholders' deficit and cash flows for the years ended December 31, 2002 and 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 NEBO Products, Inc. as of December 31, 2002 and the results of its operations and its cash flows for the years ended December 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3, the Company has a deficit in working capital, a stockholders' deficit and recurring net losses. These issues raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The accompanying financial statements do not include any adjustment that might result from the outcome of this uncertainty.
/s/ TANNER + CO. Salt Lake City, Utah March 7, 2003 |
NEBO PRODUCTS, INC.
Balance Sheet
Assets
Current assets:
Cash $ 77,712
Accounts receivable, net 60,759
Inventory 399,857
Other current assets 30,060
--------------------
Total current assets
568,388
Property and equipment, net 152,205
Intangibles, net 125,735
--------------------
$ 846,328
--------------------
----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 606,237
Accrued liabilities 233,855
Short-term notes payable 291,680
Current portion of long-term debt - related party 281,451
Current portion of long-term debt 81,922
--------------------
Total current liabilities 1,495,145
Long-term debt 471,704
Long-term debt - related party 213,442
--------------------
Total liabilities 2,180,291
--------------------
Commitments and contingencies -
Redeemable convertible preferred stock 62,803
Stockholders' deficit:
Convertible preferred stock, no par value: stated value $.20 (Series A):
100,000,000 shares authorized; 5,207,553 issued and outstanding with
liquidation preference of $1,041,510 1,041,510
Common stock, no par value, voting; 100,000,000 shares
authorized, 19,627,471 issued and outstanding 3,306,025
Subscriptions receivable (48,071)
Accumulated deficit (5,696,230)
--------------------
Total stockholders' deficit: (1,396,766)
--------------------
$ 846,328
--------------------
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NEBO PRODUCTS, INC.
Statement of Operation
2002 2001
------------------------------------
Net sales $ 3,572,817 $ 3,925,996
Cost of sales 2,024,866 2,217,362
------------------------------------
Gross profit 1,547,951 1,708,634
Expenses:
Selling expense 618,322 755,686
General and administrative expenses:
Payroll and related expenses 470,308 488,997
Professional fees 1,982,259 484,948
Facilities expense, including depreciation 268,190 273,459
Other general and administrative expenses 213,449 312,263
------------------------------------
Total general and administrative expenses 2,934,206 1,559,667
------------------------------------
Total selling, general and
administrative expenses 3,552,528 2,315,353
------------------------------------
Loss from operations (2,004,577) (606,719)
------------------------------------
Other income (expense):
Interest expense (291,433) (609,328)
Interest income 35,488 10,202
Loss on sale of receivables (131,436) (6,200)
Impairment loss on marketable securities - (28,410)
------------------------------------
Total other income (expense) (387,381) (633,736)
------------------------------------
Loss before benefit for income taxes (2,391,958) (1,240,455)
Income taxes - -
------------------------------------
Net loss $ (2,391,958) $ (1,240,455)
------------------------------------
Loss per common share - basic and diluted $ (0.14) $ (0.11)
------------------------------------
Weighted average shares - basic and diluted 17,216,000 11,801,000
------------------------------------
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NEBO PRODUCTS, INC.
Combined Statement of Stockholders' Deficit
Accumulated
Preferred Stock Common Stock Other
-------------------------------------------------- Subscriptions Comprehensive
Shares Amount Shares Amount Receivable Loss
---------------------------------------------------------------------------------
Balance, January 1, 2001 - - 11,243,915 $ 578,157 $ - (8,670)
Issuance of common stock for:
Cash
- - 54,430 40,225 - -
Services
- - 335,000 251,250 - -
Debt
- - 260,280 195,210 - -
Accrued interest payable
- - 77,039 57,779 - -
Subscriptions receivable, net of offering
costs - - 1,736,781 1,175,233 (1,100,922) -
Issuance of options for interest expense
and services - - - 123,257 - -
Comprehensive loss:
Net loss
- - - - - -
Decrease in unrealized loss
- - - - - 8,670
Total comprehensive loss
- - - - - -
------------------------------------------------------------------------------------
Balance, December 31, 2001
- - 13,707,445 2,421,111 (1,100,922) -
Issuance of common stock for:
Cash
- - 1,620,000 284,754 - -
Services
- - 4,546,692 1,401,584 - -
Cash received on subscriptions receivable
- - - - 86,700 -
Issuance of options for services
- - - 164,727 - -
Preferred stock issued for debt and accrued
interest 4,207,553 841,510 - - - -
Preferred stock issued for services
1,000,000 200,000 - - - -
Write-off of subscriptions receivable
- - (246,666) (966,151) 966,151 -
Net loss
- - - - - -
------------------------------------------------------------------------------------
Balance, December 31, 2002 5,207,553 $1,041,510 19,627,471 $ 3,306,025 $ (48,071) $ -
------------------------------------------------------------------------------------
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NEBO PRODUCTS, INC.
Combined Statement of Stockholders' Deficit
Total
Accumulated Stockholders'
Deficit Deficit
---------------------------------
Balance, January 1, 2001 (2,063,817) $ (1,494,330)
Issuance of common stock for:
Cash
- 40,225
Services
- 251,250
Debt
- 195,210
Accrued interest payable
- 57,779
Subscriptions receivable, net of offering
costs - 74,311
Issuance of options for interest expense
and services - 123,257
Comprehensive loss:
Net loss
(1,240,455) (1,240,455)
Decrease in unrealized loss
- 8,670
Total comprehensive loss
- (1,231,785)
-------------------------------
Balance, December 31, 2001
(3,304,272) (1,984,083)
Issuance of common stock for:
Cash
- 284,754
Services
- 1,401,584
Cash received on subscriptions receivable
- 86,700
Issuance of options for services
- 164,727
Preferred stock issued for debt and accrued
interest - 841,510
Preferred stock issued for services
- 200,000
Write-off of subscriptions receivable
- -
Net loss
(2,391,958) (2,391,958)
-------------------------------
Balance, December 31, 2002 $ (5,696,230) (1,396,766)
-------------------------------
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NEBO PRODUCTS, INC.
Statement of Cash Flows
2002 2001
--------------------------------
Cash flows from operating activities:
Net Loss $ (2,391,958) $ (1,240,455)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization expense 58,950 30,098
Provision for losses on accounts receivable (8,367) 6,901
Loss on sale of accounts receivable 131,436 -
Stock compensation for services and interest expense 1,601,584 251,250
Stock option compensation for services and interest expense 164,727 123,257
Loss on impairment of marketable securities - 28,410
Proceeds from factored receivables 3,341,931 276,952
Decrease (increase) in:
Accounts receivable (3,413,583) 571,916
Inventory (47,674) 443,752
Other assets (9,625) 14,456
Increase (decrease) in:
Accounts payable (208,341) 151,676
Accrued liabilities 63,015 79,889
--------------------------------
Net cash (used in) provided by operating activities (717,905) 738,102
--------------------------------
Cash flows from investing activities:
Purchases of property and equipment (8,645) (6,367)
Purchase of patents (3,505) -
--------------------------------
Net cash used in investing activities (12,150) (6,367)
--------------------------------
Cash flows from financing activities:
Proceeds from long and short-term debt 360,818 490,249
Principal payments on long and short-term debt (176,962) (1,088,439)
Offering costs - (127,353)
Proceeds from subscriptions receivable 288,364 -
Proceeds from stock issuance 284,754 40,225
--------------------------------
Net cash provided by (used in) financing activities 756,974 (685,318)
--------------------------------
Net increase in cash 26,919 46,417
Cash and cash equivalents at beginning of year 50,793 4,376
--------------------------------
Cash and cash equivalents at end of year $ 77,712 $ 50,793
--------------------------------
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NEBO PRODUCTS, INC.
