Annual Report — Small Business — Form 10-KSB Filing Table of Contents
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10KSB — Form 10-Ksb for Fiscal Year Ended Dec. 31, 2006
Check whether the issuer is not required to file reports pursuant to Section
13
or l5(d) of the Exchange Act. o
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 xNo
o
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 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. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
l2b-2 of the Exchange Act). YesoNo
x
Issuer’s
revenues for fiscal year ended December 31, 2006 were $8,993,993.
The aggregate market value of the voting common equity held by non-affiliates
of
registrant as of March 28, 2007 was $5,824,755.
1
The
number of shares outstanding of the registrant’s common stock, par value $0.16
per share, as of March 28, 2007 was 2,225,387.
The
definitive proxy statement for the 2007 Annual Meeting of Shareholders is
incorporated by reference into Part III of this annual report.
Transitional
Small Business Disclosure Format (Check one): YesoNo
x
PART
I
Item
1. DESCRIPTION OF BUSINESS.
General
Nature
Vision, Inc. (“Nature Vision” or the “Company”) designs, manufactures and
markets outdoor recreation products for the sport fishing and hunting markets
and other consumer and industrial products.
Nature
Vision, Inc. was incorporated under the laws of the State of Minnesota in 1959
and operated under the name “Photo Control Corporation” until August 31, 2004.
On August 31, 2004, the corporate name was changed to “Nature Vision, Inc.” in
connection with a merger transaction with Nature Vision Operating Inc. (f/k/a
Nature Vision, Inc.) Our executive offices are located at 1480 Northern Pacific
Road, Brainerd, Minnesota56401; our telephone number is (218)
825-0733.
Our
annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports
on Form 8-K and all amendments to such reports filed pursuant to Section 13(a)
or 15(d) of the Exchange Act are available, free of charge, on or through our
Internet website located atwww.naturevisioninc.com,
as soon
as reasonably practicable after they are filed with or furnished to the
Securities and Exchange Commission.
Merger
Transaction
On
August31, 2004, PC Acquisition, Inc., a wholly-owned subsidiary of the Company, merged
with and into Nature Vision Operating Inc. (f/k/a Nature Vision, Inc.), pursuant
to the terms of a merger agreement and plan of reorganization dated April 15,2004. As a result of the merger, Nature Vision Operating Inc. became a
wholly-owned subsidiary of the Company, and the Company amended its articles
of
incorporation to change its corporate name to “Nature Vision, Inc.” from “Photo
Control Corporation.” The merger received shareholder approval on August 31,2004 and closed on that day.
Each
Nature Vision Operating Inc. shareholder received 0.58137 shares of the
Company’s common stock for each share of Nature Vision Operating Inc. common
stock held on the closing date of the merger. Nature Vision Operating Inc.
shareholders received cash instead of any resulting fraction of a share in
an
amount reflecting the market value of the fractional share. After taking into
account a 1-for-2 reverse stock split of the Company’s common shares that was
effected immediately after the merger on August 31, 2004, 894,301 common shares
were issued to former Nature Vision Operating Inc. shareholders.
Each
outstanding Nature Vision Operating Inc. option and warrant was converted at
the
closing of the merger into an option or warrant exercisable for that number
of
the registrant’s common shares equal to the product of (a) the number of shares
of Nature Vision Operating Inc. common stock subject to the option or warrant
multiplied by (b) 0.58137. The exercise price was adjusted to equal the quotient
of (x) the current exercise price of the option or warrant divided by (y)
0.58137.
A
description of the merger is included in the joint proxy statement/prospectus
on
Form S-4 filed with the Securities and Exchange Commission (Commission No.
333-115593).
Sale
of Bookendz Product Line
On
October 28, 2005, we completed the sale of our Bookendz product line, related
patent and remaining inventory. We initially purchased Bookendz docking stations
for Apple PowerBook and iBook in October of 2000, but decided to sell this
product line to allow the Photography division to focus on its core products.
Sale
of Photo Control Division
Since
the
merger, Nature Vision operated two separate divisions: the Nature Vision
division and the Photo Control division. The Nature Vision division designed,
manufactured and marketed outdoor recreation products primarily for the sport
fishing, hunting and industrial markets. The Photo Control division designed,
manufactured and marketed professional cameras, electronic flash equipment,
lens
shades and related photographic accessories and provided peripheral products
for
the videoconferencing and the audiovisual markets. The photography product
lines
were marketed under the Norman product line. The videoconferencing and
audiovisual product lines were marketed under the Vaddio product line. Photo
Control Corporation acquired the assets comprising the Vaddio product line
in
January of 2004.
On
October 20, 2006, Nature Vision sold its Norman product line to Promark
International, Inc. Pursuant to the terms of the asset purchase agreement dated
October 20, 2006, we sold the inventory, equipment, intellectual property and
certain other assets relating to the Norman product line for a total purchase
price of approximately $2,400,000, of which $300,000 was payable pursuant to
the
terms of a three-year note.
Following
the sale of our Norman product line, we also consummated the sale of the Vaddio
product line to New Vad, LLC, under the terms of the asset purchase agreement
dated as of February 5, 2007. New Vad, LLC is owned in part by former managers
of Nature Vision’s Photo Control division, including Robin K. Sheeley, who
served as President of the Photo Control division. The transaction involved
the
sale of fixed assets, equipment, licenses, intellectual property and certain
other assets relating to the Vaddio product line for a total estimated purchase
price of approximately $1,500,000.
As part
of the sale, the parties also entered into a consignment sale agreement,
providing for the sale of the inventory related to Vaddio product line to New
Vad over the subsequent 12 months after the closing at cost for $2,031,359,
and
a collection agreement, under which New Vad will collect and transmit to us
payments made by customers on our accounts receivable for products or services
sold or provided before the closing date. Under the terms of the consignment
sale agreement, New Vad also agreed to purchase the consigned inventory from
us
as needed before purchasing similar type of item from a third party until the
inventory is sold in its entirety, or January 31, 2008, at which time the
remaining inventory will be purchased.
The
amount of consideration paid for the assets of Vaddio product line was
determined after an extensive effort to sell the Vaddio product line and the
final price was the result of arms-length negotiations with New Vad.
The
sale
of our Photo Control division was part of our planned strategic move to exit
from the photography and audiovisual markets and to focus on the long—term
growth in the outdoor recreation markets. We anticipate the revenues lost in
the
sale to be replaced organically through our remaining products, new products
and
strategic acquisitions of companies or product lines all within the outdoor
recreation markets.
Investment
Considerations
Investors
should consider all of the information contained in this report including the
factors discussed under Item 1 - Description of Business - Factors That May
Affect Future Results, Item 6 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations and Item 7 - Financial Statements,
before making an investment decision with regard to our securities.
Some
of
the statements made in this report in the sections listed above and elsewhere
in
this report constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are subject
to the safe harbor provisions of the reform act. Forward-looking statements
may
be identified by the use of the terminology such as may, will, expect,
anticipate, intend, believe, estimate, should or continue or the negatives
of
these terms or other variations on these words or comparable terminology. To
the
extent that this report contains forward-looking statements regarding the
financial condition, operating results, business prospects or any other aspect
of our business, you should be aware that our actual financial condition,
operating results and business performance may differ materially from that
projected or estimated by us in the forward-looking statements. We have
attempted to identify, in context, some of the factors that we currently believe
may cause actual future experience and results to differ from their current
expectations. These differences may be caused by a variety of factors including,
but not limited to, adverse economic conditions, intense competition, including
entry of new competitors, inability to obtain sufficient financing to support
our operations, progress in research and development activities, variations
in
costs that are beyond our control, adverse federal, state and local government
regulation, unexpected costs, lower sales and net income (or higher net losses,
than forecasted), price increases for equipment, inability to raise prices,
failure to obtain new customers, the possible fluctuation and volatility of
our
operating results and financial condition, inability to carry out marketing
and
sales plans, loss of key executives and other specific risks that may be alluded
to in this report.
Products
Overview
2
The
Nature Vision division designs, manufactures and markets outdoor recreation
products primarily for the sport fishing and hunting markets. We have also
adapted our outdoor recreation products and core technologies for sale into
certain industrial markets. Manufacturing of most of these products is
outsourced to companies located in Asia, where we use approximately six
suppliers for key components, sub-assemblies and raw materials. We have
identified but not qualified alternative Asian suppliers. Some final assembly
is
undertaken at our Brainerd, Minnesota facility, which also serves as the
distribution center and corporate headquarters.
Our
outdoor recreation products have historically been offered to the public by
traditional sporting goods distribution
channels. We have continued to focus on significant retailers and large catalog
houses to
offer
our products as we expand our product categories, including Cabela’s, Bass Pro
Shops, Gander Mountain, Dick’s Sporting Goods and Mills Fleet Farm. Sales to
each of Cabela’s, Bass Pro Shops and Gander Mountain accounted for in excess of
10% of our 2006 and 2005 revenues. In addition, CSI Sports, an
outdoor products distributor,
accounted for greater than 10% of our 2005 revenues. We primarily rely upon
independent sales representatives to sell our outdoor recreation products to
retailers. Demand for our outdoor recreation products is seasonal, with the
majority of sales occurring in the fourth and first calendar
quarters.
Underwater
Viewing Systems
We
manufacture, distribute and market a family of products called underwater
viewing systems that are sold under the trade name “Aqua-Vu.” We are credited as
the creator of the underwater viewing system product category and were the
first
to market a self-contained underwater viewing system. An underwater viewing
system consists of a submersible video camera with internal lighting and a
hand
held monitor-viewing device with a battery power supply. With the use of
attachable weights and fins, the underwater camera can be lowered into a body
of
water and used to look in the direction a boat is traveling. In the past the
Aqua-Vu systems have relied on cathode ray tube (CRT) display technology which
required a sunshield to shadow the display. In 2004, we began to market Aqua-Vu
systems that incorporate a proprietary sunlight viewable liquid crystal display
(LCD) technology that allows multi-person viewing on color display monitors.
The
2004 Aqua-Vu systems also incorporated “on-screen display” information,
including the water temperature at the camera, camera depth and camera
direction. In 2005, we expanded the Aqua-Vu systems to include the Scout series
that offers a 5-inch screen, at a retail price point of $199, Scout XL series
that offers 7-inch screens, with brightness and contrast controls and the Scout
SRT series that offers the same 7-inch screen along with on screen display
of
water temperature at the camera and our patent-pending Spectral-Response
lighting system. Another innovative product we introduced in 2005 is our new
Aqua-Vu Quad 360 Nighthawk. Instead of providing only one-directional view,
our
Aqua-Vu Quad 360 Nighthawk offers a split-screen 360 degrees view. In 2006,
we
enhanced four-way viewing, introducing the Quad 4x4, which has replaced the
Nighthawk. The 4x4 incorporates a new monitor case designed around the existing
7-inch screen and has the ability to select one of the four quadrants to be
viewed full screen. We also added a digital recording Aqua-Vu DVR line that
allows anglers to record their underwater discoveries on San Disk™ media cards.
