<PAGE>
Registration No. 333-
As filed with the Securities and Exchange Commission on September 30, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------------
VERDANT BRANDS, INC.
(Exact Name of Registrant as specified in its charter)
MINNESOTA 2870 41-0848688
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) (I.R.S. EMPLOYER
ORGANIZATION) IDENTIFICATION NO.)
MARK G. EISENSCHENK
9555 JAMES AVENUE SOUTH 9555 JAMES AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55431 BLOOMINGTON, MINNESOTA 55431
(612) 703-3300 (612) 703-3300
(ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING (NAME, ADDRESS, INCLUDING ZIP CODE,
AREA CODE, OF REGISTRANT'S AND TELEPHONE NUMBER, INCLUDING
PRINCIPAL EXECUTIVE OFFICES) AREA CODE, OF AGENT FOR SERVICE)
-----------------------
COPIES TO:
MICHAEL TRUCANO MICHAEL W. SHACKELFORD
DORSEY & WHITNEY LLP ATER WYNNE LLP
PILLSBURY CENTER SOUTH 222 S.W. COLUMBIA
220 SOUTH SIXTH STREET SUITE 1800
MINNEAPOLIS, MINNESOTA 55402 PORTLAND, OREGON 97201
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As promptly as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Each Amount Maximum Maximum Amount of
Class of Securities to be Offering Price Aggregate Registration
to be Registered (1) Registered Per Share Offering Price Fee
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.................. 10,152,069 (2) $ .9375 $ 9,517,564.69 $ 2,807.71 (3)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This Registration Statement relates to securities of the Registrant
issuable to holders of common stock of Consep, Inc. ("Consep") in
connection with the merger as described in the accompanying Joint Proxy
Statement-Prospectus (the "Merger").
(2) Based on the maximum number of shares of common stock of Consep that may be
outstanding immediately prior to the Merger (10,127,069 shares) and the
number of shares issuable to Piper Jaffray Inc., financial advisor to the
Registrant, as part of its fee (25,000).
(3) Pursuant to Rule 457(f)(1), the registration fee was computed in accordance
with Rule 457(c) on the basis of the market value of the Consep common
stock to be exchanged in the Merger. On September 28, 1998, the date used
to calculate the filing fee in connection with the initial filing of the
preliminary proxy materials under the Securities Exchange Act of 1934 with
respect to the Merger (the "Proxy Filing"), the average of the high and low
prices per share of such stock reported on the Nasdaq National Market was
$ 0.9375.
-----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
VERDANT BRANDS, INC.
9555 JAMES AVENUE SOUTH, SUITE 200
BLOOMINGTON, MINNESOTA 55431
November 6, 1998
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
of Verdant Brands, Inc., a Minnesota corporation ("Verdant"), to be held at
11:00 a.m. local time, on December 17, 1998, at the offices of Verdant at 9555
James Avenue South, Suite 200, Bloomington, Minnesota 55431. At the meeting, you
will be asked to vote upon a proposal to approve an Agreement and Plan of Merger
dated as of September 8, 1998 (the "Merger Agreement") pursuant to which Consep
Acquisition, Inc., an Oregon corporation and wholly-owned subsidiary of Verdant
will be merged (the "Merger") with and into Consep, Inc., an Oregon corporation
("Consep"), and Consep will become a wholly-owned subsidiary of Verdant. In
connection with the Merger, each outstanding share of Consep common stock will
be converted into the right to receive 0.95 of one share of Verdant common stock
(the "Exchange Ratio").
In addition, at the meeting you will be asked to vote upon a proposal
to amend the Restated Articles of Incorporation of Verdant to increase the
number of authorized shares of Verdant common stock from 25,000,000 to
50,000,000 (the "Charter Amendment").
Consummation of the Merger is subject to certain conditions, including
obtaining the requisite approvals of the Merger Agreement by Verdant's and
Consep's shareholders and approval of the Charter Amendment by Verdant's
shareholders.
THE BOARD OF DIRECTORS OF VERDANT HAS APPROVED THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND THE CHARTER AMENDMENT
AND BELIEVES THAT THESE ACTIONS ARE IN THE BEST INTERESTS OF VERDANT AND ITS
SHAREHOLDERS. THE BOARD RECOMMENDS THAT YOU VOTE FOR EACH PROPOSAL. Verdant's
financial advisor, Piper Jaffray Inc., has rendered its written opinion to the
Verdant Board of Directors that, as of September 8, 1998, the consideration to
be paid by Verdant for the Consep common stock in connection with the Merger
was fair to Verdant.
VERDANT'S SHAREHOLDERS ARE URGED TO READ CAREFULLY THE ACCOMPANYING
NOTICE OF VERDANT SPECIAL MEETING AND JOINT PROXY STATEMENT-PROSPECTUS,
INCLUDING THE APPENDICES THERETO, WHICH CONTAIN IMPORTANT INFORMATION ABOUT THE
MERGER.
Whether or not you personally attend the meeting, it is important that
your shares are represented at the Special Meeting. Failure to vote will have
the same effect as a vote against the Merger Agreement and may prevent a vote
with respect to the Charter Amendment. Please complete, sign, date and return
the accompanying proxy card as soon as possible, even if you plan to attend the
Special Meeting. This procedure will not prevent you from voting in person, but
will ensure that your vote is counted if you are unable to attend.
On behalf of the Verdant's Board of Directors, I thank you for your
support and again urge you to vote FOR the approval of the Merger Agreement and
approval of the Charter Amendment.
Very truly yours,
Stanley Goldberg
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
CONSEP, INC.
213 SOUTHWEST COLUMBIA STREET
BEND, OREGON 97702
November 6, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of the
Shareholders of Consep, Inc., an Oregon corporation ("Consep"), to be held at
9:00 a.m. local time, on December 17, 1998, at the offices of Consep at 213
Southwest Columbia Street, Bend, Oregon 97702. At the meeting, Consep's
shareholders will be asked to vote on a proposal to approve an Agreement and
Plan of Merger dated as of September 8, 1998 (the "Merger Agreement"), pursuant
to which Consep Acquisition, Inc., an Oregon corporation and wholly-owned
subsidiary of Verdant Brands, Inc., a Minnesota corporation ("Verdant"), will
merge (the "Merger") with and into Consep and Consep will become a wholly-owned
subsidiary of Verdant. In connection with the Merger, each outstanding share of
Consep common stock will be converted into the right to receive 0.95 of one
share of Verdant common stock (the "Exchange Ratio").
THE BOARD OF DIRECTORS OF CONSEP HAS APPROVED THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY, AND BELIEVES THAT THIS ACTION IS IN THE
BEST INTERESTS OF CONSEP SHAREHOLDERS. THE BOARD RECOMMENDS THAT YOU VOTE FOR
THE PROPOSAL. Consep's financial advisor, Pacific Crest Securities Inc., has
rendered its written opinion to the Consep Board of Directors, dated September
8, 1998, that, as of such date, the Exchange Ratio was fair to the holders of
Consep Common Stock.
CONSEP'S SHAREHOLDERS ARE URGED TO READ CAREFULLY THE ACCOMPANYING
NOTICE OF CONSEP SPECIAL MEETING AND JOINT PROXY STATEMENT-PROSPECTUS, INCLUDING
THE APPENDICES THERETO, WHICH CONTAIN IMPORTANT INFORMATION ABOUT THE MERGER.
Whether or not you personally attend the meeting, it is important that
your shares are represented at the Special Meeting. Failure to vote will have
the same effect as a vote against the Merger Agreement. Please complete, sign,
date and return the accompanying proxy card as soon as possible, even if you
plan to attend the Special Meeting. This procedure will not prevent you from
voting in person, but will ensure that your vote is counted if you are unable to
attend.
On behalf of the Consep Board of Directors, I thank you for your
support and again urge you to vote FOR the approval of the Merger Agreement.
Very truly yours,
Volker G. Oakey
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
VERDANT BRANDS, INC.
9555 JAMES AVENUE SOUTH, SUITE 200
BLOOMINGTON, MINNESOTA 55431
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 17, 1998
NOTICE IS HEREBY GIVEN that a special meeting (including any
adjournments or postponements thereof, the "Verdant Special Meeting") of holders
of the common stock, $0.01 par value ("Verdant Common Stock"), of Verdant
Brands, Inc. ("Verdant"), will be held at 11:00 a.m. local time, on December 17,
1998, at the offices of Verdant at 9555 James Avenue South, Suite 200,
Bloomington, Minnesota 55431. The Joint Proxy Statement-Prospectus for the
Verdant Special Meeting is attached and a Proxy Card is enclosed.
The Verdant Special Meeting is for the purpose of considering and
acting upon the following proposals:
1. A proposal to approve an Agreement and Plan of Merger,
dated as of September 8, 1998 (the "Merger Agreement"), among Consep,
Inc., an Oregon corporation ("Consep"), Verdant and Consep Acquisition,
Inc., an Oregon corporation and wholly-owned subsidiary of Verdant
("Merger Subsidiary"), providing for the merger (the "Merger") of
Merger Subsidiary with and into Consep. After the Merger, each
outstanding share of common stock, $0.01 par value ("Consep Common
Stock"), of Consep will become the right to receive 0.95 of one share
of Verdant Common Stock and Consep will become a wholly-owned
subsidiary of Verdant. A copy of the Merger Agreement is attached as
Appendix A to the accompanying Joint Proxy Statement-Prospectus.
2. A proposal to approve an amendment to the Verdant Restated
Articles of Incorporation to increase the number of authorized shares
of Verdant Common Stock from 25,000,000 to 50,000,000 shares (the
"Charter Amendment").
3. Such other matters as may properly come before the Verdant
Special Meeting or any adjournment or postponement thereof.
Approval and adoption of the Merger Agreement requires the affirmative
vote of the holders of a majority of the outstanding shares of Verdant Common
Stock. Approval of the Charter Amendment requires the affirmative vote of a
majority of the shares of Verdant Common Stock represented at the Verdant
Special Meeting, provided that a quorum of holders of at least a majority of the
outstanding shares is present at the meeting. The approval of the Merger
Agreement and the consummation of the Merger are contingent upon approval of the
Charter Amendment. The approval of the Charter Amendment is contingent upon
consummation of the Merger. The Board of Directors of Verdant is not aware of
any other business to come before the Verdant Special Meeting.
THE BOARD OF DIRECTORS OF VERDANT RECOMMENDS THAT SHAREHOLDERS VOTE FOR
THE APPROVAL OF THE MERGER AGREEMENT AND APPROVAL OF THE CHARTER AMENDMENT.
The close of business on October 15, 1998 has been fixed as the record
date for determination of the holders of Verdant Common Stock entitled to notice
of and to vote at the Verdant Special Meeting.
<PAGE>
It is important that your shares be represented at the Verdant Special
Meeting. You are urged to complete and sign the accompanying Proxy Card, which
is solicited by the Board of Directors of Verdant, and mail it promptly in the
enclosed envelope. All proxies are important, so please complete each Proxy Card
sent to you and return it in the envelope provided. Your proxy will not be used
if you attend and vote at the Special Meeting in person.
By Order of the Board of Directors,
Stanley Goldberg
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Bloomington, Minnesota
November 6, 1998
IMPORTANT: PLEASE RETURN EACH PROXY CARD SENT TO YOU. THE PROMPT RETURN OF
PROXIES WILL SAVE VERDANT THE EXPENSE OF FURTHER REQUESTS FOR PROXIES. AN
ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.
<PAGE>
CONSEP, INC.
213 SOUTHWEST COLUMBIA STREET
BEND, OREGON 97702
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 17, 1998
Notice is hereby given that a special meeting (including any
adjournments or postponements thereof, the "Consep Special Meeting") of holders
of the common stock, $.01 par value ("Consep Common Stock"), of Consep, Inc., an
Oregon corporation ("Consep"), will be held at 9:00 a.m. local time, on December
17, 1998, at the offices of Consep at 213 Southwest Columbia Street, Bend,
Oregon 97702. The Joint Proxy Statement-Prospectus for the Consep Special
Meeting is attached and a Proxy Card is enclosed.
The Consep Special Meeting is for the purpose of considering and acting
upon the following proposals:
1. A proposal to approve an Agreement and Plan of Merger,
dated as of September 8, 1998 (the "Merger Agreement"), among Consep,
an Oregon corporation, Verdant Brands, Inc. ("Verdant"), a Minnesota
corporation and Consep Acquisition, Inc., an Oregon corporation and
wholly-owned subsidiary of Verdant ("Merger Subsidiary"), providing for
the merger (the "Merger") of Merger Subsidiary with and into Consep.
After the Merger, each outstanding share of Consep Common Stock will
become the right to receive 0.95 of one share of common stock, $.01 par
value, of Verdant. A copy of the Merger Agreement is attached as
Appendix A to the accompanying Joint Proxy Statement-Prospectus.
2. Such other matters as may properly come before the Consep
Special Meeting.
Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of Consep Common Stock. The
Board of Directors of Consep is not aware of any other business to come before
the Consep Special Meeting.
THE BOARD OF DIRECTORS OF CONSEP RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL OF THE MERGER AGREEMENT.
The close of business on October 15, 1998 has been fixed as the record
date for determination of the holders of Consep Common Stock entitled to notice
of and to vote at the Consep Special Meeting.
Holders of Consep Common Stock do not have appraisal rights under the
Oregon Business Corporation Act (the "OBCA") with respect to the Merger.
It is important that your shares be represented at the Consep Special
Meeting. You are urged to complete and sign the accompanying Proxy Card, which
is solicited by the Board of Directors of Consep, and mail it promptly in the
enclosed envelope. All proxies are important, so please complete each Proxy Card
sent to you and return it in the envelope provided. Your proxy will not be used
if you attend and vote at the Special Meeting in person.
For the Board of Directors,
Volker G. Oakey
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Bend, Oregon
November 6, 1998
IMPORTANT: PLEASE RETURN EACH PROXY CARD SENT TO YOU. THE PROMPT RETURN OF
PROXIES WILL SAVE CONSEP THE EXPENSE OF FURTHER REQUESTS FOR PROXIES. AN
ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.
<PAGE>
JOINT PROXY STATEMENT
VERDANT BRANDS, INC. CONSEP, INC.
Special Meeting of Special Meeting of
Shareholders Shareholders
To be held on December 17, 1998 To be held on December 17, 1998
----------------------------
PROSPECTUS OF VERDANT BRANDS, INC.
-----------------------------
This Joint Proxy Statement-Prospectus is being furnished to
shareholders (the "Verdant Shareholders") of Verdant Brands, Inc., a Minnesota
corporation ("Verdant"), in connection with the solicitation of proxies by the
Board of Directors of Verdant (the "Verdant Board") for use at a special meeting
of shareholders of Verdant (including any adjournment or postponement thereof,
the "Verdant Special Meeting") to be held at 11:00 a.m. local time, on December
17, 1998, at the offices of Verdant at 9555 James Avenue South, Suite 200,
Bloomington, Minnesota 55431. At the Verdant Special Meeting, holders of the
common stock, $.01 par value ("Verdant Common Stock"), of Verdant are being
asked to vote upon a proposal to approve an Agreement and Plan of Merger, dated
as of September 8, 1998 (the "Merger Agreement"), among Consep, Inc., an Oregon
corporation ("Consep"), Verdant and Consep Acquisition, Inc., an Oregon
corporation and wholly-owned subsidiary of Verdant ("Merger Subsidiary"),
providing for the merger of Merger Subsidiary with and into Consep (the
"Merger"). A copy of the Merger Agreement is attached hereto as Appendix A and
is incorporated herein by reference. Holders of Verdant Common Stock will also
vote upon a proposal to amend the Restated Articles of Incorporation of Verdant
to increase the number of authorized shares of Verdant Common Stock from
25,000,000 to 50,000,000 (the "Charter Amendment").
This Joint Proxy Statement-Prospectus also is being furnished to
shareholders of Consep (the "Consep Shareholders") in connection with the
solicitation of proxies by the Board of Directors of Consep (the "Consep Board")
for use at a special meeting of shareholders of Consep (including any
adjournment or postponement thereof, the "Consep Special Meeting") to be held at
9:00 a.m. local time, on December 17, 1998, at the offices of Consep at 213
Southwest Columbia Street, Bend, Oregon 97702. At the Consep Special Meeting,
holders of the common stock, $.01 par value ("Consep Common Stock"), of Consep
will vote upon a proposal to approve the Merger Agreement.
This Joint Proxy Statement-Prospectus also constitutes a prospectus of
Verdant with respect to the Verdant Common Stock issuable to holders of Consep
Common Stock and to Verdant's financial advisor upon consummation of the Merger.
Upon consummation of the Merger, Consep will merge with and into Merger
Subsidiary, with Consep as the surviving corporation. Each outstanding share of
Consep Common Stock will be converted into the right to receive 0.95 of one
share of Verdant Common Stock (the "Exchange Ratio").
(continued on following page)
----------------------------
SEE "RISK FACTORS" ON PAGE 23 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY HOLDERS OF SHARES OF VERDANT COMMON STOCK AND HOLDERS OF
SHARES OF CONSEP COMMON STOCK IN CONNECTION WITH EVALUATION OF THE MERGER.
-----------------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
<PAGE>
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT- PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement-Prospectus is November 6, 1998.
2
<PAGE>
Verdant Common Stock is listed on the Nasdaq National Market under the
symbol "VERD" and Consep Common Stock is listed on the Nasdaq National Market
under the symbol "CSEP." The Verdant Common Stock issued in connection with the
Merger will be listed on the Nasdaq National Market under the symbol "VERD." The
last reported sale price of Verdant Common Stock as reported by the Nasdaq
National Market on September 9, the last trading day before Verdant and Consep
publicly announced the execution of the Merger Agreement, was $1.25, and on
November 5, 1998, the last trading date prior to the date of this Joint Proxy
Statement-Prospectus, such price was $__ per share. The last reported sale price
of Consep Common Stock as reported by the Nasdaq National Market on November 5,
1998 was $ per share. Because the Exchange Ratio is fixed, a change in the
market price of Verdant Common Stock before the consummation of the Merger would
affect the market value as of the Effective Time of the Verdant Common Stock to
be received in the Merger in exchange for Consep Common Stock. THERE CAN BE NO
ASSURANCE AS TO THE MARKET PRICE OF THE VERDANT COMMON STOCK AT ANY TIME PRIOR
TO THE EFFECTIVE TIME OR AT ANY TIME THEREAFTER. Shareholders are urged to
obtain current market quotations for Verdant Common Stock and Consep Common
Stock.
Based on (1) the 9,667,357 shares of Consep Common Stock outstanding on
October 15, 1998 (the "Consep Record Date"), (2) the 992,716 shares of Consep
Common Stock issuable upon the exercise of outstanding stock options and
warrants on such date and (3) the Exchange Ratio of 0.95, approximately
10,127,069 shares of Verdant Common Stock are expected to be issued in the
Merger or to be issuable following the Merger upon the exercise of the Verdant
options and warrants into which outstanding Consep options and warrants will be
converted in connection with the Merger.
This Joint Proxy Statement-Prospectus is first being mailed to holders
of Verdant Common Stock ("Verdant Shareholders") and holders of Consep Common
Stock ("Consep Shareholders") on or about November 6, 1998.
AVAILABLE INFORMATION
Verdant and Consep are each subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Verdant and Consep with the Commission
may be inspected and copied at the Commission's public reference room located at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the public reference facilities in the Commission's regional offices located
at 7 World Trade Center, 13th Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Copies of such
material may be obtained at prescribed rates by writing to the Commission,
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
Certain of such reports, proxy statements and other information are also
available from the Commission over the Internet at http://www.sec.gov. The
shares of Verdant Common Stock are traded over the counter on the Nasdaq
National Market. The shares of Consep Common Stock are also traded over the
counter on the Nasdaq National Market. Reports, proxy statements and other
information concerning Verdant and Consep may also be inspected at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
This Joint Proxy Statement-Prospectus is included as part of a
registration statement on Form S-4 (together with all amendments and exhibits
thereto, the "Registration Statement") filed with the Commission by Verdant,
relating to the registration under the Securities Act of 1933, as amended (the
"Securities Act"), of the shares of Verdant Common Stock offered hereby. This
Joint Proxy Statement-Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been omitted
pursuant to the rules and regulations of the Commission, to which reference is
hereby made for further information with respect to Verdant and Consep and the
Verdant Common Stock offered hereby. Statements contained herein concerning any
documents are not necessarily complete and, in each instance, reference is made
to the copies of such documents filed as exhibits to the Registration Statement.
Each such statement is qualified in its entirety by such reference.
3
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT-PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CONSEP OR VERDANT. THIS
JOINT PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY
OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO PURCHASE ANY SECURITIES BY
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT-PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF CONSEP OR
VERDANT SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. CONSEP HAS SUPPLIED ALL INFORMATION CONTAINED
IN THIS JOINT PROXY STATEMENT-PROSPECTUS RELATING TO CONSEP AND ITS
SUBSIDIARIES, AND VERDANT HAS SUPPLIED ALL INFORMATION CONTAINED IN THIS JOINT
PROXY STATEMENT-PROSPECTUS RELATING TO VERDANT AND ITS SUBSIDIARIES.
THIS JOINT PROXY STATEMENT-PROSPECTUS DOES NOT COVER ANY RESALES OF
SHARES OF VERDANT COMMON STOCK OFFERED HEREBY TO BE RECEIVED BY SHAREHOLDERS OF
VERDANT DEEMED TO BE "AFFILIATES" OF VERDANT OR CONSEP UPON THE CONSUMMATION OF
THE MERGER. NO PERSON IS AUTHORIZED TO MAKE USE OF THIS JOINT PROXY
STATEMENT-PROSPECTUS IN CONNECTION WITH ANY SUCH RESALES.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT-PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF VERDANT OR CONSEP
SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
4
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE MERGER
THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION FROM THIS DOCUMENT, IS
QUALIFIED BY REFERENCE THERETO AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT
IS IMPORTANT TO YOU. TO UNDERSTAND THE MERGER MORE FULLY AND FOR A MORE COMPLETE
DESCRIPTION OF THE LEGAL TERMS OF THE MERGER, YOU SHOULD READ CAREFULLY THIS
ENTIRE DOCUMENT AND THE APPENDICES HERETO. THE SUMMARY DOES NOT CONTAIN A
COMPLETE STATEMENT OF MATERIAL INFORMATION RELATING TO THE MERGER AGREEMENT, THE
MERGER, OR OTHER MATTERS DISCUSSED IN THIS DOCUMENT.
Q: WHY IS CONSEP PROPOSING TO BE ACQUIRED BY VERDANT?
A: The Consep Board determined to recommend approval of the Merger
Agreement and the Merger based on number of factors, including:
o the Consep Board's belief that a combination of Verdant and
Consep would achieve an immediate critical mass of revenues
and have a greater chance of continuing to increase revenues
and become a self-sufficient operation;
o the potential for increased sales to existing customers and
new customers as a result of offering a larger product line
that better satisfies customer needs;
o the Consep Board's belief that a combination of Verdant and
Consep would have greater opportunities to develop strategic
partnerships and funding sources needed to fund ongoing
liquidity and capital needs;
o the opportunity to leverage research and development, field
development and marketing capabilities and to share
technologies;
o the opportunity to achieve increased marketing strength in the
consumer pest control market;
o the opportunity to achieve lower costs and expenses than the
aggregate of the two separate companies through elimination or
reduction of duplicative infrastructure and personnel
expenses;
o the absence of any available alternative transactions to fund
Consep's liquidity and capital needs, including any that would
be likely to offer immediate and long-term economic benefits
to Consep Shareholders comparable or superior to the Merger;
o the terms and provisions of the Merger Agreement and related
agreements;
o the fairness opinion of Consep's financial advisor, Pacific
Crest Securities Inc.; and
o historical market prices and recent trading activity of the
Consep Common Stock.
The Consep Board also considered certain countervailing factors such
as:
o the risk that the benefits sought in the Merger would not be
fully achieved;
o the risk that the Merger would not be consummated, and the
effect of the public announcement of the Merger on Consep's
sales and operating results;
o Consep's ability to attract and retain key management,
marketing and technical personnel;
o the risk that the pending governmental action and certain
legal proceedings involving Verdant's wholly-owned subsidiary,
Southern Resources, Inc. ("SRI"), and its subsidiaries,
relating to environmental contamination discovered on or near
the manufacturing site operated by a subsidiary of SRI, could
result in material loss to Verdant and its subsidiaries,
including SRI, taken as a whole; and
o other risks described in this Joint Proxy Statement-Prospectus
under "Risk Factors."
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Q: WHY IS VERDANT PROPOSING TO ACQUIRE CONSEP?
A: The Verdant Board determined to recommend approval of the Merger
Agreement and the Merger based on a number of factors, including:
o the strategic benefits of expanding Verdant's market position
in the area of biorational pest control products;
o the benefits that the critical mass realized from the
acquisition will provide to Verdant;
o the potential for increased sales to existing customers and
new customers as a result of offering a larger product line
that better satisfies customer needs;
o the Verdant Board's belief that a combination of Verdant and
Consep would have greater opportunities to develop strategic
partnerships and funding sources needed to fund ongoing
liquidity and capital needs;
o the opportunity to leverage research and development, field
development and marketing capabilities and to share
technologies;
o the opportunity to achieve increased marketing strength in the
consumer pest control market;
o the opportunity to achieve lower costs and expenses than the
aggregate of the two separate companies through elimination or
reduction of duplicative infrastructure and personnel
expenses; and
o the terms and provisions of the Merger Agreement and related
agreements.
The Verdant Board also considered certain countervailing factors such
as:
o the risk that the benefits sought in the Merger would not be
fully achieved;
o the risk that the Merger would not be consummated, and the
effect of the public announcement of the Merger on Verdant's
sales and operating results; o Verdant's's ability to attract
and retain key management, marketing and technical personnel;
and
o other risks described in this Joint Proxy Statement-Prospectus
under "Risk Factors."
Q: WHY IS VERDANT PROPOSING TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
VERDANT COMMON STOCK?
A: The Verdant Board is recommending approval of the Charter Amendment to
increase the number of authorized shares of Verdant Common Stock from
25,000,000 shares to 50,000,000 shares. The proposed amendment is
intended to create a sufficient number of authorized shares of Verdant
Common Stock for issuance to Consep Shareholders in connection with the
Merger and to ensure that a sufficient number of shares of Verdant
Common Stock remain available for general corporate purposes, including
issuances pursuant to employee stock plans, stock dividends, and
possible future acquisitions and issuances for the purpose of raising
additional capital. There are no present plans, understandings or
agreements for issuing a material number of additional shares of
Verdant Common Stock. However, if such plans, understandings or
agreements were formulated or reached in the future in connection with
an action or transaction which would not otherwise require approval by
holders of Verdant Common Stock, it could become necessary for the
Verdant Board to call a special meeting of shareholders in order to
authorize an increase in the number of authorized shares of Verdant
Common Stock. The Verdant Board believes that it would not be in
shareholders' best interests for Verdant to bear the expense and
inconvenience of such a special meeting, and accordingly is
recommending that such an increase be approved at the Verdant Special
Meeting, which must be held in any event in order to consider and act
upon the Merger. Consummation of the Merger is conditioned upon
approval of the Charter Amendment.
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Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this Joint Proxy Statement-Prospectus,
just indicate on your proxy card how you want to vote, and sign and
mail it in the enclosed prepaid return envelope as soon as possible, so
that your shares of Consep Common Stock or Verdant Common Stock may be
represented at the Consep Special Meeting or the Verdant Special
Meeting, as the case may be. The Consep Special Meeting will take place
at 9:00 a.m., local time, on December 17, 1998, at the offices of
Consep at 213 Southwest Columbia Street, Bend, Oregon 97702. The
Verdant Special Meeting will take place at 11:00 a.m., local time, on
December 17, 1998, at the offices of Verdant at 9555 James Avenue
South, Suite 200, Bloomington, Minnesota 55431.
The Verdant Board recommends that Verdant Shareholders vote FOR the
approval of the Merger Agreement and FOR the approval of the Charter
Amendment. The Consep Board recommends that Consep Shareholders vote
FOR the approval of the Merger Agreement.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on
how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. Without
instructions, your shares will not be voted. For purposes of voting on
the proposed Merger by Consep Shareholders, failure to give
instructions will have the same effect as voting against the proposed
Merger. In the case of Verdant Shareholders, failure to give
instructions could result in preventing a vote from being taken with
respect to the Charter Amendment and will have the same effect as a
vote against the proposed Merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at
the Consep Special Meeting or the Verdant Special Meeting, as
applicable. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy.
Second, you can complete and submit a new proxy card. If you choose
either of these two methods, you must submit your notice of revocation
or your new proxy card to Consep or Verdant, as applicable, at the
address on the cover page of this Joint Proxy Statement-Prospectus
prior to December 17, 1998. Third, you can attend the Consep Special
Meeting or the Verdant Special Meeting, as applicable, and vote in
person. Simply attending the meeting, however, will not revoke your
proxy. If you have instructed a broker to vote your shares, you must
follow directions received from your broker to change your vote.
Q: SHOULD I SEND IN MY CONSEP STOCK CERTIFICATES AT THIS TIME?
A: No. Consep Shareholders should not send in their Consep stock
certificates until they receive transmittal materials from the Exchange
Agent. This will occur promptly following consummation of the Merger.
Q: WHAT WILL HOLDERS OF CONSEP COMMON STOCK RECEIVE IN THE MERGER?
A: Each outstanding share of Consep Common Stock will be converted into
the right to receive 0.95 of one share of Verdant Common Stock. For
example, a holder of 100 shares of Consep Common Stock would receive 95
shares of Verdant Common Stock.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working towards completing the Merger as quickly as possible.
Assuming approval of the Merger and the Charter Amendment, we expect to
complete the Merger on December 17, 1998, and in any event prior to
December 31, 1998.
Q: WHAT ARE THE FEDERAL TAX CONSEQUENCES OF THE MERGER?
A: The Merger is expected to qualify for federal income tax purposes as a
tax-free reorganization. Provided that the Merger does qualify as a
tax-free reorganization, the following federal income tax consequences
will generally result: (i) no gain or loss will be recognized by
Verdant, Consep or Merger Subsidiary as a result of the Merger, (ii) no
gain or loss will be recognized by any Consep
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Shareholder upon the exchange of Consep Common Stock for Verdant Common
Stock in the Merger (except to the extent of any cash received in lieu
of fractional shares) and (iii) the basis of the Verdant Common Stock
received by a Consep Shareholder who exchanges Consep Common Stock for
Verdant Common Stock will be the same as the basis of the Consep Common
Stock surrendered in exchange therefor reduced by the amount of cash
received for fractional shares. See "THE MERGER--Certain Federal Income
Tax Consequences."
Q: ARE THERE ANY RISKS ASSOCIATED WITH THE MERGER?
A: The Merger does involve risks. For a discussion of certain risk factors
that should be considered in evaluating the Merger, see "RISK FACTORS."
Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETINGS?
A: Consep does not expect to ask Consep Shareholders to vote on any matter
other than the Merger at the Consep Special Meeting. Verdant does not
expect to ask Verdant Shareholders to vote on any matter other than the
Merger and the Charter Amendment at the Verdant Special Meeting.
Q: WHO CAN HELP ANSWER YOUR QUESTIONS ABOUT THE MERGER AND PROVIDE
ADDITIONAL COPIES OF THE JOINT PROXY STATEMENT-PROSPECTUS?
A: With respect to Verdant, please contact:
VERDANT BRANDS, INC.
9555 James Avenue South, Suite 200
Bloomington, Minnesota 55431
Attention: Mark G. Eisenschenk, Secretary
Telephone Number: (612) 703-3300
With respect to Consep, please contact:
CONSEP, INC.
213 Southwest Columbia Street
Bend, Oregon 97702
Attention: Volker G. Oakey
President and Chief Executive Officer
Telephone Number: (503) 388-3688
8
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CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement-Prospectus (including information included
or incorporated by reference herein) contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties, including statements about the financial condition,
results of operations, plans, objectives, future performance and business of
each of Verdant and Consep. These forward looking statements include, (1)
statements relating to the impact on revenues of the Merger; (2) statements
relating to the restructuring charges expected to be incurred in connection with
the Merger; and (3) statements preceded by, followed by or that include the
words "believes," "expects," "anticipates," "intends," "will likely result,"
"estimates," or other similar expressions. See "THE MERGER--Reasons of Consep
for the Merger" "--Opinion of Consep's Financial Advisor," "--Reasons of Verdant
for the Merger," "--Opinion of Verdant's Financial Advisor," "Management and
Operations After the Merger," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF VERDANT," and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CONSEP,"
including any forecasts, projections and descriptions of anticipated cost
savings or other synergies referred to therein, and any statements contained
herein regarding the development of possible or assumed future results of
operations of Verdant's and Consep's businesses, the markets for Verdant's and
Consep's services and products, anticipated capital expenditures, regulatory
developments, competition or the effect of the Merger.
Because such statements are subject to risks and uncertainties, and
actual results may differ materially from those expressed or implied by such
forward-looking statements, Verdant Shareholders and Consep Shareholders are
cautioned not to place undue reliance on such statements, which speak only as of
the date hereof.
All subsequent written and oral forward-looking statements attributable
to Verdant or Consep or persons acting on its or their behalf are expressly
qualified in their entirety by the cautionary statements contained or referred
to in this section. Neither Verdant nor Consep undertakes any obligation to
release publicly any revisions to such forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION........................................................3
QUESTIONS AND ANSWERS
ABOUT THE MERGER.............................................................5
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS...................................................9
SUMMARY.....................................................................12
General..................................................................12
The Companies............................................................12
Verdant Special Meeting and Vote Required................................13
Consep Special Meeting and Vote Required.................................13
The Merger...............................................................13
Conditions to the Merger.................................................14
Recommendations of Boards of Directors...................................14
Opinions of Financial Advisors...........................................14
Effective Time of the Merger.............................................15
Waiver, Amendment; Termination...........................................15
Certain Federal Income Tax Consequences..................................16
Interests of Certain Persons in the Merger...............................16
Management and Operations After the Merger...............................16
Expenses and Termination Fees............................................16
Appraisal Rights.........................................................17
Accounting Treatment.....................................................17
Markets and Market Prices................................................17
Comparative Rights of Shareholders.......................................17
COMPARATIVE UNAUDITED PER SHARE DATA........................................18
SELECTED HISTORICAL FINANCIAL DATA..........................................20
UNAUDITED PRO FORMA SELECTED COMBINED FINANCIAL DATA
Reflecting the Merger of Verdant Brands, Inc. and Consep, Inc...............22
RISK FACTORS................................................................23
VERDANT SPECIAL MEETING.....................................................26
General..................................................................26
Solicitation, Voting and Revocability of Proxies.........................26
Recommendation of Verdant Board..........................................27
CONSEP SPECIAL MEETING......................................................29
General..................................................................29
Solicitation, Voting and Revocability of Proxies.........................29
Recommendation of Consep Board...........................................30
THE MERGER..................................................................30
Description of the Merger................................................30
Background of the Merger.................................................30
Reasons of Verdant for the Merger........................................33
Opinion of Verdant's Financial Advisor...................................34
Reasons of Consep for the Merger.........................................37
Opinion of Consep's Financial Advisor....................................38
Effective Time...........................................................40
Exchange of Certificates.................................................40
Certain Representations and Warranties...................................42
Covenants and Agreements.................................................42
Conditions...............................................................44
Termination..............................................................44
Termination Fees.........................................................45
Waiver and Amendment.....................................................45
Certain Federal Income Tax Consequences..................................45
Interests of Certain Persons in the Merger...............................46
Conflicts of Interest....................................................47
Accounting Treatment.....................................................47
Resale of Verdant Common Stock Received by Consep Shareholders...........48
Appraisal Rights.........................................................48
MANAGEMENT AND OPERATIONS AFTER THE MERGER..................................49
Board of Directors.......................................................49
Management...............................................................51
Operations...............................................................51
Costs Incurred in Connection with the Merger.............................51
Corporate Headquarters...................................................51
MARKET PRICES AND DIVIDEND INFORMATION......................................52
Verdant..................................................................52
Consep...................................................................53
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS..................................................................54
BUSINESS OF VERDANT......................................................60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS OF VERDANT.....................................67
Recent Developments......................................................68
Results of Operations....................................................69
Liquidity and Capital Resources..........................................76
Effects of Inflation.....................................................77
Year 2000 Concerns.......................................................77
New Accounting Pronouncements............................................77
BUSINESS OF CONSEP..........................................................78
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
CONSEP......................................................................88
Overview.................................................................88
Results of Operations....................................................89
Liquidity and Capital Resources..........................................95
Year 2000 Issues.........................................................96
New Accounting Pronouncements............................................96
DESCRIPTION OF VERDANT CAPITAL STOCK........................................96
General..................................................................96
Common Stock.............................................................96
Preferred Stock..........................................................97
Minnesota Business Corporation Act.......................................97
Transfer Agent and Registrar.............................................97
COMPARISON OF SHAREHOLDER RIGHTS............................................97
Number of Directors, Vacancies and Classification of Board...............98
Removal of Directors.....................................................98
Cumulative Voting........................................................99
Special Meetings of Shareholders.........................................99
Quorums for Shareholder Meetings.........................................99
Action by Written Consent of Shareholders................................99
Amendments to Articles of Incorporation..................................99
Amendments to Bylaws....................................................100
Indemnification.........................................................100
Preemptive Rights.......................................................100
Mergers, Consolidations and Other Business Combinations.................100
Transactions with Related Party.........................................101
Shareholders' Dissenters' Rights........................................102
PROPOSAL TO APPROVE AMENDMENT TO VERDANT
RESTATED ARTICLES OF INCORPORATION.........................................103
OWNERSHIP OF COMMON STOCK..................................................104
Verdant Common Stock....................................................104
Consep Common Stock.....................................................106
MANAGEMENT OF VERDANT AND CONSEP...........................................108
Management of Verdant...................................................108
Management of Consep....................................................109
LEGAL OPINIONS.............................................................111
EXPERTS....................................................................111
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SHAREHOLDER PROPOSALS......................................................112
OTHER MATTERS..............................................................112
Appendix A
AGREEMENT AND PLAN OF MERGER.................................................3
Appendix B
OPINION OF PIPER JAFFRAY INC.................................................1
Appendix C
OPINION OF PACIFIC CREST SECURITIES INC......................................1
11
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SUMMARY
THE INFORMATION BELOW IS QUALIFIED IN ITS ENTIRETY BY, AND REFERENCE IS
MADE TO, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS JOINT PROXY
STATEMENT-PROSPECTUS, INCLUDING THE ACCOMPANYING APPENDICES. EACH SHAREHOLDER IS
URGED TO READ THIS JOINT PROXY STATEMENT-PROSPECTUS AND THE EXHIBITS HERETO IN
THEIR ENTIRETY AND WITH CARE.
GENERAL
At the Verdant Special Meeting, Verdant Shareholders are being asked to
vote upon (1) a proposal to approve a Merger Agreement providing for the merger
of Merger Subsidiary with and into Consep and the conversion of each outstanding
share of Consep Common Stock into the right to receive 0.95 of one share of
Verdant Common Stock and (2) a proposal to amend the Verdant Restated Articles
of Incorporation to increase the number of authorized shares of Verdant Common
Stock from 25,000,000 to 50,000,000. The approval of the Merger Agreement and
the consummation of the Merger are contingent upon approval of the Charter
Amendment. The approval of the Charter Amendment is contingent on approval of
the Merger Agreement. The Board of Directors of Verdant is not aware of any
other business to come before the Verdant Special Meeting.
At the Consep Special Meeting, Consep Shareholders will vote upon a
proposal to approve the Merger Agreement.
THE COMPANIES
VERDANT BRANDS, INC. Verdant is a developer, manufacturer and marketer
of a variety of nationally-branded lawn, garden, turf, ornamental, structural
and specialty agricultural products for the retail consumer and specialty
commercial and professional markets. Verdant's product lines include
environmentally sensitive patented, proprietary pesticides and fertilizers sold
under the Safer(R) and Ringer(R) brand names, as well as traditional pesticides
sold under the Dexol(R), Black Leaf(R), AllPro(R) and various private label
brand names. Sales for the fiscal year ended September 30, 1997 were
approximately $18.5 million and are expected to be approximately $45 to $50
million for its fiscal year ending December 31, 1998.
The principal executive office of Verdant is located at 9555 James
Avenue South, Suite 200, Bloomington, Minnesota 55431, and Verdant's telephone
number is (612) 703-3300.
For further information concerning Verdant, see "SELECTED HISTORICAL
FINANCIAL DATA," "BUSINESS OF VERDANT" and "MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF VERDANT" herein.
CONSEP, INC. Consep develops, manufactures and markets environmentally
sensitive pest control products for the commercial agriculture and consumer
home, lawn and garden markets. Consep also owns and operates full-line
agrichemical distributors located principally in California. Products
manufactured by Consep employ proprietary controlled release technologies to
enhance the effectiveness and duration of biorational pest control products,
which use naturally occurring agents and biochemicals, such as pheromones, to
control pest populations. Specifically, Consep develops, manufactures and
markets three lines of non-toxic pest control products: (i) pheromone-based
mating disruption products, marketed under the CheckMate(R) label, used to
control insect populations in commercial agriculture; (ii) pheromone-based
traps, marketed under the BioLure(R) label, used to monitor and trap insects in
commercial agriculture; and (iii) consumer products, marketed under the
SureFire(TM) and Insectigone(R) labels, used to trap or otherwise control pests
in homes, lawns and gardens. Unlike most conventional toxic insecticides,
Consep's products are non-toxic to humans and animals, leave no harmful
residues, do not contaminate soil or groundwater and do not disrupt beneficial
insect populations. Consep also sells a line of insect repellent products based
on natural oils, which are manufactured by, and are the proprietary products of,
a third party, and are being marketed on an exclusive basis in the United States
under the Blocker(TM) label.