Notes to Financial Statements
1. Organization Description of Business NEBO Products, Inc. (dba NEBO Tools and NEBO Sports) operates in the wholesale industry as a wholesale distributor of hardware and outdoor equipment. The Company is located in Draper, Utah, and maintains a number of manufacturing arrangements with factories in Asia. The Company's customers consist of major retail chains and other hardware and outdoor retailers throughout the United States.
2. Summary of Concentration of Credit Risk
Significant Financial instruments which potentially subject the
Accounting Company to concentration of credit risk consist
Policies primarily of trade receivables. In the normal course
of business, the Company provides on-going credit
evaluations of its customers and maintains allowances
for possible losses which, when realized, have been
within the range of management's expectations.
The Company maintains its cash in bank deposit
accounts which, at times, may exceed federally
insured limits. The Company has not experienced any
losses in such accounts and does not believe it is
exposed to any significant credit risk on cash and
cash equivalents.
The Company has substantially all of its products
manufactured in Asia and is therefore at risk to the
political and economic trends of those countries in
receiving product. The Company has not experienced
any losses as a result from activities in those
countries.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash
includes all cash and investments with original
maturities to the Company of three months or less.
Inventory
Inventory is stated at the lower of cost or market
and is valued on an average cost basis. The inventory
consists entirely of finished goods.
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
2. Summary of Property and Equipment
Significant Property and equipment are recorded at cost less
Accounting accumulated depreciation. Depreciation and
Policies amortization on capital leases and property and
Continued equipment is determined using the straight-line
method over the estimated useful lives of the assets
or term of the lease. Depreciation and amortization
periods are as follows:
Computer, equipment and software 3-5 years
Furniture and fixtures 10 years
Office and warehouse equipment 5 years
Leasehold improvements 5 years
|
Intangible Assets Intangible assets consist primarily of patents relating to the Company's hardware product lines which were acquired in 2002 and 2001. The patents are being amortized over the estimated life of the patent or 5 years. Total amortization expense for patents during the years ended December 31, 2002 and 2001 was $12,955 and $162.
Revenue Recognition Revenue is recognized when a valid purchase order has been received, product has been shipped, the selling price is fixed or determinable, and collectibility is reasonably assured.
Income Taxes
Deferred taxes are computed using the asset and
liability method. Under the asset and liability
method, deferred tax assets and liabilities are
recognized for future tax consequences attributable
to differences between the financial statement
carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in
which those temporary differences are expected to be
recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is
recognized in income in the period that includes the
enactment date. Deferred tax assets are not
recognized unless it is more likely than not that the
asset will be realized in future years.
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
2. Summary of Earnings Per Common and Common Equivalent Share
Significant The computation of basic earnings per common share is
Accounting computed using the weighted average number of common
Policies shares outstanding during the year.
Continued
The computation of diluted earnings per common
share is based on the weighted average number of
shares outstanding during the year plus common stock
equivalents which would arise from the exercise of
stock options and warrants outstanding using the
treasury stock method and the average market price
per share during the year. Options and warrants
to purchase 2,614,189 and 1,267,500 shares of common
stock at December 31, 2002 and 2001, respectively, at
prices ranging from $.77 to $.05 per share were
outstanding. At December 31, 2002, common stock
equivalents would also arise from the conversion of
convertible notes payable totaling $461,244 with a
conversion price of $.20 per share. Common stock
equivalents are not included in the diluted earnings
per share calculation since their effect is
anti-dilutive.
Stock-Based Compensation
The Company accounts for stock options granted to
employees under the recognition and measurement
principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related
Interpretations, and has adopted the disclosure-only
provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has
been recognized in the financial statements on
options issued to employees, as all options granted
to employees had an exercise price equal to or
greater than the market value of the underlying
common stock on the date of grant. Had the Company's
option values been determined based on the fair value
method, the results of operations would have changed
to the pro forma amounts indicated below:
December 31
----------------------------
2002 2001
----------------------------
Net loss - as reported $(2,391,958) $ (1,240,455)
Deduct total stock based
employee compensation
expense determined under
fair value based method
for all awards, net of
related taxes (168,060) (76,802)
----------------------------
Net loss - pro forma $(2,560,018) $ (1,317,257)
----------------------------
Diluted loss per share -
as reported $ (.14) $ (.11)
----------------------------
Diluted loss per share -
pro forma $ (.15) $ (.11)
----------------------------
--------------------------------------------------------------------------------
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NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
2. Summary of Stock-Based Compensation - Continued
Significant The fair value of each option grant is estimated on
Accounting the date of grant using the Black-Scholes option
Policies pricing model with the following assumptions:
Continued
Expected dividend yield $ - $ -
Expected stock price
volatility 94.14% 141%
Risk-free interest rate 5.25% 4.75%
Expected option life 3-5 years 3-5 years
|
The weighted average fair value of each option and warrant granted during 2002 and 2001 was $.15 and $.45, respectively.
Advertising
Advertising costs are expensed as incurred.
Advertising expense was approximately $45,000 and
$19,000 for the years ended December 31, 2002 and
2001, respectively.
Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through undiscounted future cash flows. If it is determined that an impairment loss has occurred based on expected cash flows, such loss is recognized in the statement of operations.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Accordingly, actual results could differ from those estimates.
Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation.
NEBO PROUDCUTS, INC.
Notes to Financial Statements
Continued
3. Going The Company has a working capital deficit, a
Concern stockholders' deficit, and recurring net losses. In
addition, the Company is in default on certain notes
payable. These factors create substantial doubt about
the Company's ability to continue as a going concern.
The financial statements do not include any
adjustment that might be necessary if the Company is
unable to continue as a going concern.
Management's plans with regard to continuing as a
going concern, include expanding market share through
introduction of new products in order to become
profitable and obtaining equity financing through
sale of its common stock. However, there can be no
assurance management of the Company will be
successful in attaining equity financing or achieving
profitability.
4. Accounts Accounts receivable consist of the following at
Receivable December 31, 2002:
Trade receivables $ 104,310
Allowance for doubtful accounts (43,551)
----------------
$ 60,759
----------------
5. Loss on During the year ended December 31, 2001, the Company
Marketable recognized an impairment loss on its investment in
Securities marketable securities which constituted common stock
of an entity with some common shareholders. The
ownership interest in the related entity was less
than 5%. The securities were classified as available-
for sale and had a cost of $28,410. The securities
were considered impaired due to a lack of
marketability and because the decrease in value was
considered to be other than a temporary decrease in
the value of the stock. The Company owned no
securities in 2002.
--------------------------------------------------------------------------------
F-10
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
6. Property and Property and equipment consists of the following at
Equipment December 31, 2002:
Computer equipment and software $ 146,662
Office and warehouse equipment 92,988
Furniture and fixtures 30,755
Leasehold improvements 4,376
--------------
274,781
Less accumulated depreciation
and amortization (122,576)
--------------
$ 152,205
--------------
|
7. Short-term The Company has the following short-term notes
Notes payable at December 31, 2002:
Payable
Note payable to a company, based on a lien against
inventory. Under the advances against inventory
agreement the client may receive proceeds equal to
60% of the cost of eligible inventory up to the
lessor of $250,000 or a ratio of one dollar of
eligible inventory to every two dollars of eligible
accounts receivable. Interest on loans against the
inventory bear interest at 5% over prime or
approximately 9.25% at December 31, 2002. The note is
secured by the receivables and inventory and is due
on demand. $ 243,890
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
8. Long Term The Company has the following long-term debt as of
Debt December 31, 2002:
Convertible notes payable to various trusts and
investment groups with interest at 6% to 8%, secured
by 3,000,000 shares of authorized and unissued common
stock, and with aggregate monthly principal
installments ranging from $4,400 to $6,000 with a
balloon payment of $166,842 due October 2006. The
debt is convertible into common stock at $.20 per
share.