Aside from recreational viewing, Aqua-Vu DVR allows serious anglers to create
video logs of their favorite fishing grounds to help them analyze repeatable
fishing patterns. In 2005 we continued to develop the Aqua-Vu MAV (Motorized
Aqua-Vu) that allows anglers the ability to fish and view at the same time
much
more efficiently. Utilizing foot controls the angler will be able to adjust
the
depth of the camera while viewing on a 10.5-inch daylight viewable LCD monitor.
In 2006 we completed our on the water testing of the MAV and began production
for sales to begin in 2007.
In
2006
we purchased substantially all of the assets of Vector Teknologies, LLC. Vector
marketed all machined metal downriggers and accessories for controlled depth
fishing. We began marketing these in Spring 2006 through our channels of
distribution as the Heavy Metal Series.
The
Vector line provides a “trolling products platform” which will include our new
wireless underwater video viewing system. This wireless product line will
transmit a video signal and other useful data from the camera to the boat for
viewing on a large LCD monitor. The wireless technology is scheduled for on
the
water testing in 2007. We anticipate new product innovation in the trolling
products platform extending beyond 2008.
Hunting
Products
We
also
sell products for the recreational hunting market. These products include
“Woodland Whisper” hearing enhancers, Digital Deer Scales, Digital Archery
Scales, Digital Turkey Scales and the Quick Set Chair Blind. The Woodland
Whisper hearing enhancers aid wild turkey hunters, by detecting distant game
calls, and deer and elk hunters, by amplifying the sounds of approaching prey.
Introduced in 2005, the Digital Deer Scale allows hunters to accurately weigh
their game, up to 300 lbs, and display that weight on a digital read out in
order to get those all important pictures for the “brag book.” In 2006 we began
to market the Digital Archery Scale to archery shops and shooters alike. Once
the scale is hooked on the draw string and pulled, the scale will display the
draw weight of a bow up to 100 lbs with accuracy +/- .5 lbs. The scale will
provide the shops and shooters the ability to set up their bows with a high
degree of accuracy. The Digital Turkey Scale is a National Wild Turkey
Federation, NWTF, licensed product which we began to market in 2006. The scale
will allow hunters the ability to calculate their prized gobblers score based
on
the NWTF system utilizing weight, beard length and spur length. Also introduced
in 2006 was the Quick Set Chair Blind, patent pending, featuring Mossy Oak
licensed fabric. In 2007 we
3
introduced
the new Quick Sit Low Profile hunting blinds in one and two person units. The
blinds which fit neatly into an over the shoulder carry bag will allow
hunters to be very mobile, set up quickly and comfortably disappear into the
woods.
Licensed
Products
In
2006
Nature Vision, in cooperation with In-Fisherman, introduced a new line of
branded products. New products introduced were soft sided coolers with licensed
artwork, fillet knives with an instructional fish cleaning DVD and inspirational
posters and plaques. All products bear the In-Fisherman brand and will be
marketed through our current and new non-traditional distribution
channels.
Ice
Fishing Products
In
2003,
we introduced a product for the ice fishing market called the “Buzz Stix.” A
Buzz Stix ice fishing rod incorporates a miniature vibrating motor activated
with a push button switch. In 2004, Nature Vision expanded the Buzz Stix ice
fishing rod product line. An automatic jigging rod called the AutoBuzz Stix
was
introduced that incorporates a small micro processor and three pre-programmed
jigging routines. Also introduced, was the Hot Stix ice fishing rod with a
heated handle.
In
2005,
we incorporated our jigging technology into tip-ups, a mechanical device that
“tips up” a flag signaling the fisherman when a fish is on the line, by creating
the new Jig-Up. The new Jig-Up combines traditional tip-up design with a battery
powered motor that “jigs” the bait to entice more strikes. Recognizing the
burgeoning popularity of glow-in-the-dark ice fishing lures, we also introduced
the Blazer Stix series of fishing rods that feature a built-in LED light that
anglers can use to recharge their phosphorescent ice fishing lures. The Blazer
Stix LED concept was also offered in a clip-on version that attaches to any
fishing rod, ice or open-water. Rounding out our new ice fishing product line
in
2005 are the Genz Stix line of premium ice fishing rods named after Dave Genz,
a
nationally recognized ice fishing angler. Dave personally assisted in the design
and development of these rods.
Industrial
Products
We
have
adapted our underwater viewing technology for use in the water well inspection
industry, offering a line of cameras under the trade name “Well-Vu.” Our Well-Vu
underwater viewing systems that are submersible to 1,000 feet. In addition,
we
sell viewing system products called “Tool-Vu” and “Mini-Vu” for use in
automotive and building inspections.
Intellectual
Property
Although
our patents and trademarks are valuable, they are not considered to be essential
to our company’s success. Innovative application of existing technology along
with providing efficient and quality products are of primary
importance.
We
have
entered into agreements with employees that grant us the exclusive right to
use,
make and sell inventions conceived by our employees during their employment.
Management believes that the right to use, make and sell such inventions
adequately protects against any employee who might claim an exclusive
proprietary right in an invention developed while the employee was employed
by
us.
We
hold
14 patents and have numerous patent applications pending for products offered
by
our outdoor recreation products division. Most patents relate to aspects of
the
Aqua-Vu underwater viewing system, including the camera housing. Other patents
cover our Buzz Stix ice fishing pole, a bird feeder with a built-in video camera
and transmitter and a hand-held monocular video monitor. Some of the pending
patents include the MAV, Quick Set Chair Blind, and Game Vu. The patents expire
during the period 2014 through 2023. There is no guarantee that others may
not
copy any of our products in whole or in part to produce a product similar in
design and purpose. Patent protection of our products does not imply that they
will recognize any substantial, competitive edge in the
marketplace.
We
also
hold various trademarks relating to our outdoor recreation products, including
Aqua-Vu, Game-Vu, Tool-Vu, Mini-Vu, Woodland Whisper, Buzz Stix, Hot Stix,
PIDS,
RTG and Ice Pro. We consider these trademarks important in assuring consumer
recognition of our products.
Competition
Our
Aqua-Vu systems compete with underwater cameras sold by several smaller
companies. We also face competition from manufacturers of sonar and global
positioning system (GPS) devices. Sonar devices detect schools of fish and,
at
times, individual fish, and can provide information about lake and river bottom
contours. GPS devices allow fishers to “mark”
4
spots
where fish are located and then easily find them again. Large consumer and
marine electronics companies as well as established companies offering fishing
and hunting equipment are sources of potential competition.
Research
and Development
For
the
years ended December 31, 2006 and 2005, we spent $166,320 and $72,334,
respectively, on research activities relating to the development of new outdoor
recreation products division. We anticipate that spending on research and
development in 2007 will be comparable as a percentage of net sales to that
in
2006.
Government
Regulation
Our
outdoor recreation and photography products are not subject to significant
government regulations other than those regulations applicable to businesses
generally. When they were introduced in 1998, the Aqua-Vu systems were the
subject of proposed legislation to ban the devices in Minnesota, but the
legislation was never enacted.
Employees
As
of December 31, 2006, we employed 48 persons, consisting of 47 full-time
employees and one part-time employee. We also are utilizing the services of
two
leased personnel.
Compliance
with Environmental Laws
We
are in
compliance with all applicable federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants. Compliance
with these environmental laws and regulations has had no material effect on
our
capital expenditures, earnings or competitive position.
Management
Executive
officers of Nature Vision are as follows:
Name
Age
Position
Jeffrey
P. Zernov
54
President,
Chief Executive Officer and a director
Michael
R. Day
45
Chief
Financial Officer and Chief Operating Officer
Jeffrey
P. Zernov
has
served as our President and Chief Executive Officer and as a director since
August 31, 2004. Prior to August 31, 2004, Mr. Zernov served in the same
capacities for Nature Vision Operating, Inc. (f/k/a Nature Vision, Inc.), which
he founded in 1998. Mr. Zernov also served as Chief Financial Officer of Nature
Vision Operating, Inc from 1998 through 2002. In 1979, Mr. Zernov founded Zercom
Corporation, a defense electronics contractor, which he sold to Communication
Systems Inc. in 1990. Mr. Zernov served as Zercom's Chief Executive Officer
until 1996 and, in addition, from 1990 though 1996, he established and served
as
President of the Zercom Marine division, a designer and manufacturer of sonar
products for sports fishing applications. Prior to 1979, Mr. Zernov served
as a
field promotion specialist with Lindy Tackle and was a co-founder of
In-Fisherman, a sports fishing publisher and producer of television
shows.
Michael
R. Day
has
served as our Chief Financial Officer and Chief Operating Officer since August31, 2004. Prior to August 31, 2004, Mr. Day served in the same capacities for
Nature Vision Operating, Inc. (f/k/a Nature Vision, Inc.). From 1999 through
2002, Mr. Day served as the Chief Financial Officer of Image Rotational
Enterprises, Inc., a Brainerd, Minnesota manufacturer of rotational molded
plastic parts.
Factors
That May Affect Future Results
Factors
that may affect our future results include, but are not limited to, the
following items as well as the information in Item 6 - Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
We
may need additional capital in the future. While
we
believe that we currently have sufficient resources with current cash and our
current credit facility to conduct business, we may need additional capital
in
the future. We may not be able to obtain additional debt or equity financing
or,
if we do, it may not be on favorable terms. Sources of additional
capital
5
may
include additional bank debt financing or the sale of debt or equity securities,
the latter of which could result in significant dilution to existing
shareholders.
We
depend on patents and proprietary technology. Our
long-term success may depend on our ability to defend current patents and obtain
patent protection for future products and processes. We currently have 14 United
States patents. In addition, we have applied for patent protection on additional
aspects of our current products. These patent applications may not be granted.
Even if they are, the scope of any patent protection may be limited, allowing
for competitive products, or the patents may be held invalid if challenged.
We
also rely upon trade secrets, and no assurance can be given that others will
not
independently develop or otherwise acquire substantially equivalent know-how
or
otherwise gain access to our proprietary technology.
We
depend on our key personnel. Our
future success depends to a significant degree upon the continued services
of
key technical and senior management personnel including, but not limited to,
Jeffrey P. Zernov, our Chief Executive Officer and President, as well as our
ability to attract, retain and motivate highly qualified managerial and
technical personnel if we expand. Failure to attract and retain skilled
personnel could hinder our research and development and manufacturing efforts,
and could limit our ability to expand our product offering or to manage growth.
The loss of one or more key employees could similarly affect us.
The
future growth of our Nature Vision division will depend upon our ability to
continue to develop new and innovative products and enter new markets.
A
significant portion of our outdoor recreation products division’s current
revenue has been historically dependent upon sales to traditional sporting
goods
dealers. In addition to current products, we intend to introduce new products
for other applications in the outdoor recreation market. Because some of these
new product categories may be new to us, we may need to develop relationships
with major participants in this market, which in many cases are different from
our existing customers. Any new products may not be accepted by the ultimate
users. Even if they are, we may need to continue to develop relationships with
significant retailers to penetrate markets and compete against suppliers of
similar products.