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The principal executive offices of Consep are located at 213 Southwest
Columbia Street, Bend, Oregon 97702, and Consep's telephone number is (541)
388-3688.
For further information concerning Consep, see "SELECTED HISTORICAL
FINANCIAL DATA," "BUSINESS OF CONSEP" and "MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION OF CONSEP" herein.
VERDANT SPECIAL MEETING AND VOTE REQUIRED
The Verdant Special Meeting will be held at 11:00 a.m. local time, on
December 17, 1998, at the offices of Verdant at 9555 James Avenue South, Suite
200, Bloomington Minnesota 55431, at which time the Verdant Shareholders will be
asked to vote to approve the Merger Agreement and the Charter Amendment. The
approval of the Merger Agreement and the consummation of the Merger are
contingent upon approval of the Charter Amendment. The approval of the Charter
Amendment is contingent on approval of the Merger Agreement.
Only the record holders of Verdant Common Stock at the close of
business on October 15, 1998 (the "Verdant Record Date") are entitled to notice
of and to vote at the Verdant Special Meeting. On the Verdant Record Date, there
were approximately holders of record of Verdant Common Stock and 16,705,261
shares of Verdant Common Stock outstanding. Each share of Verdant Common Stock
entitles its holder to one vote.
Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of Verdant Common Stock.
Approval of the Charter Amendment requires the affirmative vote of a majority of
the shares of Verdant Common Stock represented at the Verdant Special Meeting,
provided that a quorum of holders of at least a majority of the outstanding
shares is present or represented by proxy at the meeting. As of the Verdant
Record Date, directors and executive officers of Verdant beneficially owned and
were entitled to vote shares of Verdant Common Stock, or approximately % of the
shares entitled to vote at the Verdant Special Meeting. It is currently expected
that each such director and executive officer of Verdant will vote the shares of
Verdant Common Stock he or she is entitled to vote for approval and adoption of
the Merger Agreement and the other proposals described above. As of the Verdant
Record Date, directors and executive officers of Consep did not beneficially own
any shares of Verdant Common Stock. See "VERDANT SPECIAL MEETING."
CONSEP SPECIAL MEETING AND VOTE REQUIRED
The Consep Special Meeting will be held at 9:00 a.m. local time, on
December 17, 1998, at the offices of Consep at 213 Southwest Columbia Street,
Bend, Oregon 97702, at which time the Consep Shareholders will be asked to
approve the Merger Agreement. Only the record holders of Consep Common Stock at
the close of business on October 15, 1998 (the "Consep Record Date") are
entitled to notice of and to vote at the Consep Special Meeting. On the Consep
Record Date, there were holders of record of Consep Common Stock and 9,667,357
shares of Consep Common Stock outstanding.
The affirmative vote of the holders of a majority of the outstanding
shares of Consep Common Stock entitled to vote is required to approve the Merger
Agreement. As of the Consep Record Date, directors and executive officers of
Consep beneficially owned and were entitled to vote 729,270 shares of Consep
Common Stock, or approximately 7.54% of the shares entitled to vote at the
Consep Special Meeting. It is currently expected that each such director and
executive officer of Consep will vote the shares of Consep Common Stock he or
she is entitled to vote for approval of the Merger Agreement. As of the Consep
Record Date, directors and executive officers of Verdant did not beneficially
own any shares of Consep Common Stock. See "CONSEP SPECIAL MEETING."
THE MERGER
The Merger Agreement provides that, upon the satisfaction or waiver of
certain conditions, Merger Subsidiary will be merged with and into Consep,
Consep will continue as the surviving corporation, and the separate existence of
Merger Subsidiary will cease. Following the Merger, Consep will be a
wholly-owned subsidiary of Verdant. Pursuant to the Merger Agreement, each share
of Consep Common Stock issued and outstanding at the Effective Time will be
converted into 0.95 of one validly issued, fully paid and nonassessable share of
Verdant Common Stock, with cash to
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be paid in lieu of any fractional shares of Verdant Common Stock. Each share of
Verdant Common Stock outstanding prior to the Merger will continue to be
outstanding after the Effective Time. Holders of Verdant Common Stock
immediately prior to the Merger as a group will own approximately 65%, and
holders of Consep Common Stock immediately prior to the Merger as a group will
own approximately 35%, of the Verdant Common Stock to be outstanding immediately
following the Effective Time, based on shares outstanding as of the respective
Record Dates. The shares of Verdant Common Stock issued to Consep Shareholders
in connection with the Merger are sometimes referred to herein as the "Merger
Consideration."
Upon consummation of the Merger, each option or warrant to purchase
shares of Consep Common Stock issued by Consep pursuant to any of its stock
option plans, currently outstanding stock purchase warrants or otherwise (each,
a "Consep Stock Option") that is outstanding and unexercised immediately prior
to the Effective Time will be converted automatically into an option or warrant,
as the case may be, to purchase shares of Verdant Common Stock. The number of
shares of Verdant Common Stock purchasable upon the exercise of such Consep
Stock Options will be equal to the product of the number of shares of Consep
Common Stock underlying the Consep Stock Options multiplied by the Exchange
Ratio and rounded down to the nearest whole share, and the exercise price per
share of Verdant Common Stock under each such Consep Stock Option will be
adjusted by dividing the per share exercise price of each such Consep Stock
Option by the Exchange Ratio and rounding upward to the nearest full cent. See
"THE MERGER--Description of the Merger."
CONDITIONS TO THE MERGER
The Merger is subject to the satisfaction of certain conditions,
including among others, the approval of the Merger Agreement and the Merger by
the holders of a majority of the outstanding shares of Consep Common Stock
entitled to vote at the Consep Special Meeting, the approval of the Merger
Agreement and the Merger by the holders of a majority of the outstanding shares
of Verdant Common Stock entitled to vote at the Verdant Special Meeting, the
approval of the Charter Amendment by a majority of the shares of Verdant Common
Stock represented at the Verdant Special Meeting, provided that a quorum of at
least a majority of the votes entitled to be cast at the meeting is present, and
the receipt of applicable authorizations, consents, orders or approvals from
third parties. See "THE MERGER--Conditions to the Merger."
For additional information relating to the Merger, see "THE MERGER."
RECOMMENDATIONS OF BOARDS OF DIRECTORS
THE BOARD OF DIRECTORS OF VERDANT HAS APPROVED THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY AND THE CHARTER AMENDMENT. THE VERDANT
BOARD BELIEVES THAT THE MERGER AND THE CHARTER AMENDMENT ARE IN THE BEST
INTERESTS OF VERDANT AND ITS SHAREHOLDERS AND RECOMMENDS THAT VERDANT
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND APPROVAL OF THE
CHARTER AMENDMENT. FOR A DISCUSSION OF THE FACTORS CONSIDERED BY THE VERDANT
BOARD IN REACHING ITS CONCLUSIONS, SEE "THE MERGER--BACKGROUND OF THE MERGER"
AND "--REASONS OF VERDANT FOR THE MERGER."
THE BOARD OF DIRECTORS OF CONSEP (THE "CONSEP BOARD") HAS APPROVED THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE CONSEP BOARD
BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF CONSEP SHAREHOLDERS AND
RECOMMENDS THAT CONSEP SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
FOR A DISCUSSION OF THE FACTORS CONSIDERED BY THE CONSEP BOARD IN REACHING ITS
CONCLUSIONS, SEE "THE MERGER--BACKGROUND OF THE MERGER" AND "--REASONS OF CONSEP
FOR THE MERGER."
OPINIONS OF FINANCIAL ADVISORS
Piper Jaffray Inc. ("Piper") is the financial advisor to Verdant. Piper
rendered to the Verdant Board a written opinion, dated September 30, 1998 to
the effect that, as of September 8, 1998, and based upon and subject to certain
matters stated in such opinion, the consideration to be paid by Verdant for the
Consep Common Stock in connection with the Merger is fair to Verdant from a
financial point of view. A copy of the opinion of Piper is attached hereto as
Appendix B and should be read carefully in its entirety with respect to
14
<PAGE>
the procedures followed, assumptions made, matters considered and limitations on
the review undertaken in connection with such opinion. The opinion is directed
to the Verdant Board and relates only to the fairness of the Exchange Ratio from
a financial point of view, does not address any other aspect of the proposed
Merger or any related transaction and does not constitute a recommendation to
any shareholder as to how such shareholder should vote at the Verdant Special
Meeting. See "THE MERGER--Opinion of Verdant's Financial Advisor."
Pacific Crest Securities Inc. ("PCS") is the financial advisor to
Consep. PCS rendered to the Consep Board a written opinion, dated September 8,
1998, to the effect that, as of such date and based upon and subject to certain
matters stated in such opinion, the Exchange Ratio was fair to the holders of
Consep Common Stock from a financial point of view. A copy of the opinion of PCS
is attached hereto as Appendix C and should be read carefully in its entirety
with respect to the procedures followed, assumptions made, matters considered
and limitations on the review undertaken in connection with such opinion. The
opinion of PCS is directed to the Consep Board, and relates only to the fairness
of the Exchange Ratio from a financial point of view, does not address any other
aspect of the proposed Merger or any related transaction and does not constitute
a recommendation to any shareholder as to how such shareholder should vote at
the Consep Special Meeting. See "THE MERGER--Opinion of Consep's Financial
Advisor."
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction or, to the extent permitted
in the Merger Agreement, waiver of all conditions set forth below, the parties
will cause the Merger to be consummated by filing the articles of merger (the
"Articles of Merger") with the Secretary of State of the State of Oregon and
make all other filings or recordings required by Oregon Law in connection with
the Merger and the transactions contemplated by the Merger Agreement. The Merger
will become effective at such time as the Articles of Merger are duly filed with
the Secretary of State of the State of Oregon or at such later time as may be
agreed by the parties in writing and specified in the Articles of Merger (the
"Effective Time"). See "THE MERGER--Effective Time."
WAIVER, AMENDMENT; TERMINATION
The Merger Agreement may be changed or modified by the parties only by
action taken by or on behalf of the respective boards of directors, reflected in
a written amendment signed by the parties, at any time prior to the Effective
Time; provided, however, that, after the approval of the Merger Agreement and
the Merger by the shareholders of Consep, no amendment may be made which would
reduce the amount or change the type of consideration into which each share of
Consep Common Stock will be converted upon consummation of the Merger. See "THE
MERGER--Waiver and Amendment."
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, notwithstanding any requisite approval
of the Merger Agreement and the Merger by the shareholders of Consep or of
Verdant: (1) by mutual written consent of each of Verdant, Merger Subsidiary and
Consep; (2) by either Verdant, Merger Subsidiary or Consep if either (a) the
Effective Time has not occurred on or before December 31, 1998 (except that this
right to terminate the Merger Agreement is not available to any party whose
failure to fulfill any obligation under the Merger Agreement has been the cause
of, or resulted in, the failure of the Effective Time to occur on or before such
date) or (b) there is a law that makes consummation of the Merger illegal or
otherwise prohibited or if any court or governmental entity shall have issued an
order, decree, ruling, or has taken any action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action
shall have become final and unappealable; (3) by either Verdant or Merger
Subsidiary if the board of directors of Consep withdraws, modifies or changes
its recommendation of the Merger Agreement or the Merger in a manner adverse to
Verdant or Merger Subsidiary, for any reason other than the occurrence of an
event or the discovery of a falsity of a representation or warranty relating to
Verdant that has a Parent Material Adverse Effect (as defined in the Merger
Agreement) or recommends to the shareholders of Consep any competing
transaction, or resolves to do so; (4) by Consep if the Verdant Board withdraws,
modifies or changes its recommendation of the Merger Agreement or the Merger in
a manner adverse to Consep, for any reason other than the occurrence of an event
or the discovery of a falsity of a representation or warranty relating to Consep
that has a Company Material Adverse Effect (as defined in the Merger Agreement)
or resolves to do so; (5) by either Verdant, Merger Subsidiary or Consep if the
shareholders of Consep fail to approve the Merger Agreement or the Merger; (6)
by either Verdant, Merger Subsidiary or Consep, if shareholders of Verdant fail
to approve the Merger Agreement, the Merger or the Charter Amendment; (7) by
Consep, in the event of a material breach by Verdant or Merger
15
<PAGE>
Subsidiary of any representation, warranty, covenant or agreement contained in
the Merger Agreement (other than a breach of Verdant or Merger Subsidiary due to
the occurrence of a Parent Material Adverse Effect arising solely due to the
public announcement of the Merger) which has not been cured or is not curable by
December 31, 1998; or (8) by Verdant, in the event of a material breach by
Consep of any representation, warranty, covenant or agreement contained in the
Merger Agreement (other than a breach of Consep due to the occurrence of a
Company Material Adverse Effect arising solely due to the public announcement of
the Merger) which has not been cured or is not curable by December 31, 1998. See
"THE MERGER--Termination" and "--Termination Fees."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to qualify for federal income tax purposes as a
tax-free reorganization. Consep will receive an opinion from Ater Wynne LLP,
counsel to Consep, to the effect that the Merger will be treated as a tax-free
reorganization within the meaning of Section 368 of the Internal Revenue Code,
as amended (the "Code"), subject to customary assumptions and representations.
Consummation of the Merger by Consep is conditioned upon receipt of such opinion
prior to such consummation. Such opinion is not, however, binding on the
Internal Revenue Service. If the Merger qualifies as a tax-free reorganization,
holders of the Consep Common Stock will generally recognize no gain or loss for
federal income tax purposes as a result of the exchange of their shares of
Consep Common Stock for shares of Verdant Common Stock. Each Consep Shareholder
is urged to consult his or her own tax advisor concerning the federal income tax
consequences of the Merger, as well as any applicable state, local, foreign or
other tax consequences, based on such shareholder's own particular facts and
circumstances. See "THE MERGER--Certain Federal Income Tax Consequences."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Each of Volker G. Oakey, Steven R. Hartmeier and Kenneth C. Rymer,
officers and managers of Consep, as well as eight other manager level employees
of Consep, are parties to change of control agreements that provide them with
certain benefits in the event of involuntary termination or voluntary
termination preceded by changes in their current job responsibilities, their job
titles, their reporting relationships or their job locations after the Merger.
In addition, the Merger Agreement provides for indemnification arrangements for
Consep directors and officers. See "THE MERGER--Interests of Certain Persons in
the Merger. "
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Management officials of Consep are expected to be retained, and the
Verdant Chief Executive Officer, Chief Financial Officer and Vice President and
General Manager-Retail Sales are expected to continue in their current
capacities with Verdant. Consep will become a wholly-owned subsidiary of Verdant
with a board of directors consisting of Stanley Goldberg, Volker G. Oakey and
Mark G. Eisenschenk. See "MANAGEMENT AND OPERATIONS AFTER THE MERGER."
EXPENSES AND TERMINATION FEES
The Merger Agreement provides that if the Merger Agreement is
terminated because (1) Consep withdraws, modifies, or changes its recommendation
of the Merger Agreement or the Merger in a manner adverse to Verdant or Merger
Subsidiary or shall have resolved to do any of the foregoing, for any reason
other than the occurrence of an event or the discovery of a falsity or a
representation or warranty relating to Verdant that has a Parent Material
Adverse Effect or the Consep Board shall have recommended to its shareholders
any Competing Transaction (as defined in the Merger Agreement) or resolved to do
so, (2) Consep's shareholders shall have failed to approve the Merger Agreement
and the Merger at the Consep Special Meeting (including any adjournment or
postponement thereof) and a Competing Transaction exists on the date of the
Consep Special Meeting, or (3) there exists a material breach by Consep of any
representation, warranty, covenant or agreement contained in the Merger
Agreement (other than a breach of Consep due to the occurrence of a Material
Adverse Effect arising solely due to the public announcement of the Merger)
which has not been cured or is not curable by December 31, 1998, and the breach
giving rise to such termination is a result of a Competing Transaction, Consep
shall pay Verdant a fee of $1,000,000 and shall reimburse Verdant and Merger
Subsidiary for all of its out-of-pocket costs and expenses incurred in
connection with the transactions contemplated by the Merger Agreement (such fee
and expenses being referred to herein as the "Termination Fee").
16
<PAGE>
Each party to the Merger Agreement will bear all expenses incurred by
it in connection with the Merger Agreement and the transactions contemplated
thereby, except for the Termination Fee described above and except that
printing, mailing and filing expenses related to the Registration Statement and
the Joint Proxy Statement--Prospectus will be shared equally between Consep and
Verdant.
APPRAISAL RIGHTS
Holders of Verdant Common Stock do not have appraisal rights under the
Minnesota Business Corporation Act (the "MBCA") with respect to the Merger.
Holders of Consep Common Stock do not have appraisal rights under the Oregon
Business Corporation Act (the "OBCA") with respect to the Merger. See "THE
MERGER--No Appraisal Rights."
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for as a "purchase"
under generally accepted accounting principles ("GAAP"). See "THE
MERGER--Accounting Treatment."
MARKETS AND MARKET PRICES
The Verdant Common Stock is listed on the Nasdaq National Market under
the symbol "VERD" and the Consep Common Stock is traded on the Nasdaq National
Market under the symbol "CSEP." The following table sets forth the closing price
per share of Verdant Common Stock and the closing price per share of Consep
Common Stock as reported on the Nasdaq National Market and the "equivalent per
share price" (as defined below) of Consep Common Stock as of September 9, 1998,
the last trading day before Verdant and Consep publicly announced the execution
of the Merger Agreement, and on November 5, 1998, the last trading day prior to
the date of this Joint Proxy Statement-Prospectus. The "equivalent per share
price" of Consep Common Stock as of each such date equals the closing price per
share of Verdant Common Stock on such date multiplied by the Exchange Ratio.
MARKET PRICE PER SHARE
-----------------------------------
VERDANT CONSEP EQUIVALENT
COMMON COMMON PER SHARE
STOCK STOCK PRICE
--------- --------- ------------
September 9, 1998................... $ 1.25 $ 0.875 $ 1.187
November 5, 1998....................
Verdant Shareholders and Consep Shareholders are urged to obtain
current market quotations for Verdant Common Stock and Consep Common Stock.
Because the Exchange Ratio is fixed, a change in the market price of Verdant
Common Stock before the consummation of the Merger would affect the market value
as of the Effective Time of the Verdant Common Stock to be received in the
Merger in exchange for Consep Common Stock. THERE CAN BE NO ASSURANCE AS TO THE
MARKET PRICE OF VERDANT COMMON STOCK AT ANY TIME BEFORE THE EFFECTIVE DATE OR AT
ANY TIME FOLLOWING THE EXCHANGE OF CONSEP COMMON STOCK FOR VERDANT COMMON STOCK
PURSUANT TO THE MERGER.
COMPARATIVE RIGHTS OF SHAREHOLDERS
Upon consummation of the Merger, holders of Consep Common Stock will
become holders of Verdant Common Stock. Consep is organized under the OBCA and
the laws of the State of Oregon, while Verdant is organized under the MBCA and
laws of the State of Minnesota. Because of differences between the OBCA and the
MBCA and between the provisions that are included in their charter documents,
there are differences in the rights of the holders of Consep Common Stock, on
one hand, and the holders of Verdant Common Stock, on the other. For a
discussion of certain
17
<PAGE>
similarities and differences between the rights of holders of Consep Common
Stock and the rights of holders of Verdant Common Stock, see "COMPARISON OF
SHAREHOLDER RIGHTS."
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth selected comparative unaudited basic and
diluted per share data for Verdant on a historical and pro forma combined basis,
and for Consep on a historical and pro forma equivalent basis, giving effect to
the Merger using the purchase method of accounting. For a description of the
effect of purchase accounting on the historical financial statements of Verdant,
see "THE MERGER--Accounting Treatment." The information set forth below is based
on and derived from the consolidated historical financial statements of Verdant
and Consep and the unaudited pro forma condensed combined financial statements,
including the respective notes thereto appearing elsewhere in this Joint Proxy
Statement-Prospectus. This information should be read in conjunction with such
historical financial statements and pro forma financial statements and the
related notes thereto. See "AVAILABLE INFORMATION," "UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS" and "INDEX TO FINANCIAL STATEMENTS."
The per share data set forth herein are presented for comparative
purposes only and are not necessarily indicative of the future combined
financial position, the results of the future operations or the actual results
or combined financial position of Verdant that would have been achieved had the
Merger been consummated as of the dates or for the periods indicated.
While no assurance can be given, Verdant and Consep expect that,
following the Merger, the combined operations will achieve substantial benefits
from the Merger including operating cost savings and revenue enhancements.
However, the pro forma comparative unaudited per share data do not reflect any
direct costs, potential savings or revenue enhancements which are expected to
result from the consolidation of operations of Verdant and Consep, and
therefore, do not purport to be indicative of the results of future operations
of Verdant following the Merger.
<TABLE>
<CAPTION>
BASIC VERDANT CONSEP
COMMON STOCK (1) COMMON STOCK
------------------------------ -------------------------------
PRO FORMA PRO FORMA
BOOK VALUE:(2) HISTORICAL COMBINED(3) HISTORICAL EQUIVALENT(3)
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
June 30, 1998................................. $ 0.91 $ 1.03(2) $ 1.58 $ 0.58(2)
Income (loss) from operations (3):
Six Months Ended June 30, 1998................ $ 0.09 $ 0.06 $ 0.01 $ 0.00
October 1, 1997 to December 31, 1997.......... $(0.09) $(0.22) $(0.22) $(0.08)
Year Ended:
September 30, 1997 (Verdant); December 31, 1997
(Consep)...................................... $(0.05) $(0.15) $(0.19) $(0.07)
DILUTED VERDANT CONSEP
COMMON STOCK COMMON STOCK
------------------------------ -------------------------------
PRO FORMA PRO FORMA
BOOK VALUE:(2) HISTORICAL COMBINED(3) HISTORICAL EQUIVALENT(3)
------------- ------------- -------------- --------------
June 30, 1998................................. $ 0.90 $ 1.02(2) $ 1.57 $ 0.58(2)
Income (loss) from operations (3):
Six Months Ended June 30, 1998................ $ 0.09 $ 0.06 $ 0.01 $ 0.00
October 1, 1997 to December 31, 1997.......... $(0.09) $(0.22) $(0.22) $(0.08)
Year Ended:
September 30, 1997 (Verdant); December 31, 1997
(Consep)...................................... $(0.05) $(0.15) $(0.19) $(0.07)
</TABLE>
18
<PAGE>
- -------------------
(1) In February 1998, management of Verdant announced the decision to change
Verdant's fiscal year end from September 30 to December 31. In connection
therewith, Verdant filed a Transition Report on Form 10-Q for the period
from October 1, 1997 through December 31, 1997 to transition to the
beginning of its new fiscal year which began on January 1, 1998.
(2) The pro forma combined book value per share of Verdant Common Stock is
based upon the pro forma total common equity for Verdant and Consep,
divided by the total pro forma shares of Verdant Common Stock assuming
conversion of Consep Common Stock at the Exchange Ratio of 0.95 of one
share of Verdant Common Stock for each share of Consep Common Stock. The
pro forma equivalent book value per share of Consep Common Stock was
determined by dividing the historical shareholders' equity of Consep by the
total pro forma shares of Verdant Common Stock assuming conversion of
Consep Common Stock at the Exchange Ratio. See "THE MERGER--Description of
the Merger."
(3) The pro forma combined income (loss) per share from continuing operations
is computed based on the average number of outstanding shares and common
equivalent shares of Verdant, and the average number of outstanding shares
and common equivalent shares of Consep, adjusted for the Exchange Ratio.
The pro forma equivalent income per share of Consep stock represents the
pro forma combined income per share divided by the average number of
outstanding shares and common equivalent shares of Verdant, and the average
number of outstanding shares and common equivalent shares of Consep,
adjusted for the Exchange Ratio. See "THE MERGER--Description of the
Merger."
19
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth certain selected historical consolidated
financial data for Verdant and Consep. The interim financial data is unaudited;
however, in the opinion of each of the companies, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods. The selected historical
financial data of Verdant for the years ended September 30, 1995 through 1997
and the selected historical financial data of Consep for the years ended
December 31, 1995 through 1997 were derived from the audited consolidated
historical financial statements of Verdant and Consep, respectively. The
selected historical financial data for the six months ended June 30, 1998 and
1997, for the three month period from October 1 to December 31, 1997 and 1996 of
Verdant and the selected historical financial data for the six months ended June
30, 1998 and 1997 of Consep were derived from the unaudited historical financial
statements of Verdant and Consep, respectively. The selected historical
financial data for Verdant and Consep as of December 31, 1998 was derived from
audited consolidated historical financial information which is not included
herein. This information should be read in conjunction with the audited
consolidated historical financial statements of Verdant and Consep, the pro
forma selected historical financial data, and the unaudited pro forma condensed
combined financial statements, including the respective notes thereto, appearing
elsewhere in this Joint Proxy Statement-Prospectus. See "AVAILABLE INFORMATION,"
"PRO FORMA SELECTED HISTORICAL FINANCIAL DATA," "UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS" and "INDEX TO FINANCIAL STATEMENTS."
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
VERDANT BRANDS, INC.
(in thousands except per share data)
<TABLE>
<CAPTION>
SIX MONTHS OCTOBER 1 TO
ENDED JUNE 30, DECEMBER 31, YEAR ENDED SEPTEMBER 30,
---------------- --------------- --------------------------
1998 1997 1997 1996 1997 1996 1995
------- ----- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $31,745 $12,197 $ 4,767 $3,481 $18,821 $14,673 $14,194
Gross profit..................... 11,696 5,686 1,636 1,774 8,565 7,025 7,204
Operating expenses.............. 9,596 5,488 2,768 1,748 9,090 7,371 9,503
------- ------- ------- ------ ------- ------- -------
Income (loss) before other
income (loss) 2,100 198 (1,132) 26 (525) (346) (2,300)
Other income (expense), net...... (586) (68) (65) 33 (21) (222) 127
------- ------- ------- ------ ------- ------- -------
Net (loss) income................ $ 1,514 $ 130 $(1,197) $ 60 $ (546) $ (568) $(2,173)
======= ======= ======= ====== ======= ======= =======
Income (loss)
per share - basic ............. $ .09 $ .01 $ (.09) $ (.01) $ (.05) $ (.05) $ (.20)
======= ======= ======= ====== ======= ======= =======
Income (loss)
per share - diluted ........... $ .09 $ .00 $ (.09) $ (.01) $ (.05) $ (.05) $ (.20)
======= ======= ======= ====== ======= ======= =======
Shares uses in calculating basic
income (loss) per share ....... 16,689 11,526 13,313 10,922 11,541 10,922 10,898
======= ======= ======= ====== ======= ======= =======
Shares used in calculating diluted
income (loss) per share........ 16,870 11,555 13,313 10,922 11,541 10,922 10,898
======= ======= ======= ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, SEPTEMBER 30,
--------------- --------------- -------------------------
BALANCE SHEET DATA: 1998 1997 1997 1996 1997 1996 1995
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents..... $ 159 $1,614 $ 423 $1,391 $3,264 $3,289 $ 2,756
Accounts receivable........... 14,702 4,354 4,437 3,543 1,153 992 1,200
Inventories................... 11,069 3,530 8,804 1,834 2,806 1,520 2,027
Total current assets.......... 26,678 9,743 14,845 7,038 7,444 5,934 6,116
Total assets.................. 42,737 17,051 31,423 12,520 14,615 11,470 11,999
Current liabilities........... 20,359 3,828 14,344 2,526 2,385 1,531 1,478
Long-term debt................ 7,123 1,451 3,307 0 1,459 0 0
Shareholders' equity.......... 15,255 11,771 13,773 9,995 10,772 9,939 10,520
</TABLE>
20
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
CONSEP, INC.
(in thousands except per share data)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- ---------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1997 1996 1995
--------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 22,778 $ 24,606 $ 39,204 $ 33,229 $ 30,844
Net income (loss)................... 61 914 (1,822) (2,483) (1,286)
Net income (loss) per share (basic
and diluted)............................ 0.01 0.10 (0.19) (0.31) (0.19)
JUNE 30, DECEMBER 31,
----------------------- ---------------------------------
BALANCE SHEET DATA: 1998 1997 1997 1996 1995
--------- ---------- ---------- --------- --------
Working capital..................... $ 8,063 $ 11,118 $ 8,272 $ 10,433 $ 8,785
Total assets........................ 30,541 33,237 25,678 23,411 21,559
Long-term debt, excluding current
maturities........................ 2,062 2,395 2,168 1,191 951
Shareholders' equity................ 15,147 17,946 15,217 17,010 14,681
</TABLE>
21
<PAGE>
UNAUDITED PRO FORMA SELECTED COMBINED FINANCIAL DATA
REFLECTING THE MERGER OF VERDANT BRANDS, INC. AND CONSEP, INC.
(in thousands except per share data)
The following unaudited pro forma selected combined financial data
gives effect to the merger of Verdant and Consep, accounted for as a purchase.
The unaudited pro forma condensed combined balance sheet data is based upon
combining the balance sheet of Verdant as of June 30, 1998 with the balance
sheet of Consep as of June 30, 1998. The unaudited pro forma condensed combined
statement of operations data give effect to the proposed merger of Verdant and
Consep by combining the results of operations of Verdant for the six months
ended June 30, 1998 with the results of operations of Consep for the six months
ended June 30, 1998, by reflecting the results of operations of Verdant for the
three month period from October 1 to December 31, 1997, with the historical
operations of Consep for the three month period from October 1, 1997 through
December 31, 1997. and by combining the results of operations of Verdant for the
year ended September 30, 1997 with the results of operations of Consep for the
year ended December 31, 1997. Consep's operations for the three month period
from October 1, 1997 to December 31, 1997 are included in the pro forma selected
condensed combined financial data in both the three month period from October 1,
1997 to December 31, 1997 and the fiscal year ended September 30, 1997. The
unaudited pro forma selected combined financial data should be read in
conjunction with the historical financial statements and notes thereto of
Verdant and Consep. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS" and "INDEX TO FINANCIAL STATEMENTS."
The pro forma data is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have been achieved if the Merger had been consummated as of the beginning
of the periods indicated, nor is it necessarily indicative of future financial
position or results of operations. The pro forma statement of operations items
and related per share amounts do not include anticipated revenue enhancements,
operating cost savings or the after-tax impact of merger-related costs expected
as a result of the Merger.
<TABLE>
<CAPTION>
SIX MONTHS OCTOBER 1 TO YEAR ENDED
ENDED JUNE 30, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
-------------- ------------- -------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $54,523 $11,062 $85,964
Gross margin.................... 17,551 1,620 23,172
Operating expenses.............. 15,184 7,210 26,051
---------- --------- ---------
Income (loss) from operations... 2,367 (5,590) (2,879)
Other income (expense).......... (793) (313) (963)
---------- --------- ---------
Income (loss) before taxes... 1,574 (5,903) (3,842)
Provision for taxes.......... -- -- --
---------- --------- ---------
Income (loss) from operation
after taxes.................. $ 1,574 $(5,903) $(3,842)
========== ========= =========
Income (loss) per share -
basic and diluted............... $0.06 $(0.22) $ (0.15)
========== ========= =========
Shares used in calculating basic
income (loss) per share......... 25,873 26,997 25,225
========== ========= =========
Shares used in calculating diluted
income (loss) per share......... 26,124 26,997 25,225
========== ========= =========
</TABLE>
BALANCE SHEET DATA:
JUNE 30, 1998
----------------
Cash and cash equivalents....... $665
Accounts receivable............. 24,628
Inventory....................... 20,907
Total current assets............ 47,821
Total assets.................... 71,070
Current liabilities............. 35,151
Long-term debt.................. 7,123
Shareholders' equity............ 26,374
22
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY VERDANT
SHAREHOLDERS AND CONSEP SHAREHOLDERS IN CONNECTION WITH VOTING ON THE MERGER.
THESE FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH THE OTHER INFORMATION
INCLUDED ELSEWHERE IN THIS JOINT PROXY STATEMENT-PROSPECTUS. THE STATEMENTS
CONTAINED IN THIS JOINT PROXY STATEMENT- PROSPECTUS CONCERNING VERDANT INCLUDE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THE FOLLOWING DISCUSSION CONTAINS CAUTIONARY
STATEMENTS REGARDING VERDANT'S BUSINESS AND RESULTS OF OPERATIONS. SEE
"CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS."
ABSENCE OF PROFITABLE OPERATIONS. Verdant has reported losses during
each year since it became a public company in 1990. As of June 30, 1998, Verdant
reported an accumulated deficit of $22,295,666. Losses may continue if Verdant
is unable to achieve its projected sales, gross margins and expense levels.
SEASONALITY; WEATHER CONDITIONS. Verdant's business is highly seasonal,
with over 65% of sales occurring in the first and second fiscal quarters.
Unexpected production or transportation difficulties occurring at the time of
peak production could cause sales losses which could not readily be reversed. In
addition, Verdant's business is affected by the weather. Poor weather has
resulted in the past and may in the future result in reduced purchases of
Verdant's products.
MANUFACTURING. Verdant relies upon third parties for a significant
portion of its product manufacturing, formulation and packaging. Although
Verdant believes that most of its manufacturing does not require specialized
technical expertise and that it currently has arrangements with suppliers
adequate for its requirements, failure of a third party supplier to perform
could cause short-term supply interruptions. Such supply interruptions could
adversely affect Verdant's ability to deliver product and, during a period of
peak production, could adversely affect results of operations.
MARKET ACCEPTANCE. Verdant's business has historically been based on
environmentally sensitive fertilizers and pesticides. Recently, Verdant has
expanded its strategic objectives to include the acquisition of traditional
synthetic pesticide product lines. While Verdant intends to utilize its acquired
synthetic product lines as vehicles to develop, manufacture and market products
based upon its patented, hybrid fatty acid/traditional pesticide technologies,
its future success depends upon its ability to successfully develop and
manufacture products incorporating such technologies and upon market acceptance
of such hybrid products. Verdant's success is also dependent upon its ability to
successfully market the synthetic pesticide product lines it has acquired or may
acquire in the future as well as its environmentally sensitive lines of
pesticides and fertilizers.
COMPETITION. Verdant faces significant competition from numerous
manufacturers and marketers participating in the pesticide and fertilizer
industries, several of which significantly dominate their respective markets and
many of which have substantially greater financial, technical, marketing and
other resources than Verdant. Verdant's environmentally sensitive products
generally cost more than those of their conventional chemical counterparts and,
therefore, Verdant is generally not able to compete on pricing alone.
ACQUISITION STRATEGY. Verdant has in the past and intends to continue
in the future to pursue acquisitions of companies with related or complementary
product lines. Future acquisitions by Verdant may result in potentially dilutive
issuances of equity securities, the incurrence of additional debt and
amortization expenses related to goodwill and intangible assets that could
adversely affect Verdant's results of operations. In addition, acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations and products of the acquired company, the diversion of management's
attention from other business concerns and the potential loss of key employees
of the acquired company.
MANAGEMENT OF GROWTH. If Verdant is successful in further executing its
acquisition strategy, Verdant may experience rapid growth which may place a
significant strain on Verdant's limited personnel and other resources. Verdant's
ability to manage its growth effectively will require it to continue to improve
its operational, financial and management systems, and to successfully train,
motivate and manage its employees. If Verdant's management is unable to manage
growth effectively, Verdant's financial condition could be adversely affected.
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GOVERNMENT REGULATION; PRODUCT APPROVAL. Government regulation in the
United States and other countries is a significant factor in the research,
development, production and marketing of pesticides and, to a lesser extent,
fertilizers. To develop and sell a pesticide product, federal and state product
registration must be obtained for each pest and plant for which the product is
used. In the United States, pesticides are regulated by the EPA under the
Federal Insecticide, Fungicide and Rodenticide Act, as amended ("FIFRA"), which
requires extensive efficacy, toxicology and environmental testing to
substantiate product performance and safety prior to registration. In addition,
many states have additional registration requirements that go beyond FIFRA.
There can be no assurance that any testing approvals or registrations will be
granted on a timely basis, if at all, or that Verdant resources will be adequate
to meet the costs of regulatory compliance. Any or all of those approvals may be
the subject of disputes that could postpone or prevent research, development,
production and/or marketing of Verdant's products. Verdant cannot predict the
effect of future legislation and regulation on Verdant's operations.
In addition, some states have laws imposing liability on certain
parties for the release of pesticides and/or fertilizers into the environment in
a manner or in concentrations not permitted by law. The Comprehensive
Environment Response, Compensation and Liability Act, commonly know as the
federal Superfund law, imposes liability on certain parties for the release into
the environment of hazardous substances, which might include fertilizers and
pesticides under certain circumstances. There can be no assurance that Verdant
will not be subject to claims under such statutes. See "Environmental Matters"
below.
ENVIRONMENTAL MATTERS. Owners of property in the vicinity of the Fort
Valley, Georgia offices of Verdant's wholly owned subsidiary, Southern
Resources, Inc. ("SRI"), initiated civil actions against, among others, SRI and
its subsidiaries, SureCo, Inc. and Peach County Property, Inc., alleging bodily
injury and property damage arising out of chemical formulation activities
conducted on or about the site prior to Peach County Property, Inc.'s purchase
of the property from Canadyne-Georgia Corporation (formerly Woolfolk Chemical
Works, Inc.). Certain cases relating to this matter have been settled, with
Canadyne-Georgia Corporation agreeing to pay all settlement amounts to the
plaintiffs. Verdant believes the actions are without merit as they relate to SRI
and its subsidiaries since the environmental claims relate to circumstances
caused by the prior owner of the property. Accordingly, SRI is vigorously
defending the lawsuits, but there can be no assurance that liability will not be
imposed on Verdant as a result of such lawsuits.
In addition, the United States Environmental Protection Agency ("EPA")
has issued a recommendation regarding certain environmental matters associated
with the Fort Valley site in which it outlined the desired course of action
Canadyne-Georgia Corporation should undertake to remediate the site. The EPA has
named, among others, SureCo, Inc. as a potentially responsible party for
contamination of the site. However, Canadyne-Georgia Corporation, in a 1986
agreement covering the sale of the property, agreed to provide SRI's
subsidiaries indemnification for environmentally related losses that might arise
with respect to the site. There is no assurance that Verdant will not be
subjected to material liabilities in connection with the costs of remediation at
the site. The EPA estimates that the present value of the cost of the
remediation associated with the site is $9,570,000.
All of the former shareholders of SRI, in a separate 1993 agreement
between the SRI shareholders and SRI, and in separate agreement entered into on
December 8, 1997 in connection with the merger of SRI with Verdant, have agreed
to indemnify SRI and Verdant for any losses, liabilities, deficiencies, damages,
expenses or costs (including reasonable legal expenses), resulting from
litigation relating to environmental matters on and near the real property on
which SRI's subsidiary's manufacturing facility is located or any other property
alleged to be affected in connection with environmental matter relating to the
property. The indemnity provided by the former shareholders of SRI is not
limited in dollar amount and Verdant will permit the indemnity to terminate only
when litigation has terminated and cleanup of the property has been approved by
the Environmental Protection Agency.
ADVERTISING REGULATION. The labeling, packaging and advertising of all
products is subject to regulation by individual states and by the Federal Trade
Commission ("FTC"). The EPA restricts the use of such terms as "non-toxic,"
"biodegradable," "natural," "safe" and others covering product safety and the
FTC more generally supervises these and other claims to make certain advertising
is not misleading. Such restrictions and regulation may affect the manner in
which Verdant markets its pest control products. While Verdant's pest control
product labels have been accepted by the EPA and Verdant believes the efficacy
claims in its advertising materials are consistent with EPA guidelines and FTC
regulation, there can be no assurance that EPA or FTC regulations or
interpretations may not change in the future or that the EPA, the FTC, other
regulatory bodies or competitors of Verdant will not challenge Verdant's
advertising claims.
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PATENT PROTECTION. Verdant's success depends in part on its ability to
protect its patents and other intellectual property rights. Verdant owns over 30
patents, which expire at various times during the years 2006 through 2014 and
also licenses two patents. There can be no assurance that Verdant's existing or
any future patents will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to Verdant. Verdant may be subject to or
may initiate interference proceedings in the patent office or may be made a
party to, or may initiate, litigation or other disputes regarding intellectual
property rights, which can demand significant financial and management
resources. After the expiration of Verdant's patents, competitors may be subject
to fewer restrictions on duplicating its technology. Verdant is not aware of any
issued patents that would prohibit the use of any technology Verdant currently
has under development, but cannot be certain that its products do not infringe
upon proprietary rights held by others.
RELIANCE ON COMMODITIES. Many of Verdant's fertilizer products contain
materials, such as feather, blood and bone meal, which may be subject to price
fluctuation or supply shortages and are generally not traded in established
commodities markets. There can be no assurance that price fluctuations, weather
or other factors will not adversely affect the ability of Verdant to obtain
these materials on a favorable basis.