$ 333,898
Convertible notes payable to individuals, with
interest ranging from 5% to 24% and principal of
approximately $256 due monthly through December 2004,
and balloon payments of $19,000 on August 2003,
$3,000 December 2004, and $99,000 due November 2017.
The debt is convertible into common stock at $.20 per
share.
127,346
Note payable to GMAC, with interest at 2.9%, with
payments of $700, including principal and interest
due monthly. The note is secured by a vehicle and
matures July 2007.
36,065
Capital lease obligations (see Note 10) 56,317
--------------
Total 553,626
Less current portion (81,922)
--------------
Long-term debt $ 471,704
--------------
--------------------------------------------------------------------------------
F-12
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
8. Long Term Future maturities of long-term debt at December 31,
Debt 2002 are as follows:
Continued
Year Amount
2003 $ 81,922
2004 74,481
2005 73,528
2006 219,442
2007 4,858
Thereafter 99,395
-------------
$ 553,626
-------------
9. Long-Term The Company has the following related party long-term
Debt - debt at December 31, 2002:
Related Party
Note payable to an officer of the Company with
interest at 15%, principal due January 2005,
unsecured
$ 208,083
Revolving line-of-credit to a relative of an officer
of the Company with a borrowing limit of $300,000.
The line-of-credit bears interest at 12% (24% for
advances on letters of credit outstanding over 90
days), is secured by assets of the Company and is due
November 2003. The remaining balance available on the
line of credit at December 31, 2002, of $18,549 is
reserved for outstanding letters of credit.
281,451
Note payable to a former officer with interest at
10.75%, unsecured and principal due September 2016.
5,359
--------------
Total 494,893
Less current portion (281,451)
Long-term related party debt $ 213,442
--------------
--------------------------------------------------------------------------------
F-13
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
9. Long-Term Future maturities of long-term debt at December 31,
Debt - 2002 are as follows:
Related Party
Continued
Year Amount
2003 $ 281,451
2004 -
2005 208,083
2006 -
2007 -
Thereafter 5,359
---------------
$ 494,893
---------------
10. Capital Lease The Company leases equipment and software under
Obligation non-cancelable lease agreements. The leases provide
the Company the option to purchase the equipment at
the end of the initial lease term. The equipment and
software under capital lease is included in property
and equipment at a cost of $71,117 and accumulated
depreciation of approximately $17,200 at December 31,
2002.
Depreciation expense for the equipment under capital
lease for the years ended 2002 and 2001 was
approximately $14,500 and $2,700, respectively. The
leases have imputed interest rates ranging from 15.3%
to 18% and are payable in equal monthly installments
through December 2005 as follows:
Year Amount
2003 $ 29,081
2004 20,156
2005 19,321
--------------
68,558
Less interest (12,241)
---------------
Present value of future
minimum lease payments $ 56,317
---------------
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
11. Income Taxes The benefit for income taxes is different than
amounts which would be provided by applying the
statutory federal income tax rate to loss before
benefit for income taxes for the following reasons:
Years Ended
December 31
----------------------------
2002 2001
----------------------------
Income tax benefit at
statutory rate $ 892,000 $ 463,000
Other (2,000) (18,000)
Change in valuation
allowance (890,000) (445,000)
----------------------------
$ - $ -
----------------------------
|
Deferred tax assets (liabilities) are comprised of the following as of December 31, 2002:
2002
-------------
Net operating loss carry-forwards $ 1,486,000
Allowance for doubtful accounts 16,000
Compensated absences 6,000
Depreciation and amortization (22,000)
Contribution carry-forward 2,000
Valuation allowance (1,488,000)
-------------
$ -
-------------
|
At December 31, 2002, the Company has net operating loss carry-forwards available to offset future taxable income of approximately $3,985,000, which will begin to expire in 2019. The utilization of the net operating loss carry-forwards is dependent upon the tax laws in effect at the time the net operating loss carry-forwards can be utilized. A valuation allowance has been recorded against the deferred tax asset due to the uncertainty surrounding its realization caused by the Company's recurring losses.
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
12. Convertible The Company has issued Series A Convertible Preferred
Preferred Stock (Series A) which consist of 20,000,000 shares
Stock of the authorized and unissued shares of the
Company's Preferred Stock, no par value per share
and a stated value per share of $.20. Holders of
Series A are entitled to receive a dividend out of
any of the Company's assets legally available, prior
to any declaration or payment of any dividend on the
Company's Common Stock at a rate of 6% of the stated
value of Series A. Dividends are fully cumulative.
At December 31, 2002, dividends in arrears totaled
approximately $5,500.
Series A shares include voting rights at one vote per
share and have a liquidation preference of $.20 per
share plus all accrued and unpaid dividends. Holders
have the right to convert Series A in an amount
determined by dividing the original purchase price
paid per share of Series A ($.20 at December 31,
2002) by the conversion price, which is equal to the
original price paid per share adjusted for stock
dividends, stock splits, stock combinations,
distributions, or re-capitalizations.
13. Redeemable The Company issued 314,013 shares of Series A
Convertible convertible preferred stock with a mandatory
Preferred redeemable obligation at $.20 per share. On November
Stock 1, 2003, 62,365 shares are required to be redeemed
and on November 1, 2004, 251,648 shares are required
to be redeemed. The total obligation to the Company
at December 31, 2002 is $62,803. The redeemable stock
has a liquidation reference of $62,803 and all other
terms are identical to that of Series A Stock
convertible preferred stock.
14. Stock Options The Company has a stock option plan (the Option
and Warrants Plan), which allows a maximum of 7,000,000 options
to be granted to purchase common stock at prices
generally not less than the fair market value of
common stock at the date of grant. Under the Option
Plan, grants of options may be made to selected
officers and key employees without regard to any
performance measures. The options may be immediately
exercisable or may vest over time as determined by
the Board of Directors. However, the maximum term of
an option may not exceed 5 years.
--------------------------------------------------------------------------------
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
14. Stock Options Information regarding stock options and warrants is
and Warrants summarized below:
Continued
Number of
Options
and Price Per
Warrants Share
----------------------------
Outstanding at January
1, 2001 - $ -
Granted 1,487,000 .60 -.77
Expired or forfeited (219,500) .70 -.77
December 31, 2001 1,267,500 .60 -.77
Granted 3,943,189 .05 -.70
Expired or forfeited (974,500) .60 -.75
Exercised (1,620,000) .10 -.50
----------------------------
Outstanding at December
31, 2002 2,616,189 $ .77 -.05
----------------------------
|
The following table summarizes information about stock options and warrants outstanding at December 31, 2002:
Outstanding Exercisable
----------------------------------------- ----------------------------
---------------- -------------- -------------- ------------- -------------- --------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (Years) Price Exercisable Price
---------------- -------------- -------------- ------------- -------------- --------------
$ .05-.20 1,393,189 3.58 $ .19 1,393,189 $ .19
.55-.77 1,221,000 9.01 .70 855,000 .67
---------------- -------------- -------------- ------------- -------------- --------------
$ .05-.77 2,614,189 6.47 $ .43 2,248,189 $ .38
---------------- -------------- -------------- ------------- -------------- --------------
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
15. Stock During the year ended December 31, 2001 the Company
Subscriptions issued 1,736,781 shares of its common stock for
Receivable $1,175,233 of stock subscriptions receivable, net
of offering costs of $127,353, of which $717,586 of
subscriptions receivable with corresponding shares
of 956,781 were issued to relatives of an officer of
the Company. The subscriptions had an original due
date of June 30, 2002. During the year ended December
31, 2002, the Company determined that only $48,071
of the remaining uncollected subscriptions
receivable including those to a relative would be
collected. The Company cancelled 246,666 shares
of its common stock related to the uncollectible
subscriptions receivable. The remaining subscriptions
receivable are now due between August 15, 2008 and
November 1, 2010, including interest at 8% per annum.