We
use Asian-based sources of supply for some of our products.
We
currently purchase, and will continue to purchase, finished goods, components
and raw materials from Asian-based vendors for our outdoor recreation products.
Although we have identified alternative finished goods manufacturers and
suppliers for key components, sub-assemblies and raw materials, at the present
time we use approximately six Asian suppliers. Should a key supplier be
unwilling or unable to supply components or sub-assemblies in a timely manner
or
subject to specifications, or should approval of a current or proposed supplier
be delayed, withheld or withdrawn, we could experience delays in obtaining
alternative suppliers, which might result in reduced product output. In
addition, the price that we pay for these products could increase due to trade
barriers, tariffs or other trade restrictions imposed by the United States
or
changes in international currency rates.
Government
regulation banning or restricting the use of underwater video cameras would
hurt
our business. The
use
of the Aqua-Vu underwater viewing system is not regulated by any federal or
state governmental entity, nor is management aware of any similar restrictions
in Canada or other foreign countries. In 1998, at the time the product was
introduced, the Minnesota Senate passed a bill that would have outlawed the
use
of underwater video cameras for sport fishing. The Minnesota House of
Representatives did not act upon the bill, and it was never enacted. If a
federal, state or foreign governmental entity were to enact legislation banning
or restricting the use of underwater video cameras, sales of the Aqua-Vu
underwater viewing system would decline and our business would suffer as a
result of fewer sales of our flagship product.
Potential
competitors could lower our revenues or cause expenses to increase.
Our
current competition for the Aqua-Vu underwater viewing system and other products
consists of several small companies. Potential competitors include large
consumer and marine electronics companies with broader product lines and better
name recognition and market acceptance. These companies also have significantly
greater financial, technical, marketing and other resources. Increased
competition, especially by these larger, more established potential competitors,
may result in increased pricing pressure resulting in reduced gross profit
margins. We may also be forced to increase its spending on marketing, sales
and
product development, which would further reduce profits.
We
may never replace the lost revenue generated by the former Photo Control
division.
We
recently sold our Photo Control division to focus our efforts on the long—term
growth of our outdoor recreation markets. Although we hope to replace the lost
revenue previously generated by the Photo Control division by expanding our
outdoor recreation markets, our growth will significantly depend on this outdoor
recreational products sector. Unless we successfully develop and market new
and
innovative products in the outdoor recreation markets, we may lose market share
and may never compensate for the lost source of revenue from the former Photo
Control division.
Item
2. DESCRIPTION OF PROPERTY.
6
In
late
2006, Nature Vision moved its operations into a leased 35,600
square
foot facility located at 1480 Northern Pacific Road, Brainerd, Minnesota which
houses corporate, accounting, administrative, manufacturing, research and
development, sales, and customer service departments. Management felt that
the
former facility located at 213 NW 4th street did not provided us with sufficient
space to meet our future growth plan. Accordingly, the Company sold its former
location in late 2006, and the mortgage securing the former facility was paid
in
full.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not
applicable.
PART
II
Item
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
Market
Information. The
number of record holders of our common stock on March 26, 2007 was 288. The
table below sets forth the high and low sale prices for the common stock during
the two years ended December 31, 2006, and gives effect to the 1-for-2 reverse
stock split of Nature Vision’s common stock that was effected on August 31,2004. The information shown is based on information provided by Yahoo! Inc.
and
Nasdaq Stock Market. These quotations represent prices between dealers, and
do
not include retail markups, markdowns or commissions, and may not represent
actual transactions. Our common stock is currently traded on the Nasdaq Capital
Market under the symbol “NRVN.” Nature Vision did not pay any cash dividends on
our common stock during the periods presented.
Common
Stock
Quarter
Ended
Low
High
2005
March
31
$
5.61
$
6.97
June
30
$
4.00
$
6.30
September
30
$
4.50
$
6.54
December
31
$
4.51
$
9.10
2006
March
31
$
8.26
$
11.47
June
30
$
8.40
$
10.57
September
30
$
8.40
$
10.20
December
31
$
5.72
$
9.90
Securities
Authorized for Issuance Under Equity Compensation Plans. The
following table sets forth the securities authorized for issuance under Nature
Vision’s compensation plans as of December 31, 2006.
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
Weighted
average exercise price of outstanding options, warrants and
rights
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in
column (a))
The
following discussion and analysis of financial condition, results of operations,
liquidity and capital resources should be read in conjunction with our audited
consolidated financial statements and notes thereto appearing elsewhere in
this
report. This discussion contains forward-looking statements that involve risks
and uncertainties, including information with respect to our plans, intentions
and strategies for our businesses. Our actual results may differ materially
from
those estimated or projected in any of these forward-looking statements.
Company
History and Overview
Nature
Vision, Inc., (f/k/a Photo Control Corporation) (the “Company” or “we”) was
incorporated as a Minnesota corporation in 1959. On August 31, 2004, the Company
changed its name to Nature Vision, Inc. in connection with a merger transaction
with Nature Vision Operating Inc. (f/k/a Nature Vision, Inc.) a Minnesota
corporation that was incorporated in 1998. As a part of the merger, Nature
Vision Operating Inc. became a wholly-owned subsidiary of the Company. The
shares of the combined company trade on the Nasdaq SmallCap Market under the
symbol, “NRVN.”
The
Company’s continuing operations are composed of one operating division, the
Nature Vision Division for outdoor recreation products, located in Brainerd,
Minnesota. On October 20, 2006, Nature Vision, Inc. sold the Norman product
line
of its Photo Control division (Norman) and renamed the division the Vaddio
Division. On February 5, 2007, the Company sold certain assets and transferred
certain liabilities related to its Vaddio division (Vaddio). The Norman and
Vaddio divisions designed, manufactured and marketed professional cameras,
electronic flash equipment, lens shades and related photographic accessories
and
sold audio visual peripheral products used in the video conferencing and
presentation industry. The Company began discussions and efforts to sell Norman
and Vaddio in the third and fourth quarter of 2006, respectively. The assets
and
liabilities of Vaddio at December 31, 2006 met the requirements of Statement
of
Financial Accounting Standards (SFAS) No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" as being held for sale. Operations and cash
flows
will be eliminated as a result of the sale and the Company will not have any
significant involvement in the operations after the sale. In accordance with
appropriate accounting rules, the Company has reclassified the previously
reported financial results to exclude the results of the Norman and Vaddio
operations and have presented on a historical basis these operations as a
separate line in the consolidated statements of operations and the consolidated
balance sheets under discontinued operations. All of the financial information
in the consolidated financial statements and notes to the consolidated financial
statements has been revised to reflect only the results of continuing operations
of the Company’s outdoor recreation products.
The
long-term growth plans for the Company will be in the outdoor recreation
markets. This growth will be generated organically and through strategic
acquisitions.
7
Revenue
Revenue
consists of sales of our products net of returns and allowances. Direct revenue
includes sales from orders to distributors, dealers and direct consumers and
includes customer service and shipping charges. New product innovation through
the use of technology will continue to be the basis of our organic growth.
We
will look to strategic acquisitions to provide penetration into new product
categories and channels.
Cost
of Goods Sold
Cost
of
goods sold for our products consists of the cost of direct materials, labor
to
produce the products, freight in, depreciation, amortization, warehousing,
associated management, occupancy costs, customer service and warranty, shipping
and receiving costs, quality assurance and other indirect miscellaneous
manufacturing costs. Cost of goods sold can fluctuate based on the product
mix
sold for a given period. The increased cost of oil continues to drive up the
cost of components and the freight to receive and ship products. We continue
to
evaluate make versus outsource opportunities to reduce these costs. We look
to
increase our distribution abilities and capacities.
Gross
Profit
We
define
gross profit as the difference between revenue and cost of goods sold. We
believe our gross profit is our best metric to manage the business on a
divisional and product line basis.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses include directly identifiable operating
costs and other expenses. The majority of these costs are fairly consistent
from
month to month. Selling costs consist of payroll, commissions, product
management, marketing, advertising and servicing accounts costs. General and
administrative costs include payroll, product design, product development,
engineering, order processing costs, management information systems, accounting
and administrative. General and administrative expenses include costs associated
with general corporate management and shared departmental services such as
legal, external accounting, management information systems, finance, insurance
and human resources. Other costs consist primarily of interest on the existing
line of credit. The interest rate on the credit facility floats with prime,
at
prime plus .75%. As rates have increased over the prior year, these costs have
continued to rise.
Income
from Operations
Income
from Operations is defined as revenue less cost of goods sold and selling,
general and administrative expenses.
Gain
(Loss) from Discontinued Operations
On
October 20, 2006, Nature Vision, Inc. sold the Norman product line of its Photo
Control division (Norman) and renamed the division the Vaddio Division. On
February 5, 2007, the Company sold certain assets and transferred certain
liabilities related to its Vaddio division (Vaddio). In accordance with
Statement of Financial Accounting Standards No. 144 , “Accounting for the
Impairment or Disposal of Long-Lived Assets,” this operating segment was
classified as discontinued operations and the financial results are reported
separately as discontinued operations for all periods presented.
Trends
and Opportunities
Retail
Expansion by Larger Customers. Our
large
customers, such as Cabela’s, Bass Pro Shops and Gander Mountain continue to
represent a large concentration of our revenue. Our smaller customers continue
to reduce in quantity and quality. These new large retail store expansion plans
will provide significant opportunities for growth at the expense of the smaller
owner operator establishments. We anticipate the number of customers within
the
Outdoor recreation products market to continue to reduce as the average size
of
our customer continues to increase. This consolidation puts significant pressure
on the business with its increased reliance on fewer customers. Failure to
continue business with an existing customer or even maintain an existing sales
level with a customer could have a significant impact on earnings.
Increased
Inventories.
Inventory has increased in comparison to 2005 levels. At the end of 2006, we
increased our required levels to insure a high rate of order fulfillment. Lower
than anticipated sales in 2006 were a cause for the increase in
8
inventories.
We currently have stock in place to fulfill orders and management feels that
the
inventory is saleable. We anticipate the ability to reduce the required levels
in future quarters. Should sales of existing products not achieve forecasted
levels, a change in product components or customer requirements occur, such
reductions may not be obtainable.
Increased
oil prices. Increased
oil prices may affect us more negatively than our competition. If gasoline
prices should continue to increase, consumers may opt to reduce the amount
of
discretionary spending on entertainment items and take fewer vacations.
Increased oil prices continue to impact the costs of material components. We
rely on outsourced production and the costs for the associated shipping could
materially impact the cost of product and gross profit margins.
Increased
interest costs. Given
the
cyclical nature of our business we are reliant on a credit facility. As growth
rates dictate additional borrowing, interest rates have consistently increased
impacting the costs of financing. If we are unable to maintain favorable
financing arrangements it will impact the overall profitability of the Company.
Acquisition
opportunities.
We
continue to evaluate opportunities for strategic acquisitions. These
acquisitions are expected to be accretive to earnings. These potential
acquisitions will require financing which we anticipate we will be able to
obtain.