PRODUCT LIABILITY. Like most producers of consumer goods, Verdant faces
the risk of exposure to product liability claims and unfavorable publicity in
the event the use of its products results in adverse effects. Although Verdant
has not been subject to any material claims for products liability, and although
it believes that its products do not represent any significant risk if used as
directed, there can be no assurance that it will be able to avoid product
liability exposure. Although Verdant believes that it has adequate products
liability insurance, there can be no assurance that such insurance will be
adequate to cover potential future claims.
POSSIBLE VOLATILITY OF STOCK PRICE. Verdant believes factors such as
new product announcements by Verdant or its competitors, announcements of
acquisitions, and quarter-to-quarter variances in financial results could cause
the market price of the Verdant Common Stock to fluctuate substantially. In
addition, the stock market in general has experienced significant price and
volume fluctuations. These fluctuations have often been unrelated to the
operating performance of individual companies. Broad market fluctuations as well
as general economic or political conditions may adversely affect the market
price of the Verdant Common Stock.
NASDAQ STOCK LISTING. Shares of Verdant Common Stock are listed for
trading on the Nasdaq National Market System, and are currently in compliance
with the requirements for such listing, including the requirement that stock
trade at a minimum bid price of $1.00. If the Verdant Common Stock were to fail
to comply with the minimum bid price requirement, and did not regain compliance
within the time alloted by Nasdaq, it is possible it would be delisted from the
Nasdaq Stock Market, in which event trading in Verdant Common Stock would occur
on the Over The Counter Bulletin Board and be subject to certain "Penny Stock
Rules." Under Exchange Act Rule 15g-9, broker-dealers must take certain steps
prior to selling a "penny stock," including: (i) obtaining financial and
investment information from the investor; (ii) a written suitability
questionnaire and purchase agreement signed by the investor; (iii) providing the
investor a written identification of the shares being offered and in what
quantity; and (iv)deliver to the investor a written statement setting forth the
basis on which the broker-dealer approved the investor's account for the
transaction. Accordingly, delisting from the Nasdaq Stock Market and the
application of the foregoing Penny Stock Rules may make it more difficult for
broker-dealers to sell the Company's securities. In addition, purchasers of the
Company's securities may have difficulty in selling such securities in the
future in secondary trading markets and the price of such securities may be
reduced.
INTEGRATION OF OPERATIONS FOLLOWING THE MERGER. The financial
performance of Verdant following the Merger will depend in part on Verdant's
ability to integrate the operations of Consep with those of Verdant and to
realize the synergies and cost savings anticipated from the Merger. The
operations to be integrated include the corporate, management marketing, and
other functions, as well as Verdant's and Consep's information systems. Cost
savings anticipated from the Merger are expected to result from the elimination
of duplicative functions, personnel and facilities as operations are integrated.
Verdant expects to incur non-operating costs of approximately $1.2
million in connection with the Merger, including Merger-related costs and the
estimated expenses and charges associated with the elimination of duplicative
functions, personnel and facilities. These costs will be incurred in the period
in which the Merger is consummated. If
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unforeseen difficulties or expenses were to arise in connection with the
integration of Verdant's and Consep's operations, these costs could be exceeded
and could result in additional Merger-related costs being expensed in subsequent
periods.
Verdant has estimated that the annual cost savings resulting from the
integration of Consep's operations with Verdant will be approximately $1.1
million and that a portion of these annual savings will begin to be realized in
1999. If unforeseen difficulties were to arise in connection with the
integration of Verdant's and Consep's operations, realization of the cost
savings anticipated from the Merger could be delayed, or such cost savings might
not be realized in full. Such unforeseen difficulties also could have a
disruptive effect on the ability of the combined companies to service their
current business and to pursue new opportunities.
Although Verdant has integrated the operations of other acquired
companies in the past, there is no assurance that significant unforeseen
difficulties or expenses will not arise in connection with its integration of
Consep's operations following the Merger. For the reasons set forth above, such
difficulties or expenses could have a material adverse effect on Verdant's
revenues and results of operations following the Merger.
YEAR 2000. Verdant and Consep are aware of the issues associated with
the programming of existing computer systems as the year 2000 approaches. The
issue is whether computer systems will properly recognize data-sensitive
information when the year changes to 2000. Verdant and Consep believe that any
costs incurred related to year 2000 compliance will not have a material impact
on its or the combined company's business, operations or financial condition.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF VERDANT--Year 2000" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CONSEP--Year 2000"
VERDANT SPECIAL MEETING
GENERAL
This Joint Proxy Statement-Prospectus is being furnished to holders of
Verdant Common Stock as part of the solicitation of proxies by the Verdant Board
for use at the Verdant Special Meeting to be held at 11:00 a.m., local time, on
December 17, 1998 at the offices of Verdant at 9555 James Avenue South, Suite
200, Bloomington, Minnesota 55431. This Joint Proxy Statement-Prospectus and the
accompanying Proxy Card are first being mailed to holders of Verdant Common
Stock on or about November 6, 1998.
The purpose of the Verdant Special Meeting is to vote upon (i) a
proposal to approve the Merger Agreement and (ii) a proposal to amend the
Restated Articles of Incorporation of Verdant to increase the number of
authorized shares of common stock from 25,000,000 to 50,000,000.
The Merger is subject to a number of conditions, including the receipt
of shareholder approvals. See "THE MERGER--Conditions."
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
Holders of Verdant Common Stock as of the Verdant Record Date are
entitled to notice of and to vote at the Verdant Special Meeting and any
adjournments or postponements thereof. Accordingly, only holders of record of
shares of Verdant Common Stock at the close of business on such date will be
entitled to vote at the Verdant Special Meeting and any adjournments or
postponements thereof, with each share entitling its owner to one vote on all
matters properly presented at the Verdant Special Meeting and any adjournments
or postponements thereof. On the Verdant Record Date, there were holders of
record of the 16,705,261 shares of Verdant Common Stock then outstanding. Under
Minnesota law, the Merger Agreement must be approved by the holders of a
majority of outstanding shares of Verdant Common Stock. A majority of the shares
of Verdant Common Stock represented at the Verdant Special Meeting may approve
the Charter Amendment, provided that a quorum of at least a majority of the
votes entitled to be cast at the meeting is present.
If an executed Proxy Card is returned and the shareholder has
explicitly abstained from voting on any matter, the shares represented by such
proxy will be considered present at the Verdant Special Meeting for purposes of
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determining the presence of a quorum and for purposes of calculating the vote,
but will not be considered to have been voted in favor of such matter. In
addition, brokers who hold shares in street name for customers who are the
beneficial owners of such shares are prohibited from giving a proxy to vote
shares held for such customers on matters other than the election of directors
without specific instructions from such customers. Given that the MBCA requires
the affirmative vote of the holders of a majority of the outstanding shares of
Verdant Common Stock entitled to vote on the proposal to approve the Merger
Agreement, if such customers fail to provide specific instructions with respect
to their shares of Verdant Common Stock to their broker or such shareholders
explicitly abstain from voting on the proposals, the effect will be the same as
a vote against the approval of the Merger Agreement. FAILURE TO RETURN A
PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE VERDANT SPECIAL MEETING WILL HAVE
THE SAME EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT AND MAY PREVENT A VOTE
WITH RESPECT TO THE CHARTER AMENDMENT.
It is currently expected that all of the shares of Verdant Common Stock
which the directors and executive officers of Verdant beneficially owned and
were entitled to vote as of the Verdant Record Date ( % of the total number of
outstanding shares of Verdant Common Stock as of such date) will be voted for
approval of the Merger Agreement. As of the Verdant Record Date, directors and
executive officers of Consep did not beneficially own any shares of Verdant
Common Stock entitled to be voted at the Verdant Special Meeting.
If the accompanying Proxy Card is properly executed and returned to
Verdant in time to be voted at the Verdant Special Meeting, the shares
represented thereby will be voted in accordance with the instructions marked
thereon. EXECUTED BUT UNMARKED PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER
AGREEMENT AND FOR APPROVAL OF THE CHARTER AMENDMENT. The Verdant Board does not
know of any matters other than those described in the notice of the Verdant
Special Meeting that are to come before the Verdant Special Meeting. If any
other matters are properly brought before the Verdant Special Meeting,
including, among other things, a motion to adjourn or postpone the Verdant
Special Meeting to another time or place for the purpose of soliciting
additional proxies in favor of the proposal to approve the Merger Agreement and
the Charter Amendment or to permit dissemination of information regarding
material developments relating to the Merger or otherwise germane to the Verdant
Special Meeting, one or more of the persons named in the Proxy Card will vote
the shares represented by such proxy upon such matters as determined in their
discretion; provided, however, that no proxy that is voted against the proposal
to approve the Merger Agreement or the Charter Amendment will be voted in favor
of any such adjournment or postponement for the purpose of soliciting additional
proxies.
The presence of a shareholder at the Verdant Special Meeting will not
automatically revoke such shareholder's proxy. Any proxy given pursuant to this
solicitation may be revoked by the person giving it by giving written notice of
such revocation to the Secretary of Verdant at any time before it is voted, by
delivering to Verdant a duly executed, later-dated proxy, by delivering to any
other person a duly executed, later dated proxy that such other person uses to
vote at the Verdant Special Meeting or by attending the Verdant Special Meeting
and voting in person. All written notices of revocation and other communications
with respect to revocation of Verdant proxies should be addressed to Mark G.
Eisenschenk, Secretary, Verdant Brands, Inc., 9555 James Avenue South, Suite
200, Bloomington, Minnesota 55431- 2543.
The cost of soliciting proxies for the Verdant Special Meeting will be
borne by Verdant, except that the cost of preparing and mailing this Joint Proxy
Statement-Prospectus (except legal and accounting fees, which will be borne by
the respective parties) will be borne equally by Verdant and Consep. In addition
to use of the mails, proxies may be solicited personally or by telephone,
facsimile or other means of communication by directors, officers and employees
of Verdant, who will not be specially compensated for such activities, but who
may be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. Verdant also will request persons, firms and companies holding
shares in their names or in the name of their nominees, which are beneficially
owned by others, to send proxy materials to and obtain proxies from such
beneficial owners. Verdant will reimburse such persons for their reasonable
expenses incurred in that connection.
RECOMMENDATION OF VERDANT BOARD
The Verdant Board has approved the Merger Agreement and the
transactions contemplated thereby and the Charter Amendment. The Verdant Board
believes that the Merger Agreement and the Charter Amendment are in the best
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interests of Verdant and its shareholders and recommends that Verdant
Shareholders vote "FOR" approval of the Merger Agreement and the Charter
Amendment. See "THE MERGER--Reasons of Verdant for the Merger" and "PROPOSAL TO
APPROVE AMENDMENT TO VERDANT RESTATED ARTICLES OF INCORPORATION."
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CONSEP SPECIAL MEETING
GENERAL
This Joint Proxy Statement-Prospectus is being furnished to holders of
Consep Common Stock as part of the solicitation of proxies by the Consep Board
for use at the Consep Special Meeting to be held at 9:00 a.m., on December 17,
1998, at the offices of Consep at 213 Southwest Columbia Street, Bend, Oregon
97702. This Joint Proxy Statement-Prospectus and the accompanying Proxy Card are
first being mailed to holders of Consep Common Stock on or about November 6,
1998.
The purpose of the Consep Special Meeting is to vote upon a proposal to
approve the Merger Agreement.
The Merger is subject to a number of conditions, including the receipt
of shareholder approvals. See "THE MERGER--Conditions."
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
Consep Shareholders as of the Consep Record Date are entitled to notice
of and to vote at the Consep Special Meeting and any adjournment or postponement
thereof. Accordingly, only holders of record of shares of Consep Common Stock at
the close of business on such date will be entitled to vote at the Consep
Special Meeting and any adjournment or postponement thereof, with each share
entitling its owner to one vote on all matters properly presented at the Consep
Special Meeting and any adjournment or postponement thereof. On the Consep
Record Date, there were approximately holders of record of the 9,667,357 shares
of Consep Common Stock then outstanding.
Under Oregon law, the Merger Agreement must be approved by the holders
of a majority of the outstanding shares of Consep Common Stock.
If an executed Proxy Card is returned and the shareholder has
explicitly abstained from voting on any matter, the shares represented by such
proxy will be considered present at the Consep Special Meeting for purposes of
determining a quorum and for purposes of calculating the vote, but will not be
considered to have been voted in favor of such matter. Under the rules of the
Nasdaq National Market, brokers who hold shares in street name for customers who
are the beneficial owners of such shares are prohibited from giving a proxy to
vote shares held for such customers without specific instructions from such
customers. Given that the OBCA requires the affirmative vote of the holders of a
majority of the outstanding shares of Consep Common Stock to approve the Merger
Agreement, any abstention and any failure of such customers to provide specific
instructions with respect to their shares of Consep Common Stock to their broker
will have the same effect as a vote against the approval of the Merger
Agreement. FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE
CONSEP SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER
AGREEMENT.
It is currently expected that all of the 729,270 shares of Consep
Common Stock which the directors and executive officers of Consep beneficially
owned and were entitled to vote as of the Consep Record Date (7.54% of the total
number of outstanding shares of Consep Common Stock as of such date) will be
voted for approval of the Merger Agreement. As of the Consep Record Date,
directors and executive officers of Verdant did not beneficially own any shares
of Consep Common Stock entitled to be voted at the Consep Meeting.
If the accompanying Proxy Card is properly executed and returned to
Consep in time to be voted at the Consep Special Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
EXECUTED BUT UNMARKED PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER
AGREEMENT. The Consep Board does not know of any matters other than those
described in the notice of the Consep Special Meeting that are to come before
the Consep Special Meeting. If any other matters are properly brought before the
Consep Special Meeting, including, among other things, a motion to adjourn or
postpone the Consep Special Meeting to another time and/or place for the purpose
of soliciting additional proxies in favor of the proposal to approve the Merger
Agreement or to permit dissemination of information regarding material
developments relating to the Merger or otherwise germane to the Consep Special
Meeting, one or more of the persons named in the Proxy Card will vote the shares
represented by such proxy upon such matters as determined in their discretion;
provided, however, that no proxy that is voted against
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the proposal to approve the Merger Agreement will be voted in favor of any such
adjournment or postponement for the purpose of soliciting additional proxies.
The presence of a shareholder at the Consep Special Meeting will not
automatically revoke such shareholder's proxy. Any proxy given pursuant to this
solicitation may be revoked by the person giving it by giving written notice of
such revocation to the Secretary of Consep at any time before it is voted, by
delivering to Consep a duly executed, later-dated proxy or by attending the
Consep Special Meeting and voting in person. All written notices of revocation
and other communications with respect to revocation of Consep proxies should be
addressed to Volker G. Oakey, Secretary, Consep, Inc., 213 Southwest Columbia
Street, Bend, Oregon 97702.
The cost of soliciting proxies for the Consep Special Meeting will be
borne by Consep, except that the cost of preparing and mailing this Joint Proxy
Statement-Prospectus (except legal and accounting fees, which will be borne by
the respective parties) will be borne equally by Verdant and Consep. In addition
to use of the mails, proxies may be solicited personally or by telephone,
facsimile or other means of communication by directors, officers and employees
of Consep, who will not be specially compensated for such activities, but who
may be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. Consep will also request persons, firms and companies holding
shares in their names or in the name of their nominees, which are beneficially
owned by others, to send proxy materials to and obtain proxies from such
beneficial owners. Consep will reimburse such persons for their reasonable
expenses incurred in that connection.
RECOMMENDATION OF CONSEP BOARD
The Consep Board has approved the Merger Agreement and the transactions
contemplated thereby. The Consep Board believes that the Merger is in the best
interests of Consep shareholders and recommends that Consep Shareholders vote
"FOR" approval of the Merger Agreement. See "THE MERGER--Reasons of Consep for
the Merger."
THE MERGER
THE FOLLOWING SUMMARY OF CERTAIN TERMS AND PROVISIONS OF THE MERGER
AGREEMENT, WHICH DESCRIBES ALL MATERIAL TERMS AND PROVISIONS THEREOF, IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OTHER INFORMATION CONTAINED
ELSEWHERE IN THIS JOINT PROXY STATEMENT-PROSPECTUS INCLUDING THE APPENDICES
HERETO. A COPY OF THE MERGER AGREEMENT (EXCLUDING THE EXHIBITS AND SCHEDULES
THERETO) IS SET FORTH IN APPENDIX A TO THIS JOINT PROXY STATEMENT-PROSPECTUS AND
IS INCORPORATED HEREIN BY REFERENCE, AND REFERENCE IS MADE THERETO FOR A
COMPLETE DESCRIPTION OF THE TERMS OF THE MERGER. SHAREHOLDERS ARE URGED TO READ
THE MERGER AGREEMENT AND EACH OF THE OTHER APPENDICES HERETO CAREFULLY.
DESCRIPTION OF THE MERGER
The Merger Agreement provides that, upon the satisfaction or waiver of
certain conditions, Merger Subsidiary will be merged with and into Consep,
Consep will continue as the surviving corporation, and the separate existence of
Merger Subsidiary will cease. Pursuant to the Merger Agreement, (1) each share
of Consep Common Stock issued and outstanding immediately prior to the Effective
Time will be converted into the right to receive 0.95 of one share of Verdant
Common Stock; (2) each share of Consep Common Stock issued and outstanding
immediately prior to the Effective Time and owned by Verdant, Merger Subsidiary
or Consep or any direct or indirect subsidiary of Verdant, Merger Subsidiary or
Consep will be canceled and extinguished without any conversion thereof and no
payment will be made with respect thereto; and (3) each share of common stock of
Merger Subsidiary issued and outstanding immediately prior to the Effective Time
will be converted into one validly issued, fully paid and nonassessable share of
the surviving corporation.
BACKGROUND OF THE MERGER
Verdant regularly reviews candidates for potential merger, acquisition
and other strategic purposes. During the summer of 1995, Stanley Goldberg,
President and Chief Executive Officer of Verdant contacted Volker Oakey,
President and Chief Executive Officer of Consep to discuss strategic business
opportunities. Stanley Goldberg and Mark
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Eisenschenk, Executive Vice President and Chief Financial Officer of Verdant,
met with Volker Oakey and Howard Allred, former Chief Financial Officer of
Consep, at Consep's offices and discussed a variety of business possibilities,
including proceeding toward a merger of the two companies. Mr. Goldberg made a
presentation to Verdant's Board of Directors describing Consep and the potential
benefits of merging with Consep. Mr. Oakey later met with Verdant management and
its directors in Minneapolis. After additional meetings and telephonic
conversations, Verdant and Consep determined they were unable to reach agreement
regarding relative valuations for their respective companies and regarding
certain organizational structure issues. As a result, each of Consep and Verdant
decided at that time to discontinue merger discussions and to continue to carry
on their respective business activities in the ordinary course.
Business relations between the companies remained positive thereafter.
In May 1998, David Vansant, Executive Vice President of Corporate
Development for Verdant, contacted Volker Oakey to discuss the potential for
strategic business opportunities. On June 9 and 10, 1998, Mr. Vansant met with
Mr. Oakey and Larry Katz, former Consep Chief Financial Officer, and discussed
the possibility of Verdant acquiring Consep's Canadian business or merging
Verdant and Consep. They agreed there were important strategic and financial
reasons for completing a merger of Verdant and Consep. Telephonic conversations
ensued between Mr. Vansant, Stanley Goldberg, Mark Eisenschenk and Messrs. Oakey
and Katz which lead to a formal meeting at Consep's offices to further discuss
more detailed merger possibilities.
On June 29 and 30, 1998, Stanley Goldberg, David Vansant and Mark
Eisenschenk met with Volker Oakey and Larry Katz at Consep's offices. They each
made extensive presentations regarding the backgrounds and current status of
each company's respective business. The representatives of Verdant and Consep
discussed strategic business opportunities and clarified the reasons for
potentially combining the two companies. They reviewed historical financial
results, possible synergistic benefits resulting from a business combination,
potential cost savings, possible organizational structures, historical and
current stock prices and potential ranges of relative business valuation. It was
generally agreed that, given a variety of factors, the parties would be willing
to continue their merger discussions, assuming a merger were completed on a
one-for-one stock swap basis.
Telephonic conversations between the parties continued on July 1, 1998
regarding the potential merger. On July 2, 1998, a meeting of the Board of
Directors of Verdant was held in Minneapolis, Minnesota. Mark Eisenschenk and
Stanley Goldberg presented an overview and update of Consep, including financial
information, benefits arising from a business combination, organizational
structure matters, historical stock values, potential cost savings and the
proposed transaction structure, which would include exchanging one share of
Verdant common stock for each share of Consep common stock outstanding and
provide for adding Volker Oakey and Walter C. Babcock to Verdant's board of
directors. Verdant's board of directors authorized management to issue a letter
of intent to Consep incorporating these basic terms.
A letter of intent regarding a proposed merger of Verdant and Consep
was prepared by Verdant and delivered to Consep on July 6, 1998.
On July 8, 1998, the Consep Board held a special meeting to review and
discuss the proposed letter of intent prepared by Verdant to enter into
negotiations between the two companies with a view towards executing a
definitive merger agreement. During the meeting, Volker Oakey made a brief
presentation to the Consep Board regarding the strategic and market potential of
the combination with Verdant. Based upon this presentation, and following a
review and discussion of the terms of the proposed letter of intent with
Verdant, the Consep Board authorized Volker Oakey to execute the letter of
intent with Verdant.
On July 9 and 10, 1998, William DeMare, Vice President of Technology
and Professional Products Division of Verdant and Patrick McGinnity, Vice
President of Product Development for Verdant, met with Volker Oakey and key
employees in Consep's technology, agricultural products and regulatory groups to
better understand the relevance, opportunities and organizational capabilities
of each company's respective technologies. They also exchanged detailed
information regarding each company's operating activities.
A letter of intent to acquire all outstanding stock of Consep in a
one-for-one stock exchange was executed on July 10, 1998 and Consep retained
Pacific Crest Securities Inc. to act as its financial advisor for the proposed
transaction. Both parties then issued press releases on July 14, 1998 announcing
their intent to merge.
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A definitive Agreement and Plan of Merger to merge Verdant and Consep
was drafted by Verdant and presented to Consep on July 14, 1998. Between July
16, 1998 and September 3, 1998, several meetings and telephone calls between
Volker Oakey, Stanley Goldberg and their respective advisors resulted in
agreement on the terms of the Merger Agreement.
Detailed due diligence activities began on July 16, 1998 and continued
through September 3, 1998. Verdant's due diligence investigation was performed
by Verdant employees responsible for finance, accounting, sales, marketing,
technology and operations. The investigation included, among other things,
onsite reviews at Consep's headquarters in Bend, Oregon, visits to Consep's
distribution facilities in California, onsite reviews of Consep's Canadian
subsidiary's operations and meetings with Consep's key vendors and customers.
Verdant also engaged Deloitte and Touche, LLP to review Consep's external
auditor's workpapers, to make due diligence inquiries of Consep personnel and to
document accounting policies and financial statement components. In addition,
Verdant engaged GE Capital Services to perform audits of significant portions of
Consep's assets. During this same period of time, management personnel of Consep
obtained confidential information regarding financial, employment, legal and
general operational matters of Verdant. A meeting of Verdant's Board of
Directors was held on August 4, 1998 at which the board of directors was
provided an update on the due diligence review.
On August 11, 1998, as part of a regularly scheduled meeting of the
Consep Board, Volker Oakey presented alternative strategies, the risks and
benefits of continued operations as an independent company, and the strategic
and market potential of a combination with Verdant. In addition, Consep's
financial advisor presented its financial analysis of the terms and conditions
of the Merger, and at the conclusion of its presentation, the financial advisor
delivered to the Consep Board its opinion as to the fairness, as of such date,
from a financial point of view, to Consep's shareholders of the consideration to
be paid pursuant to the Merger. Based on the information provided by Verdant, a
review by Consep management of the strategic considerations of a combination,
the presentation and oral opinion of Consep's financial advisor, and other
information, the Consep Board authorized Mr. Oakey to continue due diligence and
negotiations regarding a merger with Verdant. Subsequently, members of Consep's
management team met with their Verdant counterparts to perform further due
diligence work in their respective areas of responsibility and exchanged
relevant documents and other information.
On August 31, 1998, at a special meeting of the Consep Board, Volker
Oakey and Consep's legal counsel made further presentations to the Consep Board
regarding the results of their continuing due diligence investigation, including
Verdant's financial condition, operational status, legal affairs and future
prospects. Based on the information provided by Mr. Oakey and Consep's legal
counsel, the Consep Board authorized Mr. Oakey to continue due diligence and
negotiations regarding a merger with Verdant.
In the course of Verdant's due diligence review, certain issues
relating to contingencies and inventory-related valuation matters were addressed
with Volker Oakey. As a result, Verdant and Consep renegotiated the exchange
ratio from one share of Verdant common stock for each share of Consep common
stock to 0.95 of one share of Verdant common stock for each share of Consep
common stock.
A meeting of the Board of Directors of Verdant was held on September 8,
1998 to obtain an update on matters relating to Consep merger, its renegotiated
terms and key provisions of the merger agreement. The directors reviewed and
discussed a variety of factors regarding the amount of consideration Verdant
would provide to consummate the Merger. It reviewed historical and current
market prices of Consep common stock. It reviewed the purchase prices of
Verdant's previous transactions as a percentage of the acquired company's sales,
as well as similar statistics for other transactions in the industry. The
directors also reviewed the net book value of Consep and its net tangible book
value in relation to the consideration being provided by Verdant, as well as the
expected combined financial performance if the Merger is completed. The Board of
Directors then authorized Verdant officers to execute the merger agreement and
indicated it would recommend to the Verdant shareholders that they vote for
completion of the merger. The Verdant Board also directed management to retain
the services of a qualified financial advisor to Verdant, and to obtain from
such financial advisor and opinion as to whether, as of the date of the meeting,
the terms of the Merger were fair to Verdant.
On September 8, 1998, a special meeting of the Consep Board was held
with Consep's legal advisors to consider approval of the Merger Agreement.
Consep's financial advisor, Pacific Crest Securities Inc., presented its
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updated financial analysis of the terms and conditions of the Merger, and at the
conclusion of its presentation, the financial advisor delivered to the Consep
Board its oral opinion, confirmed by a subsequent written opinion dated
September 8, 1998, as to the fairness, as of such date, from a financial point
of view, to Consep's shareholders of the consideration to be paid pursuant to
the Merger. See "Opinion of Consep's Financial Advisor." Following the
presentation of Consep's financial advisor, the Consep Board approved the Merger
Agreement and the Merger.
A press release was issued on September 9, 1998 to announce that the
Merger Agreement had been signed by both Verdant and Consep.
REASONS OF VERDANT FOR THE MERGER
In reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby and to recommend that the Verdant Shareholders
approve the Merger Agreement and the Charter Amendment, the Verdant Board
considered a variety of factors, including the following:
TERMS OF MERGER AGREEMENT. The Verdant Board took into consideration
the terms of the Merger Agreement and the transactions contemplated thereby. See
"--Covenants and Agreements" and "--Interests of Certain Persons in the Merger."
DUE DILIGENCE REVIEW. The Verdant Board considered its knowledge and
review of the financial condition, results of operations and business operations
and prospects of Verdant and Consep, as well as the results of Verdant's due
diligence review of Consep.
DIRECTORS AND MANAGEMENT OF VERDANT AFTER THE MERGER. The Verdant Board
took into account that the new Verdant Board would initially consist of eight of
the current directors of Verdant and two of the current board members of Consep,
and that the current management of Verdant would have a significant influence in
the management of the combined company, with Stanley Goldberg continuing as
Chief Executive Officer and President of the combined entity. See "--Interests
of Certain Persons in the Merger" and "MANAGEMENT AND OPERATIONS AFTER THE
MERGER."
TAX AND ACCOUNTING TREATMENT OF THE MERGER. The Verdant Board
considered that the Merger was expected to be tax-free to Verdant and its
shareholders for federal income tax purposes and be accounted for under the
purchase method of accounting. See "--Accounting Treatment" and "--Certain
Federal Income Tax Consequences."
OTHER. Certain other key reasons for the Merger are as follows:
(i) The potential for increased sales to existing customers and to
new customers as a result of a larger product line that better
satisfies customer needs for integrated pest management across
a broader spectrum of pest control.
(ii) The opportunity to leverage research, field development and
marketing capabilities and to share technology and
technological expertise.
(iii) The opportunity to achieve lower costs and expenses than the
aggregate costs and expenses of Verdant and Consep if they
were to continue to operate separately through elimination of
duplicate facilities and infrastructure, reductions in staff
and consolidation of research and development expenditures.
(iv) Improved potential for the combined companies to raise
additional capital through debt or equity financing and
thereby satisfy the funding needs of Verdant and Consep.
CHARTER AMENDMENT. The proposed Charter Amendment is intended to create
a sufficient number of authorized shares of Verdant Common Stock for issuance to
Consep Shareholders in connection with the Merger and to ensure that a
sufficient number of shares of Verdant Common Stock remain available for general
corporate purposes, including issuances pursuant to employee stock plans, stock
dividends, and possible future acquisitions and issuances for the purpose of
raising additional capital. There are no present plans, understandings or
agreements for issuing a material
33
<PAGE>
number of additional shares of Verdant Common Stock. However, if such plans,
understandings or agreements were formulated or reached in the future in
connection with an action or transaction which would not otherwise require
approval by holders of Verdant Common Stock, it could become necessary for the
Verdant Board to call a special meeting of shareholders in order to authorize an
increase in the number of authorized shares of Verdant Common Stock. The Verdant
Board believes that it would not be in shareholders' best interests for Verdant
to bear the expense and inconvenience of such a special meeting, and accordingly
is recommending that such an increase be approved at the Verdant Special
Meeting, which must be held in any event in order to consider and act upon the
Merger. Consummation of the Merger is conditioned upon approval of the Charter
Amendment.
The foregoing discussion of the information and factors considered by
the Verdant Board is not intended to be exhaustive but is believed to include
all material factors considered by the Verdant Board. In reaching its
determination to approve the Merger and the transactions contemplated thereby
and the Charter Amendment, the Verdant Board did not assign any relative or
specific weights to the foregoing factors, and individual directors may have
given differing weights to differing factors. After deliberating with respect to
the Merger and other transactions contemplated by the Merger Agreement, and
considering, among other things, the matters discussed above, the Verdant Board
approved the Merger Agreement and the transactions contemplated thereby as being
fair to, and in the best interests of, Verdant and its shareholders. There is no
guarantee that the combined company will achieve or receive any of the benefits,
cost savings or synergies described above. See "CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION."
BASED ON THE FOREGOING, THE VERDANT BOARD RECOMMENDS THAT VERDANT
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND THE CHARTER
AMENDMENT.
OPINION OF VERDANT'S FINANCIAL ADVISOR
At the request of the Verdant Board at its September 8, 1998 meeting,
at which the Merger Agreement was approved, management of Verdant retained Piper
Jaffray Inc. ("Piper") on September 22, 1998 to render an opinion as to the
fairness to Verdant, from a financial point of view, of the consideration to be
paid by Verdant for the Consep Common Stock in connection with the Merger.
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<PAGE>
Piper was selected by Verdant on the basis of its experience in valuing
securities in connection with mergers and acquisitions, its knowledge of Verdant
and other manufacturers and marketers of lawn, garden and turf products and its
expertise in transactions involving such companies. Piper is a nationally
recognized investment banking firm and is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Piper has from time to time issued research reports and
recommendations on the Verdant Common Stock, and in the ordinary course of
business makes a market in Verdant Common Stock. In the course of its market
making and other trading activities, Piper may, from time to time, have a long
or short position in, and buy and sell securities of, Verdant. Piper also
periodically publishes research reports regarding other companies that develop,
manufacture and market lawn, garden and turf products.
On September 30, 1998, Piper delivered to Verdant its written opinion to
the Verdant Board to the effect that, as of September 8, 1998, based upon and
subject to the assumptions, factors and limitations set forth in the opinion and
as described below, the consideration proposed to be paid to the holders of
outstanding Consep Common Stock in the Merger was fair, from a financial point
of view, to Verdant. A copy of the opinion of Piper is attached as Appendix B
to this Joint Proxy Statement-Prospectus and is incorporated herein by
reference. The Verdant Shareholders are urged to read the attached opinion in
its entirety.
Piper was not requested to, and did not, make any recommendation to the
Verdant Board as to the form or amount of the consideration to be paid in the
Merger, which was determined through negotiations between Verdant and Consep.
The opinion was rendered to the Verdant Board and does not constitute a
recommendation to any Verdant Shareholder as to how such Verdant Shareholder
should vote at the Verdant Special Meeting. The opinion does not address
Verdant's underlying business decision to proceed with or effect the Merger.
In arriving at its opinion, Piper reviewed (i) the Merger Agreement, (ii)
certain information relative to the business, financial condition and operations
of Consep, (iii) certain internal financial planning information of Consep, (iv)
certain financial and securities data relating to Consep and companies deemed
similar to Consep or representative of the business sector in which Consep
operates, (v) to the extent publicly available, the financial terms of certain
acquisition transactions deemed comparable to the Merger, (vi) certain publicly
available information relative to the business, financial condition and
operations of Verdant, (vii) certain publicly available financial and securities
data relating to Verdant and companies deemed similar to Verdant or
representative of the business sector in which Verdant operates and (viii)
certain internal financial information of Verdant on a stand-alone basis and as
consolidated with Consep prepared for financial planning purposes. In addition,
Piper engaged in discussions with members of management of Verdant and Consep
concerning the respective financial conditions, current operating results and
business outlook of Verdant and Consep and the plans and business outlook for
the companies on a consolidated basis following the Merger.
Analysis of Selected Publicly Traded Companies. Piper compared Consep's
financial and stock market information to similar information for certain
publicly traded companies that develop, manufacture and/or market lawn, garden
and turf products. Companies reviewed by Piper included AgriBioTech, Inc., U.S.
Home and Garden, Inc., Ecogen, Inc., Central Garden & Pet Co., Scotts Company,
Eco Soil Systems, Inc., and Verdant Brands Inc. (the "Comparable Companies"). Of
the companies that produce these items, the Comparable Companies were those
public companies determined by Piper to be most comparable to Consep based on a
number of criteria. These criteria included, but were not limited to, product
offerings, size, sales growth rate, relative profitability and earnings growth
rates.
Piper calculated valuation ratios based on published stock prices for each
of the Comparable Companies. The valuation ratios were based upon several
variables, including sales, earnings before interest, taxes, depreciation and
amortization ("EBITDA"), operating income, net income for the latest twelve
month ("LTM") periods, and projected net income for both the current and
following fiscal years. The projections for net income were based upon consensus
earnings estimates for the Comparable Companies prepared by research analysts
from various investment firms.
After (i) examining the historical and expected performance for Consep and
the Comparable Companies and (ii) noting that Consep was not profitable for the
LTM period ended June 30, 1998 at the operating income, EBITDA or net income
levels, Piper determined that only LTM sales multiples were applicable for
valuing Consep Common Stock under this approach. For the Comparable Companies,
LTM sales multiples ranged from a high of 2.6 to a low of 0.6, with a mean and
median of 1.4 and 1.0, respectively. Based on the closing price of Verdant
common stock on September 8, 1998, the Exchange Ratio and Consep's estimated
permanent debt and cash totals as of June 30, 1998, Piper calculated that the
LTM sales multiple for the Merger (the "Merger LTM Sales Multiple") was
approximately equal to 0.4.
Analysis of Selected Merger and Acquisition Transactions. Piper reviewed
numerous acquisitions involving target companies engaged in the manufacturing
and/or marketing of agricultural and consumer lawn, garden and turf products and
summarized the terms of ten selected acquisitions. The following table lists
the transactions that Piper summarized (the "Comparable Acquisitions"):
<TABLE>
<CAPTION>
EFFECTIVE DATE
OF TRANSACTION ACQUIRING COMPANY --------------------------------
- -------------- ------------------------------ ACQUIRED COMPANY
--------------------------------
<C> <S> <C>
12/22/97 IMC Global, Inc. Freeport-McMoRan, Inc.
12/16/97 Ringer Corporation Southern Resources, Inc.
3/6/97 Potash Corp. of Saskatchewan Arcadian Corp.
1/20/97 Thermo Ecotek Biosys
8/21/96 Crompton & Knowles Corp. Uniroyal Chemical Co.
3/1/96 IMC Global, Inc. Vigoro Corp.
11/15/95 Agrium Inc. Nu-West Industries, Inc.
8/9/95 Arcadian Corp. Arcadian Partners L.P.
4/21/95 Freeport-McMoRan, Inc. Freeport-McMoRan Resource Ptnrs.
3/31/95 Biosys Crop Genetics International
</TABLE>
The Comparable Acquisitions were selected on the basis of the comparability
of the acquired companies to Consep with respect to several factors. These
factors included, but were not limited to, sales attributable to the
development, manufacture and/or marketing of agricultural and consumer lawn,
garden and turf products. In addition, Piper concentrated on transactions that
occurred since January 1, 1994, and those for which relevant financial data were
available.
For purposes of evaluating the Merger, valuation ratios were calculated for
each of the Comparable Acquisitions based upon several variables, including
sales, EBITDA, operating income and net income. Based upon a review of the
Comparable Acquisitions and Consep's historical financial performance, Piper
determined that, as with the Analysis of Selected Publicly Traded Companies,
only the Comparable Acquisitions' LTM sales multiples were applicable to the
valuation of Consep Common Stock under this approach. For the Comparable
Acquisitions, LTM sales multiples ranged from a high of 3.2 to a low of 0.1,
with a mean and median of 1.5 and 1.4, respectively. As noted previously, Piper
calculated a Merger LTM Sales Multiple equal to approximately 0.4 .
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<PAGE>
Discounted Cash Flow Analysis. Piper assessed the present values of future cash
flows that Consep's business activities could be expected to generate over a
defined time period and the residual value of Consep at the end of the projected
period (the "DCF Analysis"). In preparing the DCF Analysis, Piper used a set of
projections prepared by Verdant and Consep management for calendar years 1999
through 2003. These five-year projections (the "Projections") formed the basis
of the DCF Analysis.
The Projections were evaluated with respect to various assumptions
regarding discount rates and terminal operating income multiples used to
calculate the residual value of Consep following the projection period. The
discount rates that were considered ranged from 19% to 21% and the terminal
operating income multiples that were considered ranged from 5 to 7 times. The
projected cash flows and residual value were discounted to the present and
adjusted for Consep's debt and cash as of June 30, 1998 to determine a range of
values for Consep Common Stock. This range of values corresponded to LTM sales
multiples ranging from approximately 0.4 to 0.6.
Analysis of Merger & Acquisition Control Premiums. Piper also reviewed
certain data to determine premiums paid for the acquisition of public companies
in relation to their respective share prices prior to the announcement of an
acquisition. According to Securities Data Corporation, average premiums for
selected merger and acquisition transactions between January 1, 1997 and the
current date involving public companies and transaction sizes between $10
million and $100 million were 31%, 37% and 47% based on the acquired companies'
share prices as of one day, one week and four weeks prior to the acquisition
announcements. This range of premiums was used by Piper to calculate implicit
values of Consep's common stock (based on the last sale price of Consep common
stock on July 14, 1998, the last trading day prior to the announcement that
Consep had entered into a letter of intent to merge with Verdant) and
corresponding LTM sales multiples, which ranged from 0.6 to 0.7.
Accretion and Dilution Analysis. Piper also calculated the expected
incremental earnings per share Verdant could expect to earn on the shares to be
issued to the Consep Shareholders in the Merger and compared the pro forma
combined results with Verdant's expectations for the future earnings on Verdant
Common Stock. Specifically, Piper utilized Consep's Base Case Plan and Verdant
management's projections of (i) Verdant's own expected performance and (ii) the
cost synergies it expects to realize as a result of the Merger, and determined
that the Merger will be accretive to Verdant's earnings in both 1999 and 2000 if
all of the estimated cost synergies are realized and both Consep and Verdant
achieve their expected stand-alone earnings. If none of the expected synergies
are realized but both companies' expected stand-alone earnings are achieved, the
Merger will be dilutive to Verdant's 1999 earnings per share and approximately
breakeven with respect to its fiscal year 2000 earnings per share.
Contribution Analysis. Piper analyzed the ownership percentage of the
Consep Shareholders in the consolidated entities post-transaction and compared
such percentage with the proportion of future sales and EBITDA expected to be
contributed to the consolidated entities by Consep. Based on this analysis,
Consep Shareholders will own approximately 35% of the consolidated entities
following the transaction, and Consep will be expected to contribute 45% of
fiscal 1999 sales and 38% of fiscal 1999 EBITDA (excluding anticipated cost
synergies) and 47% of fiscal 1999 EBITDA (including anticipated cost synergies).
In reaching its conclusion as to the fairness of the consideration to be
paid by Verdant for the Consep Common Stock in the Merger, Piper did not rely on
any single analysis or factor described herein, assign relative weights to the
analyses or factors considered by it, or make any conclusion as to how the
results of any given analysis, taken alone, supported its opinion. The
preparation of a fairness opinion is a complex process and not necessarily
susceptible to partial analysis or summary description. Piper believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all factors
and analyses, would create a misleading view of the processes underlying its
opinion. The analyses of Piper are not necessarily indicative of actual values
or future results, which may be significantly more or less favorable than
suggested by such analyses. Analyses relating to the value of companies do not
purport to be appraisals or valuations or necessarily reflect the price at which
companies may actually be sold. No company or transaction used in any comparable
analysis as a comparison is identical to Verdant, Consep or the Merger.