16. Commitments Operating Leases
and The Company leases office facilities under
Contingencies non-cancelable operating leaseswhich expire in the
year 2005. Rental expense incurred under these
leases for the years ended December 31, 2002 and 2001
totaled approximately $115,000 and $97,000,
respectively. At December 31, 2002 the future minimum
lease payments under these operating leases are as
|
follows:
Year Amount
---- ------
2003 $ 104,000
2004 108,000
2005 74,000
-------------
Total future minimum
lease payments $ 286,000
-------------
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
16. Commitments Employment Agreement
and During the year ended December 31, 2002, the
Contingencies Company entered into anemployment agreement with
Continued the President of the Company. The agreement provides
the President with a salary, participation in
employee benefit plans and severance pay. The
employment agreement expires August 20, 2007.
However, the Company may terminate the President at
any time after all debts owed to him have been paid
off and all loans guaranteed by him have been paid
off or other guarantor substituted. Severance pay
shall be equal to one year's annual salary and
employee benefits, provided that such compensation
shall not be due in any month that the average daily
price of NEBO stock exceeds $1.00 per share.
Factored Receivables
The Company entered into agreement to sell its
accounts receivable to a financing company in
November 2002. The Company receives 90% of the face
value of receivables sold and is required to
repurchase receivables at face value upon request. At
December 31, 2002 the uncollected receivable balance
that the Company may be required to repurchase totals
$487,780. The Company has not been asked to
repurchase any accounts receivable to date. The
Company recorded a loss of $131,436 and $6,200 on the
sale of receivables to the financing company for the
years ended December 31, 2002 and 2001, respectively.
Litigation
The Company is involved in lawsuits ensuing out of
the normal course of business. The Company believes
it has adequately accrued for possible losses that
could have a material effect on its financial
position or results of operations.
17. Supplemental During the year ended December 31, 2002, the Company:
Cash Flow
Information |X| Issued 5,207,553 shares of convertible
preferred stock and 314,013 of mandatorily
redeemable shares of convertible preferred
stock in exchange for debt with a value of
$791,694, accrued interest of $112,619 and
consulting compensation of $200,000.
|X| Issued 4,546,692 shares of common stock in
exchange for services of $1,401,584.
--------------------------------------------------------------------------------
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
17. Supplemental |X| Acquired a vehicle for debt in the amount of
Cash Flow $39,068.
Information
Continued |X| Eliminated stock subscriptions receivable of
$966,151 in exchange for the return of
6,666 shares of common stock
|X| Acquired a patent in exchange for accrued
royalty payable of $120,000.
|
During the year ended December 31, 2001, the Company:
|X| Issued 260,280 shares of common stock in
exchange for debt with a value of $195,210.
|X| Issued 77,039 shares of common stock in
exchange for accrued interest totaling
$57,779.
|X| Acquired software totaling $57,506 that was
financed through a capital lease.
|X| Sold land with a cost of $20,800 to an
officer in exchange for partial payment of a
note payable to the officer of $20,800.
|X| Issued 1,736,781 of common stock in exchange
for subscriptions receivable totaling
$1,302,586. A total of $201,664 of the
subscriptions receivable were collected
subsequent to December 31, 2001 and are
classified as current assets.
Years Ended
December 31,
------------------------
2002 2001
------------------------
Interest $ 208,945 $ 517,058
Income taxes $ - $ -
------------------------
--------------------------------------------------------------------------------
F-20
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
18. Related Party Related party transactions are as follows:
Transactions
Not Otherwise 2002
Disclosed
|X| The Company during 2002 modified the
terms of certain stock subscription
agreements and cancelled subscriptions
receivable of $488,151 to purchase
approximately 650,867 shares of the
company's common stock due from relatives
of the Company's President and an employee
of the Company. Based on the modified
terms for the individual subscriptions,
the price ultimately paid by certain
related parties for common stock issued in
2001 under subscriptions receivable is as
follows: 1) relatives of the President
received 570,114 shares at $.06 per share;
and 2) an employee including entities
controlled by the employee received 320,000
shares at $.41 per share.
2001
|X| The Company sold land with a historical cost
of $20,800 to an officer of the Company in
exchange for payment on a note payable due
to the officer.
|X| The Company issued 226,285 shares of common
stock in exchange for a reduction of debt of
$160,210 and accrued interest of $9,504
payable to relatives of an officer and
shareholders of the Company.
|X| The Company at December 31, 2001 has
subscriptions receivable from relatives of
the Company's President of $717,586.
19. Retirement The Company sponsors a defined contribution 401(K)
Plan profit sharing plan for all eligible employees.
Employees may contribute a percent of their annual
compensation subject to regulatory limitations.
Contributions by the Company are discretionary and
the Company may elect not to contribute in any given
year. The Company made contributions of approximately
$3,000 and $8,000 for the years ended December 31,
2002 and 2001, respectively.
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
20. Major Sales to customers which exceeded 10% of total Customers sales are as follows for the years ended December 31,:
2002 2001
------------------------
Customer A $ 619,000 $ 571,098
Customer B 438,000 -
21. Fair Value of The Company's financial instruments consist of cash,
Financial receivables, payables, and notes payable. The
Instruments carrying amount of cash, receivables and payables
approximates fair value because of the short-term
nature of these items. The aggregate carrying amount
of the notes payable approximates fair value as the
individual borrowings bear interest at market
interest rates.
22. Recent In June 2001, the Financial Accounting Standards
Accounting Board issued Statement of Financial Accounting
Pronounce- Standards No. 143, "Accounting for Asset Retirement
ments Obligations". This Statement addresses financial
accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement
is effective for financial statements issued for
fiscal years beginning after June 15, 2002. This
Statement addresses financial accounting and
reporting for the disposal of long-lived assets. The
Company does not believe that adoption of this
statement will have a mutual effect on the Company's
financial position.
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
22. Recent In August 2001, the Financial Accounting Standards
Accounting Board issued Statement of Financial Accounting
Pronounce- Standards No.144 "Accounting for the Impairment of
ments Long-Lived Assets". This Statement addresses
Continued financial accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be
disposed of. This Statement supercedes FASB
Statement 121 and APB Opinion No. 30. This Statement
retains certain fundamental provisions of Statement
121, namely; recognition and measurement of the
impairment of long-lived assets to be held and used,
and measurement of long-lived assets to be disposed
of by sale. The Statement also retains the
requirement of Opinion 30 to report discontinued
operations separately from continuing operations.