Investment
in infrastructure. We
anticipate that we will continue investing in our infrastructure to support
our
new distribution facility. We will also continue to invest in qualified
employees to support our organic growth with new product
innovation.
Results
of Operations
The
following table provides the percentage change in our net sales, gross profit,
income from operations, and net income for 2006 and 2005.
(in
thousands)
2006
2005
Increase/
(Decrease)
NET
SALES
$
8,994
$
11,663
(22.9
%)
GROSS
PROFIT
1,936
4,119
(53.0
%)
INCOME
(LOSS) FROM OPERATIONS
(2,132
)
997
n/a
NET
INCOME (LOSS)
$
(1,081
)
$
887
n/a
The
following table presents our gross profit, income from operations and net income
as a percentage of net sales for 2006 and 2005.
2006
2005
GROSS
PROFIT
21.5
%
35.3
%
INCOME
(LOSS) FROM OPERATIONS
(23.7)
%
8.5
%
NET
INCOME (LOSS)
(12.0)
%
7.6
%
Decreased
sales were due to the carryover of unfilled demand from 2004 increasing first
quarter sales for 2005 to an unusual level. The sales carryover from 2004
resulted from the demand for new product that was not available prior to
year-end. This carryover increased the first quarter sales for 2005 and was not
repeated during the quarter ended March 31, 2006. Additionally, sales of ice
fishing products and underwater viewing systems for ice fishing were impacted
by
a warmer than normal winter. Ice formed early in the Northern reaches of the
country only to see 40-60 degree daily highs before the end of the 2005-2006
winter season. Ice never reformed in many of these areas or was unstable at
best, and never formed at all in other areas. The second and third quarters
have
been historically the weakest quarters for the division’s sales.
The
sales
shortfall in the first quarter of 2006 was compounded by a weak fourth
quarter due to warmer than normal weather
9
and
unsafe ice fishing conditions. These conditions caused order cancellations
in
December and again created an increase in inventory levels. In an attempt to
increase sales and reduce inventories in the fourth quarter of 2006, the Company
implemented a rebate program on its Scout camera system. This program was well
received by consumers and negatively impacted gross profits. Net sales have
also been disproportionately reduced by returns for the year ended December31,2006.
Gross
profits
for the year were impacted by returns at a run rate similar to the prior year
which was anticipated. Management anticipates the returns to become more in
line
with historical performance in 2007. Gross profits were also impacted by rising
fuel costs passed along through increased freight costs, both incoming and
outgoing. Outgoing freight was additionally impacted by the sale of lower cost
items in similar or larger configurations and quantities, thereby increasing
the
cost per unit shipped. The final major impact on gross profits was the move
to
our new leased facility for the last four months of the year from our previously
owned facility. While a planned move, the change is shown in reduced gross
profits rather than interest and depreciation. This impact will continue into
2007 as an entire year of lease costs will be incurred.
Inventories
were ordered in anticipation of a normal ice seasons for 2005-2006 and for
2006
- 2007, and resulted in increased inventory levels through out the year 2006
and
for the year ended December 31, 2006. Since the beginning of the year, several
of our larger customers have implemented a focus on reducing inventory levels.
This factor impacted the Company in two areas, reduced sales and increased
inventories. We anticipate this trend will continue within the industry, forcing
suppliers to maintain larger inventories and satisfy orders within shorter
time
periods. An additional impact of increased inventories is the reliance upon
financing to support this, reducing available working capital resources. A
focus
on reducing inventory levels has been implemented in order to reduce future
capital resource requirements. Management anticipates gross product margins
to
increase over 2006 levels in future quarters. Product mix and seasonality of
products can have a substantial impact on the gross profit margin for any given
period.
In
2006 the
Company expanded its Product Development capabilities with the anticipation
of
increased sales by providing more quality products to market through a reduced
development cycle. This expansion did not produce the desired results and has
been subsequently reduced for 2007. Also in 2006, marketing efforts were
increased with the anticipation of the above mentioned products being available.
The cost to remain a public entity continues to increase corporate costs.
Historically these costs have been spread across a larger revenue base. With
the
sale of the Photo Control division, all of these costs will need to be absorbed
within the continued operations. Additionally, other non-recurring costs
were incurred in 2006, including costs associated with preparing the
product lines for sale and bonuses related to a prior incentive plan.
Consistently increasing interest rates have continued to increase interest
expense.
Liquidity
and Capital Resources
The
Company had a cash balance of $2,344 at December 31, 2006 compared to $0 at
December 31, 2005. The change is a combination of many factors. Cash used in
operations was $2,315,337 for the year ended December 31, 2006. The components
of cash used in operations are the following: (i) net loss of $1,081,070 (ii)
benefit from income taxes of $692,000 (iii) gain on sale of discontinued
operations and equipment of $261,757 (iv) changes in various operating assets
and liabilities of approximately $1,211,736, and (v) change in deferred
retirement benefits of $16,311. These amounts were offset by depreciation and
amortization of $435,737, accrual relating to the contract payable of $511,800.
The most significant components relating to the change in various operating
assets and liabilities relate to the change in accounts receivable of $797,133
and inventory of $315,356. The majority of the change in the accounts receivable
is related to increase in the accounts receivable related to the discontinued
operations. The change in the inventory is a result of lower than anticipated
sales during the year ended December 31, 2006.
Cash
provided from investing activities was approximately $1,557,604 for the year
ended December 31, 2006.
Nature
Vision Inc. sold the Norman photography product line on October 20, 2006
pursuant to the terms of an Asset Purchase Agreement. The transaction involved
the sale of inventory, equipment and certain other assets relating to Nature
Vision’s Norman photography product line for a total purchase price of
approximately $2,423,252, of which $300,000 is payable pursuant to the terms
of
a three-year note. The gain on the sale was based on carrying amount of
inventories of $1,979,651, property and equipment net book value of $9,832,
and
prepaid expenses of approximately $37,766. Sales proceeds received were cash
of
$1,998,252, three year note receivable of $300,000 and a 90-day inventory
holdback of $125,000. Transaction costs (legal and broker fee) were $142,853.
The pretax gain on the sale of the business was calculated at $253,150. The
Company utilized the net proceeds to reduce the line of credit by approximately
$1,900,000.
In
addition, the Company received $674,545 in cash proceeds from the sale of
property and equipment, of which $643,640 relates to the building sold in July
2006. The Company sold its Brainerd, MN facility on July 14, 2006. Upon the
sale, the existing mortgage was satisfied. Management negotiated a lease of
a
new 35,600 square foot facility. The lease commenced on September 1, 2006 and
expires August 31, 2016. The monthly base rent increases from $11,718 to $17,800
over the term of the lease.
10
The
Company purchased $736,285 of property, equipment, and intangibles during the
year ended December 31, 2006. In addition, on February 28, 2006, we completed
a
purchase of the assets of Vector Teknologies, a small downrigger company located
in Illinois for $384,074 that consists of $256,932 of fixed assets and $56,420
of intangibles, and $70,722 of inventory. Management continues to review
opportunities for acquisitions in the outdoor recreation marketplace.
Cash
provided by financing activities was approximately $760,077 for the year ended
December 31, 2006. This is made up of net advances on the Company’s line of
credit of $1,670,000 and $301,320 received from the exercise of stock options;
offset by approximately $905,085 of payments made on long-term debt and contract
payables and a change of checks issued in excess of cash in bank of
approximately $306,158.
Nature
Vision Inc. had a secured line of credit for $5,600,000 at prime plus .75%.
The
prime rate at December 31, 2006 was 8.25%. As of December 31, 2006, the Company
had the ability to borrow against the entire line of credit. The Company has
replaced the line with a $3,000,000 line of credit that expires on
April 1, 2008 and has an interest rate of prime plus 1.00%. Management
anticipates continued advances against the line of credit to fund anticipated
sales growth in future quarters. The agreement requires the following
affirmative covenants measured based on December 31 audited results, minimum
net
worth of $7,000,000, debt to equity ratio of less than 1.0 to 1.0 and debt
service ratio of not to exceed 1.2 to 1.0. The
Company was out of compliance with debt to equity ratio being 1.11 to 1.0 and
a
negative debt service ratio. The Company has received a waiver letter from
its
credit provider. Management believes short-term liquidity needs of the Company
will be provided through working capital and the line of credit, and will be
sufficient to finance operations for a period of at least the next 12
months.
The
Company signed an agreement in November 2006 to market and sell its Minneapolis,
MN facility and land. This property relates to the discontinued operations
of
the Company. Management anticipates the sale of the property to exceed the
carrying value as presented on the balance sheet. The Company anticipates
utilizing the proceeds to reduce any existing debt or assist in funding a future
acquisition. There is no assurance the Company will be able to sell the
building.
The
Company sold its Vaddio product line to New Vad, LLC on February 5, 2007
pursuant to the terms of the Asset Purchase Agreement. The transaction involved
the sale of fixed assets, equipment, licenses, intellectual property and certain
other assets relating to Nature Vision’s Vaddio product line. The original
purchase price paid by the Buyer was $759,070 which consisted of $710,694 in
cash at closing and $48,376 in assumed vacation pay. The estimated gain on
the
sale of the product line is based on prepaid expenses of $72,167 and equipment
and intangibles of $181,623. Estimated transaction costs payable (legal and
broker fee) are projected to be approximately $438,500. The estimated pretax
gain on the sale of the business unit is calculated at approximately $66,780.
The Company utilized the net proceeds to pay down the contract payable liability
that was retained by the Company in the sale and to reduce the line of credit.
In connection with the asset purchase agreement, Nature Vision will receive
2%
of receipts from the gross sale of all Vaddio products sold by New Vad after
March 1, 2007, paid on a monthly basis with a six month deferral, until a total
payment of $750,000 is received. The proceeds from these deferred payments
are
not included in the above mentioned pretax gain. As part of the transaction,
the
parties also entered into a Consignment Sale Agreement, providing for the sale
of Nature Vision’s inventory to New Vad LLC over the next 12 months at a book
value estimated to be $2,031,359. Under the terms of the Consignment Sale
Agreement, New Vad LLC will purchase the consigned inventory from Nature Vision,
Inc. as needed before purchasing a similar type of item from a third party
until
the inventory is sold in its entirety, or January 31, 2008, at which time the
remaining inventory will be purchased. In addition, the parties entered into
a
Collection Agreement, under which New Vad LLC will collect and transmit to
Nature Vision, Inc. payments made by customers on Nature Vision’s accounts
receivable for products or services sold or provided before the closing date.
Any remaining balances due on June 5, 2007 will be remitted by New Vad LLC
to
Nature Vision, Inc.
It
is
management’s belief that it will fund any potential acquisitions through
additional financing and the potential issuance of common stock. Management
believes that any additional long-term debt requirements and additional lines
of
credit will be available. There is no assurance the Company will be able to
obtain the necessary financing if needed.
It
is
management’s belief that long-term liquidity needs for the foreseeable future
will be provided by working capital, and the expectation that the current line
of credit will be renewed and any additional long-term debt requirements will
be
available.