Accordingly, an analysis of the results is not mathematical; rather, it involves
complex considerations and judgments concerning differences in the various
characteristics of the comparable companies and other factors that could effect
the public trading value of the Comparable Companies to which Verdant and Consep
were compared.
For purposes of its opinion, Piper relied upon and assumed the accuracy and
completeness of the financial and other information made available to it and did
not assume responsibility independently to verify such information. Piper
relied upon the assurances of the respective managements of Verdant and Consep
that the information provided by Verdant and Consep had a reasonable basis and,
with respect to financial planning data, products and technologies under
development and other business outlook information, reflected the best available
estimates, and that they were not aware of any information or fact that would
make the information provided to Piper incomplete or misleading. Financial
planning data was prepared based on numerous variables and assumptions that are
inherently uncertain, including, without limitation, factors relating to general
economic and competitive conditions; and actual results could vary significantly
from those set forth in such financial planning data.
In arriving at its opinion, Piper did not perform and was not provided any
appraisal or valuation of specific assets or liabilities (contingent or
otherwise) of Verdant or Consep and expressed no opinion regarding the
liquidation value of any entity. Piper did not make any physical inspection of
the properties or assets of Verdant or Consep. Piper expressed no opinion as to
the price at which shares of Verdant common stock have traded or at which shares
of Verdant common stock may trade at any future time. Piper's opinion is based
upon information available to Piper and the facts and circumstances as they
existed and were subject to evaluation on the date of the opinion. Events
occurring after such date could materially affect the assumptions used in
preparing the opinion.
Verdant will pay Piper a fixed fee of $75,000 in cash and 25,000 shares of
freely tradable Verdant common stock for the delivery of its written opinion
that is included in this Joint Proxy Statement-Prospectus. No portion of this
fee is contingent upon the consummation of the Merger. To date, Verdant has paid
Piper $25,000 of the above cash fee. Verdant has also agreed to reimburse Piper
for its reasonable out-of-pocket expenses and to indemnify Piper against certain
liabilities, including those arising under securities laws.
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<PAGE>
REASONS OF CONSEP FOR THE MERGER
In reaching its decision to approve the Merger Agreement and related
transactions, and to recommend that the Consep Shareholders approve the Merger
Agreement, the Consep Board considered several factors, including, but not
limited to the following benefits of the Merger which the Consep Board believes
will contribute to the success of the combined company:
(i) The potential for increased sales to existing customers and to
new customers as a result of a larger product line that better
satisfies customer needs for integrated pest management across
a broader spectrum of pest control.
(ii) The opportunity to leverage research, field development and
marketing capabilities and to share technology and
technological expertise.
(iii) The opportunity to achieve lower costs and expenses than the
aggregate costs and expenses of Verdant and Consep if they
were to continue to operate separately through elimination of
duplicate facilities and infrastructure, reductions in staff
and consolidation of research and development expenditures.
(iv) Improved potential for the combined company to raise
additional capital through debt or equity financing and
thereby satisfy the funding needs of Verdant and Consep.
In addition to the potential benefits summarized above, the Consep
Board believes that additional reasons for shareholders of Consep to vote for
approval of the Merger Agreement and the Merger include the absence of available
alternative transactions including any that appear likely to offer the Consep
Shareholders immediate or long-term economic benefits comparable or superior to
the Merger.
In particular, the Consep Board was influenced by a belief that a
combination of Verdant and Consep would achieve an immediate critical mass of
revenues from broader product offerings and have a greater chance of continuing
to increase revenues and become a self-sufficient operation, and also had
greater opportunities in the near-term to develop strategic partnerships and
funding sources needed to satisfy ongoing cash and funding needs. The Consep
Board also believes that the Merger will provide Consep with the opportunity to
achieve increased marketing strength in the consumer pest control market.
The Consep Board also considered negative factors relating to the
Merger, including (i) the risk that the benefits sought in the Merger would not
be fully achieved; (ii) the risk that the Merger would not be consummated, and
the effect of the public announcement of the Merger on Consep's sales and
operating results; (iii) Consep's ability to attract and retain key management,
marketing and technical personnel; (iv) the risk that the pending governmental
action and certain legal proceedings involving Verdant's wholly-owned
subsidiary, Southern Resources, Inc. ("SRI"), and its subsidiaries relating to
environmental contamination discovered on or near the manufacturing site
operated by a subsidiary of SRI could result in material loss to Verdant and its
subsidiaries, including SRI, taken as a whole; and (v) other risks described
above under "Risk Factors." The Consep Board believed that these risks were
outweighed by the potential benefits of the Merger.
In the course of its deliberations during Board meetings held on August
11, August 31 and September 8, 1998, the Consep Board reviewed with Consep
management a number of additional factors relevant to the Merger, including the
strategic overview and prospects for Consep, its products and its finances. The
Consep Board also considered, among other factors (i) information concerning
Consep's and Verdant's respective businesses, prospects, financial performance
and condition, operations, technology, management and competitive position; (ii)
the financial condition, results of operation and businesses of Consep and
Verdant before, and after, giving effect to the Merger; and (iii) current
financial market conditions and historical market prices, volatility and trading
information with respect to the Verdant Common Stock and Consep Common Stock. In
addition, the directors reviewed the consideration to be received by Consep
shareholders in the Merger and the relationship between the market value of
Verdant Common Stock to be issued in
37
<PAGE>
exchange for each share of Consep Common Stock and the market value of Consep
Common Stock and certain other measures. The Consep Board also considered the
terms of the proposed Merger Agreement regarding Consep's rights to consider and
negotiate other acquisition proposals in certain circumstances as well as the
possible effects of the provisions regarding termination fees payable to
Verdant. In addition, the Consep Board noted that the Merger is expected to be
accounted for as a purchase transaction. The Consep Board considered financial
presentations by its financial advisor, PCS, including the oral opinion of PCS
delivered at the August 11, 1998 meeting of the Consep Board and the updated
oral opinion of PCS delivered at the September 8, 1998 meeting of the Consep
Board and the opinion of PCS dated September 8, 1998, which concluded that, as
of such date, the aggregate merger consideration to be received by the
shareholders of Consep as a whole was fair from a financial point of view. The
opinion of PCS and the analysis underlying its opinion are summarized below, and
a copy of the opinion dated September 8, 1998, setting forth the procedures
followed, the matters considered, the scope of the review undertaken and the
assumptions made by PCS, is attached hereto as Appendix C. See "-- Opinion of
Consep's Financial Advisor."
The foregoing discussion of the information and factors considered by
the Consep Board is not intended to be exhaustive but is believed to include all
materials factors considered by the Consep Board. In reaching its determination
to approve the Merger and the transactions contemplated thereby, the Consep
Board did not assign any relative or specific weights to the foregoing factors,
and the individual directors may have given differing weights to differing
factors. After deliberating with respect to the Merger and other transactions
contemplated by the Merger Agreement and considering, among other things, the
matters discussed above, the Consep Board approved the Merger Agreement and the
transactions contemplated thereby as being fair to, and in the best interests
of, Consep and the Consep shareholders. There is no guarantee that the combined
company will achieve or receive any of the benefits, cost savings or synergies
described above. See: "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION."
BASED ON THE FOREGOING, THE CONSEP BOARD RECOMMENDS THAT CONSEP
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
OPINION OF CONSEP'S FINANCIAL ADVISOR
Pacific Crest Securities, Inc. was retained by Consep to, among other
things, render an opinion as to the fairness, from a financial point of view, to
Consep Shareholders of the Exchange Ratio. On August 11, 1998, PCS presented its
financial analysis of the terms and conditions of the Merger, and at the
conclusion of its presentation, PCS delivered its oral opinion to the Consep
Board to the effect that, as of such date and based upon and subject to the
assumptions, objectives and qualifications stated in its opinion, the Exchange
Ratio was fair to Consep Shareholders from a financial point of view. PCS
subsequently updated and confirmed such oral opinion by delivering a written
opinion dated September 8, 1998 to the same effect.
A copy of PCS's opinion dated September 8, 1998 is attached hereto as
Appendix C. Consep Shareholders are urged to read PCS's opinion in its entirety
for assumptions made, procedures followed, other matters considered and limits
of the review by PCS.
PCS's opinion was prepared for the Consep Board and is directed only to
the fairness of the Exchange Ratio to the shareholders of Consep from a
financial point of view and does not constitute a recommendation to any Consep
Shareholder as to how such shareholder should vote at the Consep Special
Meeting. PCS was not retained as an advisor or agent to Consep Shareholders or
any other person, other than as an advisor to the Consep Board. PCS's opinion
does not constitute an opinion as to the price at which Verdant Common Stock
will actually trade at any time. The Exchange Ratio was determined in
arm's-length negotiations between Consep and Verdant. No restrictions or
limitations were imposed by Consep upon PCS with respect to the investigations
made or the procedures followed by PCS in rendering its opinion.
PCS relied upon, and assumed the accuracy and completeness of, all of
the financial and other information that was available to PCS from public
sources, or that was provided to PCS by Consep, Verdant, or their respective
representatives, or that was otherwise reviewed by PCS. PCS assumed also that
the financial projections supplied to it were reasonably prepared on the basis
reflecting the best currently available estimates and judgments of the
management of Consep and Verdant. PCS did not make an independent evaluation of
any assets or liabilities or any independent verification of any of the
information it reviewed. PCS also assumed that the Merger shall be accounted for
using the
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purchase method of accounting, and that the conversion of shares pursuant to the
Merger will take place as a tax-free exchange.
PCS's opinion was necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available as
of, the date of the opinion. PCS undertook no obligation to update the opinion.
PCS, as part of its investment banking services, is regularly engaged
in the valuation of businesses and securities in connection with mergers,
acquisitions, underwriting; sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
PCS has performed investment banking and other services for Consep, including
co-managing Consep's follow-on public offering on September 13, 1995.
Consep paid PCS $65,000 for its services in providing the fairness
opinions, which payment is not contingent upon the closing of the Merger. Consep
also will provide PCS with reimbursement for PCS's out-of-pocket expenses,
including reasonable fees and disbursements of counsel. Consep has agreed to
indemnify PCS and its affiliates, and the directors, officers, agents, and
employees of PCS and its affiliates, against certain liabilities, including
certain liabilities under the federal securities laws, relating to or arising
out of its engagement.
In conjunction with preparing it presentation to the Consep Board on
August 11, 1998, and its written opinion dated September 8, 1998, PCS performed
a variety of financial and comparative analyses as summarized below:
ANALYSIS OF COMPARABLE PUBLICLY TRADED COMPANIES. PCS compared and
projected selected historical and projected earnings and historical operating
and financial ratios for both Consep and Verdant to corresponding data and
ratios of five broad categories including large agriculture chemical companies,
natural pesticide manufacturers, inorganic lawn and garden care products
manufacturers, specialty chemical consumer product manufacturers, and specialty
chemical distributors whose securities are publicly traded. In conducting its
analysis, PCS compared the ratios implied by the Exchange Ratio based on closing
market prices on August 31, 1998 and September 8 , 1998 to the ratios implied
from the market valuation of publicly traded companies selected by PCS for
Consep and Verdant based upon qualitative factors which PCS deemed relevant.
Data and ratios considered included: the ratio of enterprise value to last 12
months ("LTM") revenues, EBITDA and EBIT; and the ratio of market price to
fiscal 1997, 1998 and 1999 projected earnings per share ("EPS").
PCS obtained all projected information for the comparable companies
from IBES which summarizes the estimates made by analysts employed by several
investment banking firms and from the published reports of research analysts
employed by investment banking firms, including analysts employed by PCS. No
company utilized in this analysis is identical to Consep or Verdant.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of companies, compared to Consep or Verdant, as well
as other factors that could affect the public trading value of the comparable
group.
COMPARABLE MERGER AND ACQUISITION ANALYSIS. PCS reviewed the implied
valuation multiples of 25 selected merger and acquisition transactions in the
comparable group. PCS compared the value implied by the Exchange Ratio based on
closing market prices to certain ratios implied by the mean of certain ratios
relating to the Transactions. The ratios were enterprise value implied by the
purchase price as a multiple of the LTM revenues at the time of announcement or
closing, the ratio of enterprise value to LTM EBITDA at the time of announcement
or closing, and the ratio of enterprise value to LTM EBIT at the time of
announcement or closing. No transaction utilized in this analysis is identical
to the Merger. Accordingly an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of Consep and the companies involved
in the comparable group and other factors that could affect the acquisition
value of the companies to which it is being compared. Mathematical analysis such
as determining the mean is not in itself a meaningful method of using comparable
transactions data.
DISCOUNT CASH FLOW ANALYSIS. Discounted cash flow analysis derives the
enterprise value for a company by computing the net present value of a company's
future cash flows. For purposes of this analysis, PCS relied on projected and
historical data as provided by Consep. In addition PCS relied on ratios from the
comparable company analysis. From
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this analysis, PCS was able to arrive at a range of values that are based on
various sales and terminal value growth rate scenarios.
ACCRETION/DILUTION ANALYSIS. PCS analyzed Verdant and Consep's current
and estimated income statements in order to determine whether the Merger would
be accretive or dilutive to the existing Consep Shareholders In conducting the
analysis, PCS considered two scenarios. In the first scenario PCS considered
slight revenue growth and operating expense savings as a result of savings from
the merger. In the second scenario PCS considered more aggressive revenue growth
along with the same cost savings. In both scenarios PCS assumed that the Merger
occurred in January 1998.
RELATIVE CONTRIBUTION ANALYSIS. For the relative contribution analysis,
PCS determined what contributions Verdant and Consep have made and will make to
the newly combined company on an enterprise value, equity, revenue and total
asset basis. PCS then compared its results with the post-acquisition allocation
of shares between Verdant and Consep after the Merger so as to determine
fairness of the stock allocation. PCS's analysis of the Exchange Ratio based on
closing market prices on August 31, 1998 and September 4, 1988 using relative
contribution analysis was based upon determining the average implied Exchange
Ratio based upon Consep's respective EPS for 1997, 1998 and 1999. In this case,
PCS relied on the average earnings estimates for 1998 and 1999 using IBES and
conservative-case internal management estimates for Consep.
STOCK TRADING PRICE HISTORY. PCS reviewed the history of the trading
prices for Consep Common Stock over the 52 weeks prior to the announcement of
the Merger. The Consep Common Stock traded between $.625 and $2.125 per share
and had a high price of $2.125 on October 15, 1997. Over the 90 days prior to
the announcement of the Merger, the Consep Common Stock traded between $.625 and
$1.8125 per share.
The summary set forth above does not purport to be a complete
description of the analyses performed by PCS, but describes, in summary form,
the material elements of the presentations made by PCS to the Consep Board in
connection with rendering its written opinions. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Each of the analyses conducted by PCS was
carried out in order to provide a different perspective on the transaction and
add to the total mix of information available. PCS did not attribute any
particular weight to any analysis or factor considered by it, but rather
considered the results of the analysis in light of each other and concluded that
its analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, PCS believes that its
analysis must be considered as a whole and that selecting portions of its
analysis and the factors considered by it, without considering all analyses and
factors, could create an incomplete view of the evaluation process underlying
its opinions. The analyses performed by PCS are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses.
EFFECTIVE TIME
As soon as practicable after satisfaction or, to the extent permitted
in the Merger Agreement, waiver of all conditions set forth below, the parties
will cause the Merger to be consummated by filing Articles of Merger with the
Secretary of State of the State of Oregon and make all other filings or
recordings required by Oregon Law in connection with the Merger and the
transactions contemplated by the Merger Agreement. The Merger will become
effective at such time as the Articles of Merger is duly filed with the
Secretary of State of the State of Oregon or at such later time as may be agreed
by the parties in writing and specified in the Articles of Merger.
EXCHANGE OF CERTIFICATES
As of the Effective Time, Verdant will deposit with Norwest Bank
Minnesota, National Association or such other bank or trust company as may be
designated by Verdant and as is reasonably acceptable to Consep (the "Exchange
Agent") certificates representing the shares of Verdant Common Stock issuable
for the Merger Consideration (such shares of Verdant Common Stock, together with
any dividends or distributions with respect thereto, being hereinafter referred
to as the "Exchange Fund"). The Exchange Agent will hold the Exchange Fund for
the benefit of holders of shares of Consep Common Stock. The Exchange Agent will
distribute the Exchange Fund pursuant to provisions for
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the conversion of the securities in exchange for outstanding shares of Consep
Common Stock. Except as contemplated by provisions for termination of the
Exchange Fund, the Exchange Fund will not be used for any other purpose.
As promptly as practicable after the Effective Time, Verdant will cause
the Exchange Agent to mail to each holder of record of certificates which
immediately prior to the Effective Time represented outstanding shares of Consep
Common Stock (the "Certificates") a letter of transmittal in customary form. The
letter of transmittal will specify that delivery of Certificates will be
effected, and risk of loss and title to the Certificates will pass, only upon
delivery of the Certificates to the Exchange Agent. The Exchange Agent will
accompany the letter of transmittal with instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Verdant Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent, together with such letter of transmittal, duly executed, and
such other documents as the Exchange Agent may reasonably require, the holder of
such Certificate will be entitled to receive a certificate representing that
number of whole shares of Verdant Common Stock which such holder has the right
to receive pursuant to such provisions of the Merger Agreement (after taking
into account all the shares of Consep Common Stock then held by such holder
under all such Certificates so surrendered), and any dividends or other
distributions to which such holder is entitled. If there is a transfer of Share
ownership which is not registered in the transfer records of Consep, a
certificate representing the proper number of shares of Verdant Common Stock may
be issued to a person other than the person in whose name the Certificate so
surrendered is registered, if, upon presentation to the Exchange Agent, such
Certificate will be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment will pay any transfer or other
taxes required by reason of the issuance of shares of Verdant Common Stock to a
person other than the registered holder of such Certificate or establish to the
reasonable satisfaction of Verdant that such tax has been paid or is not
applicable. Subject to certain exceptions, each Certificate will be deemed at
any time after the Effective Time to represent only the right to receive upon
such surrender the Certificate representing shares of Verdant Common Stock, cash
in lieu of any fractional shares of Verdant Common Stock, and any dividends or
other distributions to which such holder is entitled.
No fractional shares of Verdant Common Stock will be issued upon the
surrender of Certificates. Each holder of shares of Consep Common Stock
exchanged for shares of Verdant Common Stock pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Verdant Common
Stock (after taking into account all Certificates delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of Verdant Common Stock multiplied by the
closing price of Verdant Common Stock on the closing date of the Merger.
Verdant will not pay dividends or other distributions to the holder of
any unsurrendered Certificate, and Verdant will not make any cash payment for
fractional shares to any such holder until the holder of record of such
Certificate surrenders such Certificate. Such payments will be made, without
interest, only when the Certificate is surrendered.
The Exchange Agent will deliver any portion of the Exchange Fund that
remains undistributed to the holders of the Certificates for two years after the
Effective Time to Verdant, upon demand. After that time, any holders of the
Certificates who have not complied with the provisions for exchange of
Certificates will be required to look only to Verdant for payment of their claim
for Verdant Common Stock, any cash in lieu of fractional shares of Verdant
Common Stock, and any dividends or distributions with respect to Verdant Common
Stock.
None of Verdant, Merger Subsidiary, Consep or the Exchange Agent will
be liable to any person in respect of any shares of Verdant Common Stock (or
dividends or distributions with respect thereto) or cash in the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
The Exchange Agent will invest any cash included in the Exchange Fund
in deposit accounts, as directed by Verdant, on a daily basis. The Exchange
Agent will pay any interest and other income resulting from such investments to
Verdant.
If any Certificate is lost, stolen, or destroyed, upon the making of an
affidavit of that fact by the person claiming such Certificate to be lost,
stolen, or destroyed, and, if required by the surviving corporation, upon the
delivery to the Exchange Agent of a bond in such sum as the surviving
corporation may direct as indemnity against any claim that may be made against
it with respect to such Certificate, the Exchange Agent will issue in exchange
for such lost, stolen, or
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destroyed Certificate the shares of Verdant Common Stock and any cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of Verdant
Common Stock deliverable in respect thereof, pursuant to this Agreement.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Verdant, Merger Subsidiary and Consep, (which representations and warranties are
subject, in certain cases, to specified exceptions) to: (1) its organization,
existence and good standing; (2) its subsidiaries and their corporate
organization and existence; (3) its corporate power to consummate the
transactions contemplated by the Merger Agreement; (4) required governmental or
regulatory approvals to consummate the Merger; (5) the lack of any conflict
between the Merger and the charter, bylaw, laws or assets of the parties; (6)
its capitalization; (7) its compliance with securities law filing requirements;
(8) the absence of certain adverse events, occurrences or developments; (9) its
title to properties; (10) its accounts receivable; (11) its inventory; (12) the
filing of all tax returns and payment of all required taxes; (13) its
performance of material obligations in connection with disclosed contracts and
commitments; (14) its intellectual property rights; (15) the absence of pending
or threatened litigation; (16) its outstanding claims, pending or threatened for
breach of warranties and product warranties; (17) its employees; (18) its
employee benefit plans; (19) its insurance; (20) the absence of certain
affiliate transactions; (21) its customers and suppliers; (22) its former
distributors that were terminated; (23) its officers and directors and the
existence of bank accounts; (24) the absence of any collective bargaining
agreements or other labor union contract applicable to persons employed by any
of the parties; (25) its compliance with laws; (26) except for fees payable to
PCS by Consep, the absence of any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions contemplated
by the Merger Agreement; (27) tax treatment of the Merger; (28) the absence of
certain illegal activities; (29) certain contract matters; (30) its compliance
with environmental laws; (31) absence of liens; and (32) the absence of any
untrue statement of a material fact or omission of a material fact with regard
to the various representations and warranties contained in the Merger Agreement.
COVENANTS AND AGREEMENTS
Pursuant to the Merger Agreement, each of Verdant, Merger Subsidiary
and Consep have agreed that, prior to the Effective Time, they will, among other
things, conduct their respective businesses in the ordinary course consistent
with past practice and use reasonable efforts to preserve intact their business
organizations and relationships with third parties. Prior to the Effective Time,
neither Consep nor any of its subsidiaries, without prior written approval of
Verdant, will (1) amend its articles of incorporation, bylaws or other
comparable charter documents; (2) (a) declare or pay dividends, (b) split,
combine or reclassify any of their capital stock, or issue or authorize the
issuance of any other securities, or (c) purchase, redeem or otherwise acquire
any shares of capital stock; (3) issue, grant, award, sell, pledge or otherwise
encumber any shares of their capital stock or any other voting securities; (4)
acquire or agree to acquire by merger, consolidation, asset purchase or any
other manner (a) any corporation, partnership, joint venture, association or
other business organization, or (b) any assets that are material to Consep,
except purchases of inventory in the ordinary course of business; (5) sell,
lease, license, mortgage, subject to lien or otherwise dispose of any of its
assets that are material individually or in the aggregate, except sales of
inventory in the ordinary course of business; (6) incur any indebtedness or make
any loans, advances or capital contributions to any other person other than to
Consep or its subsidiaries or to employees consistent with past practice; (7)
make or agree to make any new capital expenditure or expenditures which
individually is in excess of $5,000 or in the aggregate are in excess of
$25,000; (8) make any tax election or settle or compromise any tax liability, or
make any change in any method of accounting for taxes or accounting policy or
practice with respect to taxes; (9) pay, discharge, settle or satisfy any
material claims, liabilities or obligations other than payment, discharge,
settlement or satisfaction in the ordinary course of business consistent with
past practice; (10) except in the ordinary course of business, modify, amend or
terminate any material contract or agreement to which Consep is a party or
waive, release or assign any material rights or claims; (11) enter into any
contract or agreement with sales representative or distributor; (12) except as
required by law or in the ordinary course of business, change any bonus plan,
compensation, fringe benefit or grant any awards or take any action to fund any
employee plan, agreement or arrangement; (13) make any change in any method of
accounting or accounting practice or policy other than those required by
generally accepted accounting principles; (14) take any action that without
regard to any action taken by Consep or any of its affiliates that would prevent
the Merger from qualifying as a reorganization within the meaning of Section
368(a) of the Code; (15) pay any fees of any legal or tax advisor retained in
connection with the Merger calculated on a basis other than an hourly basis at
the maximum agreed rates per hour (16) enter into any written employment
agreement with any employee or any verbal agreement providing for benefits not
equivalent to employees
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of similar position in Consep; (17) accelerate the vesting of any of Consep's
options; or (18) authorize any of, or commit or agree to take any of, the
foregoing actions. Neither Verdant nor any of its subsidiaries, without the
prior written approval of Consep, will (1) except for the Charter Amendment,
amend its articles of incorporation, bylaws or other comparable charter or
organizational documents; (2) (a) declare or pay dividends, (b) split, combine
or reclassify any of their capital stock, or issue or authorize the issuance of
any other securities, or (c) purchase, redeem or otherwise acquire any shares of
capital stock; (3) issue more than 2,500,000 shares of Verdant Common Stock any
other voting securities, or any securities convertible into or any rights,
warranties or options to acquire such shares, voting securities or convertible
securities, at a price equivalent that is less than 75% of the market price of
the Parent Common Stock on the date of issuance; (4) make any acquisition or
take any other action which would materially adversely affect its ability to
consummate the transactions contemplated by the Merger Agreement; (5) take any
action that would prevent the Merger from qualifying as a reorganization within
the meaning of Section 368(a) of the Code; or (6) authorize any of, or commit or
agree to take any of, the foregoing actions.
Consep has covenanted that it will not, prior to the Effective Time,
participate in any discussions with, provide any information to, enter into any
agreement or understanding with, or otherwise cooperate in any other way with
any person concerning any Competing Transaction, or permit or authorize any of
their respective directors, officers, employees, shareholders or representatives
(including, without limitation, any financial advisor, attorney or accountant)
or any of their subsidiaries to take any such action. Consep is required to
provide Verdant notice of any inquiries, proposals or requests for information
concerning any Competing Transaction. For such purposes, a "Competing
Transaction" shall mean any of the following involving Consep (1) any tender or
exchange offer, proposal for a merger, consolidation or other business
combination involving Verdant or Consep, as the case may be, or any proposal or
offer to acquire in any manner 20% or more of their voting equity securities in
a single transaction or series of related transactions; (2) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 25% or more of
their assets in a single transaction or a series of related transactions; or (3)
any agreement to, or public announcement of a proposal, plan or intention to do
any of the foregoing. Notwithstanding the foregoing, nothing contained in the
Merger Agreement shall prevent Consep or Consep's Board from furnishing
non-public information to, or entering into discussions or negotiations with,
any person or entity in connection with an unsolicited bona fide written
proposal or inquiry concerning a Competing Transaction by such person or entity
or recommending an unsolicited bona fide written proposal concerning a Competing
Transaction to the Consep Shareholders if and only to the extent that (i) the
Consep Board believes in good faith that such Competing Transaction would, if
consummated, result in a transaction more favorable to Consep's shareholders
from a financial point of view than the transaction contemplated by the Merger
Agreement and the Consep Board determines in good faith after consultation with
outside legal counsel that such action is necessary for Consep to comply with
its fiduciary duties to Consep's Shareholders under applicable law, and (ii)
prior to furnishing such non-public information to, or entering into discussions
or negotiations with, such person or entity, the Consep Board receives from such
person or entity an executed confidentiality agreement with terms no more
favorable to such party than those contained in the Confidentiality Agreement
dated June 30, 1998, between Verdant and Consep.
Verdant and Consep have also agreed to take certain other actions,
including: (1) all actions necessary to convene meetings of shareholders to vote
on approval of the Merger Agreement, the Merger, the Charter Amendment and
certain other matters outlined in the Merger Agreement; (2) to cooperate in the
preparation of a registration statement on Form S-4 to be filed by Verdant in
connection with the issuance of Verdant Common Stock in the Merger; (3) to
provide to each other access to all information and documents which the other
may reasonably request regarding the business, assets, liabilities, employees
and other aspects of the other party, other than the information and documents
that in the opinion of such other party's legal counsel may not be disclosed
under applicable law; (4) to comply with all of their respective obligations
under the Confidentiality Agreement; (5) to consult with each other before
issuing any press release or making any public statement; (6) to use reasonable
efforts to (a) take all appropriate action necessary under applicable law or
required to be taken by any governmental entity to consummate the Merger, (b)
obtain appropriate licenses, waivers or approvals from any governmental
entities, (c) give any notices to non-governmental entities and obtain necessary
third party consents, and (iv) make necessary filings under the securities laws
and any other applicable law; (7) to indemnify, defend and hold harmless the
present and former officers and directors of Consep against certain losses and
expenses arising out of actions or omissions occurring at or prior to the
Effective Time to the extent permitted or required as of the Agreement Date (as
defined in the Merger Agreement) under the Consep Articles and the Consep
Bylaws; (8) to deliver certain information necessary to comply with Rule 145
under the Securities Act; (9) to prepare and submit certain listing
applications;(10) to file all tax returns; and (11) to cause Volker G. Oakey and
Walter C. Babcock to be appointed and later nominated to the Verdant Board.
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CONDITIONS
The respective obligations of Consep, Verdant and Merger Subsidiary to
consummate the Merger are subject to the satisfaction upon or prior to the
Closing of the following conditions: (1) the holders of a majority of shares of
outstanding Verdant Common Stock and Consep Common Stock must approve the Merger
Agreement in accordance with state law, and their respective charters and
bylaws; (2) all filings and approvals from governmental entities necessary for
the consummation of the transactions contemplated by the Merger Agreement must
have been filed and all applicable waiting periods must have run or obtained;
(3) the Form S-4 must have become effective under the Securities Act, without
stop orders or proceedings commenced or threatened by the Commission; (4) there
must be no legal restraint or prohibition preventing the consummation of the
Merger; and (5) the Charter Amendment must be approved by the Verdant
Shareholders and shall have been filed with the Secretary of State of the State
of Minnesota.
The obligations of Verdant and Merger Subsidiary to effect the Merger
are subject to the satisfaction prior to or upon the Closing of the following
conditions unless waived by Verdant: (1) the accuracy of the representations and
warranties of Consep as of the Closing Date; (2) the performance by Consep of
the obligations and covenants required to be performed by it prior to or as of
the Closing Date; (3) the receipt of certain consents, approvals and
authorizations; and (4) receipt of executed copies of affiliate letters.
The obligation of Consep to effect the Merger is subject to the
satisfaction prior to or upon the closing of the following conditions, unless
waived by Consep: (1) the accuracy of the representations and warranties of
Verdant and Merger Subsidiary as of the Closing Date; (2) the performance of all
obligations and covenants required to be performed by Verdant and Merger
Subsidiary prior to or as of the Closing Date; (3) the receipt of certain
consents, approvals and authorizations; (4) the listing of shares of Verdant
Common Stock constituting the Merger Consideration on the Nasdaq National Market
and (5) the receipt by Consep of an opinion in form and substance satisfactory
to Consep of Ater Wynne LLP as to certain tax matters.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, notwithstanding any requisite approval
of the Merger Agreement and the Merger by the shareholders of Consep or of
Verdant: (1) by mutual written consent of each of Verdant, Merger Subsidiary and
Consep; (2) by either Verdant, Merger Subsidiary or Consep if either (a) the
Effective Time has not occurred on or before December 31, 1998 (except that this
right to terminate the Merger Agreement is not available to any party whose
failure to fulfill any obligation under the Merger Agreement has been the cause
of, or resulted in, the failure of the Effective Time to occur on or before such
date) or (b) there is a law that makes consummation of the Merger illegal or
otherwise prohibited or if any court of competent jurisdiction or governmental
entity shall have issued an order, decree, ruling, or taken any action
restraining, enjoining or otherwise prohibiting the Merger that has become final
and unappealable; (3) by either Verdant or Merger Subsidiary if the Consep Board
of Directors changes its recommendation of the Merger Agreement or the Merger in
a manner adverse to Verdant or Merger Subsidiary or shall have resolved to do so
or, recommends to the shareholders of Consep any Competing Transaction, or
resolved to do so; (4) by Consep if the Verdant Board withdraws, modifies, or
changes its recommendation of the Merger Agreement or the Merger in a manner
adverse to Consep or resolved to do so; (5) by either Verdant, Merger Subsidiary
or Consep if the shareholders of Consep fail to approve the Merger Agreement and
the Merger; (6) by either Verdant, Merger Subsidiary or Consep, if shareholders
of Verdant fail to approve the Merger Agreement, the Merger or the Charter
Amendment; (7) by Consep, in the event of a material breach by Verdant or Merger
Subsidiary of any representation, warranty, covenant or agreement contained in
the Merger Agreement (other than a breach of Verdant or Merger Subsidiary due to
the occurrence of a Material Adverse Effect arising solely due to the public
announcement of the Merger) which has not been cured or is not curable by
December 31, 1998; or (8) by Verdant, in the event of a material breach by
Consep of any representation, warranty, covenant or agreement contained in the
Merger Agreement (other than a breach of Consep due to the occurrence of a
Material Adverse Effect arising solely due to the public announcement of the
Merger) which has not been cured or is not curable by December 31, 1998.
In the event of termination of the Merger Agreement pursuant to the
termination provisions, the Merger Agreement will forthwith become void, there
will be no liability under the Merger Agreement on the part of Verdant,
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<PAGE>
Merger Subsidiary or Consep or any of their respective officers or directors and
all rights and obligations of any party will cease, subject to the provision for
Termination Fees.
TERMINATION FEES
The Merger Agreement provides that if the Merger Agreement is
terminated because (1) Consep withdraws, modifies, or changes its recommendation
of the Merger Agreement or the Merger in a manner adverse to Verdant or Merger
Subsidiary or shall have resolved to do any of the foregoing or, the Consep
Board shall have recommended to the Consep Shareholders any Competing
Transaction or resolved to do so, for any reason other than the occurrence of an
event or the discovery of a falsity or a representation or warranty relating to
Verdant that has a Parent Material Adverse Effect, (2) Consep's Shareholders
shall have failed to approve the Merger Agreement and the Merger at the Consep
Special Meeting (including any adjournment or postponement thereof) and a
Competing Transaction exists on the date of the Consep Special Meeting, or (3)
of a material breach by Consep of any representation, warranty, covenant or
agreement contained in the Merger Agreement (other than a breach Consep due to
the occurrence of a Material Adverse Effect arising solely due to the public
announcement of the Merger) which has not been cured or is not curable by
December 31, 1998 and the breach giving rise to such termination is a result of
a Competing Transaction, then Consep shall pay Verdant a fee of $1,000,000 and
shall reimburse Verdant and Merger Subsidiary for all of their out-of-pocket
costs and expenses incurred in connection with the transactions contemplated by
the Merger Agreement (such fee and expenses being referred to herein as the
"Termination Fee"). Such Termination Fee shall be due and payable within thirty
(30) days of termination of the Merger Agreement; provided that, in no event
shall Consep be required to pay the Termination Fee to Verdant if, immediately
prior to the termination of the Merger Agreement, Verdant was in breach of any
of its material obligations under the Merger Agreement. In the event that Consep
shall fail to pay the Termination Fee when due, there shall also be paid the
costs and expenses actually incurred or accrued by Verdant or Merger Subsidiary
(including, without limitation, reasonable fees and expenses of counsel) in
connection with the collection under and enforcement of the Termination Fee,
together with interest on such unpaid Termination Fee, commencing on the date
that such Termination Fee becomes due, at a rate equal to the prime rate of
interest published in the Wall Street Journal plus 2%.
WAIVER AND AMENDMENT
The Merger Agreement may be changed or modified by the parties only by
action taken by or on behalf of their respective boards of directors, reflected
in a written amendment signed by the parties, at any time prior to the Effective
Time; provided, however, that, after the approval of the Merger Agreement by the
Consep Shareholders, no amendment may be made which would reduce the amount or
change the type of consideration into which each share of Consep Common Stock
will be converted upon consummation of the Merger.
At any time prior to the Effective Time, any party may (1) extend the
time for the performance of any obligation or other act of any other party, (2)
waive any inaccuracy in the representations and warranties contained in the
Merger Agreement or in any document delivered pursuant the Merger Agreement, and
(3) waive compliance with any agreement or condition contained in the Merger
Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consep and Verdant expect that the Merger will constitute a
reorganization within the meaning of Section 386(a) of the Code and that for
federal income tax purposes no gain or loss will be recognized by Consep
Shareholders upon the receipt solely of Verdant Common Stock for Consep Common
Stock pursuant to the Merger. The Internal Revenue Service (the "Service") has
not been and will not be asked to rule on the tax consequences of the Merger.
Instead, Consep will rely on the opinion of Ater Wynne LLP, legal counsel to
Consep, as to certain federal income tax consequences of the Merger. Such
opinion will be based upon facts described therein and upon certain assumptions
and certain representations that will be made by Consep and Verdant. The opinion
of Ater Wynne LLP will be based on the Code, the Regulations promulgated
thereunder, current administrative rulings and practice and judicial authority,
all of which are subject to change. An opinion of counsel is not binding on the
Service and there can be no assurance, and none is hereby given, that the
opinion will be upheld by the courts if challenged by the Service. EACH HOLDER
OF CONSEP COMMON STOCK IS URGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL
ADVISORS AS TO THE FEDERAL INCOME TAX
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<PAGE>
CONSEQUENCES OF THE MERGER UNDER SUCH SHAREHOLDER'S OWN PARTICULAR FACTS AND
CIRCUMSTANCES AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES
ARISING OUT OF THE MERGER.
The obligation of Consep to consummate the Merger is conditioned on,
among other things, the receipt by Consep of the opinion, dated as of the
Effective Time, of Ater Wynne LLP, which will be based upon facts and
representations to be provided to such firm, and subject to various assumptions,
substantially to the effect that the Merger will qualify as a "reorganization"
within the meaning of Section 368(a) of the Code and that the following material
federal income tax consequences will result from the Merger:
(a) Verdant, Merger Subsidiary and Consep will each be a party
to that reorganization within the meaning of Code Section 368(b);
(b) No income, gain or loss will be recognized for federal
income tax purposes by Consep as a result of the consummation of the
Merger; and
(c) No income, gain or loss will be recognized for federal
income tax purposes by the Consep Shareholders upon the exchange in the
Merger of shares of Consep Common Stock solely for shares of Verdant
Common Stock (except to the extent of any cash received in lieu of
fractional shares).
Provided that the Merger does qualify as a "reorganization," the tax
basis of Verdant Common Stock received by a Consep Shareholder who exchanges all
of such shareholder's Consep Common Stock solely for Verdant Common Stock in the
Merger will be the same as the tax basis of the Consep Common Stock surrendered
therefor reduced by the amount of cash received for fractional shares.
Holders of warrants to purchase shares of Consep Common Stock should
not recognize taxable income, gain or loss as a result of the assumption of such
warrants by Verdant pursuant to the terms of the Merger Agreement. Holders of
options to acquire Consep Common Stock under Consep's 1992 Stock Incentive Plan,
1993 Stock Incentive Plan, 1993 Stock Option Plan for Nonemployee Directors, or
1997 Stock Incentive Plan, each as amended (the "Option Plans") should not
recognize income, gain or loss as a result of the assumption of the Option Plans
by Verdant pursuant to the terms of the Merger Agreement.
The foregoing is only a summary description of the material anticipated
federal income tax consequences of the Merger, without regard to the particular
facts and circumstances of each Consep Shareholder. It does not discuss all of
the consequences that may be relevant to Consep Shareholders entitled to special
treatment under the Code (such as banks, insurance companies, dealers in
securities, exempt organizations or foreign persons or entities) or to Consep
Shareholders who acquired their Consep Common Stock pursuant to the exercise of
employee stock options or otherwise as compensation. The summary set forth above
does not purport to be a complete analysis of all potential tax effects of the
transactions contemplated by the Merger Agreement or the Merger itself, and does
not purport to be a complete analysis or listing of all potential tax effects
relevant to a decision of whether to vote in favor of the Merger. No information
is provided herein with respect to the tax consequences, if any, of the Merger
or the exchange of shares pursuant thereto under state, local, foreign or other
tax laws.
A successful challenge by the Service to the "reorganization" status of
the Merger would result in a Consep Shareholder recognizing gain or loss with
respect to each share of Consep Common Stock surrendered equal to the difference
between the shareholder's basis in such share and the fair market value, at the
Effective Time, of the Verdant Common Stock received in exchange therefor. In
such event, a shareholder's aggregate basis in the Verdant Common Stock so
received would equal its fair market value, and the holding period for such
stock would begin the day after consummation of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Each of Volker G. Oakey, Steven R. Hartmeier and Kenneth C. Rymer,
officers and managers of Consep, as well as eight other manager level employees
of Consep (the "Consep Executives"), is a party to a Control Change Agreement
with Consep. Each Control Change Agreement provides that each of the Consep
Executives may receive certain severance benefits if the employment of such
Consep Executive is terminated, whether voluntarily or
46
<PAGE>
involuntarily, within two (2) years after a "Change of Control" of Consep and a
"Material Adverse Change in Employment" with respect to Messrs. Oakey, Hartmeier
and Rymer, and within one year after a "Change of Control" of Consep and a
"Material Adverse Change in Employment" of the eight other manager level
employees of Consep. The Merger will constitute a Change of Control of Consep
for purposes of such agreements. A "Material Adverse Change in Employment"
means, without the employee's consent, an adverse change in the employee's
duties, reporting responsibilities or title, any removal or failure to reelect
or reappoint the employee other than for cause or upon death, disability or
retirement, any reduction of the employee's base salary or a relocation of the
employee away from the principal executive offices of Consep. The severance
benefits include salary continuation benefits, plus continued life insurance,
health insurance, dental insurance and disability insurance benefits for a
period of two years after termination with respect to Messrs. Oakey, Hartmeier
and Rymer, and for a period of one year after termination with respect to the
eight other manager level employees of Consep.