This Statement also amends ARB No. 51 to
eliminate the exception of consolidation for a
temporarily controlled subsidiary. The provisions of
this statement are effective for financial statements
issued for fiscal years beginning after December 15,
2001.
The adoption of SFAS No. 144 did not have a
significant impact on the financial position or
results of operations of the Company.
In April 2002, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This
statement requires the classification of gains or
losses from the extinguishments of debt to meet the
criteria of Accounting Principles Board Opinion No.
30 before they can be classified as extraordinary in
the income statement. As a result, companies that use
debt extinguishment as part of their risk management
cannot classify the gain or loss from that
extinguishment as extraordinary. The statement also
requires sale-leaseback accounting for certain lease
modifications that have economic effects similar to
sale-leaseback transactions. The Company does not
expect the adoption of SFAS No. 145 to have a
material impact on its financial position or results
of operations.
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
22. Recent In June 2002, the FASB issued SFAS No. 146,
Accounting "Accounting for Costs Associated with Exit or
Pronounce- Disposal Activities." This standard, which is
ments effective for exit or disposal activities initiated
Continued after December 31, 2002, provides new guidance on
the recognition, measurement and reporting of costs
associated with these activities. The standard
requires companies to recognize costs
associated with exit or disposal activities when they
are incurred rather than at the date the company
commits to an exit or disposal plan. The adoption of
SFAS No. 146 by the Company is not expected to have a
material impact on the Company's financial position
or results of operations.
In December 2002, the FASB issued SFAS No. 148
"Accounting for Stock-Based Compensation--Transition
and Disclosure--an amendment of FASB Statement No.
123," which is effective for all fiscal years ending
after December 15, 2002. SFAS No. 148 provides
alternative methods of transition for a voluntary
change to the fair value based method of accounting
for stock-based employee compensation under SFAS No.
123 from the intrinsic value based method of
accounting prescribed by Accounting Principles Board
Opinion No. 25. SFAS 128 also changes the disclosure
requirements of SFAS 123, requiring a more prominent
disclosure of the pro-forma effect of the fair value
based method of accounting for stock-based
compensation. The adoption of SFAS No. 148 by the
Company did not have a material impact on the
Company's financial position or results of
operations.
|
NEBO PRODUCTS, INC.
Notes to Financial Statements
Continued
22. Recent In January 2003, the Financial Accounting Standards
Accounting Board (FASB) issued Interpretation No. 46,
Pronounce- Consolidation of Variable Interest Entities (FIN
ments No. 46), which addresses consolidation by business
Continued enterprises of variable interest entities. FIN No.
46 clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity
investors do not have the characteristics of a
controlling financial interest or do not have
sufficient equity at risk for the entity to finance
its activities without additional subordinated
financial support from other parties. FIN No. 46
applies immediately to variable interest
entities created after January 31, 2003, and to
variable interest entities in which an enterprise
obtains an interest after that date. It applies in
the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company does
not expect to identify any variable interest entities
that must be consolidated. In the event a variable
interest entity is identified, the Company does not
expect the requirements of FIN No. 46 to have a
material impact on its financial condition or results
of operations.
In November 2002, the FASB issued Interpretation No.
45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN No. 45).
FIN No. 45 requires certain guarantees to be recorded
at fair value, which is different from current
practice to record a liability only when a loss is
probable and reasonably estimable, as those terms are
defined in FASB Statement No. 5, Accounting for
Contingencies. FIN No. 45 also requires the Company
to make significant new disclosures about guarantees.
The disclosure requirements of FIN No. 45 are
effective for the Company in the first quarter of
fiscal year 2003. FIN No. 45's initial recognition
and initial measurement provisions are applicable on
a prospective basis to guarantees issued or modified
after December 31, 2002. The Company's previous
accounting for guarantees issued prior to the date of
the initial application of FIN No. 45 will not be
revised or restated to reflect the provisions of FIN
No 45. The Company does not expect the adoption of
FIN No. 45 to have a material impact on its
consolidated financial position, results of
operations or cash flows.
--------------------------------------------------------------------------------
|
NEBO Products, Inc.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated effective as of the date executed by both parties hereto, is between NEBO Products, Inc., a Utah corporation with its principal place of business at 12382 Gateway Parkplace, #300, Salt Lake City, Utah 84020 ("NEBO") and Scott Holmes, an individual employed or to be employed by NEBO.
This Agreement is intended to protect NEBO's investment in client relationships and proprietary information and in its ability to employ its people, by maintaining confidentiality and customer relationships. As a material inducement to employment or continued employment of me by NEBO, and for other good and valuable consideration, including but not limited to salary, wages and/or other benefits, the receipt and sufficiency of which are hereby acknowledged, and in view of the relationship of trust and confidence between NEBO and me, I, the undersigned employee of NEBO, hereby agree as follows:
1. Compensation. During the term of this Agreement, NEBO will pay me an annual salary of $96,000. Salary will be paid every two weeks in equal installments, subject to withholding and other deductions according to the usual and customary practices and policies of NEBO. I will also participate in all employee benefit and welfare benefit plans offered by NEBO to its employees and executives.
2. Confidential Information.
2.1 Definition. "Confidential or Proprietary Information" means all present and future confidential or proprietary information belonging to NEBO, whether in written, electronic, visual or oral form, and whether developed by me or by other NEBO employees or agents, including but not limited to products, trade secrets, ideas, business and marketing plans and information, financial and operational matters, pricing information, customer names and contacts, supplier names and contacts, technology, inventions, processes, computer software, source code, software development tools, third party confidential information that has been entrusted to NEBO, and including all information marked as confidential or which reasonably should be understood to be confidential or proprietary, whether or not so marked. However, Confidential or Proprietary Information does not include information that I can show is or has become available for unrestricted public use, without breach of this or any other agreement.
2.2 Limitations on Use and Disclosure. I acknowledge that in the course of my employment by NEBO, I will have access to Confidential or Proprietary Information, which is and shall remain the sole property of NEBO. I agree that, except as appropriate in connection with NEBO's business I shall not at any time (i) disclose or deliver Confidential or Proprietary Information to any person; (ii) use such information in any manner, (iii) copy such information or remove it from NEBO's premises, or (iv) use any Confidential or Proprietary Information for the direct or indirect benefit of any person or entity other than NEBO, except as NEBO may otherwise consent or direct in writing. I agree to
use reasonable and diligent effort to maintain the proprietary nature, security and/or confidentiality of all Confidential or Proprietary Information. I shall also keep confidential any information provided by any client or other third party to NEBO under obligation of confidentiality. I shall promptly notify NEBO if I become aware of any misuse or wrongful disclosure of Confidential or Proprietary Information by any person. All obligations of confidentiality shall continue for as long as is permitted under Utah law.
3. Employee Inventions.
3.1 Definition. I recognize and acknowledge that as a result of my employment with NEBO, I may have access to, be involved in the development of, and have knowledge of certain "Employee Inventions," which term is defined to include all inventions, programs, ideas, processes, trade secrets, techniques, technology, computer code, and operating ideas, all Confidential or Proprietary Information, processes and materials, whether or not published, patented, copyrighted, registered or suitable therefor, and all intellectual property rights therein, that are made, developed, written, conceived or first reduced to practice by me in part or in whole, whether alone or with others, during the term of my employment with NEBO, to the extent they relate to NEBO's past, present, future or anticipated business, research, development or trade or are developed using NEBO's time, equipment or materials. I agree to promptly disclose the existence, use and manner of operation of any Employee Inventions to NEBO.