The
Company believes that the effect of inflation has not been material during
the
year ended December 31, 2006.
11
Off-Balance
Sheet Financing Arrangements
As
of
December 31, 2006, there were no off-balance sheet arrangements, unconsolidated
subsidiaries and commitments or guaranties of other parties.
Critical
Accounting Policies
Management’s
estimate of the warranty reserve is based on historical company data and
management’s best estimate. We evaluated the key factors and assumptions used to
develop the warranty reserve in determining that it is reasonable in relation
to
the consolidated financial statements taken as a whole.
The
Company recognizes revenue when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price
is
fixed or determinable. The Company’s revenue recognition policy is in
accordance with SEC Staff Accounting Bulletin, No. 104.
Management
records a reserve on accounts receivable which is an estimate of the amount
of
accounts receivable that are uncollectible. The reserve is based on a
combination of specific customer knowledge, general economic conditions and
historical trends. Management believes the results could be materially different
if economic conditions change for our customers.
The
carrying value of long-lived assets is periodically assessed to insure their
carrying value does not exceed their estimated net realizable future value.
This
assessment includes certain assumptions related to future needs for the asset
to
help generate future cash flow. Changes in those assessments, future economic
conditions or technological changes could have a material adverse impact of
the
carrying value of these assets.
The
inventory reserve is an estimate of the future net realizable value of our
inventory. It is based on historical trends, product life cycles, forecast
of
future inventory needs and on-hand inventory levels. Management believes reserve
levels could be materially affected by changes in technology, our customer
base,
customer needs, general economic conditions and the success of certain Company
sales programs.
Realization
of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities and
projected future taxable income in making this assessment. Actual future
operating results, as well as changes in future performance, could have a
material adverse impact on the valuation reserves.
Recent
Accounting Pronouncements
See
Note
1 to our Consolidated Financial Statements for a discussion of new accounting
standards.
Item
7. FINANCIAL STATEMENTS.
See
Financial Statements beginning on page F-1.
12
Item
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not
applicable.
Item
8A. CONTROLS AND PROCEDURES.
Our
Chief
Executive Officer, Jeffrey P. Zernov, and our Chief Financial Officer, Michael
R. Day, have reviewed our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based upon this review, Messrs. Zernov and Day
believe that our disclosure controls and procedures are effective in ensuring
that material information related to Nature Vision is made known to them by
others within Nature Vision.
There
have been no significant changes in internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the fiscal period covered by this report that have materially
affected, or are reasonably likely to materially affect, Nature Vision’s
internal control over financial reporting.
PART
III
Item
9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.
Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2007 Annual
Meeting of Shareholders.
Item
10. EXECUTIVE COMPENSATION.
Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2007 Annual
Meeting of Shareholders.
Item
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2007 Annual
Meeting of Shareholders.
Item
12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2007 Annual
Meeting of Shareholders.
Item
13. EXHIBITS.
For
a list of Exhibits filed as a part of this report, see Exhibit Index page
following the signature page to this annual report on Form 10-KSB.
Item
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES.
Incorporated
by reference from Nature Vision’s definitive proxy statement for the 2007 Annual
Meeting of Shareholders.
13
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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.
2.1 Merger
agreement and plan of reorganization dated April 15, 2004, by and among
Nature Vision, Inc. (n/k/a Nature Vision Operating Inc.), Photo Control
Corporation (n/k/a Nature Vision, Inc.), PC Acquisition, Inc.,
Jeffrey P. Zernov (as shareholders’ representative) and certain
Nature Vision, Inc. (n/k/a Nature Vision Operating Inc.) shareholders
(previously filed as Exhibit 10.2 to the Registrant’s Quarterly Report on
Form 10-QSB for the period ended March 31, 2004).
10.1 Amended
and restated retention agreement with Curtis R. Jackels (previously filed as
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-QSB for the period
ended March 31, 2004).
10.2 Amended
and Restated 2004 Stock Incentive Plan, dated June 3, 2004 (previously filed
as
Exhibit 10.1 to Registrant's Form 10-QSB Registration for the period ended
June30, 2005).
10.3 Executive
salary continuation plan adopted August 9, 1985, including exhibits (previously
filed as Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the
year ended June 30, 1986).
10.4 1983
Stock Option Plan (previously filed as Exhibit 10.4 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended June 30, 1989).
10.5 Form
of
stock option agreement under the 1983 Stock Option Plan (previously filed as
Exhibit 5 to the Registrant’s Registration Statement on Form S-8, Commission
File No. 2-85849).
10.6 Form
of
Nonstatutory Option Agreement under the 2004 Stock Incentive Plan and Form
of
First Amendment thereto (previously filed as Exhibit 10.6 to the Registrant’s
Annual Report on Form 10-KSB for the fiscal year ended December 31,2005).
10.11 Subscription
and investment representation agreement with Richard P. Kiphart, including
form
of irrevocable proxy (previously filed as Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-QSB for the period ended March 31,2004).
10.13 Asset
Purchase Agreement, dated October 20, 2006, by and between Promark
International, Inc. d/b/a Photogenic Professional Lighting and Nature Vision,
Inc. (previously filed as Exhibit 10.1 to the Registrant’s Report on Form 8-K
dated October 20, 2006).
14.1
Code of Business Conduct and Ethics (previously filed as Exhibit 14.1 to the
Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31,2005).
23.1
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer.
31.2
Certification of Chief Financial Officer.
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
16
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareholders, Audit Committee and Board of Directors
Nature
Vision, Inc.
Brainerd,
Minnesota
We
have
audited the accompanying consolidated balance sheets of Nature Vision, Inc.
as
of December 31, 2006 and 2005, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration
of
its internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Nature Vision, Inc. as
of
December 31, 2006 and 2005 and the results of their operations and their cash
flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
Current
Assets Sold Relating to Discontinued Operations
84,855
2,208,991
Current
Assets Retained Relating to Discontinued Operations
4,066,480
3,525,985
Total
Current Assets
11,774,722
12,753,814
PROPERTY
AND EQUIPMENT, NET
1,695,958
1,180,539
NON-CURRENT
ASSETS
Building
and Land Held for Sale, Net
565,449
1,200,001
Other
Assets Sold Relating to Discontinued Operations
186,701
203,039
Cash
Surrender Value of Life Insurance
148,310
135,698
Note
Receivable, net of Current Portion
200,000
-
Prepaid
Expenses, net of Current Portion
61,040
-
Deferred
Income Taxes
1,022,546
-
Intangibles
- net
91,498
40,916
Total
Non-Current Assets
2,275,544
1,579,654
TOTAL
ASSETS
$
15,746,224
$
15,514,007
LIABILITIES
AND STOCKHOLDERS’ EQUITY
CURRENT
LIABILITIES
Checks
Issued in Excess of Cash in Bank
$
71,394
$
377,552
Current
Portion of Long-Term Debt
-
55,649
Current
Portion of Deferred Retirement Benefits
72,795
71,400
Line
of Credit, Bank
3,900,000
2,230,000
Accounts
Payable
632,398
675,491
Accrued
Payroll and Payroll Taxes
175,582
301,798
Accrued
Expenses
840,005
551,009
Income
Taxes Payable
5,000
2,000
Current Liabilities Sold Relating to Discontinued
Operations
46,678
46,906
Current
Liabilities Retained Relating to Discontinued Operations
1,872,901
1,542,226
Total
Current Liabilities
7,616,753
5,854,031
LONG-TERM
LIABILITIES
Long-term
Debt, Net of Current Portion
-
387,016
Deferred
Retirement Benefits, Net of Current Portion
557,871
651,725
Deferred
Income Taxes
-
78,454
Long-term
Liabilities Retained Relating to Discontinued Operations
-
250,431
Total
Non-Current Liabilities
557,871
1,367,626
Total
Liabilities
8,174,624
7,221,657
COMMITMENTS
AND CONTINGENCIES
STOCKHOLDERS’
EQUITY
Common
Stock, $.16 Par Value per Share 25,000,000 Shares Authorized Common
Shares
Issued and Outstanding at December 31, 2006 were 2,225,387 and December31, 2005 were 2,178,887
356,062
348,620
Additional
Paid-In Capital
6,789,287
6,436,409
Retained
Earnings
426,251
1,507,321
Total
Stockholders’ Equity
7,571,600
8,292,350
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
$
15,746,224
$
15,514,007
See
accompanying notes to consolidated financial statements.
NOTE
1 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE
OF
OPERATIONS
On
August31, 2004, the Company changed its name from Photo Control Corporation to Nature
Vision, Inc. in connection with a reverse merger transaction with Nature Vision
Operating, Inc. (f/k/a, Nature Vision, Inc.), a Minnesota corporation that
was
incorporated in 1998. As part of the merger transaction, Nature Vision
Operating, Inc. became a wholly owned subsidiary of the Company. The merger
transaction has been accounted for as a reverse merger.
Nature
Vision, Inc. (the Company) is an outdoor recreation products Company. On October20, 2006, Nature Vision, Inc. sold the Norman product line (Norman) of its
Photo
Control division and renamed the division the Vaddio Division. On February5,2007, the Company sold certain assets and transferred certain liabilities
related to its Vaddio division (Vaddio). The Norman and Vaddio divisions
designed, manufactured and marketed professional cameras, electronic flash
equipment, lens shades and related photographic accessories and sold products
used in the video conferencing and presentation industry. The Company began
discussions and efforts to sell Norman and Vaddio in the third and fourth
quarter of 2006, respectively. See Note 12 for additional information related
to
the sale of the Norman and Vaddio operations, respectively. The assets and
liabilities of Vaddio at December 31, 2006 met the requirements of Statement
of
Financial Accounting Standards (SFAS) No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" as being held for sale. Operations and cash
flows
will be eliminated as a result of the sale and the Company will not have any
significant involvement in the operations after the sale. In accordance with
appropriate accounting rules, the Company has reclassified the previously
reported financial results to exclude the results of the Norman and Vaddio
operations and have presented on a historical basis these operations as a
separate line in the consolidated statements of operations and the consolidated
balance sheets under discontinued operations. All of the financial information
in the consolidated financial statements and notes to the consolidated financial
statements has been revised to reflect only the results of continuing operations
of the Company’s outdoor recreation products. As a result of the sale of the
Vaddio and Norman divisions, the Company has only one segment.
Nature
Vision, Inc. (Nature Vision) designs and markets video viewing systems for
the
sport fishing market and other video based consumer and industrial products.
The
Company grants unsecured credit to its customers which are primarily dealers
and
consumers located throughout the United States and Canada. The Companycontracts
with outside organizations for the manufacture and sale of its products. The
geographic market in which the Company competes consists of the entire United
States and, to a lesser extent some foreign countries.
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary. All significant inter-company transactions and balances
have been eliminated in consolidation.
FINANCIAL
INSTRUMENTS
The
carrying amounts for all financial instruments approximate fair value. The
carrying amounts for cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short
maturity of these instruments. The fair value of long-term debt, line of
credit-bank, contract payable and deferred liabilities - retirement benefits
approximates the carrying amounts based upon the Company’s expected borrowing
rate for debt with similar remaining maturities and comparable
risk.