Consep, and from and after the Effective Time, Verdant and Consep will,
indemnify, defend and hold harmless each person who is now, or has been at any
time prior to the Effective Time, a director or officer of Consep or any of its
subsidiaries against all losses, claims, damages, costs, expenses, liabilities
or judgments or amounts there paid in settlement with the approval of Verdant in
connection with any claim, action, suit, proceeding or investigation based in
whole or in part on or arising in whole or in part out of acts or omissions
occurring at or prior to the Effective Time (including, without limitation, the
transactions contemplated by the Merger Agreement). Such indemnification is
given in each case to the full extent a corporation is permitted to do so under
the Oregon Business Corporation Act and Consep's Articles of Incorporation and
Bylaws as in effect on the date of the Merger Agreement.
CONFLICTS OF INTEREST
As of the Consep Record Date, non-employee members of the Consep Board
beneficially owned an aggregate of 351,389 shares of Consep Common Stock and
held options to acquire an aggregate of 26,250 shares of Consep Common Stock
exercisable at prices ranging from $4.625 to $1.313 per share. See "OWNERSHIP OF
CONSEP COMMON STOCK." Assuming a closing price per share of Verdant Common Stock
on the Closing Date (as defined in the Merger Agreement) of $1.1875, the
aggregate dollar value of Verdant Common Stock to be received by these non-
employee directors in respect of issued and outstanding shares of Consep Common
Stock would be approximately $396,411, representing approximately 3.6% of the
aggregate consideration to be received by all holders of Consep Common Stock.
Pursuant to the Merger Agreement, all outstanding options to purchase shares of
Consep Common Stock, including those held by the non-employee directors of
Consep, would be assumed by Verdant and automatically converted into options to
purchase shares of Verdant Common Stock. Assuming a closing price per share of
Verdant Common Stock on the Closing Date of $1.1875, the options to purchase
shares of Verdant Common Stock to be received by these non-employee directors in
respect of outstanding options to purchase Consep Common Stock would initially
have no value since the exercise price of such options to purchase Verdant
Common Stock would be greater than the assumed closing price of $1.1875 per
share.
As of the Consep Record Date, the executive officers of Consep
beneficially owned an aggregate of 335,951 shares of Consep Common Stock and
held options to purchase an aggregate of 278,858 shares of Consep Common Stock
exercisable at prices ranging from $3.25 to $0.50 per share. See "OWNERSHIP OF
CONSEP COMMON STOCK." Assuming a closing price per share of Verdant Common Stock
on the Closing Date of $1.1875, the aggregate dollar value of Verdant Common
Stock to be received by these executive officers in respect of issued and
outstanding shares of Consep Common Stock would be approximately $378,995,
representing approximately 3.5% of the aggregate consideration to be received by
all holders of Consep Common Stock. Pursuant to the Merger Agreement, all
outstanding options to purchase shares of Consep Common Stock, including those
held by the executive officers of Consep, would be assumed by Verdant and
automatically converted into options to purchase shares of Verdant Common Stock.
Assuming a closing price of Verdant Common Stock on the Closing Date of $1.1875,
the aggregate dollar value of options to purchase Verdant Common Stock to be
received by these executive officers in respect of outstanding options to
purchase Consep Common Stock would be approximately $25,126, representing
approximately 80% of the aggregate consideration to be received by all holders
of options to purchase shares of Consep Common Stock.
ACCOUNTING TREATMENT
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<PAGE>
The Merger will be accounted for by Verdant under the purchase method
of accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations," as amended. Under this method of accounting, the
purchase price will be allocated to assets acquired and liabilities assumed
based on their estimated fair values. Income of the combined company will not
include income or loss of Consep prior to the Effective Date.
RESALE OF VERDANT COMMON STOCK RECEIVED BY CONSEP SHAREHOLDERS
The shares of Verdant Common Stock issuable to Consep Shareholders upon
consummation of the Merger have been registered under the Securities Act. Such
securities may be traded freely without restriction by those shareholders who
are not deemed to be "affiliates" of Verdant or Consep, as that term is defined
in rules promulgated under the Securities Act.
Shares of Verdant Common Stock received by those Consep Shareholders
who are deemed to be "affiliates" of Consep at the time of the Consep Special
Meeting may be resold without registration under the Securities Act only as
permitted by Rule 145 under the Securities Act or as otherwise permitted under
the Securities Act.
Consep has agreed in the Merger Agreement to use its reasonable best
efforts to obtain and deliver to the other party, on or prior to the date of
mailing of this Joint Proxy Statement-Prospectus, signed representation letters
from each director, executive officer and other person who may reasonably be
deemed to be an "affiliate" of Consep to the effect that such persons will not,
among other things, offer to sell, transfer or otherwise dispose of any of the
shares of Verdant Common Stock distributed to them pursuant to the Merger
except, in compliance with Rule 145, or in a transaction that, in the opinion of
counsel reasonably satisfactory to Verdant, is otherwise exempt from the
registration requirements of the Securities Act, or in an offering which is
registered under the Securities Act. This Joint Proxy Statement-Prospectus does
not cover resales of Verdant Common Stock received by persons who are deemed to
be "affiliates" of Consep. No person is authorized to make use of this Joint
Proxy Statement-Prospectus in connection with any such resales.
APPRAISAL RIGHTS
NO APPRAISAL RIGHTS FOR VERDANT SHAREHOLDERS. Under the MBCA, holders
of Verdant Common Stock will have no appraisal rights in connection with the
Merger Agreement and the consummation of the transactions contemplated thereby.
NO APPRAISAL RIGHTS FOR CONSEP SHAREHOLDERS. Under the OBCA, holders of
Consep Common Stock will have no appraisal rights in connection with the Merger
Agreement and the consummation of the transactions contemplated thereby.
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<PAGE>
MANAGEMENT AND OPERATIONS AFTER THE MERGER
BOARD OF DIRECTORS
Immediately after the Effective Time, Verdant will cause Volker Oakey
and Walter C. Babcock to be appointed to the Verdant Board, and thereafter at
the next annual meeting of Verdant, the Verdant Shareholders will cause Volker
Oakey and Walter C. Babcock to be nominated and will use their best efforts to
cause them to be elected as directors of Verdant. In the event that the Merger
Agreement is not approved, each of the following directors, except Volker Oakey
and Walter C. Babcock, will remain and be continuing directors of Verdant.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND
NAME AGE DIRECTOR SINCE BUSINESS EXPERIENCE FOR PAST FIVE YEARS
---- --- -------------- ---------------------------------------
<S> <C> <C> <C>
Stanley Goldberg 51 1992 (Verdant) Chairman of the Board of Directors of Verdant since
1997; Chief Executive Officer of Verdant Since
1993, President of Verdant Since September 1992.
Vice President and General Manager of Thomson,
S.A., World Wide Audio Division, a defense and
electronics company from 1990 to 1992; General
Manager of Thomson S.A., Audio Americas
Operations from 1988 to 1990; Manager of Product
Development for General Electric Company, a
consumer and industrial products and defense
company, from 1986 to 1988. Director of Destron-
Fearing Corporation.
Gordon F. Stofer 50 1985 (Verdant) President of Cherry Tree Investments, Inc. and
Managing General Partner of Cherry Tree Ventures
venture capital partnerships since 1980. Chairman of
the Board of Directors of Verdant from 1986 to
1997. Director of Coda Music Technology, Inc.,
Insignia Systems Incorporated and Harmony Brook,
Inc.
Robert W. Fischer 79 1981 (Verdant) President of R.W. Fischer & Company, Inc., a
corporate development and investment banking
services company, since 1979. Director of Apertus
Technologies Incorporated.
Donald E. Lovness 73 1965 (Verdant) Former Senior Scientist of Verdant until his
retirement in December 1988.
Franklin Pass, M.D. 61 1990 (Verdant) Chairman and Chief Executive Officer of Medi-Ject
Corporation, a manufacturer of needle-free injection
devices, since 1992; President of International
Agricultural Investments, Ltd., an agricultural and
consulting partnership from 1990 to 1993; Chairman
and Chief Executive Officer of Bioseeds
International, Inc., an agricultural seed company,
from 1987 to 1990.
Frederick F. Yanni, Jr. 55 1993 (Verdant) President and Chief Executive Officer of Health
Services Medical Corporation of Central New York,
Inc., a network health maintenance organization,
since 1976; President and Chief Executive Officer of
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C>
Health Services Association, a provider of
ambulatory care, since 1972.
John F. Hetterick 52 1993 (Verdant) Independent consultant in the consumer products
industry since 1997; President and Chief Executive
Officer of Rollerblade, Inc., a manufacturer of in-line
skates, from 1992 to 1997; President of Tonka
International, a division of Tonka, Corporation, a toy
manufacturer, from 1989 to 1991; Vice President-
Marketing of Pepsi-Cola International, a
manufacturer and distributor of soft drinks from
1986 to 1989.
Richard Mayo 57 1987 (Verdant) President of Richard Mayo and Associates, a consulting
firm specializing in the lawn and garden industry, since
1991; President of The Chas. H. Lilly Company, a
marketer of consumer lawn and garden pesticides,
fertilizers and seeds, from 1990 to 1991; Executive Vice
President and Chief Operating Officer of the Chas. H.
Lilly Company from 1987 to 1990.
David K. Vansant 53 1998 (Verdant) Executive Vice President-Corporate Development of
the Verdant since 1997. Chairman and Chief
Executive Officer of Southern Resources, Inc. from
1986 until Southern Resources, Inc. was acquired by
Verdant in 1997.
Volker G. Oakey 57 1984 (Consep) Mr. Oakey has been a director of Consep since 1984
and was appointed President and Chief Executive
Officer of Consep in 1988. Mr. Oakey was
appointed Chief Financial Officer and Secretary of
Consep in September 1998. From 1986 to 1988, Mr.
Oakey was a Manager with the investment banking
firm of Brown Brothers Harriman. Prior to that, Mr.
Oakey spent fifteen years at Bethlehem Steel
Corporation, serving most recently as Assistant
Treasurer of that Company. Mr. Oakey is a member
of the Board of Directors of Bend Research, Inc.
Mr. Oakey holds an M.B.A. from The Wharton
School of Business at the University of Pennsylvania
and a B.A. in Economics from the University of
Maryland.
Walter C. Babcock, Ph.D. 50 1984 (Consep) Dr. Babcock has been a director of Consep since it
was formed in 1984 and was appointed to the
Compensation Committee of the Board of Directors
of Consep in September 1996. Dr. Babcock is
President, Chief Executive Officer and Chairman of
the Board of Directors of Bend Research, Inc., where
he has been employed since 1976. Dr. Babcock
holds a Ph.D. in Physical Chemistry from the
University of Oregon.
</TABLE>
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<PAGE>
MANAGEMENT
The executive officers of Verdant after the Merger will be comprised of
current members of Verdant's senior management. Specifically, it is expected
that Stanley Goldberg will continue to be President and Chief Executive Officer
of Verdant and, Mark G. Eisenschenk, David K. Vansant, William DeMare and Scott
Glatstein, each of Verdant, will remain Executive Vice President, Chief
Financial Officer and Secretary, Executive Vice President of Corporate
Development, Vice President of Technology and Commercial Products, and Vice
President and General Manager-Retail Sales, respectively, of Verdant. In
addition, it is expected that Volker G. Oakey will continue to be President,
Chief Executive Officer and Chief Financial Officer of Consep and, Kenneth C.
Rymer and Steven R. Hartmeier, each of Consep, will remain Vice President,
Consumer Products and Vice President, Commercial Agriculture Products,
respectively, of Consep. See "THE MERGER--Interests of Certain Persons in the
Merger."
OPERATIONS
Verdant and Consep expect to ultimately realize annual pre-tax cost
savings of approximately $1.1 million as a result of the Merger. Such cost
savings are expected to be realized by various means including reductions in
staff, consolidation of certain data processing and other back office
operations, and consolidation and elimination of certain duplicate or corporate
overhead expenses. No adjustment has been included in the unaudited pro forma
condensed combined financial statements included in this Joint Proxy
Statement-Prospectus for the anticipated cost savings.
The extent to which cost savings will be achieved is dependent upon
various factors beyond the control of Verdant or Consep, including regulatory
factors, economic conditions, and unanticipated changes in business conditions.
Therefore, no assurances can be given with respect to the ultimate level of cost
savings, if any, to be realized, or that such savings will be realized in the
time frame currently anticipated. See "SUMMARY--Selected Historical Financial
Data," "SUMMARY--Pro Forma Selected Historical Financial Data," "FINANCIAL
STATEMENTS--Unaudited Pro Forma Condensed Combined Financial Statements" and
"CAUTIONARY STATEMENT CONCERNING FORWARD- LOOKING INFORMATION."
COSTS INCURRED IN CONNECTION WITH THE MERGER
Verdant and Consep also anticipate that they will incur Merger-related
expenses and restructuring charges in connection with the Merger, which costs
are estimated to be approximately $1.2 million. These items principally result
from expenses to be incurred in connection with the integration of operations
and systems, elimination of redundancies, and staff reductions and officer and
employee retention arrangements. It is anticipated that substantially all of
these expenses and charges will be incurred in the first year following the
Merger.
The expenses and charges to be incurred in connection with the Merger
are dependent upon various factors beyond the control of Verdant and Consep. No
assurance can be given that such expenses and charges will not exceed the
amounts described above. See "SUMMARY--Selected Historical Financial Data,"
"SUMMARY--Pro Forma Selected Historical Financial Data," "FINANCIAL
STATEMENTS--Unaudited Pro Forma Condensed Combined Financial Statements" and
"CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION."
CORPORATE HEADQUARTERS
Verdant's corporate headquarters will remain in Bloomington, Minnesota.
In addition, it is expected that Verdant will continue to operate key portions
of its businesses from Consep's offices in Bend, Oregon.
For additional information regarding management and operations of the
combined company, see "BUSINESS OF VERDANT," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND, RESULTS OF OPERATIONS OF VERDANT,"
"BUSINESS OF CONSEP" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT SOF OPERATIONS OF CONSEP.
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<PAGE>
MARKET PRICES AND DIVIDEND INFORMATION
VERDANT
The Verdant Common Stock is traded on the Nasdaq National Market under
the symbol "VERD." The following table sets forth the range of high and low
sales prices as reported by the Nasdaq National Market during the periods
indicated.
PRICE RANGE
-----------------
QUARTER HIGH LOW
- ----------- ------ --------
Fiscal Year Ended September 30, 1996:
First.............................................. $2.125 $1.375
Second............................................. 2.000 1.625
Third.............................................. 2.750 1.375
Fourth............................................. 2.325 1.375
Fiscal Year Ended September 30, 1997:
First.............................................. $2.125 $1.250
Second............................................. 1.688 1.031
Third.............................................. 1.750 1.000
Fourth............................................. 1.813 1.063
Transition Period:
October 31, 1997 to December 31, 1997.............. 2.125 1.125
Fiscal Year Ending December 31, 1998:
First.............................................. 2.125 1.250
Second............................................. 2.938 1.750
Third..............................................
Fourth (through November 5, 1998)..................
On September 9, 1998, the last trading day before Verdant and Consep
publicly announced the execution of the Merger Agreement, the closing price per
share of Verdant Common Stock was $1.25. On November 5, 1998, the last trading
day prior to the date of this Joint Proxy Statement-Prospectus, such price was
$ . Past price performance is not necessarily indicative of likely future
price performance. Holders of Verdant Common Stock and Consep Common Stock are
urged to obtain current market quotations for shares of Verdant Common Stock.
Verdant has never declared or paid cash dividends on the Verdant Common
Stock and does not anticipate declaring or paying any such dividend in the
foreseeable future. The Credit Agreement restricts payment of dividends by
Verdant during the foreseeable future.
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<PAGE>
CONSEP
Consep Common Stock is listed on the Nasdaq National Market under the
symbol "CSEP." The following table sets forth the range of high and low sales
prices as reported on the Nasdaq National Market during the periods indicated.
PRICE RANGE
-------------------
QUARTER HIGH LOW
- ------------ ------- -------
Fiscal Year Ended December 31, 1996:
First Quarter...................................... $ 3.750 $2.625
Second Quarter..................................... 5.125 2.375
Third Quarter...................................... 4.000 2.625
Fourth Quarter..................................... 3.875 3.250
Fiscal Year Ended December 31, 1997:
First Quarter...................................... $ 3.625 $2.875
Second Quarter..................................... 3.250 2.375
Third Quarter...................................... 2.938 2.000
Fourth Quarter..................................... 2.125 1.313
Fiscal Year Ending December 31, 1998:
First Quarter...................................... $ 1.875 $1.375
Second Quarter..................................... 1.5625 1.000
Third Quarter......................................
Fourth Quarter (through November 5, 1998)..........
On September 9, 1998, the last trading day before Verdant and Consep
publicly announced the execution of the Merger Agreement, the closing price per
share of Consep Common Stock on the Nasdaq National Market was $0.875. On
November 5, 1998, the last trading day prior to the date of this Joint Proxy
Statement- Prospectus, such price was $ . Past price performance is not
necessarily indicative of likely future price performance. Holders of Consep
Common Stock are urged to obtain current market quotations for shares of Consep
Common Stock.
Consep has never declared or paid any cash dividends on Consep Common
Stock. Consep currently intends to retain any earnings for future growth and,
therefore, does not anticipate declaring or paying any cash dividends in the
foreseeable future.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined balance sheet as
of June 30, 1998, and the unaudited pro forma condensed combined statements of
operations for the six months ended June 30, 1998 and the three month transition
period ended December 31, 1997, combine the historical amounts of Verdant and
Consep for the periods after giving effect to certain adjustments described in
the notes to the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined statement of operations for the
fiscal year ended September 30, 1997 include the historical statement of
operations of Verdant for the twelve months ended September 30, 1997 and the
historical statement of operations of Consep for the twelve months ended
December 31, 1997. The unaudited pro forma condensed combined financial
information presents the combined results of operations of Verdant and Consep as
if the Merger had been effective at the beginning of the earliest period
presented.
The unaudited pro forma condensed combined financial information and
accompanying notes reflect the application of the purchase method of accounting.
Under this method of accounting, the purchase price is allocated to each asset
purchased and liability assumed based on the respective estimated fair market
values of each such asset and liability.
The unaudited pro forma condensed combined financial information also
reflects:
(i) The merger of Verdant with Souther Resources, Inc. ("SRI"), a
manufacturer and marketer of consumer pesticides. The merger, completed
in December 1997, was accounted for as a purchase. The operating
results of SRI are included in Verdant's historical amounts beginning
December 1, 1997. The pro forma information for fiscal 1997 below
includes the operations of SRI prior to December 1, 1997 as if the
acquisition had occurred on October 1, 1996, and is based in part on
the historical financial statements of SRI for the year ended October
3, 1997 included elsewhere in this joint Proxy Statement-Prospectus.
(ii) The acquisition by Verdant of substantially all of the assets of
Dexol Industries, Inc. ("Dexol"), a manufacturer and marketer of
consumer pesticides. The acquisition, completed in March 1997, was
accounted for as a purchase. The operating results of Dexol are
included in Verdant's historical amounts beginning March 1, 1997. The
pro forma information for fiscal 1997 below includes the operations of
Dexol prior to March 1, 1997 as if the acquisition had occurred on
October 1, 1996, and is based on internal unaudited financial
statements of Dexol for the period from October 1, 1996 to February 28,
1997.
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results or financial position
that would have occurred if the Merger had been consummated on the date
indicated, nor is it necessarily indicative of future operating results or
financial position.
54
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
AS OF JUNE 30, 1998
(in thousands, except per share amounts)
VERDANT CONSEP PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
Cash $ 159 $ 438 $ -- $ 597
Investments -- 68 68
Accounts receivable 14,702 9,926 24,628
Inventories, net 11,069 9,988 (150)(d) 20,907
Other current assets 747 974 (100)(c) 1,621
-------- -------- --------- --------
26,677 21,394 (250) 47,821
Assets held for sale 2,113 -- 2,113
Property, net 596 5,681 6,277
Intangibles, net 13,200 1,447 14,647
Goodwill, net -- 1,958 (1,958)(b) --
-- (f)
Other assets 151 61 212
-------- -------- --------- --------
$ 42,737 $ 30,541 $ (2,208) $ 71,070
======== ======== ========= ========
Accounts payable $ 10,133 $ 7,324 $ -- $ 17,457
Accrued expenses 2,315 1,365 1,460(e) 5,140
Bank line of credit 7,609 3,975 11,584
Current maturities 302 496 798
Other current liabilities -- 172 172
-------- -------- --------- --------
Total current liabilities 20,359 13,332 1,460 35,151
Long-term debt 7,123 -- 7,123
Notes payable -- 2,042 2,042
Warrant obligation -- 20 20
Common stock 167 96 (5)(a) 258
Additional paid in capital 37,620 44,227 (32,839)(a) 49,008
Cumulative translation adjustment (236) (59) 59 (a) (236)
Accumulated deficit (22,296) (29,117) 29,117 (a) (22,296)
-------- -------- --------- --------
Total shareholders' equity 15,255 15,147 (3,668) 26,734
-------- -------- --------- --------
$ 42,737 $ 30,541 $ (2,208) $ 71,070
======== ======== ========= ========
55
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
VERDANT CONSEP PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $ 31,745 $22,778 $ -- $ 54,523
Cost of revenues 20,049 16,923 36,972
-------- ------- ------ -----------
Gross margin 11,696 5,855 17,551
Operating expenses 9,596 5,588 --(g) 15,184
-------- ------- ------ -----------
Income from operations 2,100 267 -- 2,367
Other expenses (586) (207) (793)
-------- ------- ------ -----------
Income before taxes 1,514 60 -- 1,574
Provision for taxes -- -- --
-------- ------- ------ -----------
Net income $ 1,514 $ 60 $ 1,574
======== ======= ====== ===========
Earnings per share - basic $ 0.09 $ 0.01 $ 0.06
======== ======= ===========
Earnings per share - diluted $ 0.09 $ 0.01 $ 0.06
======== ======= ===========
Weighted average shares - basic 16,689 9,607 9,184(a) 25,873
======== ======= ====== ===========
Weighted average shares - diluted 16,940 9,640 9,184(a) 26,124
======== ======= ====== ===========
</TABLE>
56
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
VERDANT SRI PRO FORMA VERDANT CONSEP PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ---------- --------- ---------- ---------- ----------
(m)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 4,767 $ 1,411 $ (67)(h) $ 6,111 $ 4,951 $ -- $ 11,062
Cost of revenues 3,131 1,936 (67)(h) 5,000 4,442 9,442
----------- ---------- ---------- --------- ---------- ---------- ----------
Gross margins 1,636 (525) -- 1,111 509 -- 1,620
Operating expenses 2,768 1,862 59(i) 4,689 2,521 --(g) 7,210
----------- ---------- ---------- --------- ---------- ---------- ----------
Income (Loss) from
operations (1,132) (2,387) (59) (3,578) (2,012) -- (5,590)
Other income (expense) (65) (215) -- (280) (33) (313)
----------- ---------- ---------- --------- ---------- ---------- ----------
Income (loss) before taxes (1,197) (2,602) (59) (3,858) (2,045) -- (5,903)
Provision (benefit) for taxes -- -- -- -- -- -- --
----------- ---------- ---------- --------- ---------- ---------- ----------
Net income (loss) $ (1,197) $ (2,602) $ (59) $ (3,858) $ (2,045) $ -- $ (5,903)
=========== ========== ========== ========= ========== ========== ==========
Earnings (loss) per
share - basic $ (0.09) $ (0.22) $ (0.22) $ (0.22)
=========== ========= ========== ==========
Earnings (loss) per
share - dilute $ (0.09) $ (0.22) $ (0.22) $ (0.22)
=========== ========= ========== ==========
Weighted Average
Shares - basic 13,313 4,500 17,813 9,451 9,184 26,997
=========== ========== ========= ========== ========== ==========
Weighted Average
Shares - diluted 13,313 4,500 17,813 9,451 9,184 26,997
=========== ========== ========= ========== ========== ==========
</TABLE>
57
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO PRO
FORMA 12/31/97 FORMA PRO
VERDANT DEXOL SRI ADJUST- VERDANT CONSEP ADJUST- FORMA
HISTORICAL HISTORICAL HISTORICAL MENTS ADJUSTED HISTORICAL MENTS COMBINED
---------- ---------- ---------- ------- -------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 18,820 $ 2,973 $ 25,034 $ (67)(h) $ 46,760 $ 39,204 $ -- $ 85,964
Cost of revenues 10,255 2,030 20,787 (67)(h) 33,005 29,787 62,792
-------- --------- -------- ------ -------- -------- ------ ---------
Gross margin 8,565 943 4,247 -- 13,755 9,417 -- 23,172
(42)(j)
Operating expenses 9,090 1,486 3,847 389 (i) 14,770 11,281 --(g) 26,051
-------- --------- -------- ------ -------- -------- ------ ---------
Income (loss) from operations (525) (543) 400 (347) (1,015) (1,864) -- (2,879)
Interest income (expense), net (80) (78) (927) 28 (k) (1,057) (267) -- (1,324)
Other income (expense) 59 -- (7) -- 52 309 361
-------- --------- -------- ------ -------- -------- ------ ---------
Loss before taxes (546) (621) (534) (319) (2,020) (1,822) -- (3,842)
Provision benefit for taxes -- -- (125) -- (125) -- 125(l) --
-------- --------- -------- ------ -------- -------- ------ ---------
Net Loss $ (546) $ (621) $ (409) $ (319) $ (1,895) $ (1,822) $ 125(l) $ (3,842)
======== ========= ======== ====== ======== ======== ====== =========
Loss per share-basic $ (0.05) $ (0.12) $ (0.19) $ (0.15)
======== ======== ======== =========
Loss per share-diluted $ (0.05) $ (0.12) $ (0.19) $ (0.15)
======== ======== ======== =========
Weighted average shares-basic 11,541 16,041 9,451 9,184(a) 25,225
======== ======== ======== ====== =========
Weighted average shares-diluted 11,541 16,041 9,451 9,184(a) 25,225
======== ======== ======== ====== =========
</TABLE>
58
<PAGE>
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS:
(a) Issuance of Verdant Common Stock and retirement of Consep Common Stock
at time of Merger.
(b) Elimination of Consep goodwill not acquired.
(c) To adjust receivable to fair value.
(d) Inventory valuation reserve for products that will be discontinued.
(e) Accrue estimated direct costs of Merger ($1,210,000) and record
adjustments referred to in notes (c) and (d).
(f) Excess of purchase price over the fair value of net assets acquired at
time of Merger (less than $1,000).
(g) Amortization over 20 years of the excess of purchase price over the net
assets acquired in the Merger (less than $1,000).
(h) Elimination of sales to Verdant by SRI for the three month transition
period ended December 31, 1997 and fiscal year ended September 30,
1997.
(i) Amortization of excess of purchase price over net assets acquired in
the SRI merger and Dexol acquisition and amortization of intangible
assets valued at the time of the SRI merger for the three month
transition period ended December 31, 1997 and fiscal year ended
September 30, 1997.
(j) Elimination of portion of Dexol business not acquired.
(k) Reduction in interest expense on notes to Dexol shareholders not
assumed by Verdant.
(l) Elimination of income tax benefit.
(m) The historical results of operations of Consep for the three month
period ended December 31, 1997 have also been included in the
historical results of Consep contained in the unaudited pro forma
condensed combined statement of operations for the twelve months ended
September 30, 1997.
59
<PAGE>
BUSINESS OF VERDANT
GENERAL. At its April 15, 1998 Annual Shareholders Meeting, Verdant
Shareholders approved a proposal to change its name from Ringer Corporation to
Verdant Brands, Inc. The name change occurred in July 1998 when an official
announcement was made. In connection with the name change, Verdant adopted the
new trading symbol of "VERD" for its shares traded on the NASDAQ National Market
System.
Verdant is a developer and marketer of lawn, garden and turf products for
consumer, specialty commercial and professional markets. Verdant's product lines
include proprietary and non-proprietary pest control products and lawn and
garden fertilizers.
Verdant was founded by C. Judd Ringer and incorporated in 1961. Until 1986,
Verdant was operated as a regionally-based, closely-held provider of lawn and
garden products. In 1986, Verdant was sold to new venture capital investors who
reorganized Verdant under new management and expanded its distribution channels
into national lawn, garden and turf care markets.
Since 1986, Verdant has raised approximately $27 million in capital through
private equity offerings to venture capital organizations and individuals, and
through public offerings of common stock in 1990 and 1992. The capital raised
was used by Verdant to acquire pest control product lines, to fund programs for
advertising, promotion, product development and product package redesign and to
increase working capital. Verdant's current pest control product lines were
acquired in 1991 through the acquisition of Safer, Inc., a wholly-owned
subsidiary of Verdant, and in 1997 through the purchase of substantially all of
the assets of Dexol Industries, Inc.
Verdant's products are sold primarily in the consumer lawn and garden and
the commercial golf course turf management markets. Product lines are composed
of environmentally-oriented pest control products, traditional pesticides,
granular fertilizers and water soluble fertilizers.
Verdant's environmentally-oriented pest control products, sold under the
Safer(R) brand name, use microbial, botanical and mechanical technologies to
effectively control insects, weeds and fungal diseases. These products are
designed to work on targeted pests without harming beneficial insect populations
or leaving harmful residues on turf and garden plants and are developed to
provide premium performance using available technologies with the lowest
environment impact.
Verdant's traditional pesticides, sold under the Dexol(R) and Black Leaf(R)
brand names and various private labeL brands, use synthetic chemical pesticide
compounds commonly used in the lawn and garden industry for the control of
insects, rodents, weeds and fungal diseases. Verdant's line of traditional
pesticides was acquired in March 1997 with the acquisition of the assets of
Dexol Industries, Inc.
Verdant's granular fertilizer products use proprietary microbially-based
delivery systems that control release of nutrients for extended uniform plant
feeding and are marketed under the Restore(R) and Supreme Garden Fertilizers
brand names.
Verdant's water soluble fertilizer products use proprietary oxygen
releasing compounds that enhance root growth and function to promote more
vigorous and healthy plants. Water soluble fertilizers were added to Verdant's
product lines in December 1994 through the acquisition of the assets of Plant
Research Laboratories. These products were marketed by Verdant under the Oxygen
Plus(R) brand name in fiscal 1995 and under the Safer(R) brand name beginning in
fiscal 1996.
Verdant's products are directed toward wholesale fertilizer and pesticide
markets which exceed $1 billion in annual sales according to the 1991 Kline &
Company industry survey report. Verdant anticipates that future growth in its
share of these markets will be derived from increased sales of its existing
products, from sales of future products developed by Verdant or licensed from
others, and from the acquisition of additional product lines or companies with
additional product lines.
60
<PAGE>
SOUTHERN RESOURCES, INC. On December 9, 1997, Verdant completed a merger
with Southern Resources, Inc. ("SRI"), a previously privately-owned
Georgia-based holding company, with annual consolidated sales of approximately
$25 million. SRI manufactures and markets traditional pesticides, through its
subsidiary, SureCo, Inc., under a variety of proprietary and private label brand
names to commercial and consumer markets throughout North America. The merger
was accounted for using the purchase method of accounting.
DEXOL INDUSTRIES, INC. In March 1997, Verdant acquired substantially all of
the assets of Dexol Industries, Inc. (the "Dexol acquisition"), a California
based manufacturer and marketer of pesticides to the retail consumer with annual
sales of approximately $10 million. The pesticide products acquired use
non-proprietary traditional chemical technology commonly available in the lawn
and garden industry. The acquisition was accounted for using the purchase method
of accounting.
SALES AND MARKETING. Verdant's products are marketed in the United States
through both retail and commercial distribution channels. Retail channels
consist principally of mass merchants, specialty lawn and garden stores and
hardware cooperatives. Commercial channels consist of specialty distributors who
sell products to turf management professionals primarily in the golf course
industry. In fiscal 1997, U.S. retail and commercial markets accounted for 87%
and 3%, respectively, of Verdant's sales. The remaining 10% is attributable to
foreign retail and commercial market sales, primarily in Canada.
Retail sales in the United States are conducted through a variety of retail
outlets in all fifty states. These outlets consist of mass merchandisers and
several lawn and garden wholesale distributors who, in turn, resell to retail
garden centers, nurseries and hardware and home center stores. National
retailers selling Verdant's products include The Home Depot, Menards, Target,
Tru-Serve and Frank's Nursery & Crafts, although some of these retailers
currently carry only limited selections of Verdant's products or only carry them
in certain regions of the country.
Verdant's retail sales efforts in the United States are managed by a vice
president of sales located in Verdant's main office, and by six regional sales
managers located in Maryland, Georgia, Illinois, Indiana, Washington and
California. Verdant uses a combination of direct sales personnel and independent
manufacturers' representatives to market its products. The direct sales
personnel and independent representatives, who report to the regional managers,
are assigned territories that cover all 50 states. In addition, Verdant uses its
wholesalers' sales and merchandising personnel and other merchandising service
organizations to contact and service some of the larger retail outlets who sell
Verdant's products.
Most of Verdant's distribution and marketing activities are concentrated in
the United States and Canada, however, a level of international overseas
business has been maintained for a number of years. Verdant currently sells
certain pest control products to foreign manufacturers and distributors and has
sold products to customers in Germany, Switzerland and other European markets
for over ten years. International sales are currently managed by Safer, Ltd.,
Verdant's subsidiary in Toronto, Ontario, Canada. Safer, Ltd. maintains its own
sales and marketing organization, its own product development operation and most
of its own sources of supply and manufacturing. Although management believes
there are significant future international market opportunities, management
expects to concentrate Verdant's marketing efforts in the United States and
Canada for the foreseeable future while Verdant focuses on establishing
profitable operations in these primary market areas.
Verdant's commercial sales are supervised by a manager of commercial sales.
Approximately 30 professional turf distributors, with several locations
throughout the U.S. and Canada, buy products from Verdant for sale primarily to
golf courses with some sales going to lawn service operators, specialty
landscapers and government landscape services. The commercial product line
includes several microbial fertilizer formulations specifically designed for the
needs of professional turf managers.
In recent years, Verdant has used various forms of advertising and
promotion to market its products. These forms primarily consist of cooperative
advertising programs, point-of-purchase marketing materials and radio and print
advertising,.
In fiscal 1997, 1996 and 1995, Verdant spent approximately $3.8 million,
$3.3 million and $4.8 million, respectively, on sales and marketing expenses.
61
<PAGE>
DISTRIBUTION AND TRANSPORTATION. Verdant relies primarily on common
carrier transportation, leased warehouse facilities and public warehouse
services to distribute its products nationwide. Verdant's distribution and
freight costs tend to be significant as a percentage of sales. This is due to
the relatively heavy weight and bulky nature of Verdant's products and the
substantial shipping distances from distribution locations to some of Verdant's
major market areas.
Freight costs are particularly significant for granular fertilizer
products. Some fertilizer competitors located in closer proximity to some of
Verdant's major market areas incur lower freight costs which can be an advantage
when competing against Verdant's fertilizer products. Consequently, Verdant's
relatively high distribution and freight costs can hinder fertilizer sales
growth in some markets.
In fiscal years 1997, 1996 and 1995, Verdant spent approximately $2.2
million, $1.6 million and $1.9 million, respectively, on product transportation
and warehousing costs.
VERDANT'S TECHNOLOGIES. Verdant applies four major areas of technology
to its products. First, biological and botanical pest control technologies which
focus on a broad spectrum of plant pests including insects, weeds and fungal
diseases. Second, synthetic chemical technologies common to the lawn and garden
industry which are used for the control of various insects, rodents, weeds and
fungal diseases. Third, granular microbially-activated fertilizer systems which
have been developed for specific lawn, garden and commercial turf uses. Fourth,
oxygen-releasing water soluble fertilizer technology which is used in Verdant's
water soluble fertilizer products for use on indoor plants, outdoor container
plants, and other lawn and garden uses.
Verdant's biological and botanical pest control technology is based on
fatty-acid compounds, naturally occurring plant extracts and microorganisms, and
mechanical traps to control unwanted pests. Verdant holds numerous patents for
fatty-acid based pest control products and products using fatty-acids as
synergists in combination with both natural and synthetic pesticides.
Verdant's synthetic chemical pesticide technologies are based on
non-proprietary synthetic chemical pesticides common to the lawn and garden
industry. These include various forms of chemical insecticides, herbicides,
fungicides and rodenticides which are obtained primarily from large national and
international chemical companies who supply the agricultural, horticultural and
lawn and garden markets.
Verdant's granular fertilizer technologies are based on the use of
naturally occurring soil microbes in combination with plant nutrients and high
energy carbohydrate sources to produce a superior controlled release fertilizer
system. These fertilizers promote natural soil microbial activity which helps
make nutrients available to plants and promotes plant health and vigor. Healthy
microbial activity also plays an important role in regulating some plant
diseases.
Verdant's water soluble fertilizer technologies use a patented oxygen
releasing compound ("ORC") in combination with high quality plant nutrients.
This fertilizer technology overcomes plant growth problems associated with
oxygen deficient soils caused by physical compaction, heavy clay content, over
watering and flooding. Through the use of ORC, Verdant's water soluble
fertilizers help to reduce oxygen deficient conditions and promote a heathy
growing environment by providing a reliable supply of timed-release oxygen and
other beneficial plant nutrients directly to the plant root system.
Verdant performs extensive product performance tests through contract
research and development facilities.
To assist the process of investigating new product opportunities,
Verdant consults, from time to time, with knowledgeable scientists and other
experts regarding trends and technologies in fertilizers, pesticides and turf
management.
PRODUCTS. Verdant's four major product categories are
environmentally-oriented pest control products, traditional pesticides,
microbial fertilizers and water soluble fertilizers.
ENVIRONMENTALLY ORIENTED PEST CONTROLS. Verdant's environmentally
oriented pest control products, sold under the Safer(R) brand name, are based on
naturally occurring microbial and botanical derivatives and synthesized versions
of naturally occurring botanical derivatives. These active ingredients, used
alone or in combinations, have been
62
<PAGE>
developed to control specific insects, weeds and fungal diseases. The active
ingredients include fatty-acids, pyrethrum (a derivative of a certain
chrysanthemum flower), pyrethroids (synthetic variations of pyrethrum), neem (a
derivative of the tropical Neem tree), bacterium strains with toxicity specific
to certain insects, and elemental sulfur. Verdant's environmentally-oriented
pest controls bio-degrade more rapidly and have a lower mammalian toxicity
rating than most traditional pesticides.
Verdant's environmentally-oriented pest control products accounted for
48%, 70% and 63% of sales in fiscal 1997, 1996 and 1995, respectively.
TRADITIONAL PESTICIDES. Verdant acquired its line of traditional
pesticide products in March 1997 with the purchase of substantially all of the
assets of Dexol Industries, Inc. See "--Dexol Industries, Inc." above.
Verdant's traditional pesticide products, sold under the Dexol(R)
brand name and various private label brand names, use synthetic chemical
pesticides common to the lawn and garden industry and include insecticides based
on organophosphates (such as Diazinon and Malathion) and carbamates (such as
Carbaryl or Sevin), herbicides based on phenoxy-herbicides and dicamba
compounds, and fungicides based on sulfur or chlorthalonil.
Verdant's traditional pesticides accounted for 33% of sales in fiscal
1997 since the acquisition of these products in March 1997. There were no sales
of these products in prior years.
MICROBIAL FERTILIZERS. Verdant offers three types of proprietary
microbial fertilizer products which use, in varying degrees, naturally occurring
soil microorganisms to slowly break down materials into nitrogen and other
nutrients usable by the plant. These include all-natural fertilizers marketed
under the Restore(R) brand name, natural and synthetiC hybrid fertilizers
marketed under the Supreme Garden Fertilizers and Safer(R) brand names. Hybrid
fertilizers, including garden fertilizers and low phosphate lawn fertilizers,
using a natural nutrient component with synthetic nutrients. These microbial
fertilizers provide high performance, non-burning, slow-release fertilization
programs for improved plant growth and extended feeding. Natural fertilizer
components include commodity feed-grade materials, including a high protein
source (such as feather or leather meal), high carbohydrate ingredients, and
natural soil microorganisms. Synthetic materials include synthetic nitrogen
sources such as urea, coated urea and dicyanodiamide. Verdant's microbial
fertilizer products accounted for 18%, 26% and 31% of sales in fiscal 1997, 1996
and 1995, respectively.
WATER SOLUBLE FERTILIZERS. Verdant offered water soluble fertilizers
for the first time in fiscal 1995 which were acquired from Plant Research
Laboratories in December 1994. Verdant's water soluble fertilizers are marketed
in both liquid and powdered formulas under the Safer(R) brand name. Safer(R)
water soluble fertilizers use macro nutrients in combination with a patented
oxygen releasing compound ("ORC"). ORC was developed to overcome plant growth
problems caused by oxygen deficient soil due to heavy clay content, physical
compaction, over watering or flooding. ORC utilizes the plant's own soil as an
organic catalyst to provide the plant time-released oxygen, activated by water,
for an optimal balance of soil, water, air and nutrients. Verdant's water
soluble fertilizer products accounted for 2%, 3% and 4% of sales in fiscal 1997,
1996 and 1995, respectively.