3.2 Ownership. I acknowledge and agree that all Employee Inventions are the sole and exclusive property of NEBO. I agree to take all actions reasonably requested by NEBO, both during and after the term of my employment by NEBO, to assign to NEBO and to establish (including, without limitation, assisting in obtaining or registering copyrights, patents, trademarks or similar property rights and executing assignments to NEBO), perfect, exercise or protect NEBO's rights in any Employee Inventions or title thereto. If NEBO is unable, because of my mental or physical incapacity, geographic distance or for any other reason, to obtain my approval or signature on any document reasonably necessary or useful to claim, secure, extend, protect or enforce any right in intellectual property to which NEBO has a reasonable claim, then I hereby appoint NEBO and its duly authorized officers as my agent and attorney-in-fact to act for me and in my place and stead for the purpose of accomplishing such act with the same legal force and effect as if executed by me.
4. No Competitive Use of Materials. I agree not to sell or use any specific material and ideas from Employee Inventions or Confidential or Proprietary Information in or out of the course of business in any manner that would compete with or pose a threat of competition to NEBO. I agree not to sell or use specific technology, software, terminology, names, titles, packaging, artwork, or other key components of any Employee Inventions in any manner, whether or not a threat of competition is posed, without the express, written consent of NEBO.
5. No Unrelated Business with Customers. I agree that during the term of my employment with NEBO, unless NEBO otherwise agrees in writing, I shall not contact or initiate discussions, directly or indirectly, with any customer or prospective customer of NEBO (as defined below) to attempt to sell such customer any product or service other than NEBO's products or services.
6. Return of Information. Upon NEBO's request or upon termination of my employment with NEBO, I shall immediately return and deliver all Employee Inventions and Confidential or Proprietary Information to NEBO, regardless of whether it is in written, electronic, photographic or any other form, including all copies of such information that are in my possession, custody or control.
7. Non-Solicitation Covenant. I covenant that during the term of my employment with NEBO and for one (1) year thereafter, I shall not:
(a) Do anything, directly or indirectly, which would solicit away from NEBO or otherwise tend to divert from NEBO any business with a customer or prospective customer of NEBO; including, without limitation, by providing NEBO customers' or suppliers' names, contacts or business information
to a competitor of NEBO;
(b) Associate with or contact, directly or indirectly,
with the purpose or intent of competing with NEBO, any supplier, customer or
prospective customer of NEBO; or
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(c) Solicit, recruit or otherwise cause any NEBO employee or independent contractor to cease providing services for NEBO.
As used herein, the term "prospective customer of NEBO" is defined as any company or person whom NEBO has sold products or services to in the past or with whom NEBO has had contact during the term of my employment for the purpose of marketing or offering its products or services.
8. Scope of Restrictions. I acknowledge and agree that the foregoing restrictions are reasonable and are properly required for adequate protection of the business and good will of NEBO, given the special training and/or Confidential or Proprietary Information that I have obtained or will be obtaining from NEBO, the unique and specialized nature of NEBO's business, and the fact that my services are of a special character that have a unique value to NEBO, and that NEBO has a legitimate business purpose in requiring me to abide by the above restrictive covenants. I agree that the above restrictions will not prevent me from earning a livelihood upon termination of my employment with NEBO. In the event that any restriction or term in this Agreement is deemed to be unreasonable or invalid by a court of competent jurisdiction, then it is agreed that such court shall reduce or modify such term to the minimum extent necessary to make it reasonable, valid and enforceable in the applicable jurisdiction of such court. If such term cannot be so reduced or modified, it shall be severed and all other terms and restrictions of this Agreement shall remain in full force and effect and shall be interpreted in such a way as to give maximum validity and enforceability to this Agreement. In the event I shall be in violation of the above restrictive covenants, then the time limitation thereof shall be extended for a period of time equal to the time during which such breach or breaches occur.
9. No Conflicts. I hereby covenant, represent and warrant that (i) I am not now subject to, and will not enter into, any employment, consulting or other agreement or arrangement that would or may conflict or interfere with or prohibit the performance by me of any of my obligations to NEBO (under this Agreement or otherwise); and (ii) I have not and will not use or disclose proprietary or confidential information of any other former employer or any other person or entity with which I have any agreement or duty of confidentiality.
10. Term. The term of this Agreement shall be 60 months; provided, however, that I agree that my employment may continue after the expiration of the term; provided, further, however, that NEBO may terminate my employment at any time after all NEBO-related debts in my name or with my personal guaranty have been paid off or other guarantor substituted without cause so long as my compensation continues for a period of twelve months following termination (the Severance Period); provided, further, that such compensation shall not be due in any month that the average daily NEBO stock price exceeds $1.00 per share during the Severance Period. Unless otherwise provided in a written agreement between NEBO and myself or otherwise provided or required by applicable law, following the expiration of the term stated above, I agree and understand that I will be considered an employee at will, and nothing in this Agreement shall be construed to provide otherwise. "At will employment" means that following the expiration of the term of this Agreement, except as provided above, either NEBO or I may terminate my employment at any time for any reason, with or without notice, and with or without cause.
11. Adherence to Policies. I agree to comply with NEBO's policies and procedures, including those set forth in NEBO's policy manual (if available) or in written memoranda or directives issued by NEBO from time to time. I acknowledge and agree that NEBO has the right, in its sole discretion, to change any policy, procedure, memorandum or directive, for any reason and with or without prior notice to me.
12. Termination of Employment. If my employment is terminated, I shall, upon request, participate in an exit interview to finalize any remaining issues and assure a proper transition. On or before termination of employment, I will return to NEBO all of NEBO's property, including without limitation equipment, documents, diskettes, files, programs, tools, data, information and media pertaining to past, present, future or anticipated business, research, Employee Inventions and other Confidential or Proprietary Information. I agree that I will not take with me any originals, copies or reproductions of any documents, data or information pertaining to any Employee Inventions or Confidential or Proprietary Information, except as otherwise authorized by this Agreement or an authorized officer of NEBO. The terms of this Agreement shall survive termination of my employment. Upon NEBO's request, I will execute a statement, within 2 weeks of termination of my employment with NEBO, certifying that to the best of my knowledge, all copies of Confidential or Proprietary Information and Employee Inventions in my possession or control has been returned to NEBO.
13. Breach and Remedies. If I breach any term of this Agreement, NEBO may immediately terminate my employment and seek any available remedies at law or in equity for such breach. I agree that the available remedies at law for any breach of my covenants made in this Agreement, including the covenant not to solicit and the covenant of confidentiality, will be inadequate and that NEBO shall be entitled to immediate temporary and permanent injunctive relief, in addition to any other remedy it might have, including damages and the right to recover reasonable attorneys' fees, if it becomes necessary for NEBO to enforce its rights under this Agreement. I specifically release NEBO from the requirement of posting any bond in connection with temporary or interlocutory injunctive relief, to the extent permitted by law.
14. General Provisions. This Agreement constitutes the entire agreement between NEBO and myself with respect to the subject matter hereof. No amendment,
modification, release or waiver of any provision of this Agreement shall be binding on NEBO unless in a written agreement signed by an authorized officer of NEBO. The failure of NEBO to take any action under this Agreement or the waiver of a breach of this Agreement shall not affect NEBO's right to require performance hereunder or constitute a waiver of any subsequent breach. This Agreement shall be governed by Utah law and applicable U.S. federal laws. Utah state and federal courts shall have exclusive jurisdiction in any legal action arising out of this Agreement, and I consent to the personal jurisdiction and venue of such courts. The prevailing party in any action arising out of this Agreement shall be entitled to an award of its costs and reasonable attorneys' fees, in addition to any other available remedy. This Agreement shall be binding upon my heirs, legal representatives and successors; however, I agree that I may not assign or transfer my obligations under this Agreement to any other person.