CASH
AND
CASH EQUIVALENTS
The
Company maintains its cash balances in various area banks. Cash balances are
insured up to $100,000 per bank by the FDIC. The balances, at times, may exceed
federally insured limits. The Company defines cash and cash equivalents as
highly liquid, short-term investments with a maturity at the date of acquisition
of three months or less.
ACCOUNTS
RECEIVABLE
The
Company reviews customers' credit history before extending unsecured credit
and
establishes an allowance for uncollectible accounts based upon factors
surrounding the credit risk of specific customers and other information.
Accounts receivable are generally due 30 days after invoice date. Accounts
receivable over 30 days are considered past due. The
F-6
Company
does not accrue interest on past due accounts receivable. If accounts receivable
in excess of the provided allowance are determined uncollectible, they are
charged to expense in the year that determination is made. Accounts receivable
are written off after all collection efforts have failed. Accounts receivable
have been reduced by an allowance for uncollectible accounts of approximately
$15,000 at both December 31, 2006 and 2005.
INVENTORIES
Inventories
consist of raw materials, work in process and finished goods and are valued
at
lower of cost using the first-in, first-out (FIFO) method or market. Market
represents estimated realizable value in the case of finished goods and
replacement or reproduction cost in the case of other inventories. Because
of
changing technology and market demand, inventory is subject to obsolescence.
An
annual review is made of all inventories to determine if any obsolete,
discontinued or slow moving items are in inventory. Based on this review,
inventory is disposed of or an allowance for obsolescence established to cover
any future disposals. Such estimates are difficult to make under current
volatile economic conditions and it is possible significant changes in required
inventory reserves may occur in the future.
IMPAIRMENT
OF LONG-LIVED ASSETS
The
Company reviews long-lived assets, including property and equipment and
intangible assets, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. An impairment loss would be recognized when the estimated future
cash flows from the use of the asset are less than the carrying amount of that
asset. To date, there have been no such losses.
DEPRECIATION
Property
and equipment are recorded at cost. Depreciation is provided for using the
straight-line method over an estimated useful life of 25 to 30 years for
buildings and improvements and over useful lives ranging from three to seven
years for all other property and equipment. Improvements are capitalized while
maintenance, repairs and minor renewals are expensed when incurred.
DISCONTINUED
OPERATIONS
The
sale
of the Company’s Norman photography product line to Promark International, Inc.
was completed on October 20, 2006 pursuant to the terms of an Asset Purchase
Agreement. The transaction involved the sale of inventory, equipment and certain
other assets relating to the Norman photography product line. The Company
negotiated the sale of these assets during the quarter ended September 30,2006.
On
February 5, 2007, the Company sold certain assets and transferred certain
liabilities related to its Vaddio division. The Company negotiated the sale
of
these assets and assumption of certain liabilities during the quarter ended
December 31, 2006.
These
assets met the requirements of SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" as being held for sale. Operations and cash
flows
will be eliminated as a result of the sales and the Company will not have any
significant involvement in the operations after the sales. In accordance with
appropriate accounting rules, the Company has reclassified the previously
reported financial results to exclude the results of the Norman and Vaddio
product lines and these results are presented on a historical basis as a
separate line in the consolidated statements of operations and the consolidated
balance sheets entitled "Assets/Liabilities sold relating to discontinued
operations" and “Assets/Liabilities retained relating to discontinued
operations”. In accordance with EITF 87-24, “Allocation of Interest to
Discontinued Operations”, the Company elected to not allocate consolidated
interest expense to the discontinued operations where the debt is not directly
attributed to or related to the discontinued operations. All of the
financial information in the consolidated financial statements and notes to
the
consolidated financial statements has been revised to reflect only the results
of continuing operations (see Note 12).
BUILDING
AND LAND HELD FOR SALE
On
June30, 2005, management signed an agreement to market for sale the building and
land located in Brainerd, Minnesota. The building and land included our former
assembly and distribution facility and our corporate headquarters. Accordingly,
we reflected the carrying value of the building as held for sale as of December31, 2005. We discontinued recording depreciation on the building effective
July1, 2005. On July 14, 2006 the building was sold for net proceeds of $643,640,
prior to the repayment of the related mortgage, resulting in a loss of $5,276.
F-7
In
November 2006, management signed an agreement and began marketing for sale
the
building and land located in Minneapolis, Minnesota. Accordingly, we have
reflected the carrying value of the building as held for sale as of December31,2006 and December 31, 2005. As a result, we have discontinued recording
depreciation on the building in the fourth quarter of the year ended December31, 2006 and management believes that the current market value of the building
and land is in excess of its carrying value.
INTANGIBLE
ASSETS
Intangible
assets consisted primarily of patents and identifiable intangible assets,
(intellectual property and non-compete agreement), and are being amortized
using
the straight-line method over their estimated useful lives ranging from three
to
fifteen years. Amortization expense was $22,412 and $24,446 relating to
continuing operations for the years ended December 31, 2006 and 2005,
respectively, and $24,065 and $59,544 relating to discontinued operations for
the years ended December 31, 2006 and 2005, respectively. Estimated remaining
amortization expense for the years ending December 31, 2007, 2008, 2009, 2010,
and 2011 is $27,213, $23,466, $21,070, $15,454 and $2,984, respectively.
The
Company recognizes revenue on the date products are shipped to the customer
and
returns are permitted for defective equipment. The Company does not sell
products with the guaranteed right of return. Estimated reserves for returns
are
established by management based on historical experience and are subject to
ongoing review and adjustment by the Company. Sales and cost of goods sold
are
reported net of the provision for actual and estimated future returns in the
accompanying consolidated statements of operations. Revenues are reported net
of
discounts and allowances. The Company’s revenue is recognized in accordance with
generally accepted accounting principles as outlined in the SEC’s Staff
Accounting Bulletin No. 104 “Revenue Recognition,” which requires that four
basic criteria be met before revenue can be recognized: (i) persuasive evidence
of an arrangement exists; (ii) the price is fixed or determinable; (iii)
reasonably assured it is collectible; and (iv) product delivery has occurred.
The Company recognizes revenue as products are shipped based on FOB shipping
point terms when title passes to customers.
F-8
SHIPPING
AND HANDLING COSTS
Shipping
and handling costs charged to customers are included in sales and shipping
and
handling costs incurred by the Company have been included in cost of goods
sold.
ALLOWANCE
ACCOUNTS
The
Company has established allowance reserves for sales returns and warranty cost.
Reserves are estimated based on historical experience, current product lines
being sold, and management's estimates. The Company provides a standard one
or
two-year warranty program for its products. The allowance reserve for sales
returns and warranty cost relating to continuing operations was $175,000 at
both
December 31, 2006 and December 31, 2005. The following table provides the
expense recorded and charges against the reserve relating to continuing
operations for the years ended December 31, 2006 and 2005.
2006
2005
Accrued
balance - beginning
$
175,000
$
85,000
Provision
72,654
168,163
Claims
incurred
(72,654
)
(78,163
)
Accrued
balance - ending
$
175,000
$
175,000
PREPAID
EXPENSES
Included
in prepaid expenses is purchased advertising time on television programs,
advertising space in outdoor publications and catalogs for Nature Vision, Inc.
products. These costs are then expensed over the contract, as the television
shows are aired, and when the publications and catalogs are issued. Prepaid
advertising expenses were $306,491 and $127,881 at December 31, 2006 and
December 31, 2005, respectively. Advertising expensed relating to the continuing
operations was $995,197 and $876,051 for the years ended December 31, 2006
and
2005, respectively. Advertising expensed relating to the discontinued operation
was $409,426 and $266,354 for the years ended December 31, 2006 and 2005,
respectively.
SELF-FUNDED
INSURANCE
The
Company maintains a partially self-funded group health and fully-funded
short-term disability employee benefit plan. Specific and aggregate stop loss
coverage on the health plan is provided to limit the ultimate exposure of the
Company. A liability is provided for claims incurred but not reported.
Management reviews this accrual on an on-going basis and believes it is adequate
to cover such claims.
RESEARCH
AND DEVELOPMENT
The
Company expenses all costs related to product research and development as
incurred. Research and development expense relating to the continuing operations
was $166,320 and $72,334 for years ended December 31, 2006 and 2005,
respectively. Research and development expense relating to the discontinued
operation was $172,087 and $162,239 for the years ended December 31, 2006 and
2005, respectively.
STOCK-BASED
COMPENSATION
Prior
to
January 1, 2006, the Company accounted for its employee stock awards under
the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, as permitted by SFAS
No.
123, Accounting for Stock-Based Compensation. See Note 6 for information
regarding the Company’s stock-based incentive plans, including stock options.
Generally, no stock option-based employee compensation cost was recognized
in
the Company’s Consolidated Statements of Operations prior to January 1, 2006, as
stock options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
Effective
January 1, 2006, the Company adopted the fair value recognition and measurements
provisions of SFAS No. 123(R), using the modified-prospective-transition method.
Under that transition method, compensation cost for stock options recognized
during the year ended December 31, 2006 includes compensation cost for all
options granted prior to, but not
F-9
vested
as
of January 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123. Compensation cost will be recorded for
all
options granted, if any, subsequent to January 1, 2006, based on the grant-date
fair value estimated in accordance with the provisions of SFAS No. 123(R).
Results for prior periods have not been restated.
In
accordance with SFAS No. 123(R), cash flows from income tax benefits resulting
from tax deductions in excess of the compensation cost recognized for
stock-based awards have been classified as financing cash flows prospectively
from January 1, 2006. Prior to adoption of SFAS No. 123(R), such excess income
tax benefits were presented as operating cash flows. There were no cash flows
from income tax benefits for the year ended December 31, 2006.
As
a
result of adopting SFAS 123(R) on January 1, 2006, the Company’s net loss for
the year ended December 31, 2006 was not impacted since there were no options
that were granted and / or vested during the year ended December 31, 2006.
Basic
and diluted loss per common share would not have changed for the year ended
December 31, 2006 if the Company had not adopted SFAS No. 123(R). Basic and
diluted income per common share for the year ended December 31, 2005 would
have
been impacted as shown in the pro forma information shown below, determined
using the fair value method based on provisions of SFAS No. 123, Accounting
for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure.
2005
Net
income:
As
reported
$
886,934
Pro
forma
$
687,234
Basic
net income per common share:
As
reported
$
.41
Pro
forma
$
.32
Diluted
net income per common share:
As
reported
$
.38
Pro
forma
$
.30
Stock
based compensation:
As
reported
$
0
Pro
forma
$
199,700
There
were no stock grants for the years ended December 31, 2006 and 2005. Therefore,
there were no assumptions used in calculating the fair value of the options
grants using the Black-Scholes option pricing model.
Stock
options issued to non-employees (which no options were issued to non-employees),
are accounted for in accordance with Emerging Issues Task Force (EITF) 96-18.
NET
INCOME (LOSS) PER COMMON SHARE
Net
loss
per common share was based on the weighted average number of common shares
outstanding during the periods when computing the basic net loss per share.