PRODUCT DEVELOPMENT. Verdant conducts ongoing product development
efforts to enhance existing products and develop new products. Current efforts
include product development using Verdant's patented pesticide and herbicide
technology which uses fatty-acids as a synergist in combination with traditional
synthetic chemicals. Management believes that the technology will enable Verdant
to develop effective pesticides and herbicides that use much less chemical
active ingredient, thus making traditional chemical herbicides and pesticides
more environmentally friendly. Most of Verdant's product development, research
and testing is conducted by university and government researchers unaffiliated
with Verdant.
In fiscal 1997, 1996 and 1995, Verdant spent $972,360, $748,932 and
$981,495, respectively, on research and development expenditures.
MANUFACTURING. Verdant has a leased manufacturing facility in
Torrance, California where it manufactures much of its traditional pesticide
products. The manufacturing facility was acquired with the Dexol acquisition in
March 1997. In addition, subsidiaries of one of Verdant's subsidiaries own a
manufacturing facility in Fort Valley, Georgia. Verdant also uses outside
subcontract manufacturers to produce the remainder of its products.
63
<PAGE>
Verdant's microbial fertilizers and water soluble fertilizers are
produced pursuant to short-term manufacturing agreements with two
subcontractors. Verdant's environmentally oriented pest control products and
certain traditional pesticides fertilizers are manufactured by subcontract
companies located in Minnesota, Missouri and California.
Verdant believes that its manufacturing facilities and its
subcontractors have sufficient available manufacturing capacity to satisfy
Verdant's needs for the foreseeable future. Products for Canada and overseas
markets are manufactured by subcontractors in Canada, Europe and the United
States. Verdant believes that adequate alternative subcontractors are available,
if needed.
Verdant believes that its fertilizers and composting products and its
pest control products are manufactured using generally available raw materials
and processes common to the industry. Verdant does not anticipate any shortages
of such raw materials or manufacturing capacity which would materially affect
the supply of finished goods, although price fluctuations may affect total
product costs.
GOVERNMENT REGULATION AND PRODUCT REGISTRATION. Government regulation
in the United States and other countries is a significant factor in the
research, development, production and marketing of pesticides and, to a lesser
extent, fertilizers. To develop and sell a pesticide product, federal and state
product registration must be obtained for each pest and plant for which the
product is used. In the United States, pesticides are regulated by the
Environmental Protection Agency ("EPA") under the Federal Insecticide, Fungicide
and Rodenticide Act, as amended ("FIFRA"), which requires extensive efficacy,
toxicology and environmental testing to substantiate product performance and
safety prior to registration. In addition, many states have additional
registration requirements that go beyond FIFRA.
Under FIFRA, field efficacy testing may be conducted on a small scale
in certain instances. To conduct large-scale field tests, a company must obtain
an experimental use permit ("EUP"), which generally requires satisfactory
completion of certain toxicology and environmental studies. Initial EPA
registration for a new pesticide may therefore be a lengthy and expensive
process. In addition, the U.S. Congress has mandated that the EPA require that
all pesticide products registered prior to 1984 be re-registered by 1997 using
today's stricter testing protocols. Registration applicants also must submit
their proposed labeling for EPA approval. FIFRA creates a complex and detailed
scheme for pesticide labeling. After a pesticide is registered, it must be sold
with labeling and claims exactly as approved by the EPA.
To regulate the development and use of biological pest controls,
including those based on naturally occurring microorganisms, the EPA established
special guidelines for their registration which are set forth in Subdivision M
of the EPA's Pesticide Assessment Guidelines. Biological pest controls currently
are subject to a three-tier toxicology testing procedure and a four-tier
environmental testing procedure. A biological pest control product that
satisfactorily completes both the toxicology and environmental Tier I tests is
not required to go through the tests specified in subsequent tiers. Should
questions arise during any tier of testing, additional tests may be required.
The cost of registering biological pest control products is generally
substantially lower than that for chemical pesticides. Most of Verdant's
products have only required Tier I testing. Stricter registration requirements
apply to products based on genetically engineered organisms. Verdant does not
currently use any genetically modified organisms. Based on current EPA
regulations, management believes that biological pest control product
registrations can be obtained at a reasonable cost to Verdant.
The fertilizer products produced and marketed by Verdant are currently
regulated by individual state departments of agriculture. Requirements for
obtaining registrations to sell fertilizers vary from state to state. Every
fertilizer product must be registered and licensed in each state where it is
sold, and a registration or license fee to maintain this registration must be
paid on an annual basis.
Verdant's product performance claims for its fertilizers are more
extensive than those typical of traditional fertilizers, and include claims that
the products improve soil and minimize conditions that promote certain diseases.
As part of the registration process, research data in support of these claims
must be submitted to the appropriate state agencies. This research must be
independently generated, preferably at the university level. Verdant's
fertilizer products have been tested at several state universities across the
country, as well as in a leading independent turf research facility in Europe.
64
<PAGE>
Verdant's fertilizer products are currently registered in most states
under a national label which makes certain performance claims. Several states
object to certain claims made on the packaging or require claims specific to a
state. Verdant, where possible, has designed special packaging, citing limited
claims, to permit as wide of registration and sale as possible. Verdant
continues to work with all states to improve registration status nationwide, and
to substantiate the performance claims through studies conducted at
universities.
Verdant's products will also be subject to regulation by agencies of
foreign countries in which the products are tested, sold or used. Verdant's
activities may be subject to regulation under various other federal and
international laws, regulations and guidelines, and state and local regulatory
requirements, including approvals prior to shipping the products into a country,
state or locality for either experimental or commercial purposes. Verdant
currently maintains product registrations in 11 foreign countries and has
registrations pending in three additional foreign countries. Verdant cannot
predict the effect of future legislation and regulation on Verdant's operations.
There can be no assurance that any testing approvals or registrations
will be granted on a timely basis, if at all, or that Verdant's resources will
be adequate to meet the costs of regulatory compliance. Any or all of those
approvals may be the subject of disputes that could postpone or prevent
research, development, production and/or marketing of Verdant's products.
Some states have laws imposing liability on certain parties for the
release of pesticides and/or fertilizers into the environment in a manner or in
concentrations not permitted by law. Such liability could include, among other
things, responsibility for cleaning up the damage resulting from such a release.
In addition, the Comprehensive Environment Response, Compensation and Liability
Act, commonly known as the federal Superfund law, imposes liability on certain
parties for the release into the environment of hazardous substances, which
might include fertilizers and pesticides under certain circumstances. The
federal Superfund law has been interpreted to impose liability on a producer of
pesticides for cleaning up environmental damage resulting from the release of
its products into the environment during their manufacture. Verdant has not been
subject to any claims for responsibility relating to impermissible releases of
pesticides under such federal or state statutes. However, there can be no
assurance that Verdant will not be subject to claims under such statutes at some
time in the future. Verdant believes that it does not need, and it does not
maintain, insurance for any environmental claims which might result from the
release of its products into the environment in a manner or in concentrations
not permitted by law. See "RISK FACTORS--Environmental Matters."
COMPETITION. Verdant faces significant competition in the fertilizer
and pesticide industries from numerous manufacturers and suppliers, several of
which significantly dominate their respective markets and many of which have
substantially greater financial, technical, marketing and other resources than
Verdant. The principal competitive factors in Verdant's markets are efficacy,
ease of application, price, health and environmental compatibility and name
recognition. Many of Verdant's products generally cost more than those of their
conventional chemical counterparts, and therefore Verdant is generally not able
to compete on pricing alone.
Verdant believes that it has three categories of competitors in the
pesticides market: large chemical pesticide companies, companies with existing
bio-pesticide product lines, and companies developing new bio-pesticide
products. The pesticide industry is dominated by large chemical companies
located in the United States and Europe. These companies generally operate
throughout the world and have the capability to manufacture chemical pesticides
very efficiently.
Verdant's principal competitors in the consumer chemical pesticide
market are Solaris (Ortho) and Spectracide. There are several companies which
manufacture and market bio-pesticides for agricultural use, including Abbott
Laboratories and Novartis. Many of the large chemical pesticide companies are
currently conducting research on biological pest control technology. In
addition, Verdant is aware that at least one dominant chemical pesticide
manufacturer has introduced a limited line of alternative pest control products.
There are also small biotechnology companies which are conducting research in
the biological pest control area. These companies may represent significant
competition in the future.
Verdant's principal competitor in the consumer fertilizer market is
The Scotts-Miracle Grow Company. Other significant competitors include Lebanon
(Greenview), Milwaukee Sewer Improvement District (Milorganite) and Estech
(Vigoro). Freight cost involved in shipping bulk fertilizer products across the
country are a significant factor in national
65
<PAGE>
competition. In addition to national competitors, Verdant has many regional and
local competitors who incur lower freight costs and are therefore more price
competitive in regional and local markets. Verdant estimates that approximately
35% of the market share is held by smaller regional and local fertilizer
manufacturers.
Products developed by Verdant may also be subject to competition from
products developed by companies using other technologies. One potential source
of competition in the future may come from plant science technology, including
development of pest-resistant plants by genetic engineering and other methods.
SEASONALITY. Sales of Verdant's products are highly seasonal, with
Verdant shipments of fertilizers and pest controls being heavily concentrated in
the winter (first fiscal quarter) and spring (second fiscal quarter). See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF VERDANT--Quarterly Performance."
PATENTS AND PROPRIETARY TECHNOLOGIES. Verdant uses proprietary and
non-proprietary technologies in its products. Non-proprietary technologies are
use in Verdant's traditional pesticide products sold under the Dexol(R) and
Black Leaf(R) brand names and various private label brands. Proprietary
technologies are used in many of Verdant's environmentally-oriented pest control
products, microbial fertilizers and water soluble fertilizers.
Verdant seeks to protect its proprietary product technologies through
a variety of means including patents, licenses, trade secrets, proprietary
know-how, technological innovation and customer education.
Verdant relies on the use of proprietary processes in the formulation
of its microbial fertilizer products to protect them against duplication by
competitors. Verdant acknowledges that there can be no assurance that such
proprietary processes will provide sufficient protection.
Verdant owns patents covering the herbicidal soap and the soap
synergized pyrethrum (SAP) technology. These patents expire in the years 2008
and 2007, respectively. Also, in connection with the December 1994 acquisition
from Plant Research Laboratories of a water soluble fertilizer product line,
marketed under the Oxygen Plus(R) brand name, Verdant acquired an exclusive
worldwide license to practice patents relating to oxygen releasing technology in
the horticultural, agricultural and lawn and garden markets. The license covers
currently existing patents and any further patents on the technology that may be
issued in the future. The current patents on oxygen releasing technology expire
in the year 2011.
As of December 1997, Verdant owned 39 patents, including 20 U.S.
patents, and licensed two additional U.S. patents, which expire at various times
during the year from 2006 through 2012. Verdant acknowledges that there can be
no assurances that its owned or licensed patents will provide sufficient
protection for its products or be of commercial benefit to Verdant.
Verdant obtains confidentiality agreements from current Verdant
employees, scientific consultants and potential strategic corporate partners
prior to disclosing Verdant trade secrets and know-how. There can be no
assurance that these confidentiality agreements will be honored or that such
proprietary know-how or trade secrets will not be independently created by third
parties.
EMPLOYEES. As of June 30, 1998 , Verdant had 146 employees, all of
whom are full-time, located in the U.S. and Canada. Of these employees, 65 were
engaged in manufacturing, two were engaged in product development, 22 were
engaged in sales and marketing, 25 were engaged in distribution and material
control and 22 were in general administration. Verdant plans to hire additional
personnel as required by the needs of its business. Verdant does not currently
anticipate difficulties in attracting sufficient numbers of qualified employees.
None of the employees are covered by collective bargaining agreements, and
Verdant has experienced no work stoppages. Verdant believes that its employee
relations are good.
DESCRIPTION OF PROPERTY. Verdant leases approximately 6,000 square
feet of office facilities located in Bloomington, Minnesota. In addition,
Verdant leases approximately 26,000 square feet of warehouse and office space in
Eagan, Minnesota and approximately 32,500 square feet of office, warehouse and
production facilities in Torrance, California. Verdant's corporate office lease
and its warehouse lease expire in September 1999 and December 2001,
66
<PAGE>
respectively. Its California facility lease is month to month with a six month
notice requirement. A subsidiary of Verdant leases approximately 13,600 square
feet of office and warehouse space in a suburb of Toronto, Canada. The lease for
the subsidiary's office and warehouse space expires in fiscal 2000. Verdant
anticipates that it will be able to renew such leases or enter into new leases
on substantially similar terms. In addition, subsidiaries of one of Verdant's
subsidiaries own a facility with approximately 100,000 square feet of
production, distribution and office space in Fort Valley, Georgia. Verdant
believes that the properties are adequately covered by insurance.
LEGAL PROCEEDINGS. Verdant's wholly-owned subsidiary, SRI, is a party
to a governmental action and certain legal proceedings in Superior Court of
Fulton County, Georgia, brought by or on behalf of property owners in the area
of SRI's Fort Valley, Georgia, manufacturing site, relating to contamination
discovered on or near the site. Management believes that the contamination arose
prior to the purchase of the plant site by SRI from an unaffiliated predecessor
owner. The former owner has been cooperating with governmental authorities and
has initiated remedial activities on the site. Management believes that the
governmental and legal actions relating to the property will not result in a
material loss to SRI or Verdant. See "RISK FACTORS--Environmental Matters."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF VERDANT
Financial amounts discussed below in this management discussion and
analysis and presented in the Selected Consolidated Financial Data included
therein have been extracted from Verdant's unaudited condensed consolidated
financial statements for the six months ended June 30, 1998 and 1997 and for the
period from October 1 to December 31, 1997 and 1996, included elsewhere in this
Joint Proxy Statement--Prospectus and Verdant's audited consolidated financial
statements for fiscal years ended September 30, 1997, 1996 and 1995 also
included elsewhere in this Joint Proxy Statement-Prospectus. The selected
consolidated financial data as of September 30, 1995 was derived from Verdant's
audited historical financial statements, which are not included herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands except per share data)
<TABLE>
<CAPTION>
SIX MONTHS OCTOBER 1 TO
ENDED JUNE 30, DECEMBER 31, YEAR ENDED SEPTEMBER 30,
----------------- ----------------- ----------------------------
1998 1997 1997 1996 1997 1996 1995
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONDENSED STATEMENT OF OPERATIONS
INFORMATION:
Net Sales........................... $31,745 $12,197 $ 4,767 $ 3,481 $18,821 $14,673 $14,194
Gross Profit........................ 11,696 5,686 1,636 1,744 8,565 7,025 7,204
Operating expenses:
Distribution and warehousing.... 3,050 1,315 512 387 2,200 1,556 1,887
Sales and marketing............. 3,527 2,414 1,032 818 3,814 3,332 4,812
General and administrative...... 1,928 1,111 1,045 419 2,105 1,734 1,824
Product development and
registration.................. 1,091 648 179 125 972 749 981
------- ------- ------- ------- ------- ------- -------
Total operating expenses..... 9,596 5,488 2,768 1,748 9,090 7,371 9,503
------- ------- ------- ------- ------- ------- -------
Income (loss) before other
income (loss)..................... 2,100 198 (1,132) 26 (525) (346) (2,300)
Other income (expense), net......... (586) (68) 65 33 9 (2) 4
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes... 1,514 130 (1,197) 60 (21) (222) 127
Income taxes........................ 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Net income (loss)................... $ 1,514 $ 130 $(1,297) $ 60 $ (546) $ (568) $(2,173)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share -
basic and diluted................. $ 0.09 $ 0.01 $ (0.09) $ (0.05) $ (0.05) $ (0.05) $ (0.20)
======= ======= ======= ======= ======= ======= =======
CONDENSED BALANCE SHEET INFORMATION:
Cash and cash equivalents........... $ 159 $ 1,614 $ 423 $ 1,391 $ 3,264 $ 3,289 $ 2,756
Accounts receivable................. 14,702 4,354 4,437 3,543 1,153 992 1,200
Inventories......................... 11,069 3,530 8,804 1,834 2,806 1,520 2,027
Prepaid assets...................... 747 245 1,180 269 221 134 133
------- ------- ------- ------- ------- ------- -------
Total current assets............ 26,678 9,743 14,845 7,038 7,444 5,934 6,116
Property and equipment (net)........ 596 415 631 268 430 238 299
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS OCTOBER 1 TO
ENDED JUNE 30, DECEMBER 31, YEAR ENDED SEPTEMBER 30,
----------------- ----------------- ---------------------------
1998 1997 1997 1996 1997 1996 1995
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets held for sale 2,113 -- 2,273 -- -- -- --
Intangible assets (net)...................... 13,200 6,892 13,470 5,214 6,654 5,297 5,583
------- ------- ------- ------- ------- ------- -------
Total assets................................. $42,737 $17,051 $31,423 $12,520 $14,615 $11,470 $11,999
======= ======= ======= ======= ======= ======= =======
Current liabilities.......................... $20,359 $ 3,828 $14,344 $ 2,526 $ 2,385 $ 1,531 $ 1,478
Long-term debt............................... 7,123 1,451 3,307 0 1,459 0 0
------- ------- ------- ------- ------- ------- -------
Shareholders' equity......................... 15,255 11,771 13,773 9,995 10,772 9,939 10,520
------- ------- ------- ------- ------- ------- -------
Total liabilities and shareholders' equity... $42,737 $17,051 $31,423 $12,520 $14,615 $11,470 $11,999
======= ======= ======= ======= ======= ======= =======
</TABLE>
RECENT DEVELOPMENTS
NAME CHANGE TO VERDANT BRANDS, INC. At Verdant's 1998 Annual
Shareholders Meeting, the shareholders approved a proposal to change Verdant's
name from Ringer Corporation to Verdant Brands, Inc. Verdant announced its
intent to change its name in its first quarter earnings press release on April
30, 1998. The name change occurred on July 20, 1998. In connection with the name
change, Verdant adopted the new trading symbol of "VERD" for its shares traded
on the NASDAQ National Market System.
MERGER WITH SOUTHERN RESOURCES, INC. On December 8, 1997, a subsidiary
of Verdant Brands, Inc. (the "Company") merged with Southern Resources, Inc.
("SRI") which, on that date, became a wholly-owned subsidiary of Verdant. Prior
to the merger, SRI was privately held. SRI is a Fort Valley, Georgia-based
corporation with annual consolidated sales in 1997 of approximately $25 million,
which, through its wholly-owned subsidiary, SureCo, Inc., manufactures and
markets traditional liquid and granular pesticides. Its products are sold under
a variety of proprietary and private label brand names to commercial and
consumer retail markets throughout North America. Commercial pesticides are sold
principally under the AllPro(R) brand to specialty agricultural, turf ornamental
and professional pest control distributors. Consumer products are sold into the
consumer retail market principally under the Rigo/Black Leaf(R) brand as well as
under various private label store brands. Verdant is currently operating SRI as
a stand-alone subsidiary.
Verdant acquired all of the outstanding stock of SRI in exchange for
4,500,000 shares of Verdant's restricted common stock with an aggregate
valuation of $4,218,750. The SRI acquisition was accounted for using the
purchase method of accounting rather than the pooling-of-interest method as
originally announced. The change in accounting methods was required because of
management's post-merger decision to dispose of certain assets and discontinue
certain activities of the combined business entities. Such a desision precludes
the pooling of interest method of accounting. Verdant has not yet finalized its
analysis of the full financial impact associated with its disposal plans.
However, it has reflected in its balance sheet as of June 30, 1998 the Fort
Valley, Georgia manufacturing facility acquired in the acquisition as "Assets
held for Sale".
The SRI purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair market values. The excess of
purchase price over the estimated fair market values of assets acquired and
liabilities assumed ("goodwill") totals approximately $2,072,000. Goodwill is
being amortized on a straight-line basis over 20 years. SRI's operations are
included in Verdant's consolidated statements of operations subsequent to the
effective date of the acquisition which, for accounting purposes, is December 1,
1997. Verdant is completing the process of establishing fair values of assets
acquired and liabilities assumed. As part of this process, during the three
months ended March 31, 1998, Verdant reallocated $4,950,000 of the purchase
price from goodwill to product registrations and trademarks, which are being
amortized over twenty years. Since Verdant has not formally completed the
valuation process, further adjustments to the allocation of purchase price based
on a final determination of fair values may occur.
ACQUISITION OF THE ASSETS OF DEXOL INDUSTRIES, INC. In March 1997,
Verdant completed the acquisition of substantially all of the assets of Dexol
Industries, Inc. ("Dexol"), a California based manufacturer and marketer of home
and garden pesticides sold under the Dexol(R) and various private label brand
names, for an aggregate purchase price of approximately $3,012,790 (the "Dexol
Acquisition"). The purchase price was comprised of the issuance of 1,059,340
shares of Verdant's restricted common stock valued at $1,397,005, the issuance
of a promissory note to Dexol with a principal amount of $1,477,000 bearing
simple interest at an annual rate of prime plus 3/4% and estimated transaction
costs of $138,785.
68
<PAGE>
The Dexol Acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair market values at
the date of acquisition. The excess of purchase price over estimated fair market
value of net assets acquired ("goodwill") of approximately $1,840,000 is being
amortized on a straight-line basis over twenty years. Since the acquisition,
Verdant has operated the acquired business as its Dexol division and has
continued marketing Dexol products. Dexol division operations are included in
Verdant's consolidated statements of operations from the effective date of the
acquisition which, for accounting purposes, is March 1, 1997.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the consolidated statements of operations of Verdant as a
percentage of net sales:
Six Months Ended
June 30,
---------------------
1998 1997
----- -----
Net sales 100.0% 100.0%
Cost of sales 63.2 53.4
----- -----
Gross profit 36.8 46.6
Operating Expenses:
Distribution 9.6 10.8
Sales & Marketing 11.1 19.8
General & Administrative 6.1 9.1
Product Development & Registration 3.4 5.3
----- -----
30.2 45.0
----- -----
Income before other expense 6.6 1.6
Other expense, net (1.8) (.5)
----- -----
Net income 4.8% 1.1%
===== =====
The following table sets forth the percentage of net sales represented by each
of Verdant's major product categories:
Six Months Ended
June 30,
---------------------
1998 1997
----- -----
Pest control 89.6% 80.9%
Fertilizers and composting 10.4 19.1
----- -----
100.0% 100.0%
===== =====
SEASONAL FACTORS EFFECTING SALES AND RESULTS OF OPERATIONS
Sales during the year are very seasonal. First quarter sales normally
consist of sales on initial orders from direct customers and reorders from
distributors who made their initial purchases for the season in the final
quarter of the preceding year. Second and third quarter sales consist largely of
reorders from direct-ship customers and sales of in-season promotion products.
Fourth quarter sales consist primarily of shipments on early season orders from
distributors who are stocking warehouses for the upcoming spring selling season.
Most of Verdant's sales occur during the months of December through June of each
year. The level of sales for the fiscal year depends largely upon the level of
retail sales of Verdant's products to home owner consumers and the level of
unsold retail inventory of Verdant's products remaining in retail and wholesale
distribution channels carried over from the previous year. Retail sales to
consumers are affected by numerous outside circumstances such as weather,
competitors' products and sales and marketing programs, as well as new product
introductions. Each of these factors can fluctuate substantially from year to
year and from quarter to quarter. Total year sales cannot be accurately
projected with any degree of certainty based on results for the three months and
six months ended June 30.
69
<PAGE>
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX MONTHS ENDED
JUNE 30, 1997
NET SALES. Net sales increased $19,548,129 or 160.3% to $31,745,288 in
the six months ended June 30, 1998 compared to $12,197,159 for the six months
ended June 30, 1997. The increase was due primarily to additional sales
generated from the Dexol and SRI acquisitions. Net sales for the six months
ended June 30, 1998 contained approximately $15.9 million in SRI net sales
compared to no SRI net sales for the six months ended June 30, 1997. In
addition, the six month period ended June 30, 1998 included six months of Dexol
product sales totaling approximately $6.8 million compared to only four months
of Dexol product sales totaling $4.8 million included in the six months ended
June 30, 1997. Increased sales of Verdant's Safer(R) brand pesticides
contributed to the remaining increase in net sales.
GROSS MARGINS. Gross margins as a percent of sales decreased to 36.8%
for the six months ended June 30, 1998 compared to 46.6% for the six months
ended June 30, 1997. The decrease was the result of the SRI product sales added
in 1998 which shifted product mix to an increased proportion of traditional
chemical pesticide sales which carry lower average gross margins compared to the
sales mix in 1997. Verdent expects that gross margin will continue to be
adversely affected by changes in sales mix. In addition, in the six months ended
June 30, 1998 unfavorable manufacturing efficiency variances incurred at the SRI
plant caused by certain material and packaging shortages, down time associated
with manufacturing equipment repair and other factors, further contributed to
the decrease in gross margins as a percent of sales.
OPERATING EXPENSES. Distribution expenses increased in absolute dollars
by $1,734,781 or 131.9% to $3,049,607 for the six months ended June 30, 1998
from $1,314,826 for the three months ended June 30, 1997, but decreased as a
percentage of sales to 9.6% for the six months ended June 30, 1998 from 10.8%
for the six months ended June 30, 1997. The increase in distribution expenses in
absolute dollars in 1998 compared to 1997 was primarily due to incremental
distribution expenses incurred on increased sales in 1998 compared to 1997. The
decrease in distribution expenses as a percentage of sales reflects lower
average freight cost on SRI shipments due to closer proximity to customer
locations.
Sales and marketing expenses in absolute dollars increased $1,112,778
or 46.1% to $3,526,982 for the six months ended June 30, 1998 from $2,414,204
for the three months ended June 30, 1997, but decreased as a percentage of sales
to 11.1% for the six months ended June 30, 1998 compared to 19.8% for the same
period in 1997. The increase in sales and marketing expenses was largely due to
increased variable selling expenses associated with higher sales levels, offset
in part by the reversal of $195,000 in estimated co-op advertising accruals
originally recorded in 1997, and the addition of the SRI sales and marketing
organizations for the six months ended June 30, 1998. The decrease in sales and
marketing expenses as a percentage of sales for the three months ended June 30,
1998 compared to the same period in 1997 was largely the result of synergies
experienced from combining the various sales and marketing organizations and
eliminating redundant expenses and unnecessary overhead.
General and administrative costs increased $816,556 or 73.5% to
$1,927,579 for the six months ended June 30, 1998 from $1,111,023 for the six
months ended June 30, 1997. The increase was primarily due to the addition of
SRI general and administrative expenses and increased amortization of intangible
assets associated with the SRI acquisition.
Product development and registration expenses increased $443,881 or
68.5% to $1,091,432 for the six months ended June 30, 1998 compared to $647,551
for the three months ended June 30, 1997. The increase was due primarily to
increased product registration costs for products added in the SRI acquisitions.
OTHER EXPENSE, NET. Net other expense increased by $518,648 to $586,223
for the six months ended June 30, 1998 compared to net other expense of $67,575
for the six months ended June 30, 1997. The increase in net other expense was
mainly due to additional interest expense on increased borrowings on Verdant's
lines of credit and interest expense incurred on long-term and short-term debt
assumed in the SRI acquisitions.
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1997 TO THE THREE MONTHS ENDED
DECEMBER 31, 1996
The following table sets forth, for the periods indicated, information
derived from the consolidated statements of operations of Verdant as a
percentage of net sales:
70
<PAGE>
For the Three Months
Ended December 31,
------------------
1997 1996
----- -----
Net sales 100.0% 100.0%
Cost of sales 65.7 49.0
----- -----
Gross profit 34.3 51.0
Operating Expenses:
Distribution 10.7 11.1
Sales & Marketing 21.6 23.5
General & Administrative 18.8 9.3
Research & Development 3.8 3.6
Amortization of intangibles 3.1 2.7
---- ----
58.0 50.2
Income (loss) before other income (23.7) .8
Other income, net (1.4) .9
----- ----
Net income (loss) (25.1)% 1.7%
===== ====
The following table sets forth the percentage of net sales represented by each
of Verdant's major product categories:
Three Months Ended
December 31,
------------------
1997 1996
----- ----
Pest control 91% 76%
Fertilizers and composting 9 24
----- ---
100% 100%
===== ===
NET SALES. Net sales increased $1,286,502 or 36.7% to $4,767,233 in the
three months ended December 31, 1997 compared to $3,480,731 for the same three
months ended December 31, 1996. The increase was due to the addition of
approximately $2 million in 1997 sales from acquired businesses and product
lines added as a result of the 1997 Dexol and SRI acquisitions, partially offset
by lower sales of various products mainly caused by timing of shipments.
GROSS MARGINS. Gross margins decreased to 34.3% in the three months
ended December 31, 1997 compared to 51.0% in the three months ended December 31,
1996. The decrease was due primarily to a shift in product mix to a higher
percentage of lower-margin traditional chemical pesticides and to high levels of
manufacturing overhead at SRI for the month December 1997, the first month of
inclusion in Verdant's financial statements.
OPERATING EXPENSES. Distribution expenses increased $124,616, or 32.2%,
to $511,727 in the three months ended December 31, 1997 from $387,111 in the
same three months ended December 31, 1996, due primarily to increased variable
distribution costs on higher sales and the first-time inclusion of SRI
distribution operations for the month of December 1997. Sales and marketing
expenses increased $214,471 or 26.2%, to $1,032,010 for the three months ended
December 31, 1997 from $817,539 for the three months ended December 31, 1996.
The increase in sales and marketing expenses was largely due to the addition of
the SRI sales and marketing organization for the month of December 1997.
Increased variable selling expenses due to higher sales levels for the three
months ended December 31, 1997 compared to the three months ended December 31,
1996 also added to the increase. General and administrative costs increased
$572,612 or 176% to $897,685 for the three months ended December 31, from
$325,073 for the three months ended December 31, 1996. The increase was
primarily the result of additional administrative and corporate operating costs
incurred related to the addition and integration of the Dexol and SRI
businesses, a significant portion of which were eliminated effective December
31, 1997 as a result of headcount reductions at Dexol and SRI. Research and
development expenses increased $54,296 or 43.6% to $178,913 for the three months
ended December 31, 1997 compared to $124,617 for the three months ended December
31, 1996. The increase was due primarily to increased product registration costs
for products added in the Dexol acquisition.
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<PAGE>
OTHER INCOME, NET. Net other income (expense) decreased to net other
expense of $65,065 for the three months ended December 31, 1997 compared to net
other income of $33,456 for the three months ended December 31, 1996. The
increase in net other expense was mainly due to increased interest expense on
increased borrowings on Verdant's line of credit and interest expense incurred
on long-term and short-term debt assumed in the Dexol and SRI acquisitions. In
addition, the increase in net other expense was unfavorably impacted by reduced
royalty income on international licencing agreements.
72
<PAGE>
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 1997 TO FISCAL YEAR ENDED
SEPTEMBER 30, 1996
The following table sets forth selected information derived from
Verdant's consolidated statements of operations:
Percentage of Net Sales
For Years Ended September 30,
1997 1996 1995
------ ------ -----
Net sales............................... 100.0% 100.0% 100.0%
Cost of sales........................... 54.5 52.1 49.2
----- ----- -----
Gross margin............................ 45.5 47.9 50.8
Operating expenses:
Distribution and warehousing.......... 11.7 10.6 13.3
Sales and marketing................... 20.2 22.7 33.9
General and administrative............ 8.8 9.1 10.2
Research and development.............. 5.2 5.1 6.9
Amortization of intangibles........... 2.4 2.7 2.7
----- ----- -----
Total operating expenses 48.3 50.2 67.0
----- ----- -----
Loss before other (expense) income...... (2.8) (2.3) (16.2)
Other (expense) income .............. (.1) (1.6) .9
----- ----- -----
Net loss................................ (2.9)% (3.9)% (15.3)%
===== ===== =====
The following table sets forth the percentage of net sales represented by each
of Verdant's major product categories:
Year Ended September 30,
1997 1996 1995
---- ---- ----
Pest control........................... 80% 70% 63%
Fertilizer ............................ 20% 30% 37%
---- ---- ----
100% 100% 100%
==== ==== ====
NET SALES. Net sales for the fiscal year ended September 30, 1997
increased by $4,147,841 or 28.3% to $18,820,625 from $14,672,784 for the
previous fiscal year ended September 30, 1996. The sales increase for fiscal
1997 was primarily due to the Dexol acquisition and the inclusion of $6,187,190
in sales from the new Dexol division beginning March 1, 1997, offset by a
decline of $2,039,349 in sales for Verdant's base business, principally as a
result of a decline in Verdant's fertilzer sales (See "Dexol Industries, Inc"
and "Acquisition Activities" above.)
GROSS MARGIN. Gross margins as a percent of sales decreased to 45.5% in
fiscal 1997 compared to 47.9% in fiscal 1996. The decline in gross margin as a
percent of sales was caused by the 1997 addition of Dexol products which carry a
lower average gross margin compared to Verdant's other products.
OPERATING EXPENSES. Distribution and warehousing expenses increased
$643,689, or 41.4%, to $2,199,586 in fiscal 1997 compared to $1,55 5,897 in
fiscal 1996 and increased as a percentage of sales in fiscal 1997 to 11.7%
compared to 10.6% in fiscal 1996. The increase was due to the addition of the
Dexol division warehousing function and additional direct distribution costs
associated with increased sales. Sales and marketing expenses increased $481,462
or 14.4%, to $3,813,795 in fiscal 1997 compared to $3,332,333 in fiscal 1996.
The increase in sales expenses was due primarily to the addition of the Dexol
sales organization and increased direct selling costs associated with Dexol
sales. In addition, sales and marketing expenses were favorably impacted by the
reversal in fiscal 1997 of approximately $227,000 in estimated co-operative
advertising expenses, which were accrued in fiscal 1996, resulting from a change
in estimate based on actual utilization of co-op advertising allowances. Fiscal
1996 sales and marketing expenses were favorably impacted by the reversal of
approximately $198,000 in estimated co-operative advertising expenses, which
were accrued in fiscal 1995.
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General and administrative expenses increased $325,730 or 24.5% to
$1,656,996 in fiscal 1997 compared to $1,331,266 in fiscal 1996. The increase
was due largely to the addition of Dexol division offices and administrative
functions. Research and development expenses increased $223,428 or 29.8% to
$972,360 in fiscal 1997 from $748,932 in fiscal 1996 primarily as a result of
increased product registration and development activity related to the Dexol
acquisition.
Amortization of intangible assets increased to $447,498 in fiscal 1997
compared to $402,778 in fiscal 1996. The increase was due primarily to the
amortization of the additional goodwill associated with the Dexol acquisition.
OTHER INCOME AND EXPENSE. Interest income decreased slightly to $72,247
in fiscal 1997 from $73,866 in fiscal 1996 due primarily to a small decline in
the amount of average excess cash investments. Interest expense increased to
$152,729 in fiscal 1997 from $68,250 in fiscal 1996. The increase in interest
expense was due primarily to additional interest expense incurred on a long-term
note payable added in 1997 in connection with the Dexol acquisition. Net royalty
income decreased to $50,885 in fiscal 1997 from $87,136 in fiscal 1996 due
largely to decreased royalty income on sales to foreign licensees.
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 1996 TO FISCAL YEAR ENDED
SEPTEMBER 30, 1995
NET SALES. Net sales for the fiscal year ended September 30, 1996
increased by $478,886, or 3.4%, to $14,672,784 from $14,193,898 for the previous
fiscal year ended September 30, 1995. The sales increase for fiscal 1996 was
primarily due to increased sales of Safer(R) brand pesticide products which were
partially offset by lower saleS of fertilizer products. Increased pesticide
sales was partially due to increased retail distribution and to new product
sales. Decreased fertilizer sales were largely due to microbial fertilizer
sales.
GROSS MARGIN. Gross margins as a percent of sales decreased to 47.9% in
fiscal 1996 compared to 50.8% in fiscal 1995. The decline in gross margin as a
percent of sales was caused primarily by a continuing change in product mix to a
higher proportion of newer products and new promotional combination packs which
carry lower average gross margins.
OPERATING EXPENSES. Distribution and warehousing expenses decreased
$330,873, or 17.5%, to $1,555,897 in fiscal 1996 compared to $1,886,770 in
fiscal 1995 and decreased as a percentage of sales in fiscal 1996 to 10.6%
compared to 13.3% in fiscal 1995. The decrease as a percentage of sales in
fiscal 1996 compared to fiscal 1995 was primarily due to lower freight and
outside distribution costs resulting from consolidation of distribution
processes and reduced freight rates. Sales and marketing expenses decreased
$1,478,315, or 30.7%, to $3,332,333 in fiscal 1996 compared to $4,810,648 in
fiscal 1995 and decreased as a percentage of sales to 22.7% in fiscal 1996 from
33.9% in fiscal 1995. The decrease in sales expenses was due largely to staffing
reductions, offset in part by increased commissions incurred from expanded
utilization of manufacturer representative organizations and to lower
advertising expenses. In addition, sales and marketing expenses were favorably
impacted by the reversal in fiscal 1996 of approximately $198,000 in estimated
co-operative advertising expenses, which were accrued in fiscal 1995, resulting
from a change in estimate based on actual utilization of co-op advertising
allowances. General and administrative expenses decreased $113,844, or 7.9%, to
$1,331,266 in fiscal 1996 compared to $1,445,110 in fiscal 1995 and decreased as
a percentage of sales to 9.1% in fiscal 1996 from 10.2% in fiscal 1995. The
decrease was due largely to reduced facility rental costs resulting from the
sublease of approximately half of Verdant's former office facility. Research and
development expenses decreased $232,563, or 23.7% to $748,932 in fiscal 1996
from $981,495 in fiscal 1995. The decrease was largely due to lower product
registration costs resulting from discontinued registrations on certain products
no longer being sold. Amortization of intangible assets increased to $402,778 in
fiscal 1996 compared to $379,358 in fiscal 1995. The increase was due primarily
to multi-year foreign product registrations obtained in fiscal 1996 which are
being amortized over the life of the registrations.
OTHER INCOME AND EXPENSE. Other income and expense includes a fourth
quarter charge of $312,771 for expenses associated with an election not to
proceed with a previously announced acquisition. (See "Merger and Acquisition
Activities" above.) Interest income decreased $9,164, or 11.0%, to $73,866 in
fiscal 1996 compared to $83,030 in fiscal 1995. The decrease in interest income
was largely due to declining interest rates on investments. Interest expense
increased to $68,250 in fiscal 1996 from $66,690 in fiscal 1995. The increase in
interest expense was due primarily to increased average borrowings in fiscal
1996 compared to fiscal 1995. Net royalty income decreased
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to $87,136 in fiscal 1996 from $106,352 in fiscal 1995. The decrease in net
royalty income was primarily caused by additional royalty expenses incurred by
Verdant in fiscal 1996 in connection with licensed technology used in Verdant's
water soluble fertilizer line.
INCOME TAXES
Income tax benefits of net deferred tax assets have been offset by
valuation allowances for the years ended September 30, 1997, 1996 and 1995
because it is more likely than not that the tax benefits, which can not be
carried back, could not be realized in future periods.
At September 30, 1997, Verdant has approximately $23.2 million in
combined U.S. net operating loss carryforwards for federal income tax purposes.
These loss carry forwards expire between 1998 and 2013. Of the total,
approximately $4.1 million are U.S. net operating loss carryforwards of Safer,
Inc., Verdant's wholly owned subsidiary. The use of the unexpired net operating
loss carryforwards of Verdant which were generated prior to September 1990,
totaling approximately $10.2 million, are restricted to $2,025,000 in any one
year under Internal Revenue Code Section 382 because of a significant ownership
change resulting from Verdant's initial public offering. The use of net
operating loss carryforwards of Verdant generated after the ownership change are
not restricted. The use of the net operating losses of Safer, Inc. are limited
to approximately $700,000 in any one year under Internal Revenue Code Section
382 because of a significant ownership change resulting from Verdant's
acquisition of Safer, Inc. in January 1991. At September 30, 1997, Verdant has
approximately $565,000 of net operating loss carryforwards in Canada which
expire between 1999 and 2002.
QUARTERLY PERFORMANCE
The following table sets forth a summary of quarterly results for the
past two fiscal years in order to show the highly seasonal pattern of Verdant's
business and quarterly fluctuations in sales and earnings or losses. This
information is unaudited but contains all adjustments, consisting of normal
recurring accruals, which Verdant believes are necessary for a fair
presentation.