I ACKNOWLEDGE THAT I HAVE READ AND UNDERSTAND THIS AGREEMENT AND THAT, BEFORE SIGNING THIS AGREEMENT I WAS GIVEN AN OPPORTUNITY TO DISCUSS IT WITH MY PERSONAL ADVISORS AND WITH REPRESENTATIVES OF NEBO.
NEBO Products, Inc.
By: /s/ Scott Holmes
---------------------------
Its: President/CEO
---------------------------
Date: August 21, 2002
---------------------------
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Employee:
/s/ Scott Holmes ----------------------------------- Signature |
PROMISSORY NOTE
$25,000.00 March 19, 2003
FOR VALUE RECEIVED, the undersigned ("Maker") hereby promises to pay to Durham Jones & Pinegar, PC ("Holder"), or to order, at such location as Holder may designate, the principal sum of Twenty-five Thousand Dollars ($25,000.00), together with interest thereon at the rate of eighteen percent (18%) per annum.
Principal and accrued interest, shall be payable in full on April 1, 2004. Principal shall be payable only in lawful money of the United States of America. Payments shall be applied first to accrued and unpaid interest, and then to the unpaid principal balance.
In the event that: (a) any installment provided for hereunder is not paid in full on its due date, or (b) Maker has filed a petition seeking that Maker be adjudged a bankrupt or Maker makes a general assignment for the benefit of creditors or suffers the appointment of a receiver, or becomes insolvent, or (c) fails to make payments to Holder under the terms of a settlement agreement of even date herewith when and as such payments become due, then in any of such events, the entire remaining unpaid balance of principal owing hereunder shall, at the option of Holder and without notice or demand, become immediately due and payable, and the unpaid balance hereunder shall accrue interest at the rate twenty-five percent (25%) per annum. In the event of default by Maker in the payment of this Promissory Note, Holder shall be entitled to recover all costs and expenses reasonably incurred in collecting the same, including reasonable attorney's fees.
This note and Maker's obligations hereunder are secured by a pledge of securities pursuant to the terms of a Pledge and Security Agreement of even date herewith, by this reference incorporated in and made a part of this Note.
Maker waives presentment for payment, protest, demand, notice of dishonor, and notice of nonpayment.
DATED as of the day, month and year first above-written.
MAKER:
NEBO PRODUCTS, INC.
By: /s/ Scott Holmes
---------------------------
Scott Holmes, President
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STOCK PLEDGE AGREEMENT
STOCK PLEDGE AGREEMENT ("Agreement") entered into as of the 19th day of March 2003, by and between Durham Jones & Pinegar, PC, a Utah professional corporation ("Secured Party") and NEBO Products, Inc., a Utah corporation having its principal executive offices at 12382 Gateway Parkplace #300, Draper, Utah 84020 ("Debtor").
RECITALS
A. Debtor has entered into an agreement and promissory note for the payment of amounts owing to Secured Party for services performed and costs advanced on behalf of Debtor.
B. Secured Party is willing to extend terms for payment of those obligations of Debtor contingent upon the pledge of securities as provided herein.
NOW, THEREFORE, in consideration of the premises, the mutual covenants and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Grant of Security Interest. Debtor grants, pledges, hypothecates, transfers and assigns to the Secured Party, as collateral and security for the obligations and performance of the Debtor a total of 2,000,000 shares of Common Stock of Debtor (the "Guarantee Shares"). The Guarantee Shares are registered in the name of Secured Party and are, together with any substitutes therefor, or proceeds thereof, hereinafter referred to collectively as the "Collateral."
2. Obligations Secured. During the term hereof, the Collateral shall secure any obligations of the Debtor to Secured Party arising under or in connection with the promissory note and other agreements or arrangements between Debtor and Secured Party upon any default by or failure of the Debtor to perform their obligations thereunder (all such obligations, the "Secured Obligations").
3. Perfection of Security Interests. Upon execution of this Agreement
by Debtor, Debtor shall deliver and transfer possession of the stock certificate
for 2,000,000 shares of Common Stock (the "Certificate") to Secured Party to be
held by Secured Party or a mutually acceptable third party until the earlier of
(i) the termination of this Agreement or (ii) foreclosure of Secured Party's
security interests as provided herein. The Debtor shall also execute all
documents and perform all acts as Secured Party may reasonably request in order
to perfect and maintain a valid security interest for Secured Party in the
Collateral.
4. Assignment. Secured Party may assign or transfer the whole or any part of its security interest granted hereunder, and may transfer as collateral security the whole or any part of Secured Party's security interest in the Collateral. Any transferee of the Collateral shall be vested with all of the rights and powers of Secured Party hereunder with respect to the Collateral.
5. Warranty of Title. Debtor hereby represents and warrants to Secured Party as follows: (i) that upon transfer by Debtor of the Certificate to Secured Party pursuant to this Agreement at such time, if any, as the occurrence of an event of default by the Debtor under the promissory note or any other agreement related to the Secured Obligations, Secured Party will have good title (both record and beneficial) to the Collateral; (ii) that there are no restrictions upon Debtors' transfer and pledge of any of the Collateral pursuant to the provisions of this Agreement; and this Agreement constitutes a legal, valid and binding obligation of the Debtor enforceable in accordance with its terms, (iii)
that the Collateral is free and clear of any encumbrances of every nature whatsoever, Debtor is the sole owner of the Guarantee Shares, and such shares are duly authorized, validly issued, fully paid and non-assessable. Debtor further agrees not to grant or create, any security interest, claim, lien, pledge or other encumbrance with respect to the Collateral or attempt to sell, transfer or otherwise dispose of any of the Collateral until the Secured Obligations have been paid in full. The Debtor represents and warrants that the Guarantee Shares are duly authorized, validly issued, fully paid and non-assessable and that it will not permit the transfer of the Guarantee Shares except in accordance with this Agreement while the same is in effect.
6. Collection of Dividends and Interest. During the term of this Agreement and so long as Debtor is not in default hereunder, Debtor is authorized to collect all dividends, distributions, interest payments, and other amounts that may be, or may become, due on any of the Collateral.
7. Voting Rights. During the term of this Agreement and until such time as this Agreement has terminated or Secured Party has exercised its rights under this Agreement to foreclose its security interest in the Collateral, the Board of Directors of Debtor shall have the sole voting authority over such shares of Common Stock; provided, however, that the authority to vote such shares does not extend to the right to approve any business combination, sale of all or substantially all of the assets or shares of the Debtor or similar transactions in which the value of the Collateral may be adversely affected or the control of the Debtor may be changed.
8. Registration Rights. The Guaranty Shares are subject to certain
registration rights as set forth in the Registration Rights Agreement of even
date herewith between the Debtor and the Secured Party as set forth in this
Section 8. During the term of this Agreement, the Debtor may not file any
registration statement with the Securities and Exchange Commission
("Commission") (other than registration statements filed on Form S-8 or Form
S-4, each as promulgated under the Securities Act of 1933, as amended, pursuant
to which the Debtor is registering securities pursuant to an employee benefit
plan or pursuant to a merger, acquisition or similar transaction, including
supplements thereto, but not additionally filed registration statements in
respect of such securities) at any time when there is not an effective
registration statement covering the resale of the Guaranty Shares and naming the
Secured Party as a selling stockholder thereunder, unless the Debtor provides
the Secured Party with not less than 20 days written notice of its intention to
file such registration statement and provides the Secured Party the option to
include any or all of the applicable Guaranty Shares therein. The piggyback
registration rights granted to the Secured Party pursuant to this Section shall
continue until all of the Guaranty Shares have been sold in accordance with an
effective registration statement or upon the expiration of this Agreement. In
addition, in the event of a default under this Agreement by Debtor, the Secured
Party may demand registration of the Guaranty Shares under any available and
applicable registration statement. The Debtor will pay all registration expenses
in connection therewith.