When
dilutive, stock options and warrants are included as equivalents using the
treasury stock market method when computing the diluted net loss per share.
There were dilutive common stock equivalents, options and warrants, of 197,958
for the year ended December 31, 2005. There were no dilutive common stock
equivalents, options and warrants, for the year ended December 31, 2006.
Anti-dilutive options were 190,458 and 43,500 at December 31, 2006 and December31, 2005, respectively.
INCOME
TAXES
The
Company accounts for income taxes using the asset and liability approach, which
requires the recognition of deferred tax assets and liabilities for tax
consequences of temporary differences between the financial statement and income
tax reporting bases of assets and liabilities based on currently enacted rates
and laws. These temporary differences principally include depreciation,
amortization, net operating losses, deferred retirement benefits, paid time
off
and performance benefits, contract payable, allowance for doubtful accounts,
inventory obsolescence allowance, and warranty reserves. Deferred taxes are
reduced by a valuation allowance to the extent that realization of the related
deferred tax assets is not assured.
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 of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues
F-10
and
expenses during the reporting period. Actual results could differ from those
estimates. For the Company, significant estimates include the allowance for
doubtful accounts receivable, reserves for inventory valuation, reserves for
sales returns, reserves for warranty services, and the valuation allowance
for
deferred tax assets.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
48
(“FIN 48”), Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No
109.
The
Interpretation provides a consistent recognition threshold and measurement
attribute, as well as clear criteria for recognizing, derecognizing and
measuring uncertain tax positions for financial statement purposes. The
Interpretation also requires expanded disclosure with respect to the uncertainty
in income tax positions. FIN 48 will be effective beginning the first quarter
of
2007 for the Company. Management is currently assessing the effect of this
pronouncement on the Company’s consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
This
statement defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. SFAS No. 157 clarifies
the definition of exchange price as the price between market participants in
an
orderly transaction to sell an asset or transfer a liability in the market
in
which the reporting entity would transact for the asset or liability, which
market is the principal or most advantageous market for the asset or liability.
The Company will be required to adopt SFAS No. 157 beginning in fiscal 2008.
The
Company does not believe the effect of SFAS No. 157 will be material to the
Company’s consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 158, Employers’
Accounting for Defined Pension and Other Postretirement Plans.
This
Statement requires recognition of the funded status of a single-employer defined
benefit postretirement plan as an asset or liability in its statement of
financial position. Funded status is determined as the difference between the
fair value of plan assets and the benefit obligation. Changes in that funded
status will be recognized in other comprehensive income. This recognition
provision and the related disclosures are effective in fiscal 2007 for the
Company. The Statement also requires the measurement of plan assets and benefit
obligations as of the date of the fiscal year-end balance sheet. The Company
will be required to adopt SFAS No. 158 beginning in fiscal 2008. The Company
does not believe the effect of SFAS No. 158 will be material to the Company’s
consolidated financial statements.
In
September 2006, the SEC staff issued Staff Accounting Bulletin
No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (“SAB
108”). SAB 108 was issued in order to eliminate the diversity in practice
surrounding how public companies quantify financial statement misstatements.
SAB
108 requires that registrants quantify errors using both a balance sheet and
income statement approach and evaluate whether either approach results in a
misstated amount that, when all relevant quantitative and qualitative factors
are considered, is material. The use of both of these methods is referred to
as
the “dual approach” and should be combined with the evaluation of qualitative
elements surrounding the errors in accordance with SAB No. 99, Materiality.
The
adoption of SAB 108 was not material to the Company’s consolidated financial
statements.
RECLASSIFICATIONS
Certain
accounts in the prior periods' consolidated financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year consolidated financial statements. These reclassifications had
no
effect on net income or stockholders' equity.
Depreciation
expense relating to continuing operations of $313,671 and $187,015 was recorded
for the years ended December 31, 2006 and 2005, respectively. Depreciation
expense related to discontinued operations of $75,589 and $76,860 was recorded
for the years ended December 31, 2006 and 2005, respectively.
NOTE
4 -
LINE OF CREDIT, BANK
The
Company had a line of credit financing agreement with First National Bank of
Deerwood up to a maximum amount of $5,600,000 which expires April 1, 2007.
Interest is payable monthly at prime plus .75% (9.00% at December 31, 2006)
with
a minimum interest rate of 5%. In March 2007, the Company replaced the line
of credit with a $3,000,000 line of credit that has an interest
rate of prime plus 1.00%. The line of credit is collateralized by accounts
receivable, inventories, property and equipment. The agreement requires the
following affirmative covenants measured based upon December 31 financial
results, minimum net worth of $7,000,000, debt to equity ratio of less than
1.0
to 1.0 and debt service ratio not to exceed 1.2 to 1.0. The Company was out
of
compliance with debt to equity ratio being 1.11 to 1.0 and a negative debt
service ratio. The Company has received a waiver letter from its credit
provider. The
Company had a line of credit financing agreement with First National Bank of
Deerwood up to a maximum amount of $4,000,000 which expired July 1, 2006.
Interest was payable monthly at prime plus .75%, (8.00% at December 31, 2005),
with a minimum interest rate of 5%. The line of credit was subsequently renewed
through October 1, 2006 with a maximum amount of $5,000,000. The line of credit
was collateralized by accounts receivable, inventories, property and equipment.
The weighted average interest rate on the line of credit for the year ended
December 31, 2006 was 8.69%. The balance outstanding on the line of credit
was
$3,900,000 and $2,230,000 at December 31, 2006 and December 31, 2005,
respectively.
Note
Payable - First National Bank of Deerwood - paid in full in July
2006
$
-
$
404,068
Note
Payable - GMAC - paid in full in January 2006
-
38,597
Totals
-
442,665
Less:
Current portion
(55,649)
Net
Long-term Debt
$
-
$
387,016
NOTE
6 -
STOCKHOLDERS’ EQUITY
The
Company has a Stock Option Plan, (the Plan), which provides for granting of
incentive and non-statutory stock options to employees and others. The aggregate
of 293,958 shares of the Company’s common stock may be granted at exercise
prices not less than fair market value at the date of grant. The Compensation
Committee from the Board of Directors administers the Plan. In general, options
vest immediately and up to 4.5 years, and expire 5 years from the date of
grant.
Information
regarding stock options is summarized below:
The
weighted average contractual life of options outstanding at December 31, 2006
and 2005 was 2.53 and 2.82 years, respectively.
Following
is a schedule of options outstanding and exercisable at December 31,2006:
Options
Outstanding
Options
Outstanding
Options
Exercisable
Exercise
Price
Number
Outstanding
Remaining
Contractual
Life
Wgt-Ave
Exercise
Price
Number
Exercise
Exercisable
Wgt-Ave
Exercise
Prices
$
0.89
87,206
2.39
$
0.89
87,206
$
0.89
$
4.72
25,002
2.02
4.72
25,002
4.72
$
5.43
78,250
2.84
5.43
78,250
5.43
$
0.89-$5.43
190,458
2.53
$
3.26
190,458
$
3.26
The
intrinsic value of the options outstanding and exercisable at December 31,2006
was $468,527. The intrinsic value of the options exercised during the year
ended
December 31, 2006 was $147,735.
On
November 11, 2005, the Company accelerated the vesting of the remaining unvested
options granted in 2004 (58,687 options), through a written action of the Board
of Directors. The Directors had been advised by its compensation consultant
that
the Company’s officer and director compensation is generally below that paid by
similarly-sized corporations. The options had no intrinsic value as of the
modification date, and therefore no accounting impact was a result of this
action.
F-12
NOTE
7 -
INCOME TAXES
The
provision for income taxes for continuing operations consists of the following
components for the years ended December 31:
2006
2005
Current
$
5,000
$
18,846
Deferred
(1,026,000
)
329,154
Total
Provision for (Benefit from) Income Taxes
$
(1,021,000
)
$
348,000
The
provision for taxes differs from the expected provision that would result from
the application of federal tax rates to pre-tax income. A comparison of the
provision for income tax expense at the federal statutory rate of 34% for the
years ended December 31 to the Company’s effective rate is as
follows:
2006
2005
Federal
statutory rate
(34.0)
%
34.0
%
State
tax, net of federal benefit
(2.8)
2.8
Permanent
differences and other including surtax exemption
(2.4)
3.2
Research
and development credit
(0.0)
(0.0
)
Effective
Tax Rate
(39.2)
%
40.0
%
The
net
deferred tax assets and liabilities included in the financial statements include
the following amounts at December 31:
The
change in the valuation allowance was $0 and $571,746 for the years ended
December 31, 2006 and 2005, respectively. The principal reason for the
change in the valuation allowance for the year ended December 31, 2005 was
due
to the sale of the Bookendz product line (see note 12) which was fully reserved
at December 31, 2004 but as a result of the sale in 2005, required the Company
to record a deferred tax liability at December 31, 2005. The valuation
allowance recorded for the year ended December 31, 2004 was based on the
Company's review of the temporary differences that resulted from the reverse
merger and recording a valuation allowance on the deferred tax assets for the
items which more likely than not were not realizable. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not
be
realized. The ultimate realization of deferred tax assets is dependent upon
the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal
of
deferred tax liabilities, historical taxable income including available net
operating loss carryforwards to offset taxable income, and projected future
taxable income in making this assessment.
The
Company has federal and state net operating losses of approximately $2,900,000
and $1,850,000, respectively, which, if not used, will begin to expire in 2024.
Future changes in the ownership of the Company may place limitations on the
use
of these net operating losses.
The
Company has employment agreements with 3 employees. The agreements, which
expired on December 31, 2006, provided for an annual base salary and bonus
payments under each employment agreement, equal to 3.4% to each employee of
annual sales of Vaddio products (net of allowances for returns and billing
errors) in excess of $1,600,000 and $2,000,000 in 2005 and 2006, respectively.
If the Company had terminated the employment agreement with the employee without
cause prior to December 31, 2006, or if the employee terminated his employment
prior to December 31, 2006 under certain conditions (including a sale of all
or
substantially all of the assets comprising the Vaddio division or the
discontinuation of the Vaddio division), then the employee was entitled to
the
bonus payment as defined in the agreement at the time of the termination of
his
employment. The employee has agreed, during his employment and for a period
of
three years thereafter, not to compete with the Company in any business that
the
Company is conducting on the date of termination, nor will he solicit employees,
customers and suppliers of the Company or accept employment or provide services
to the Company’s customers during this three-year time period. Since the bonus
payment was not contingent on the continued employment of the employee and
the
amount due can be estimated and is likely to be paid, the amount of $900,000
(the estimated bonus payment due) was accrued at the date of the reverse merger.
The amount accrued was the fair value of the liability at the date of the
reverse merger. Contract payments of $462,420 were paid in 2006. The Company
accrued an additional $511,800 related to this agreement for the year ended
December 31, 2006. The amount owed related to the contract payable was $762,231
and $712,851 at December 31, 2006 and 2005, respectively, and is included in
liabilities retained relating to discontinued operations.