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1997
Three months ended Three months ended
------------------------------------ -------------------------------------
(In thousands, except income (loss) per share data)
Dec 31 Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30
------ ------ ------- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 3,636 $ 5,613 $ 4,005 $ 1,419 $ 3,481 $ 4,839 $ 7,358 $ 3,143
Gross profit 1,850 2,878 1,709 588 1,774 2,243 3,443 1,105
Operating expenses 1,921 2,383 1,619 1,448 1,748 2283 3,205 1,854
Income (loss) before
other income (expense) (71) 495 90 (860) 26 (40) 238 (749)
Other income (expense) 19 12 14 (267) 34 (14) (54) 13
Net income (loss) $ (52) $ 507 $ 104 $(1,127) $ 60 (54) $ 184 $ (736)
Income (loss) per share -
basic and diluted $ .00 $ .05 $ .01 $ (.10) $ .01 $ .00 $ .02 $ (.06)
Shares used to calculate
basic income (loss)
per share 10,922 10,922 10,922 10,922 10,922 10,934 12,118 12,181
Shares used to
calculate diluted
income (loss) per share 10,922 10,923 10,931 10,922 10,922 10,934 12,175 12,182
<CAPTION>
Three Month Fiscal 1998
Transition Three Months Ended
Period Ended ------------------
Dec 31, 1997 Mar 31 Jun 30
------------ ------- -------
<S> <C> <C> <C>
Net sales $ 4,767 $15,859 $15,887
Gross profit 1,636 5,666 6,030
Operating expenses 2,568 4,591 5,005
Income (loss) before
other income (expense) (932) 1,075 1,025
Other income (expense) (265) (265) (321)
Net income (loss) $(1,197) $ 810 $ 704
Income (loss) per share -
basic and diluted $ (.09) $ .05 $ .04
Shares used to calculate
basic income (loss)
per share 13,313 16,688 16,689
Shares used to
calculate diluted
income (loss) per share 13,313 16,801 16,940
</TABLE>
SEASONAL FACTORS AFFECTING OPERATIONS
Verdant's operations and cash needs are highly seasonal. During the
first quarter of each year, Verdant solicits early orders and plans production,
typically building its inventory of products through January of each year for
shipment during the spring selling season. Most of the shipments for the peak
retail season, and therefore most of the billings that
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result in revenue recognition and in receivables, occur in February through May
of each year. Accordingly, Verdant typically consumes significant cash in
operating activities during the first and second quarters of each year second
and early third quarters.
LIQUIDITY AND CAPITAL RESOURCES
Verdant's operations and cash needs are highly seasonal. During the
three months ended December 31 of each year, Verdant usually solicits and ships
early orders and expands production to build inventory needed for its major
selling season. During the three months ended March 31, Verdant's shipments
consist of initial sales to direct mass merchant customers and reorder sales to
certain distribution customers. Most of Verdant's seasonal shipments and
therefore most of the billings that result in revenue recognition and in
receivables, occur during the months of December through June of each year.
Accordingly, Verdant typically consumes significant cash in operating activities
during the periods from October through June from year to year as it finances
increases in its inventory, primarily during the periods from October through
April, and increases in receivables, primarily during the period from late
December through the end of May. Verdant has historically relied upon bank lines
of credit to fund seasonal cash needs.
Verdant relies on bank financing in the form of working capital lines
of credit to fund seasonal increases in receivables and inventory. Verdant
currently has in place a three-year $25,000,000 credit facility with GE Capital
Services that expires in May 2000, which funds working capital needs of the
parent company and its wholly owned subsidiaries, Safer, Inc. and SRI.
Borrowings under the line of credit are limited to an aggregate borrowing base
calculated using 85% of qualified accounts receivable and 60% to 65% of
qualified inventory. The credit facility is intended to finance Verdant's
seasonal working capital needs and to provide working capital financing for
future acquisitions. Verdant's wholly-owned subsidiary, SRI, previously had in
place an $8,000,000 working capital credit facility with a commercial finance
corporation which matured on April 22, 1998. In April 1998, Verdant consolidated
this line into its GE Capital Services line. Outstanding borrowings on the GE
Capital Services line of credit at June 30, 1998 totaled $11,609,641 of which
$4,000,000 is classified as long-term debt. Outstanding borrowings on the GE
Capital Services line of credit at December 31, 1997 totaled $3,024,910. In
1997, Verdant's maximum borrowings from its bank line of credit were $2,436,527
compared to maximum borrowings of $3,405,417 in fiscal 1996.
Due to increased cash demands caused by unusually slow collections on
certain large customers' accounts receivable, relatively high inventory levels,
cash demands required to fund SRI operations and payment of certain components
of SRI debt, Verdant has had to extend accounts payable beyond normal payment
terms in order to minimize borrowings and manage short-term cash flow. Verdant
is aggressively pursuing collections on past due accounts receivable and is
working to reduce inventory levels to help reduce immediate cash needs. In
addition, Verdant anticipates that it may need additional long-term financing to
meet projected working capital and operating needs for 1999 and is currently
pursuing such financing. Verdant believes it will be successful in acquiring the
long-term financing needed; however, there is no assurance that adequate
long-term financing will be secured. Verdant believes that cash on hand and its
credit facilities will be adequate to meet Verdant's cash needs for the
remainder of fiscal 1998.
For the six months ended June 30, 1998, cash decreased by $264,157,
consistent with seasonal fluctuations. The decrease in cash reflects the
following: cash of $7,236,240 consumed in operating activities, primarily to
finance increased receivables and inventory which was offset in part by cash
provided by increased accounts payable, cash of $170,711 consumed in investing
activities to purchase equipment and intangible assets, and cash provided from
financing activities of $7,150,952 consisting of $8,584,731 in borrowings
against Verdant's bank lines of credit, $16,012 proceeds from the sale of common
stock, offset by principal payments on long-term debt of $1,449,791.
For the three months ended December 31, 1997, cash decreased by
$2,841,022. The decrease in cash reflects the following: cash of $2,309,057
consumed in operating activities, primarily to finance increased receivables,
inventory and product registration prepayments, and cash of $453,440 consumed in
investing activities to purchase office equipment and intangible assets and to
pay acquisition related costs.
In fiscal 1997, cash and cash equivalents decreased $24,487 to
$3,264,294 from $3,288,781 at September 30, 1996. The decrease resulted
primarily from cash used in investing activities of $255,863 which was largely
offset by cash provided from operating activities of $116,605 and cash provided
from financing activities of $111,905. Cash used in investing activities was
primarily used to purchase property and equipment of $140,008, to pay expenses
relating the
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Dexol acquisition of $82,343 and to invest in patent and trademark applications
and other intangible assets of $42,401, partially offset by proceeds from the
sale of fixed assets of $8,889. The $116,605 provided by operating activities
was primarily the result of reductions to receivables and inventory of
$1,605,348 and $873,900, respectively, offset in part by reductions in accounts
payable and accrued expenses of $2,150,758 and 195,638, respectively. The cash
provided by financing activities was primarily the result of cash received in
the Dexol acquisition of $124,073 partially offset by payments of $12,168 on
long-term debt.
In fiscal 1996, cash and cash equivalents increased $532,404 to
$3,288,781 at September 30, 1996. The increase resulted primarily from cash
provided by operating activities of $699,044, partially offset by cash used in
investing activities of $158,506. The $699,044 provided by operating activities
was primarily the result of decreased inventory and receivables of $502,224 and
$205,861, respectively, and increased accrued expenses of $249,746, which was
partially offset by cash used to fund the net operating loss of $568,119, less
net non-cash expenses of $511,896, and a reduction in accounts payable of
$194,464. Cash used in investing activities was primarily used to purchase
property and equipment of $60,861 and to invest in patent and trademark
applications and other intangible assets of $118,674, partially offset by
proceeds from the sale of fixed assets of $20,849.
In fiscal 1995, cash and cash equivalents decreased $2,091,246 to
$2,756,377 at September 30, 1995. The decline resulted primarily from cash used
in operating activities of $1,640,482, cash used in investing activities of
$440,526 and cash used in financing activities of $2,063. The $1,640,482 used in
operating activities was used primarily to fund the net loss of $2,173,104 and
increases in inventory of $748,040, which was partially offset by decreases in
accounts receivable and prepaid expenses of $313,494 and $90,174, respectively,
and increases in accounts payable of $331,887. Cash used in investing activities
was primarily used to acquire substantially all the assets of Plant Research
Laboratories (see Item 1. Business, "Plant Research Laboratories"), to purchase
property and equipment of $101,536 and to invest in patent and trademark
applications and other intangible assets of $106,288. Cash used in financing
activities resulted from final payments on capital lease obligations of $3,667
partially offset by cash of $1,604 received from the exercise of employee
incentive stock options.
There are no commitments for capital expenditures in fiscal 1998.
Verdant's bank line of credit agreement limits Verdant to capital asset
purchases to not more than $300,000 per year during the term of the credit
agreement ending May 2, 2000.
EFFECTS OF INFLATION
Verdant believes that, during the periods discussed above, inflation
has not had a material impact on Verdant's business.
YEAR 2000 CONCERNS
Verdant has completed an upgrade of its computer systems which brings
the systems into year 2000 compliance. Verdant invested approximately $250,000
over the last two years in these upgrades. Verdant is in the process of
evaluating other computer related administrative systems to determine year 2000
compliance and expects to be completed with this review by December 31, 1998.
Costs to bring these systems into compliance are not expected to be material to
Verdant. Verdant has also begun to survey major customers, vendors and suppliers
to determine year 2000 compliance issues and the potential financial impact of
non-compliance by outside parties on Verdant. Verdant expects to have this
review completed by December 31, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. Verdant will
adopt the Statement for its year ended December 31, 1998. Management has not
fully determined the impact of this Statement.
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<PAGE>
BUSINESS OF CONSEP
GENERAL. Consep develops, manufactures and markets environmentally
sensitive pest control products for the commercial agriculture and consumer
home, lawn and garden markets. Consep's products employ proprietary
controlled-release technologies to enhance the effectiveness and duration of
biorational pest control agents by protecting them from natural degradation and
by controlling their release over planned periods of time. Biorational pest
control products use naturally occurring agents and biochemicals, such as
pheromones, to control pest populations. Consep's principal commercial
agriculture products, marketed under the CheckMate label, release synthetic
pheromones to suppress population levels of insects by disrupting their mating.
Unlike most conventional insecticides, Consep's products are non-toxic to humans
and animals, leave no harmful residues, do not contaminate soil or groundwater
and do not disrupt beneficial insect populations.
The majority of Consep's commercial agriculture products are sold
through independent distributors. In addition, Consep owns and operates
full-line agrichemical distributors in major agricultural regions of California
and in the Connecticut River Valley. In addition to selling Consep's commercial
agriculture products, Consep's distributors sell products produced by other
manufacturers, including biorational insect control products, conventional toxic
pesticides, fertilizers and other farm supplies. Consep also sells a broad line
of non-toxic consumer pest control products under its SureFire and Insectigone
labels through a network of cooperative buying groups and distributors who in
turn resell to lawn and garden centers, hardware stores and retail chains.
Consep also sells a line of insect repellent products based on natural oils,
which are manufactured by, and are the proprietary products of, a third party,
and are being marketed on an exclusive basis in the United States under Consep's
Blocker label.
Consep was incorporated in Oregon in 1984. Its principal executive
offices are located at 213 S.W. Columbia Street, Bend, Oregon 97702 (telephone
number (541) 388-3688).
MARKETS. Although conventional toxic insecticides dominate the
worldwide market for insecticides used in commercial agriculture, the demand for
alternative insect control products has increased, based in part on regulatory
limitations on the use of, growing concern over the safety and effectiveness of
and an increase in insect resistance to toxic insecticides.
Biorational insect control products have significant advantages over
conventional toxic insecticides in several important areas. The comparative
advantages of biorational insect control products, and the corresponding
problems associated with the use of toxic insecticides, include the following:
REGULATORY. Under federal law, all insecticide products registered
prior to November 1984 were required to be re-registered with the EPA
by 1997. The cost of re-registration is high and entails the risk that
new testing will lead to adverse results and mandatory withdrawal of
toxic insecticides from the market. As a result, Consep believes many
insecticides were not re-registered for application in specialty crops
such as fruits and vegetables. In contrast to toxic chemicals,
biorational products can be registered with the EPA in less time and at
substantially lower costs due to the reduced level of toxicity testing
required. In addition, in 1994, the EPA established its Biopesticides
and Pollution Prevention Division, whereby companies developing safer
and less-toxic alternatives to conventional pesticides are able to have
new products reviewed and registered by a staff dedicated to this new
division. The Food Quality Protection Act ("FQPA"), passed in 1996, may
further restrict the use of toxic pesticides in that FQPA requires the
EPA to consider establishing new risk standards on U.S.
registered pesticides.
RESIDUES. Public concern over the adverse environmental and health
consequences of toxic insecticides continues to grow. These chemicals
can leave unacceptable levels of residues in food and can contaminate
soil and groundwater. Biorational insect control products use naturally
produced or occurring compounds and do not leave toxic residues in
treated crops, soil or groundwater.
RESISTANCE. One of the limitations of toxic insecticides is the
tendency of insects to develop resistance to the active compound. Over
500 insect species have developed resistance to one or more classes of
toxic chemical insecticides. When resistance occurs, growers are
forced to increase the amount of toxic insecticide necessary
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to control the target insects, which increases environmental and health
risks and reduces the economic viability of the toxic chemical. Insects
are less likely to develop resistance to biorational products,
particularly behavior-modifying pheromone-based products such as those
produced by Consep.
RESURGENCE. Toxic insecticides often destroy beneficial insects which
help to naturally control primary and secondary insect populations. As
beneficial insect populations are suppressed, there are fewer natural
enemies against primary and secondary pests and growers must use
escalating dosages and more frequent applications of toxic
insecticides. This increased application exacerbates environmental and
health risks and decreases the cost-effectiveness of the toxic
insecticides. Biorational products target specific insects and do not
adversely affect beneficial insect populations. As a result, beneficial
insects remain in the field and continue to help control detrimental
insect populations.
In response to concerns regarding conventional toxic insecticides,
commercial growers are increasingly adopting more sophisticated and
environmentally safer methods of pest control which focus on ecosystem
management, collectively identified as Integrated Pest Management ("IPM"), to
control insects in their fields. IPM involves the use of a combination of crop
selection, cultivation practices and biorational pest control measures to reduce
or eliminate toxic chemical applications. Consep's primary focus is on fruits,
nuts, vegetables and selected row crops where growers are generally more
concerned with residues in harvested products or resistance of insects to
chemical insecticides and are thus more likely to adopt biorational insect
control as an alternative to conventional toxic chemicals. Consep's products are
ideally suited to IPM practices. Consep believes that IPM and crop protection
professionals, such as pest control advisers ("PCAs"), have become key factors
in promoting the introduction and distribution of insect control products to the
commercial agriculture market. This trend is most developed in California where
state licensed PCAs are the only individuals who are authorized to recommend the
application of any pesticide, including insect control products.
Management estimates the market in which its consumer pest control
products compete in the United States and Canada to be approximately $1 billion.
Consep believes that, although biorational products currently represent less
than 30% of this market, consumers are becoming increasingly aware of the health
risks associated with many of the conventional toxic products used to control
pests in and around the home and that non-toxic products will represent an
increasing portion of the consumer pest control market.
STRATEGY. Management believes that regulatory limitations on the use
of, and increasing insect resistance to, conventional toxic pesticides, together
with growing concern over the safety of those products, have created substantial
opportunities to expand the use of Consep's alternative biorational pest control
products. The key components of Consep's strategy are set forth below.
CONTINUE TO DEVELOP AND ACQUIRE PROPRIETARY BIORATIONAL PEST CONTROL
PRODUCTS, TECHNOLOGIES OR BUSINESSES. Consep's strategy includes continuing to
develop new products and technologies through both its own research and
development efforts and its ongoing research and development relationships with
other outside organizations and governmental agencies. Consep also intends to
meet this objective by continuing to acquire complementary product lines,
technologies or businesses to further expand Consep's product lines both in the
commercial agriculture and consumer markets. During the past eight years, Consep
has completed eight acquisitions of complementary businesses and product lines.
Management believes such acquisition opportunities will continue.
FOCUS COMMERCIAL AGRICULTURE PRODUCTS ON HIGH-VALUE CROPS. Consep's
primary focus is on selected high-value fruit, nut and vegetable crops where
growers are generally more concerned with residues in harvested products and
where resistance to conventional pesticides is developing and are thus more
likely to adopt biorational insect control as an alternative to conventional
toxic chemicals. Additionally, given the high cost of re-registering
conventional toxic chemicals with the EPA, Consep believes market opportunities
will expand for biorational products as agrichemical companies have found it
uneconomical to re-register their products for these selected crop markets.
UTILIZE DISTRIBUTORS OWNED BY CONSEP TO INTRODUCE AND PROMOTE CONSEP'S
PRODUCTS. Consep believes that owning and operating agrichemical distributors
accelerates the market acceptance and penetration of its proprietary
agricultural products, provides direct access to growers and field research
personnel and facilitates rapid evaluation and introduction of new products.
Consep may acquire additional agrichemical distributors in strategic locations
to facilitate grower adoption of IPM practices and biorational pest control
products.
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EXPAND PRESENCE AND DISTRIBUTION IN SELECTED INTERNATIONAL MARKETS.
Consep believes it has the opportunity to significantly expand its international
presence. Management's strategy is to control the registration, introduction and
distribution of its products in selected international markets and, as a result,
has retained control over worldwide manufacturing and marketing rights to its
products. To effectively market its products abroad, Consep is staffing an
international sales and registration organization to support the introduction of
its products through established distributors in key international markets.
EXPAND PRESENCE AND DISTRIBUTION CHANNELS IN CONSUMER MARKETS. Consep
is focused on expanding its consumer product distribution channels by increasing
its retail account base and penetrating additional locations in existing
accounts. Through a combination of trade show attendance, promoting
relationships with independent manufacturers' representatives and direct sales,
Consep anticipates expanding into additional co-operative buying groups,
distributors and retail chains, including grocery and drug store chains. Consep
also is focusing on increasing the range of products sold within the existing
retail base through a combination of special display advertising and
co-operative promotional programs. Consep will continue its efforts to expand
its product line through product development, acquisitions and distribution of
biorational products manufactured by other manufacturers.
TECHNOLOGY. Consep believes it is well positioned to take advantage of
opportunities for biorational pest control products as a result of its
proprietary controlled release technologies. Consep's principal commercial
agricultural products combine proprietary controlled release delivery systems
with synthesized pheromones to provide effective biorational pest control.
Consep has devoted considerable resources to investigating the chemical makeup
of pheromones, their reaction with Consep's delivery systems and their behavior
in a variety of environmental conditions.
Pheromones are natural compounds produced by insects, which, when
released and detected by other insects of the same species, will elicit a
specific response. Over 1,600 insect pheromones have been identified in the
scientific literature and identification of additional insect pheromones
continues to occur. Consep has focused its efforts on one class of pheromones,
sex pheromones, most of which are produced by female insects in order to attract
males of the same species. Males are able to locate the females by using sensors
on their antennae to follow the pheromone trail to its source. These compounds
can be used to control specific insect populations if released in sufficient
quantities to overwhelm the males so that they are unable to locate females.
This system of control, called "mating disruption," produces a substantial
population drop of the target insect. The crop is thereby protected from feeding
larvae, which are the primary source of crop damage.
The key to an efficacious and economically feasible trapping or mating
disruption product is to determine the optimum release rate and to successfully
store, protect, and control the release of pheromones. Most pheromones are
highly unstable compounds which break down quickly when exposed to normal
environmental conditions. The proprietary controlled release systems used in
Consep's products protect the pheromones from the environment and delay their
degradation. Consep designs these devices to release pheromones at a planned
rate over periods ranging from a few weeks to a few months, depending on the
targeted pest and crop. Consep believes that by providing a steady rate of
release over time, Consep's controlled release technologies allow Consep to use
lower quantities of pheromones in its products, as compared to competitive
pheromone products, to achieve the same degree of pest control. The controlled
release technologies used in Consep's products include membrane-based
reservoirs, micro porous beads and dispersed (flowable) microcapsules.
MEMBRANE-BASED RESERVOIR SYSTEM. The patented, membrane-based reservoir
system used in certain of Consep's products consists of a reservoir containing
the active ingredient, a rate-controlling membrane through which the active
ingredient diffuses and a protective impermeable backing. By varying the surface
area, membrane thickness and type of membrane materials, Consep is able to adapt
this technology to a variety of applications. Membrane-based reservoir systems
are used in the CheckMate and BioLure product lines and in certain products
within the SureFire product line.
MICROPOROUS BEAD SYSTEM. A microporous bead is a polymeric bead with an
internal pore structure encased in a rate-controlling outer surface. The
microporous nature of the beads permits a high loading of active ingredient,
with up to 80% of the bead weight consisting of biorational agents. By
comparison, only 5% to 30% of the weight of conventional micro-encapsulated
systems is represented by biorational agents. The microporous beads are
compatible with a wide range of active ingredients and can be readily mixed with
water and applied by ground or aerial spray
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equipment. By controlling the size of the beads and their microporous structure,
optimum rates of release can be achieved. Microporous bead systems are used in
current and development-stage CheckMate products.
DISPERSED (FLOWABLE) MICROCAPSULE SYSTEM. A dispersed (flowable)
microcapsule system is a method of encapsulating biorational agents by
polymerizing a protective wall around the colloidal size particles of the active
agent. The release rate of the active biorational product is adjusted by
controlling the size of the microcapsule as well as the degree of polymer
crosslinking in the capsule wall. Dispersed (flowable) microcapsule systems are
used in certain current and development-stage CheckMate products.
PRODUCTS. Consep develops, manufactures and markets three lines of
non-toxic pest control products: (i) pheromone-based mating disruption products
used to control insect populations in commercial agriculture; (ii)
pheromone-based traps used to monitor and trap insects in commercial
agriculture; and (iii) consumer products used to trap or otherwise control pests
in homes, lawns and gardens. Consep also sells a line of insect repellent
products based on natural oils, which are manufactured by, and are the
proprietary products of, a third party, and are being marketed on an exclusive
basis in the United States under the Blocker label.
COMMERCIAL MATING DISRUPTION PRODUCTS. Consep's commercial mating
disruption products, marketed under the CheckMate label, are used to suppress
population levels of insects by disrupting their mating cycles. CheckMate
products employ either microporous or microcapsule beads, which are applied by
aerial or ground spray equipment, or membrane-based reservoir dispensers, which
are attached by hand to the branches or stems of plants in crops which they
protect. As of December 31, 1997, Consep offers mating disruption products for
six species of insects. Revenues from the sale of Consep's commercial mating
disruption products for the years ended December 31, 1997, 1996 and 1995 were
$4.1 million, $3.0 million and $2.9 million, or 10.4%, 9.1% and 9.5% of Consep's
total revenues for such periods, respectively.
COMMERCIAL MONITORING AND TRAPPING PRODUCTS. Consep's monitoring and
trapping products for the commercial agriculture market are sold under the
BioLure label. A monitoring product typically consists of a trap and a lure
loaded with either pheromones or food bait to attract the target insect species.
Growers use monitoring products to identify the emergence of target species,
pinpoint infestation levels, and project insect population size and crop damage,
thereby facilitating more efficient control measures. The monitoring systems are
used in conjunction with pest control products to correctly time the application
of these control products and to monitor the effectiveness of insect control
programs. The system used in most of Consep's monitoring and trapping products
is a pheromone-based lure which incorporates Consep's controlled release
membrane-based technology to provide for uniform release of the active
ingredient over a longer period of time than competitors' products. Monitoring
and trapping systems which do not incorporate a lure use food bait or a color
spectrum as the attractant. Consep currently offers trapping and monitoring
systems for over 25 species of insects. Revenues from the sale of Consep's
monitoring and trapping products for the years ended December 31, 1997, 1996 and
1995 were $983,000, $833,000 and $621,000, or 2.5%, 2.5% and 2.0% of Consep's
total revenues for such periods, respectively.
CONSUMER PRODUCTS. Consep's consumer product line, marketed under the
SureFire and Insectigone labels, is comprised of a broad group of non-toxic
products which trap or otherwise control pests found in and around the home. In
addition, Consep markets, under its SureFire label, hummingbird and butterfly
feeders. Products in Consep's consumer product line generally incorporate
Consep's proprietary technologies, which include the controlled release of
attractants that lure insects into traps, and insecticide powders composed of
patented baits and diatomaceous earth, which kill crawling insects coming into
contact with products incorporating this technology. Consep currently offers
pest control products for over 20 species of household and garden pests. Consep
also distributes a line of consumer products, based on natural oils, to repel
biting insects. These insect repellent products, which are manufactured by, and
are the proprietary products of, a third party, are being marketed on an
exclusive basis in the United States under Consep's Blocker label. Consep holds
exclusive distribution rights to these insect repellent products in the United
States, Canada and Mexico, subject to certain performance requirements. Revenues
from the sale of Consep's consumer products for the years ended December 31,
1997, 1996 and 1995 were $6.9 million, $5.3 million and $4.6 million, or 17.6%,
15.8% and 15.0% of Consep's total revenues for such periods, respectively.
SPECIALTY CHEMICALS. In February 1995, Consep acquired Farchan
Laboratories, Inc. ("Farchan"), a Florida-based specialty chemicals
manufacturer. Prior to its primary manufacturing facility being destroyed by
fire in October 1996,
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Farchan supplied certain pheromones to Consep for use in certain of its mating
disruption products. In addition, Farchan supplied high quality specialty
chemicals, including organic acetylenes, to research organizations,
pharmaceutical companies and the agricultural industry. Revenues from Farchan's
operations (excluding pheromone sales to Consep) for the years ended December
31, 1997, 1996 and 1995 were $1.0 million, $1.3 million and $1.2 million, or
2.6%, 3.9% and 3.9% of Consep's total revenues for such periods, respectively.
Farchan's primary manufacturing facility was destroyed by fire in October 1996,
and Consep has decided to discontinue its specialty chemicals operations. See
"--Manufacturing," "--Properties" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CONSEP--Liquidity and Capital
Resources."
DISTRIBUTION OPERATIONS. Consep owns and operates full-line
agrichemical distributors which, in addition to selling Consep's commercial
agriculture products, also sell products produced by other manufacturers,
including biorational insect control products, conventional toxic pesticides,
fertilizers and other farm supplies. Revenues from Consep's distribution
operations (which exclude sales of Consep's proprietary commercial agriculture
products through these distribution operations) for the years ended December 31,
1997, 1996 and 1995 were $26.2 million, $22.8 million and $21.5 million, or
66.9%, 68.6% and 69.6% of Consep's total revenues for such periods,
respectively.
SALES, MARKETING AND DISTRIBUTION. Consep's sales, marketing and
distribution strategies differ for each of the major markets in which its
products are sold.
Consep's sales in the commercial agriculture market are made
principally through agrichemical distributors. These distributors employ crop
protection professionals who consult for growers and recommend appropriate
insect control programs. Consep believes that IPM and crop protection
professionals, such as pest control advisers ("PCAs"), have become key factors
in promoting the introduction and distribution of insect control products to the
commercial agriculture market. This trend is most developed in California, where
state licensed PCAs are the only individuals who are authorized to recommend the
application of any pesticide, including insect control products. Consep's
strategy focuses on improving the PCAs' and growers' understanding of IPM and
how Consep's proprietary products can be integrated into insect control
programs. Consep markets its insect control products to this group through
Consep's 10-person technical sales organization.
As part of Consep's strategy to use distributors owned by Consep to
introduce and promote its products, Consep has acquired agrichemical
distribution subsidiaries in strategic market locations. These acquisitions,
which took place in 1990 and 1994, have allowed Consep to employ crop protection
professionals, including PCAs, and obtain direct access to growers in order to
facilitate the exchange of information and more effectively introduce IPM
practices in general, and Consep's products in particular. Consep currently
operates agrichemical distribution outlets in five locations in the Central
Valley of California and in one location in the Connecticut River Valley. Consep
believes these distribution operations, and the 24 PCAs which they employ,
provide a continuous source of valuable information with respect to new product
needs, performance of products in the field and the competitive position of
those products.
Consep supports the sales efforts of the independent and subsidiary
agrichemical distributors through the organization of grower meetings, direct
grower contact and education of other influential groups such as university pest
management specialists and researchers, government agricultural personnel and
independent PCAs. Consep's CheckMate and BioLure product lines are promoted
through the dissemination of brochures, corporate communications and an on-line
Web page, in addition to direct contact with influential groups including
distributors, retailers, PCAs and growers. Agricultural trade shows and certain
industry conferences, such as the California Agricultural Production Consultants
Conference, are other venues for promotion of Consep's CheckMate and BioLure
product lines.
Consep sells its SureFire, Insectigone and Blocker products through a
network of cooperative buying groups and distributors who in turn resell to lawn
and garden centers, hardware stores and retail chains including drug and grocery
stores. These products are also sold directly to retailers and through
mail-order catalogs. Promotion of Consep's consumer products is achieved
primarily by co-operative advertising, media participation and trade shows. In
addition, Consep uses limited television advertising to promote its Blocker
product line. Consep works directly with over 70 independent sales
representatives who are engaged in various sales and marketing activities
related to Consep's consumer product lines. These independent sales
representatives are overseen by Consep's 6-person consumer sales group. Consep's
sales and marketing efforts for its consumer products are directed towards
increasing the number of new retail and distribution accounts and increasing the
range of products carried by certain existing retail accounts.
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Consep's commercial agriculture and consumer products are also sold
through independent distributors in certain international markets. In addition,
Consep has established joint testing and marketing programs with these
distributors to introduce and sell its commercial agriculture products in
certain international markets. Consep also manufactures and sells products on a
private label basis to customers in the industrial pest control market. Consep's
revenue attributable to export sales and sales occurring outside of the United
States of both commercial agriculture and consumer products for the years ended
December 31, 1997, 1996 and 1995 were $3,332,346, $2,522,164 and $2,217,266,
respectively. Consep also sells certain BioLure products to the United States
Department of Agriculture (the "USDA") and various state and international
departments of agriculture.
Consep's business is highly seasonal, with its highest revenues being
recognized in the second quarter of each year and its lowest revenues being
recognized in the fourth quarter of each year. This seasonality coincides with
the commercial growing season in the Northern Hemisphere and, to a lesser
extent, the consumer home, lawn and garden buying season. In addition, many of
Consep's products, and the products sold by its wholly-owned distributors, are
dependent upon the emergence of certain pests in the crops they are designed to
protect. To the extent adverse weather conditions prevent or otherwise interfere
with the growth of certain crops or the emergence of certain pests, the results
of Consep's operations could be adversely impacted. From time to time, secondary
pest infestations may occur within specific crops or geographic markets causing
affected growers to alter their customary pest control practices. Such events
may cause growers to temporarily increase their use of conventional toxic
insecticides and reduce or suspend the use of biorational products, such as
those sold by Consep, which could have a material adverse effect on Consep's
results of operations.
MANUFACTURING. Consep manufactures the membrane-based reservoir
dispensers, microporous beads and dispersed (flowable) microcapsules used in its
products at its facility in Bend, Oregon. Products containing diatomaceous earth
are manufactured at Consep's wholly-owned subsidiary located in Kirkland,
Quebec, Canada. Prior to its primary manufacturing facility in Gainesville,
Florida being destroyed by fire in October 1996, Farchan produced pheromones
used in certain of Consep's commercial agriculture products. As previously
reported, Consep has partially completed the first phase of an addition to its
headquarters and manufacturing facility in Bend, Oregon for the purpose of
producing pheromones and other specialty chemicals. Consep has re-evaluated its
plans for the completion of the addition as well as its plans to produce
pheromones and other specialty chemicals at the Bend, Oregon facility. At the
present time, Consep has indefinitely postponed any additional capital
expenditures for the completion of the addition as well as any significant
production of pheromones or other specialty chemicals. In addition, after
completion of the investigation and analysis of the cost feasibility for
producing pheromones using intermediate materials purchased from third parties,
Consep has determined that it will continue to purchase its pheromones from its
current suppliers for the foreseeable future. See "--Properties" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CONSEP--Liquidity and Capital Resources." As of June 30, 1998,
Consep employed 23 people in manufacturing and quality control relating to the
production of its proprietary products.
Active ingredients, including pheromones and food baits, are purchased
from specialty chemical supply companies or are produced by Consep. Consep has
historically relied upon on a limited number of suppliers to provide pheromones
for its products. During February 1995, Consep acquired Farchan, a Florida-based
specialty chemicals manufacturer, in order to reduce the cost of certain
pheromones, provide assurance of consistent quality, and provide a stable supply
of these materials. This facility was destroyed by fire in October 1996, and
Consep has decided to discontinue its specialty chemicals operations. The
interruption of certain sources of supply or the failure of suppliers, to adapt
their products to Consep's changing technological requirements could result in
delays in product shipments, adversely affecting Consep's financial condition
and results of operations.
Consep has no current plans to expand its manufacturing facilities or
equipment and believes that it has adequate production capacity to meet its
foreseeable needs.
RESEARCH AND DEVELOPMENT. Consep believes that considerable investment
in new product development will continue to be necessary to remain competitive
in the biorational pest control market. Consep's product development projects
generally begin with the identification of major insect infestation problems
which Consep believes can be addressed with biorational agents and which provide
sufficient market opportunity. Once a potential product is identified, Consep's
research and development personnel study the intended biorational agent and make
a determination as to whether Consep's existing controlled release technologies
are likely to work with the biorational agent. If it appears that
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the controlled release technologies may need to be modified to work effectively
with the intended biorational agent, Consep's research and development personnel
work to adapt the existing controlled release technologies to suit the
requirements of the particular biorational agent. Once the controlled release
technology has been selected and the active ingredient has been tentatively
formulated, the development effort continues with laboratory studies and
eventual field testing of prototypes in order to arrive at the final form of the
product. Field testing of products is generally conducted on a collaborative
basis with academic, governmental and corporate entities in the United States,
including the USDA and numerous universities. In international markets, field
testing is generally conducted in collaboration with Consep's international
distributors and government researchers. Through these collaborative efforts,
Consep gains access to individuals within the collaborating organization who
have particular expertise in dealing with the targeted pest and crop and whose
opinions are generally widely accepted. Collaborative field testing also
provides independent verification of product efficacy which is critical to
convincing commercial growers to adopt new biorational products.
Pursuant to a license agreement with Bend Research, Consep is able to
participate in joint funding with various government agencies to develop
improvements to existing technologies. The license agreement also provides
Consep with license rights to agricultural applications of Bend Research
technologies, including technologies which are developed by Bend Research
pursuant to third party funded research and development efforts. See "--
Proprietary Rights." The license agreement also obligates Consep to request Bend
Research to perform research and development services budgeted at not less than
$600,000 a year, at least $400,000 of which must be directed towards development
of biorational products. For 1996 and 1997, the annual commitment under the
license agreement was reduced from $600,000 to $191,500 and $125,000,
respectively. For 1998, the annual commitment under the license agreement has
been waived with no minimum requirement. For years subsequent to 1998, the
$600,000 annual commitment will be reinstated. The license agreement continues
until the later of 2012 or the expiration of the last patent licensed under it.
Consep may terminate the license agreement on sixty days' notice. The license
agreement provides that if it were to be terminated for any reason, Consep would
retain rights to all Bend Research technologies incorporated in then current
products and in products then under development. If Consep were to lose the
services of Bend Research for any reason, Consep may experience delays in the
development and introduction of new products and would be required to make
alternative arrangements for the services performed by Bend Research. Any such
alternative arrangements could delay development efforts, could substantially
increase the cost of Consep's research and development efforts and could
adversely affect Consep's results of operations.
Consep is currently developing and expanding its CheckMate line of
insect control products. Field testing for the products under development is in
various stages of completion. Consep also plans to develop and introduce
additional products for its SureFire and Insectigone lines of consumer pest
control products. Additions to the consumer product lines will occur through new
product development and possible acquisitions of compatible product lines,
technologies or businesses.
GOVERNMENT REGULATION AND PRODUCT REGISTRATION. The pesticide industry
is heavily regulated worldwide. In the United States, the EPA regulates
pesticide products under FIFRA and more recently under FQPA. Pesticides are also
subject to state and foreign regulations. Some states, such as California, have
their own extensive registration requirements, as do certain foreign
governments. To develop and commercialize a pesticide product, detailed and
complex procedures must be completed prior to obtaining approvals through FIFRA,
state and foreign regulatory agencies. Small scale field testing usually can be
conducted prior to product registration to evaluate product efficacy. Unusual
weather conditions during field tests may require additional field testing
requirements in subsequent growing seasons, resulting in delays in product
registration submissions and approvals. In addition, failure to receive
regulatory approval prior to the growing season could delay market introduction
of a new product by up to a year. Significant delays in new product development
or commercialization would have a material adverse effect on Consep's results of
operations.
Chemical pesticides require extensive toxicology and environmental
testing to substantiate product safety prior to obtaining a product
registration. Commercial sale of a pesticide requires a product registration for
each pest and crop for which the product is used. Initial EPA registration for a
new chemical pesticide can take seven years or longer, and can cost $10 million
or more. In contrast to conventional toxic chemicals, biorational products have
fewer regulatory requirements before commercial use is permitted. For example,
substantially fewer toxicity studies are required for biorational insect control
products than for conventional toxic insecticides. Due to such differences,
registration costs for biorational insect control products are significantly
less than for toxic insecticides, and registration of biorational products
requires considerably less time to complete. However, there can be no assurance
that additional requirements will not be added by the EPA which could make
registration procedures more time-consuming and costly or require
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further testing and review of previously registered products. Furthermore, even
without any such additional regulatory requirements, the process of obtaining
regulatory approvals can be time-consuming and costly, and there can be no
assurance that such approvals can be obtained in a timely manner.
Government regulations have been enacted in recent years to encourage
the development and introduction of non-toxic alternatives to conventional
insecticides, including the streamlined registration of alternative pest control
products under the EPA's "Safer Pesticide Policy." In September 1993, the EPA,
the FDA and the USDA released a joint summary of the principles guiding their
legislative and regulatory agenda including: (i) a firm commitment to reducing
risks to people and the environment that may be associated with toxic pesticides
while ensuring the availability of cost-effective pest management techniques;
(ii) recognition of the need to work with growers to develop and implement
improved means of pest control, reduce use of higher-risk toxic pesticides and
promote greater use of IPM techniques; and (iii) implementation of regulatory
reforms and incentives for the development of pesticides that will eliminate or
reduce health and environmental risks. Further, in 1994, the EPA established its
Biopesticides and Pollution Prevention Division, whereby companies developing
safer and less-toxic alternatives to conventional pesticides are able to have
new products reviewed and registered by a staff dedicated to this new division.
Such product reviews and registrations are generally completed over a shorter
time period and at less expense than conventional insecticide reviews and
registrations. In addition, in 1996, Congress passed FQPA which requires the EPA
to perform a new type of risk assessment for the total exposure from pesticides.
Based upon the above actions, coupled with cost and timing advantages of
registering biorational products relative to conventional toxic chemicals,
Consep believes biorational products have significant advantages in the
commercial agriculture insect control market. Field testing, manufacture and
sale of Consep's products outside the United States may be subject to regulatory
approval by other jurisdictions which may be more or less rigorous than in the
United States.
COMPETITION. The pest control industry is highly competitive and is
dominated by multinational chemical companies that have financial, technical and
marketing resources substantially greater than those of Consep. Currently,
biorational products account for only a small fraction of aggregate sales of
pest control products, and can require insect control practices, such as timing
and method of application, which are different from those typically associated
with toxic chemical products. As a result, in order for biorational products to
successfully compete with toxic chemicals, they must not only be cost
competitive but must also provide other advantages over conventional pesticides.
Consep believes that its products are cost competitive with conventional toxic
insecticides and, because they are non-toxic and leave no harmful residue in
food, soil or groundwater, provide sufficient advantages over conventional toxic
insecticides to compete effectively against such products.
Consep believes that many of the large chemical pesticide companies are
developing chemical pesticides which are less-toxic to humans and the
environment, as well as new products based upon biorational agents. While Consep
believes that the emphasis of these companies has been on genetic engineering of
micro-organisms and insect-resistant plants and has been primarily directed
towards commodity crops such as wheat, corn, cotton and soybeans, there can be
no assurance that these companies will not direct significant resources to
either biorational products or less-toxic chemical products that would compete
directly with those of Consep.
In addition to the large chemical pesticide companies, Consep is aware
of at least five other companies using biorational control agents, including
pheromones, to produce alternative insect control products. Consep believes that
other companies are currently developing biorational insect control products.
Consep believes that none of these competing companies has delivery systems that
perform as effectively and efficiently as the proprietary controlled release
membrane-based reservoir, dispersed (flowable) microcapsule and microporous bead
systems used in Consep's CheckMate products and that Consep is therefore in a
strong competitive position with respect to these companies.
Consep expects competition within the biorational pest control segment
to intensify as regulatory pressures on conventional toxic pesticides increase
and as advances in the field are made and become more widely known. There can be
no assurance that Consep will be able to compete successfully against its
current competitors or that these competitors or new market entrants will not
develop products that compete directly with Consep's products and are more
effective, less expensive or more widely accepted than those of Consep.
PROPRIETARY RIGHTS. Proprietary protection of Consep's products is
important to its business. Consep relies upon patents, trade secrets, unpatented
know-how and continuing technological innovation to develop and maintain its
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competitive position. Consep maintains a policy of seeking patents on its
inventions, acquiring licenses under selected patents or patent applications
from third parties and entering into invention and proprietary information
agreements with its key employees and consultants with respect to technology
which it considers important to its business.