9. Warrants and Options. In the event that, during the term of this Agreement, subscription warrants, dividends, or any other rights or options shall be issued in connection with the Collateral, such warrants, dividends, rights and options shall be immediately delivered to Secured Party to be held under the terms hereof in the same manner as the Collateral.
10. Preservation of the Value of the Collateral and Reimbursement of Secured Party. Debtor shall pay all taxes, charges, and assessments against the Collateral and do all acts necessary to preserve and maintain the value thereof. On failure of Debtor so to do, Secured Party may make such payments on account thereof as (in Secured Party's discretion) is deemed desirable, and Debtor shall reimburse Secured Party immediately on demand for any and all such payments expended by Secured Party in enforcing, collecting, and exercising its remedies hereunder. If at any time during the term hereof, Secured Party considers the value of the Collateral to be less than the amounts due and owing under the Secured Obligations and all other amounts secured hereby, the Debtor will, at the request of Secured Party, surrender additional shares of Common Stock with
an aggregate market value sufficient to cover the outstanding amounts and pledge the same to Secured Party as additional Collateral for the obligations secured hereby.
11. Default and Remedies.
(a) For purposes of this Agreement, "Event of Default"
shall mean
(i) default in or under any of the Secured
Obligations after the expiration, without
cure, of any applicable cure period; and
(ii) a breach by Debtor of any of its
representations, warranties, covenants or
agreements in this Agreement.
(b) During the term of this Agreement, the Secured Party
shall have the following rights after any Event of
Default and for so long as the Secured Obligations
are not satisfied in full:
(i) the rights and remedies provided by the
Uniform Commercial Code as adopted by
the State of Utah (as said law may at any
time be amended);
(ii) the right to receive and retain all
dividends, payments and other distributions
of any kind upon any or all of the Guarantee
Shares or other Collateral;
(iii) the right to cause any or all of the
Guarantee Shares or other Collateral to be
transferred to its own name and have such
transfer recorded in any place or places
deemed appropriate by Secured Party; and
(iv) the right to sell, at a public or private
sale, the Collateral or any part
thereof for cash, upon credit or for
future delivery, and at such price or
prices in accordance with the Uniform
Commercial Code (as such law may be
amended from time to time). Upon any such
sale, Secured Party shall have the right
to deliver, assign and transfer to the
purchaser thereof the Collateral so sold.
In case of any sale of all or any part of
the Collateral upon terms calling for
payments in the future, any Collateral so
sold may be retained by Secured Party until
the selling price is paid by the purchaser
thereof, but Secured Party shall incur no
liability in the case of the failure of such
purchaser to take up and pay for the
Collateral so sold and, in the case of
such failure, such Collateral may again
be sold upon like notice. Secured Party,
however, instead of exercising the power of
sale herein conferred upon it, may proceed
by a suit or suits at law or in equity to
foreclose the security interest and sell the
Collateral, or any portion thereof, under a
judgment or decree of a court or courts of
competent jurisdiction, the Debtor having
been given due notice of all such action.
Secured Party shall incur no liability as
a result of a sale of the Collateral or
any part thereof. All proceeds of any such
sale, after deducting the reasonable
expenses and reasonable attorneys fees
incurred in connection with such sale, shall
be applied in reduction of the Secured
Obligations and the remainder, if any,
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shall be paid to Debtor.
12. Waiver. Debtor waives any right that it may have to require Secured Party to proceed against any other person, or proceed against or exhaust any other security, or pursue any other remedy Secured Party may have.
13. Term of Agreement. This Agreement shall continue in full force and effect until the Secured Obligations shall have been paid in full and the security interests are thereby released. Upon termination of this Agreement, the Collateral shall be returned within five (5) Business Days to Guarantors or counsel for the Company.
14. General Provisions.
14.1 Binding Agreement. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the respective parties hereto.
14.2 Captions. The headings used in this Agreement are inserted for reference purposes only and shall not be deemed to define, limit, extend, describe, or affect in any way the meaning, scope or interpretation of any of the terms or provisions of this Agreement or the intent hereof.
14.3 Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signatures upon any counterpart were upon the same instrument. All signed counterparts shall be deemed to be one original.
14.4 Further Assurances. The parties hereto agree that, from time to time upon the written request of any party hereto, they will execute and deliver such further documents and do such other acts and things as such party may reasonably request in order fully to effect the purposes of this Agreement.
14.5 Waiver of Breach. Any waiver by either party of any breach of any kind or character whatsoever by the other, whether such be direct or implied, shall not be construed as a continuing waiver of or consent to any subsequent breach of this Agreement.
14.6 Cumulative Remedies. The rights and remedies of the parties hereto shall be construed cumulatively, and none of such rights and remedies shall be exclusive of, or in lieu or limitation of any other right, remedy, or priority allowed by applicable law.
14.7 Amendment. This Agreement may be modified only in a written document that refers to this Agreement and is executed by Secured Party and by Guarantors.
14.8 Interpretation. This Agreement shall be interpreted, construed, and enforced according to the substantive laws of the State of Utah.
14.9 Attorneys' Fees. In the event any action or proceeding is brought by either party to enforce the provisions of this Agreement, the prevailing party in such action shall be entitled to recover its costs and reasonable attorneys' fees, whether such sums are expended with or without suit, at trial, or on appeal.
14.10 Notice. Any notice or other communication required or permitted to be given hereunder shall be effective upon receipt. Such notices may be sent (i) in the United States mail, postage prepaid and certified, (ii) by express courier with receipt, (iii) by facsimile transmission, with a copy subsequently delivered as in (i) or (ii) above. Any such notice shall be addressed or transmitted as follows:
If to Debtor: To the address in the first paragraph of this Agreement.
If to Secured Party:
Durham Jones & Pinegar, P.C.
Paul M. Durham, President
Suite 900, Broadway Centre
111 East Broadway
Salt Lake City, Utah 84111
or such other address as may be designated in writing hereafter, in the same manner, by such person.
14.11 Acknowledgement by Debtor. In the event that any provision of the promissory note or this Agreement as applied to any party or circumstances shall be adjudged by a court to be invalid or unenforceable, Debtor acknowledges and agrees that this Agreement shall remain valid and enforceable in all respects against it.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day, month and year first above written.
SECURED PARTY:
DURHAM JONES & PINEGAR, P.C.
By: /s/ KR Pinegar
---------------------------------------
Its: Vice President
---------------------------------------
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DEBTOR:
NEBO PRODUCTS, INC.
By: /s/ Scott Holmes
----------------------------------------
Its: /s/ President
---------------------------------------
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EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of NEBO Products, Inc. on Form 10-KSB for the period ending December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we Scott Holmes, Chief Executive Officer, and Paul Larsen, Controller, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Scott Holmes -------------------------------- Scott Holmes Chief Executive Officer /s/ Paul Larsen -------------------------------- Paul Larsen Controller |