F-13
NOTE
9 -
DEFERRED RETIREMENT BENEFITS
The
Company has retirement benefit agreements with past employees, which are funded
by life insurance. Under the agreements, covered individuals become vested
immediately upon death or if employed at age 65. Benefit costs were recognized
over the period of service and recorded as accrued retirement benefits. The
total accrued balance due was $630,666 and $723,125 at December 31, 2006 and
December 31, 2005, respectively.
NOTE
10 -
COMMITMENTS AND CONTINGENCIES
Employment
Agreement
The
Company has entered into an employment with the President and Chief Executive
Officer. Upon termination of employment the agreement provides for a non-compete
period of 5 years. In exchange for the non-compete, the Company is obligated
to
pay the employee at his base rate for a period of up to 2 years.
License
Agreement
In
January 2002, Waterstrike Incorporated, (Waterstrike) granted the Company an
exclusive license for the use of certain underwater camera technologies. Under
the agreement, the Company is required to pay Waterstrike a royalty of $23
for
each licensed product sold beginning on January 1, 2002. The agreement requires
the Company to pay annual royalties based on a minimum level of unit sales.
If
the minimum level of unit sales in not met, the Company must pay additional
royalties up to the minimum required, or forfeit the exclusivity of the
agreement. For the years ended December 31, 2006 and 2005, the Company did
not
meet the minimum unit sales level required under the agreement and may lose
the
exclusivity of the license agreement. The license will terminate upon the later
of the date of expiration of the last to expire patent included in the licensed
technology, or the date that the Company permanently ceases the sale of the
devices using the technology. Royalty expense pursuant to this exclusive license
agreement was $32,896 and $34,754 for the years ended December 31, 2006 and
2005, respectively.
Lease
Commitment
The
Company entered into a lease agreement for its assembly and distribution
facility and corporate headquarters in Brainerd, Minnesota. The lease commenced
on September 1, 2006 and expires August 31, 2016. The monthly base rent
increases from $11,718 to $17,800 over the term of the lease. The Company will
record monthly rent expense equal to the total of the payments due over the
lease term, divided by the number of months of the lease term. The difference
between rent expense recorded and the amount paid will be credited or charged
to
deferred rent. The Company is also required to pay its portion of operating
expenses. Rent expense, including operating expenses, was $148,158 and $18,747
for the years ended December 31, 2006 and 2005, respectively.
Future
minimum lease payments are as follows for the years ending December
31:
2007
$
142,993
2008
150,113
2009
157,233
2010
164,353
2011
172,067
Thereafter
923,267
Total
$
1,710,026
NOTE
11 -
CONCENTRATIONS
Major
Customers
The
Company derived more than 10% of its revenues from the following unaffiliated
customers and had receivable balances from those customers in the following
amounts:
2006
2005
Sales
Receivables
Sales
Receivables
Customer
A
$
1,970,130
$
445,923
$
2,032,976
$
535,059
Customer
B
1,363,882
429,095
1,356,973
561,247
Customer
C
1,077,236
461,742
1,710,910
*
Customer
D
*
*
1,168,082
261,674
*Did not represent more than 10% of the Company’s revenues or accounts
receivable for the period indicated.
Major
Suppliers
Purchases
for the year ended December 31, 2006 and 2005 include purchases from an offshore
manufacturer of outdoor recreation products that individually accounted for
47%
and 52%, respectively, of the materials and supplies used by the Company in
its
continuing operations. Management believes minimal risk is present under this
offshore manufacturing arrangement due to other suppliers being readily
available.
Foreign
Sales
Included
in the consolidated statements of operations are foreign sales related to
continuing operations of $1,123,184 and $869,904 for the years ended December31, 2006 and 2005, respectively, and foreign sales related to discontinued
operations of $1,188,431 and $1,210,322 for the years ended December 31, 2006
and 2005, respectively.
Foreign
Inventory
Included
in the consolidated balance sheets are international inventories related to
continuing operations of $204,098 and $771,301 at December 31, 2006 and December31, 2005, respectively, and international inventories related to discontinued
operations of $189,754 and $393,564 at December 31, 2006 and December 31, 2005,
respectively. Foreign inventories consist of raw material goods held in Asia
and
used in the production of Nature Vision products and finished goods held in
Europe related to discontinued operations.
F-14
NOTE
12 -
DISCONTINUED OPERATIONS
Norman
photography product line sale
The
sale
of Nature Vision’s Norman photography product line to Promark International,
Inc. was completed on October 20, 2006 pursuant to the terms of an Asset
Purchase Agreement. The transaction involved the sale of inventory, equipment
and certain other assets relating to Nature Vision’s Norman photography product
line for a total purchase price of approximately $2,400,000, of which $300,000
is payable pursuant to the terms of a three-year note. The note bears interest
at prime plus 1% and is unsecured. The note requires quarterly principal
payments of $25,000 plus interest through September 30, 2009. This business
has
been classified as discontinued operations.
The
assets sold include inventories and property and equipment based on carrying
amount of inventories of $1,979,651 and property and equipment net book value
of
$9,832, and prepaid expenses of $37,766. Sales proceeds received were cash
of
$1,998,252, three-year note receivable of $300,000 and a 90 day inventory
holdback of $125,000. Also recorded was transaction costs totaling $142,853.
The
gain on the sale of the unit was calculated as follows:
Cash
received
$
1,998,252
Note
receivable
300,000
Due
from buyer
125,000
Subtotal
2,423,252
Less:
Transaction costs
(142,853
)
Net
proceeds on sale
2,280,399
Less:
Inventories carrying amount
(1,979,651
)
Less:
Prepaid expenses
(37,766
)
Less:
Property and equipment carrying amount
(9,832
)
Gain
on disposition of assets
$
253,150
Vaddio
product line sale
The
sale
of Nature Vision’s Vaddio product line to New Vad closed on February 5, 2007
pursuant to the terms of the Asset Purchase Agreement. The transaction involved
the sale of fixed assets, equipment, licenses, intellectual property and certain
other assets relating to Nature Vision’s Vaddio product line. The original
purchase price paid by the Buyer was $759,070 which consisted of $710,694 in
cash at closing and $48,376 in assumed paid time off. In addition, Nature Vision
will receive 2% of receipts from the gross sale of all Vaddio products sold
by
New Vad after March 1, 2007, paid on a monthly basis with a six month deferral,
until a total payment of $750,000 is received.
As
part
of the transaction, the parties also entered into a Consignment Sale Agreement,
providing for the sale of Nature Vision’s inventory to New Vad over the next 12
months at a book value estimated to be $2,031,359. Under the terms of the
Consignment Sale Agreement, New Vad will purchase at the Company’s cost the
consigned inventory from Nature Vision as needed before purchasing a similar
type of item from a third party until the inventory is sold in its entirety,
or
January 31, 2008, at which time the remaining inventory will be purchased.
In
addition, the parties entered into a Collection Agreement, under which New
Vad
will collect and transmit to Nature Vision payments made by customers on Nature
Vision’s accounts receivable for products or services sold or provided before
the closing date.
Estimated
gain on the sale was calculated as follows:
Cash
received
$
710,694
Assumption
of accrued paid time off
48,376
Subtotal
759,070
Less:
Estimated transaction costs
(438,500
)
Net
proceeds on sale
320,570
Less:
Prepaid expenses
(72,167
)
Less:
Property and equipment carrying amount
(181,623
)
Gain
on disposition of assets
$
66,780
The
potential deferral proceeds of up to $750,000 will be recorded when earned
and
collection is deemed probable. No deferred sale proceeds were recorded during
the year ended December 31, 2006.
Bookendz
product line sale
On
October 28, 2005, the Company sold its Bookendz product line, related patent
and
remaining inventory. Upon the sale closing, the Company received gross $200,000
for the equipment and patent related to the product line. The Company paid
selling expenses of $45,576. The Company received $211,582 for the inventory
on
November 28, 2005. The Company recorded a loss on the sale of the Bookendz
product line of $29,378 for the year ended December 31, 2005. The Company will
also receive 10% of all future sales of product related to the patent from
the
buyer for a period of three years from the date of sale. These payments are
to
be paid quarterly, beginning in the first Quarter of 2006. These payments will
be recognized as income as earned in future periods. Royalties earned for the
year ended December 31, 2006 were $23,019. There were no royalties earned for
the years ended December 31, 2005.
The
following are condensed statements of operations of the discontinued operations
(Vaddio, Norman, and Bookendz) for the years end December 31:
2006
2005
Sales,
Net
$
14,509,256
$
12,590,621
Cost of good sold
9,352,023
9,079,071
Gross
profit
5,157,233
3,511,550
Selling,
general, and administrative
4,594,900
2,885,813
Income
from operations
562,333
625,737
Other
income (expense)
(3,658
)
5,887
Gain (loss) on sale of Bookendz product line
23,019
(29,378
)
Gain
on sale of Norman product line
253,150
-
Income
and gain from discontinued operations
834,844
602,246
Provision
for income taxes
334,000
237,000
Gain
from discontinued operations
$
500,844
$
$365,246
F-15
Assets
and liabilities as a result of discontinued operations (Vaddio and Norman)
consisted of the following at December 31:
2006
2005
Current
assets sold relating to discontinued operations:
Inventory
$
-
$
2,080,090
Prepaid
expenses
84,855
128,901
Total
$
84,855
$
2,208,991
Other
assets sold relating to discontinued operations:
Fixed
assets, net
156,199
148,472
Intangibles,
net
30,502
54,567
Total
$
186,701
$
203,039
Current
liabilities assumed relating to discontinued operations:
Accrued vacation
$
46,678
$
46,906
Assets
and liabilities retained relating to the discontinued operations (Vaddio and
Norman) consisted of the following at December 31:
2006
2005
Current
assets retained relating to discontinued operations:
Accounts receivable
$
1,805,240
$
1,181,967
Inventory
2,261,240
2,344,018
Total
$
4,066,480
$
3,525,985
Current
liabilities retained relating to discontinued operations:
Note
receivable recorded for sale of discontinued operations
$
300,000
$
-
Transfer
of prepaid expenses to property and equipment
-
$
35,470
NOTE
14 -
VECTOR ACQUISITION
On
February 28, 2006, the Company purchased substantially all the assets of
Vector Teknologies, LLC for $384,074 in cash. The Company also entered into
a royalty agreement for sales of the purchased products until December 31,2009.
The royalty agreement is not anticipated to be material. The purchase provides
the Company with a new line of products, downriggers for controlled depth
fishing, for the outdoor recreation division, Nature Vision. The product line
will also provide a platform for additional product innovation. The acquisition
was financed with the existing line of credit. The pro forma results of
operations as if the Vector Teknologies, LLC purchase occurred on January1, 2005 are not material.
NOTE
15 -
RETIREMENT PLAN
The
Company has a 401(K) Employee Retirement Plan. Company contributions made to
the
Plan for the years ended December 31, 2006 and 2005 were $122,057 and $102,608,
respectively.
Dates Referenced Herein and Documents Incorporated by Reference