As more specifically described below, Consep has obtained manufacturing
and marketing rights in agriculture to certain proprietary rights of Bend
Research, including patents, patent applications, trade secrets and unpatented
know-how which relate to existing and development-stage technologies and
products. In addition, Consep has filed patent applications with respect to its
own inventions which relate to existing and development-stage technologies and
products. There can be no assurance that patents will issue from any pending or
future patent applications or, if patents are issued, that they will be of
sufficient scope or strength to provide meaningful protection of Consep's
technologies. In addition, there can be no assurance that any of the current
patents issued or licensed to Consep or future patents issued or licensed to
Consep will not be challenged or circumvented by competitors, or be found to be
invalid or non-infringed in judicial or administrative proceedings should a
dispute arise. Moreover, notwithstanding the scope of the patent protection
available to Consep, there can be no assurance that such patent rights will
provide commercial advantage to Consep as competitors could develop controlled
release technologies which are not covered by Consep's issued or licensed
patents or future patents issued or licensed to Consep.
Pursuant to an agreement with Bend Research, Consep has obtained a
license to all agricultural applications of technologies developed by Bend
Research, other than certain animal health and agricultural applications
unrelated to Consep's current or contemplated products. The license includes
rights to certain patents, patent applications, trade secrets and unpatented
know-how owned by Bend Research, and covers aspects of Consep's membrane-based
reservoir system, microporous bead system and dispersed (flowable) microcapsule
system technologies. The license agreement provides Consep with exclusive
worldwide rights to all agricultural applications (except as noted above) of the
licensed patents, patent applications, trade secrets and know-how. The
membrane-based reservoir system technology used in many of Consep's CheckMate,
BioLure and SureFire products is the subject of a United States patent owned by
Bend Research expiring in 2002. Such technology is not patented outside the
United States, other than in Japan where the patent is held by a third party.
Neither Consep nor Bend Research has rights with respect to the Japanese patent.
The microporous bead system technology used in certain current and
development-stage CheckMate products is the subject of a pending United States
patent application owned by Bend Research. The license agreement provides Consep
exclusive, worldwide rights to agricultural applications (except as noted above)
of the microporous bead system technology. The dispersed (flowable) microcapsule
system technology used in certain current and development-stage CheckMate
products is not patented in any country. The license agreement provides Consep
exclusive, worldwide rights to agriculture applications (except as noted above)
of the dispersed (flowable) microcapsule system technology.
The foregoing licenses are royalty-free as to certain of Consep's
existing controlled-release products. Certain existing products are, and
products resulting from existing and future development efforts may be, royalty
bearing at rates ranging from 2.5% to 5.0% of Consep's direct gross margin, as
defined in the license agreement, on such products. During January 1995,
royalties related to certain products incorporating technology provided by Bend
Research for the term of the license agreement were prepaid by Consep. Such
prepaid royalties totaled $121,000 and are being amortized as the related
products are sold by Consep. The license agreement continues until the later of
2012 or the expiration of the last patent licensed under it. Consep may
terminate the license agreement on sixty days' notice. The license agreement
provides that if it were to be terminated for any reason, Consep would retain
rights to all Bend Research technologies incorporated in then current products
and any products then under development.
Consep's technology relating to its diatomaceous earth products
includes a patented bait formulation. These patents provide protection in Canada
and Australia.
Much of Consep's technology and many of its processes are dependent
upon the knowledge, experience and skills of certain scientific and technical
personnel. To protect its rights to its proprietary information and technology,
Consep requires key employees, consultants, advisors and collaborators to enter
into confidentiality agreements which prohibit the disclosure of confidential
information to persons unaffiliated with Consep and require disclosure and
assignment to Consep of ideas, developments, discoveries and inventions made by
such persons. There can be no assurance that these agreements will prevent
disclosure of Consep's confidential information or will provide meaningful
protection for Consep's confidential information if there is an unauthorized use
or disclosure. In the absence of patent protection, Consep's business may be
adversely affected by competitors who develop substantially equivalent
technology.
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Proprietary rights litigation, which could result in substantial cost
to and diversion of effort by Consep, may be necessary to enforce patents issued
or licensed to Consep, to protect trade secrets or know-how owned by Consep or
to defend Consep against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of Consep and others.
Adverse determinations in litigation could subject Consep to significant
liabilities to third parties, could require Consep to seek licenses from third
parties and could prevent Consep from manufacturing, selling or using its
products, any of which could have a material adverse effect on Consep's
business, financial condition and results of operations. Consep is not currently
a party to any patent litigation or other litigation regarding intellectual
property rights and is not aware of any challenge to its patents or proprietary
rights.
EMPLOYEES. As of June 30, 1998, Consep had 134 employees, with 16
involved in sales of proprietary products, 24 employed as PCAs in its
distribution subsidiaries, 9 involved in product development and registration,
23 involved in manufacturing and quality control of proprietary products, 15
involved in finance and administration and 47 involved in operations at its
distribution subsidiaries.
PROPERTIES. Consep is headquartered in Bend, Oregon where it owns a
28,800 square foot facility purchased in 1997 for $1.495 million. In addition to
administrative offices, the headquarters facility contains research and
development, manufacturing, warehouse and sales operations for certain of
Consep's proprietary products. In addition, Consep, through its Chemfree
subsidiary, leases an office, manufacturing, sales and warehousing facility in
Kirkland, Quebec, Canada on a month-to-month basis. Consep believes it could
replace this facility in a timely manner, if required to do so. Total lease
expenditures related to all of Consep's proprietary product-related facilities
in 1997, 1996 and 1995 were $111,159, $147,407 and $150,461, respectively.
As of August 31, 1998, Consep also owned, through its Farchan
subsidiary, one building located in Gainesville, Florida, and one building
located in Alachua, Florida, with a combined capacity of approximately 8,000
square feet used for this subsidiary's manufacturing, sales, research and
development and warehousing functions. In October 1996, one of Farchan's two
buildings then located in Gainesville, Florida with a capacity of approximately
3,000 square feet, which was used as a manufacturing facility, was destroyed by
fire. As an indirect result of the fire at the Farchan facility, Consep decided
it was not feasible to proceed with plans to finish and occupy its proposed
plant in Alachua, Florida. Consep has removed all of its equipment from the
Alachua facility and is attempting to sell the land and building. Consep has
also decided not to rebuild the manufacturing facility at its Gainesville site
and is attempting to sell the property. As previously reported, Consep has
partially completed the first phase of an addition to its headquarters and
manufacturing facility in Bend, Oregon for the purpose of producing pheromones
and other specialty chemicals. Consep has re-evaluated its plans for the
completion of the addition as well as its plans to produce pheromones and other
specialty chemicals at the Bend, Oregon facility. At the present time, Consep
has indefinitely postponed any additional capital expenditures for the
completion of the addition as well as any significant production of pheromones
or other specialty chemicals. In addition, after completion of the investigation
and analysis of the cost feasibility for producing pheromones using intermediate
materials purchased from third parties, Consep has determined that it will
continue to purchase its pheromones from its current suppliers for the
foreseeable future. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES OF CONSEP."
Consep, through certain of its distribution subsidiaries, also owns
office and warehousing facilities for its agrichemical distribution operations
in Sacramento, Fresno, and Patterson, California. Consep's distribution
operations also lease sales and distribution facilities in Livingston and
Escalon, California, under leases which expire on December 31, 1999 and 2001,
respectively. Consep's distribution operations also lease sales and distribution
facilities in Worcester and Chicopee, Massachusetts on a month-to-month basis.
Consep believes that it could replace these facilities in a timely manner, if
required to do so. Total lease expenditures related to all of Consep's
distribution facilities in 1997, 1996 and 1995 were $89,940, $93,820 and
$83,340, respectively.
Consep believes that its existing facilities will be adequate to serve
its needs at least through 1999.
LEGAL PROCEEDINGS. Consep is not a party to any legal proceedings other
than various claims and lawsuits which Consep believes are not individually or
collectively material to its business.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CONSEP
Financial amounts discussed below in this management discussion and analysis and
presented in the Selected Consolidated Financial Data included therein have been
extracted from Consep's unaudited condensed consolidated financial statements
for the six months ended June 30, 1998 and 1997 included elsewhere in this Joint
Proxy Statement--Prospectus and Consep's audited consolidated financial
statements for fiscal years ended September 30, 1997, 1996 and 1995 also
included elsewhere in this Joint Proxy Statement-Prospectus.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands except per share)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- --------------------------------
1998 1997 1997 1996 1995
-------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 22,778 $ 24,606 $ 39,204 $ 33,229 $ 30,844
Net income (loss)............... 61 914 (1,822) (2,483) (1,286)
Net income (loss) per share -
basic and diluted.............. 0.01 0.10 (0.19) (0.31) (0.19)
JUNE 30, DECEMBER 31,
--------------------- ---------------------
1998 1997 1997 1996
-------- ---------- --------- ---------
BALANCE SHEET DATA:
Working capital ................ $ 8,063 $ 11,118 $ 8,272 $ 10,433
Total assets.................... 30,541 33,237 25,678 23,411
Long-term debt, excluding current
maturities................. 2,062 2,395 2,168 1,191
Shareholders' equity............ 15,147 17,946 15,217 17,010
-------- ---------- --------- ---------
</TABLE>
OVERVIEW
Consep derives its revenues from the sale of its proprietary products
to the commercial agriculture and consumer home, lawn and garden markets and
from sales by its distribution subsidiaries of products produced by other
manufacturers, including both biorational insect control products and
conventional toxic pesticides as well as fertilizers and farm supplies. Consep's
primary focus is the development of proprietary products and expansion of the
markets for those products. A significant element of Consep's strategy for the
commercialization of its proprietary commercial agriculture products has been to
acquire distribution operations in key agricultural regions and to introduce its
proprietary products through those operations.
Continued growth in both proprietary and distribution revenues
contributed to a smaller loss in 1997 than incurred by Consep in 1996. The
growth in proprietary product revenues was primarily attributable to higher
revenues from increased sales of Consep's commercial agriculture products and to
the introduction of Consep's new insect repellent line. These increased revenues
were partially offset by higher overall operating expenses.
Since its inception, Consep has funded its growth primarily through
equity financings. Funds from these financings have allowed Consep to build its
organization, develop and register proprietary products for both the commercial
agriculture and consumer home, lawn and garden markets, acquire distribution
operations for the introduction of its commercial agriculture products and
expand its sales efforts through both domestic and international channels of
distribution.
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Consep has incurred annual operating losses since its inception in
1984. Consep believes its future annual profitability is dependent upon
continued revenue growth, maintained or strengthened gross margins, and
controlled growth of operating expenses. There can be no assurance that Consep
will become profitable on an annual basis.
Consep's business is seasonal with its highest revenues historically
being recognized in the second quarter of each year and its lowest revenues
being recognized in the fourth quarter of each year. This seasonality coincides
with the commercial growing season in the Northern Hemisphere and, to a lesser
extent, the consumer home, lawn and garden buying season. Consep anticipates
this seasonal profile will continue with a slight shift to third and fourth
quarter revenues as sales to international markets increase. In contrast to
revenues, many of Consep's operating expenses are largely independent of the
quarterly selling cycles. As a result, operating expenses will generally
represent a higher percentage of revenues in the third and fourth quarters as
compared to the first two quarters, and Consep may experience a loss in the
third and fourth quarters of an otherwise profitable year.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net revenues of certain items in Consep's Consolidated Financial
Statements. The table and the discussion below should be read in conjunction
with the historical financial statements and notes thereto of Consep. See
"Unaudited Pro Forma Condensed Combined Financial Statements" and "Index to
Financial Statements."
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
---------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- -------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues
Proprietary products..................... 32.6% 38.2% 33.1% 31.4% 30.4%
Distribution............................. 67.4 61.8 66.9 68.6 69.6
---------- ---------- ----------- ----------- -----------
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
---------- ---------- ----------- ----------- -----------
Cost of revenues
Proprietary products..................... 21.0 21.9 21.1 20.1 17.8
Distribution............................. 53.3 50.2 54.9 55.9 57.1
---------- ---------- ----------- ----------- -----------
Total cost of revenues................... 74.3 72.1 76.0 76.0 74.9
---------- ---------- ----------- ----------- -----------
Gross margin 25.7 27.9 24.0 24.0 25.1
Operating expenses
Research and development (1)............. 3.6 2.5 3.1 4.4 3.4
Selling, general and administrative (1).. 11.3 14.6 16.0 17.1 15.0
Distribution (2)......................... 9.6 7.5 9.7 10.1 10.9
---------- ---------- ----------- ----------- -----------
Total operating expenses................. 24.5 24.6 28.8 31.6 29.3
---------- ---------- ----------- ----------- -----------
Operating income (loss)....................... 1.2 3.3 (4.8) (7.6) (4.2)
Other income (expense), net................... (0.9) 0.4 0.2 0.1 0.0
Net income (loss)
Proprietary products..................... (4.6) (0.6) (7.0) (9.9) (5.6)
Distribution............................. 4.9 4.3 2.4 2.4 1.4
---------- ---------- ----------- ----------- -----------
Total net income (loss).................. 0.3% 3.7% (4.6)% (7.5)% (4.2)%
========== ========== =========== =========== ===========
</TABLE>
- -----------------
(1) Research and development and selling, general and administrative expenses
are allocated to Consep's proprietary product operations.
(2) Distribution expenses consist entirely of selling, general and
administrative expenses of Consep's distribution operations.
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<PAGE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES. Total revenues for the six months ended June 30, 1998
decreased 7.4% to $22.8 million from $24.6 million in the corresponding period
of 1997. Revenues from the sale of proprietary products decreased 21.0% during
the six months ended June 30, 1998 to $7.4 million from $9.4 million in the
corresponding period of 1997. Revenues from Consep's distribution operations
increased 1.0% during the six months ended June 30, 1998 to $15.4 million from
$15.2 million in the corresponding period of 1997.
The decrease in proprietary product revenues for the six months ended
June 30, 1998 was attributable to decreases in revenues for Consep's consumer
products, commercial agriculture products and specialty chemicals.
Revenues from the sale of commercial agriculture products decreased
$582,000, or 18.5%, for the six months ended June 30, 1998 as compared to the
corresponding period of 1997. The decrease was primarily attributable to i)
cooler and wetter weather conditions in California, Florida and Mexico that
resulted in lower insect populations in those regions and ii) a 75% reduction in
revenues from the sale of Consep's products to control pink bollworm in cotton
("CheckMate PBW" and "CheckMate PBW-F") as a result of the same cooler weather
conditions in the southwest United States and Mexico. In addition to the cooler
weather, sales of Consep's product to control peach twig borer ("CheckMate PTB")
were lower in the six months ended June 30, 1998 as compared to the
corresponding period in 1997, as a result of a shortage in the supply of
pheromone for this product. The pheromone supply shortage was due to production
delays related to the process scale-up in Consep's initial production of this
pheromone by a contract manufacturer using a new proprietary synthesis route.
Revenues from the sale of consumer products from Consep's SureFire and
Blocker line of products in the United States and Chemfree products in Canada
decreased by $1.0 million, or 17.3%, for the six months ended June 30, 1998 as
compared to the corresponding period of 1997. The decrease in consumer product
revenues in the six months ended June 30, 1998 was primarily attributable to a
decrease in revenues for Consep's Blocker line of products of 60.2% as compared
to the corresponding period in 1997. The decrease in Blocker revenues was
primarily a result of i) inventory carried over from 1997, the introductory
year, by distributors and retailers; ii) a change in the sales program which
requires that Consep partially reserve against revenues for potential product
returns and iii) a 25% reduction in the selling price. Revenues from the sale of
Consep's SureFire products in the United States and Chemfree products in Canada
increased 13.1% in the six month period ended June 30, 1998 as compared to the
corresponding period of 1997. The increase in these revenues was primarily the
result of more favorable weather conditions in certain regions of the United
States and Canada as well as lower initial inventories at the retail level as
compared to 1997.
Specialty chemical sales decreased to $46,000 in the six months ended
June 30, 1998 from $422,000 in the corresponding period of 1997. The decrease is
the result of winding down business operations at Consep's Farchan facility,
which process was completed in early 1998.
The revenue increase of 1.0% from Consep's distribution operations
during the six months ended June 30, 1998 as compared to the corresponding
period of 1997 was primarily the result of the addition of a new sales and
warehousing location for Consep's Massachusetts distribution operation. This
increase was partially offset by lower revenues in Consep's California
distribution operations as a result of the cooler and wetter weather conditions
in California discussed above.
GROSS MARGIN. The consolidated gross margin for Consep decreased to
25.7% in the six months ended June 30, 1998 from 27.9% in the corresponding
period of 1997. The gross margin on the sale of proprietary products during the
six months ended June 30, 1998 decreased to 35.5% from the 42.6% gross margin
achieved on proprietary product revenues in the corresponding period of 1997.
Distribution gross margins increased in the six month period ended June 30, 1998
to 21.0%, from 18.8% in the corresponding period of 1997.
The gross margin on commercial agriculture proprietary product sales
for the six month period ended June 30, 1998 decreased to 32.7% from 35.4% in
the corresponding period of 1997. The decrease was primarily attributable to i)
the accrual of $320,000 for estimated insurance recoveries for the additional
pheromone expenses incurred in the six months ended June 30, 1997 due to the
October 1996 fire that destroyed Consep's specialty chemicals manufacturing
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facility and ii) the change in product mix as a result of decreased sales for
Consep's higher margin CheckMate PBW and CheckMate PBW-F products. The one-time
insurance accrual reduced the cost of revenues by $320,000 for the six month
period ended June 30, 1997 and positively impacted the gross margin percentage
in 1997 on agriculture proprietary product sales by 10.2%. Approximately
$220,000 of this accrual was reversed in the fourth quarter of 1997 after
settlement discussions were terminated and Consep filed a lawsuit against its
insurance carrier. As a result of the decreased sales for the CheckMate PBW and
CheckMate PBW-F products, proprietary commercial agriculture gross margin
percentages were decreased by 1.8% for the six month period ended June 30, 1998
as compared to the corresponding period in 1997.
The gross margin on proprietary consumer product sales for the and six
months ended June 30, 1998 decreased to 41.6% from 49.0% in the corresponding
period of 1997. The decrease in gross margin was primarily attributable to a 25%
price reduction on the Blocker line of products which decreased the gross margin
for this product line to 46.9% from 58.7% for the and six month period ended
June 30, 1998 as compared to the corresponding period of 1997. In order to make
the Blocker products more competitive in the marketplace, Consep reduced its
selling price for the 1998 season which will continue to have a negative impact
on gross margin as compared to 1997.
The gross margin from distribution revenues increased to 21.0% from
18.8% for the six month period ended June 30, 1998 as compared to the
corresponding period of 1997. The increase was primarily attributable to
differences in the product sales mix for distribution operations.
RESEARCH AND DEVELOPMENT. Research and development costs during the six
months ended June 30, 1998 increased $211,000, or 34.3%, as compared to the
corresponding period of 1997. The increase was primarily attributable to
approximately $327,000 in scale-up and development costs related to the initial
production of pheromone for Consep's CheckMate PTB and CheckMate SF products by
a contract manufacturer using a new proprietary synthesis route.
SELLING, GENERAL AND ADMINISTRATIVE. In the six months ended June 30,
1998, selling, general and administrative costs associated with Consep's
proprietary product operations decreased 28.2% from the corresponding period of
1997. The decrease was primarily attributable to i) a reduction in advertising
costs associated with Consep's Blocker line of insect repellent products in the
amount of $558,000 and ii) a reduction in expenses as a result of winding down
business operations at Consep's Farchan facility in the amount of $314,000.
DISTRIBUTION. During the six months ended June 30, 1998, operating
expenses related to Consep's distribution operations increased $348,000, or
19.0%, as compared to the corresponding period of 1997. The increase was
primarily attributable to i) the increased personnel required to meet the needs
of anticipated sales growth and ii) a reduction of bad debt reserves in 1997
that did not occur in 1998.
OTHER INCOME AND EXPENSE. During the six months ended June 30, 1998,
Consep recorded net other expense of $207,000 compared to net other income of
$89,000 in the corresponding period of 1997. This decrease was primarily
attributable to i) the recognition of $195,000 in business interruption
insurance proceeds in the first six months of 1997 that did not occur in 1998
and ii) an increase of $121,000 for the six month period ended June 30, 1998 in
interest expense as a result of increased average borrowings outstanding as
compared to the corresponding period of 1997.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
REVENUES. Total revenues increased to $39.2 million in 1997 from $33.2
million in 1996 and $30.8 million in 1995. Revenues from Consep's proprietary
products increased to $13.0 million in 1997 from $10.4 million in 1996 and $9.4
million in 1995, while revenues from distribution operations increased to $26.2
million in 1997 from $22.8 million in 1996 and $21.5 million in 1995.
The growth in proprietary product revenues for the year ended December
31, 1997 was attributable to growth in sales of Consep's consumer products and
commercial agriculture products. These increases were offset by decreased sales
of specialty chemicals to third parties by Consep's Farchan subsidiary as a
result of a fire in October 1996 that destroyed Farchan's primary manufacturing
facility.
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In 1997, revenues from the sale of commercial agriculture products
increased $1.2 million or 33.8%, as compared to 1996. The increase in sales of
commercial agriculture products was primarily attributable to a 34.5% increase
in sales of Consep's CheckMate line of products. The increase in revenues from
the sales of CheckMate products was primarily attributable to (i) the
introduction of a new combination product to control both peach twig borer and
oriental fruit moth ("CheckMate SF"), (ii) increased sales of the product to
control tomato pinworm ("CheckMate TPW") as a result of Consep's strengthening
its sales organization in Mexico, (iii) increased sales of the product to
control codling moth ("CheckMate CM") into markets in the southern hemisphere
and (iv) sales of the new CheckMate flowable product to control tomato pinworm
("CheckMate TPW-F"). These increases were partially offset by a decrease in
Company's CheckMate products to control pink bollworm in cotton ("CheckMate PBW"
and "CheckMate PBW-F"). The combined decrease in CheckMate PBW and PBW-F
revenues was primarily attributable to cooler weather conditions that led to
significantly reduced pink bollworm populations. In addition to the cooler
weather, the decrease in cotton product sales was also a result of the increased
use by growers of transgenic Bt cotton seed, a genetically engineered insect
resistant cotton.
Revenues from the sale of commercial agriculture products increased
$157,000, or 4.8%, in 1996 as compared to 1995. The increase in sales of
commercial agriculture products was primarily attributable to the introduction
of newly registered formulations of products for which registration approvals
were obtained during the year. In 1996, Consep received registration approval
for CheckMate PBW-F, its new flowable micro-encapsulated product, which
contributed to a 118.4% growth in revenues from the sale of CheckMate PBW
products. Also contributing to the increase in commercial agriculture product
revenues were increased sales of other CheckMate PBW products in Mexico and
increased international sales of CheckMate CM and the product to control
oriental fruit moth ("CheckMate OFM"). These revenue increases were offset by
(i) a reduction in revenues in Mexico from the sale of Consep's CheckMate TPW
product, and (ii) a reduction in revenues in California from the sale of
Consep's CheckMate CM product. Consep believes the decrease in revenues in
Mexico from the sale of CheckMate TPW was due to increased competition in Mexico
and responded by strengthening its sales organization in that market. Consep
believes the decrease in revenues in California from the sale of CheckMate CM
was due to a delay in receiving registration of a new warm weather formulation
of CheckMate CM from the State of California which caused Consep to sell its
cool weather formulation that did not perform adequately in the hotter weather
experienced in the spring of 1996. As a result, many growers used alternatives
to Consep's cool weather formulation of CheckMate CM. Applications of Consep's
new warm weather formulation of CheckMate CM were made after registration was
received and performed as expected.
In 1997, revenues from the sale of consumer products from Consep's
SureFire and Blocker line of products in the United States and Chemfree products
in Canada increased by $1.7 million, or 29.3%, as compared to 1996. This growth
in consumer product revenue was primarily attributable to the introduction of
Consep's new Blocker line of insect repellent products. These Blocker product
revenues were partially offset by a 17.1% decrease in revenues from sales of
Consep's SureFire line of products in the United States as compared to 1996.
Consep believes the decrease in SureFire revenues was the result of excess
inventory at the retail level carried over from 1996 which reduced the amount of
new orders placed in 1997. In addition, significantly cooler than normal weather
in the late spring, which reduced insect populations, was a major contributor to
the reduction in consumer product sales for 1997. Revenues from the sale of
consumer products increased 15.5%, or $765,000, in 1996 compared to 1995 levels.
This growth in consumer product revenues was generated by Consep's continued
efforts to increase the number of retail outlets through which its products are
sold while also increasing the number of products carried by the individual
retail operations.
Specialty chemical sales by Farchan decreased 21.4% in 1997 as compared
to 1996. The decrease in sales was primarily the result of the fire in October
1996 that destroyed its primary manufacturing facility in Gainesville, Florida.
Partially offsetting the decrease in specialty chemical sales, Farchan
recognized revenues in 1997 from the sale of its research chemicals catalog
business and related inventory to GFS Chemicals, Inc. of Powell, Ohio. In 1996,
Farchan contributed $111,000 to the growth in proprietary product revenues as
compared to 1995. The increase in specialty chemical sales was primarily
attributable to an increase in the number of products offered by Farchan and the
inclusion of only eleven months of results in 1995. Partially offsetting this
increase was a significant reduction in sales in the fourth quarter of 1996 as a
result of the fire.
Distribution revenues increased $3.4 million, or 15.0%, during the year
ended December 31, 1997 as compared to 1996. In 1996, distribution revenues
increased $1.4 million, or 6.3%, as compared to 1995. These increases were
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primarily attributable to continued growth of Consep's California-based
subsidiaries as well as to favorable weather conditions in the Central Valley of
California, Consep's principal distribution market.
GROSS MARGIN. The consolidated gross margin for Consep remained at
24.0% in 1997 compared to 24.0% in 1996. In 1996 the consolidated gross margin
decreased to 24.0% from the 25.1% gross margin in 1995. The decrease in gross
margin in 1996 was primarily attributable to lower gross margins on Consep's
commercial agriculture products.
Proprietary gross margins increased to 36.0% in 1997 from 35.8% in
1996. The gross margin percentage for Consep's commercial agriculture products
increased to 28.2% in 1997 from 27.9% in 1996. This increase in margin
percentage was primarily attributable to differences in product sales mix and
increases in the overall sales and production volumes allowing manufacturing
costs to be allocated over a larger base of products. Substantially offsetting
these increases were decreases primarily as a result of (i) lower margins on
Consep's CheckMate product to control codling moth due to flexible pricing to
introduce the product into Europe and to recover lost markets in the United
States as a result of previously reported performance problems encountered in
1996, (ii) higher pheromone costs as a result of the fire that destroyed the
Farchan facility and (iii) additional manufacturing costs in the first quarter
primarily associated with the late arrival of production equipment, overtime
incurred to meet unexpected demand and the re-work of inventory carried over
from prior years. The gross margin on commercial agriculture proprietary
products includes an accrual of approximately $100,000 for estimated insurance
recoveries for additional pheromone expenses incurred in 1997 due to the October
1996 fire that destroyed Consep's specialty chemicals manufacturing facility.
This accrual reduced cost of revenues by approximately $100,000 and positively
impacted the gross margin percentage on commercial agriculture product sales by
2.2% in 1997. To date, Consep has not reached a final settlement with its former
insurance carrier for the claim. The investigation by the insurance carrier has
been completed, but settlement discussions have reached an impasse and Consep
has filed a lawsuit against its former insurance carrier, MSI Insurance Company,
in the Federal District Court in Portland, Oregon to recover its claims.
Although Consep intends to vigorously pursue full recovery of its claims in the
pending legal proceedings, there can be no assurance that Consep will prevail in
the litigation or that Consep will recover its claims in full.
Proprietary gross margins decreased to 35.8% in 1996 from 41.6% in
1995. The gross margin percentage for Consep's commercial agriculture products
decreased to 27.9% in 1996 from 43.7% in 1995. This decrease in margin
percentage was primarily attributable to differences in product sales mix and
higher than expected production and raw material costs incurred in connection
with the introduction of Consep's new warm weather CheckMate CM formulation. In
addition, the CheckMate CM product was redesigned for the 1997 season. As a
result of the new design of the CheckMate CM product, approximately $260,000 of
CheckMate CM product was written off in the fourth quarter of 1996. This
inventory write-off lowered the gross margin percentage on commercial
agriculture products by 7.6%.
The gross margins on proprietary consumer product sales for 1997
increased to 44.6% from 37.5% in 1996. The increase is primarily attributable to
the 53.3% gross margin realized on sales of the new Blocker product line. In
order to make the Blocker products more competitive in the marketplace, Consep
has reduced its selling price for the 1998 season by 25% which will negatively
impact 1998 gross margins. Sales of consumer products during 1996 resulted in a
gross margin of 37.5%, the same percentage achieved in 1995.
Sales of specialty chemicals produced a gross margin of 9.1% in 1997
down from the 49.0% gross margin reported in 1996. The decrease in gross margin
percentage for specialty chemical sales was the direct result of the October
1996 fire that destroyed Farchan's primary manufacturing facility in
Gainesville, Florida, which prevented Farchan from manufacturing higher margin
specialty chemical products during 1997. Proprietary product margins on
specialty chemical sales by Farchan in 1996 decreased to 49.0% from 53.0% in
1995. The decrease was primarily the result of differences in the product sales
mix for specialty chemicals.
The gross margins from distribution revenues for 1997 decreased to
18.1% from 18.6% as compared to 1996. The decrease was primarily attributable to
differences in the product sales mix for the distribution operations. The
distribution operations' margin was 18.6% for 1996, compared to 17.9% in 1995.
During the second quarter of 1996 Consep changed the timing for recognition of
manufacturers' rebates for purchases of bulk chemicals. Rather than recognizing
these rebates when received, typically in the fourth and first quarters of each
year, Consep determined that recognition should occur at the time the rebates
are earned. This change improved distribution margins by 0.8% in 1996.
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RESEARCH AND DEVELOPMENT. Research and development costs decreased
$251,000, or 17.2%, from 1996 to 1997. This decrease was primarily attributable
to a 84% decrease in development costs incurred by Consep's Farchan subsidiary
as a result of the October 1996 fire. In addition, costs associated with the
development of the CheckMate flowable products was reduced as the time required
to develop new flowable processes were reduced. During 1996, research and
development costs increased $395,000, or 37.3%, from the level incurred during
1995. This increase was primarily attributable to (i) increased costs associated
with the development of new, lower cost synthesis routes to be used in the
production of pheromones by Consep's Farchan subsidiary; (ii) costs associated
with the development of Consep's new dispersed (flowable) microcapsule products;
(iii) increased amortization relating to technology purchased from Bend Research
in 1995; and (iv) additional costs associated with the development of other new
products.
SELLING, GENERAL AND ADMINISTRATIVE. In 1997, selling, general and
administrative costs associated with Consep's proprietary product operations
increased 10.5% over 1996. The increase was primarily attributable to selling
and marketing expenses related to Consep's new Blocker line of insect repellent
products and a write down of $200,000 to adjust the carrying value of the
unfinished specialty chemicals facility in Alachua, Florida to its estimated
fair market value. Consep has decided to sell the facility in Alachua and
estimates its fair market value to be less than its carrying value. See
"--Liquidity and Capital Resources." In 1996, selling, general and
administrative costs associated with Consep's proprietary product operations
increased 22.8% from 1995. The principal sources of this increase were (i) sales
and marketing costs associated with both proprietary consumer products and
commercial agriculture products increased due to increased personnel, increased
commissions on higher sales of consumer products and expanded international
operations for commercial agriculture products; (ii) additional marketing costs
related to the introduction of Consep's Blocker line of insect repellent
products; (iii) additional expenses for complimentary product given to growers
in California who encountered difficulties with the CheckMate CM product
described above and (iv) 1996 results included a full twelve months of Farchan
operations while 1995 included only eleven months of operating expense for that
subsidiary acquired in February 1995.
DISTRIBUTION. During 1997, total operating costs related to Consep's
distribution operations increased 12.7% as compared to 1996. The increase is
primarily attributable to (i) increased selling and delivery expenses as a
result of greater sales volume and (ii) a reduction in bad debt reserves in 1996
that did not occur in 1997. Operating costs related to Consep's distribution
operations remained approximately the same in 1996 as in 1995. Although selling
and administrative costs increased 5.6% in 1996, Consep was able to offset these
increases with a reduction in bad debt reserves as a result of improved
collections.
OTHER INCOME AND EXPENSE. During 1997, Consep recorded net other income
of $42,000 compared to $35,000 of net other income in 1996. The increase is
primarily attributable to approximately $338,000 in business interruption
coverage reimbursements from Consep's insurance carrier in 1997 relating to the
Farchan fire. Substantially offsetting this increase in net other income was a
decrease relating to greater interest expense in 1997 as compared to 1996 as a
result of higher outstanding borrowings during the year. For the year ended
December 31, 1996, Consep recorded net other income of $35,000 compared to
approximately $20,000 in 1995. The increase was primarily attributable to (i) a
$227,000 gain relating to the insurance proceeds exceeding the book value of the
property destroyed at the Farchan subsidiary and (ii) a $63,000 estimated
reimbursement from the insurance company for the business interruption coverage
in 1996 relating to the Farchan fire. These increases were substantially offset
by (i) increased interest expense; (ii) reduced interest income; (iii) increased
foreign currency exchange losses relating to Consep's Canadian subsidiary and
(iv) the reversal of an accrued contingent liability and the gain on the sale of
property, both of which had a positive impact on the 1995 results.
QUARTERLY RESULTS OF OPERATIONS. The following table sets forth
unaudited consolidated statements of operations data for each of Consep's last
eight quarters. This quarterly financial data has been prepared on the same
basis as the annual financial information presented elsewhere in this Joint
Proxy Statement--Prospectus and, in management's opinion, reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for each such quarter. The
operating results for any quarter are not necessarily indicative of the results
which may be expected for any future period.
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<TABLE>
<CAPTION>
THREE MONTHS
ENDED THREE MONTHS ENDED THREE MONTHS ENDED
---------------- --------------------------------- -----------------------------------
JUNE 30, MAR. 31 DEC. 31, SEP.30, JUNE 30, MAR. 31, DEC. 31, SEP. 30, JUNE 30, MAR. 31,
1998 1998 1997 1997 1997 1997 1996 1996 1996 1996
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Proprietary products... $ 3,778 $ 3,642 $ 805 $ 2,770 $ 4,600 $ 4,788 $ 895 $ 2,226 $ 3,723 $ 3,575
Distribution........... 9,377 5,981 4,146 6,877 9,180 6,038 3,073 6,142 7,961 5,634
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 13,155 9,623 4,951 9,647 13,780 10,826 3,968 8,368 11,684 9,209
Cost of revenues....... 9,946 6,977 4,442 7,605 10,045 7,695 3,531 6,515 8,744 6,452
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin........... 3,209 2,646 509 2,042 3,735 3,131 437 1,853 2,940 2,757
Operating expenses..... 2,812 2,776 2,521 2,719 3,474 2,567 2,787 2,578 2,749 2,391
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 397 (130) (2,012) (677) 261 564 (2,350) (725) 191 366
Other income
(expense), net (147) (60) (33) (14) 50 39 205 (73) (85) (12)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)...... $ 250 $ (190) $(2,045) $ (691) $ 311 $ 603 $(2,145) $ (798) $ 106 $ 354
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Consep's business is seasonal, with its highest revenues being
recognized in the second quarter of each year and its lowest revenues being
recognized in the fourth quarter of each year. This seasonality coincides with
the commercial growing season in the Northern Hemisphere and, to a lesser
extent, the consumer home, lawn and garden buying season. Consep anticipates
this seasonal profile to continue with a slight shift to third and fourth
quarter revenues as sales to international markets increase. In contrast to
revenues, operating expenses tend to be largely independent of the quarterly
selling cycles. As a result, operating expenses will generally represent a
higher percentage of revenues in the third and fourth quarters as compared to
the first two quarters of the year, and Consep may experience a loss in the
third and fourth quarters of an otherwise profitable year.
In addition, many of Consep's products, and the products sold by its
wholly-owned distributors, are dependent upon the emergence of certain pests in
the crops they are designed to protect. To the extent adverse weather conditions
prevent or otherwise interfere with the growth of certain crops or the emergence
of certain pests, the results of Consep's operations could be adversely
impacted. From time to time, secondary pest infestations may occur within
specific crops or geographic markets causing affected growers to alter their
customary pest control practices. Such events may cause growers to temporarily
increase their use of conventional toxic insecticides and reduce or suspend the
use of biorational products, such as those sold by Consep, which could have a
material adverse effect on Consep's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Consep has used funds generated from operations,
equity financings and bank borrowings to fund its research and development,
marketing, acquisition of capital equipment, acquisitions of other business
operations and working capital requirements. Through June 30, 1998, Consep has
raised approximately $44.3 million of equity. In addition to equity financings,
Consep has operated under a line of credit from Silicon Valley Bank (the "Bank")
pursuant to an Amended and Restated Loan and Security Agreement (the "Loan
Agreement") with a maximum borrowing capacity of $7.5 million to support the
working capital requirements of both Consep's principal proprietary product and
distribution operations. This line of credit matures December 10, 1998 and is
secured by substantially all of Consep's current assets. Under the terms of the
Loan Agreement, Consep is required to maintain certain financial ratios and
other financial conditions. At June 30, 1998, Consep was not in compliance with
certain covenants under the Loan Agreement including the tangible net worth,
debt to tangible net worth ratio and quick ratio covenants, but has subsequently
obtained the Bank's waiver with respect to such non-compliance for the quarter
ended June 30, 1998. In connection with the Bank's waiver, the borrowing
capacity has been reduced to $5.0 million from the $7.5 million originally
available. Consep does not expect the decrease in the maximum borrowing capacity
to materially affect its financial condition since Consep does not expect to be
able to borrow more than $5.0 million during the remaining term of the Loan
Agreement.
At June 30, 1998, Consep had cash, cash equivalents and short-term
investments of approximately $506,000 and working capital of approximately $8.1
million. Borrowings under the Bank line of credit discussed above were
approximately $4.0 million. Consep believes that cash and cash equivalents at
June 30, 1998, funds generated from operations and funds available from existing
bank lines of credit will be sufficient to fund Consep's operations through
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at least 1998. Consep's capital needs may increase depending upon several
factors, including Consep's ability to comply with covenants under the Loan
Agreement for the three months ending September 30, 1998, future acquisitions,
changes to planned research and development activities, expanded manufacturing
and commercialization programs, additional technological, regulatory and
competitive developments and the timing of regulatory approvals for new
products. As a result, Consep may need to raise additional funds. There can be
no assurance that additional financing would be available and, if available,
that the terms would be acceptable to Consep or that the additional financing
could be obtained in a timely manner.
As previously reported, Consep has partially completed the first phase
of an addition to its headquarters and manufacturing facility in Bend, Oregon
for the purpose of producing pheromones and other specialty chemicals. Consep
has re-evaluated its plans for the completion of the addition as well as its
plans to produce pheromones and other specialty chemicals at the Bend, Oregon
facility. At the present time, Consep has indefinitely postponed any additional
capital expenditures for the completion of the addition as well as any
significant production of pheromones or other specialty chemicals. In addition,
after completion of the investigation and analysis of the cost feasibility for
producing pheromones using intermediate materials purchased from third parties,
Consep has determined that it will continue to purchase its pheromones from its
current suppliers in the foreseeable future. However, Consep still believes
that, long term, the greatest cost-savings will be achieved through the
production of its own pheromones.
YEAR 2000 ISSUES
Consep has reviewed its internal electronic information systems with
respect to any potential adverse impact of the upcoming change in the century on
the operation of such systems ("Year 2000 Issues") and believes that it will not
have any material internal Year 2000 Issues. Although Consep intends to inquire
as to whether its key suppliers, customers, creditors, independent distributors
and financial service organizations ( "Consep's Business Constituents") project
any Year 2000 Issues with respect to their respective business operations that
may adversely impact Consep, Consep has not yet commenced such inquiries. As a
result, Consep has not determined whether any of Consep's Business Constituents
project any Year 2000 Issues for their respective business operations that could
have a material adverse impact on Consep's future operating results or financial
condition. Consep intends to commence a program of contacting Consep's Business
Constituents over the remainder of 1998 to inquire as to their respective Year
2000 Issues.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. Consep will adopt
the statement for the year ended December 31, 1998.
DESCRIPTION OF VERDANT CAPITAL STOCK
THE FOLLOWING DESCRIPTION OF THE CAPITAL STOCK OF VERDANT DOES NOT
PURPORT TO BE COMPLETE AND IS SUBJECT, IN ALL RESPECTS, TO APPLICABLE MINNESOTA
LAW AND TO THE PROVISIONS OF THE RESTATED ARTICLES OF INCORPORATION OF VERDANT.
THE FOLLOWING DESCRIPTION IS QUALIFIED BY REFERENCE TO THE RESTATED ARTICLES OF
INCORPORATION OF VERDANT, WHICH ARE INCORPORATED BY REFERENCE AS EXHIBITS TO THE
REGISTRATION STATEMENT OF WHICH THIS JOINT PROXY STATEMENT-PROSPECTUS IS A PART.
GENERAL
The authorized capital stock of Verdant currently consists of
25,000,000 shares of Verdant Common Stock, $.01 par value, and 5,000,000 shares
of preferred stock, $.01 par value, not designated as to terms and preferences.
COMMON STOCK
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There were 16,705,261 shares of Verdant Common Stock issued and
outstanding as of September 8, 1998. In addition, Verdant had reserved a total
of 969,747 shares of Verdant Common Stock for issuance upon exercise of options
granted or to be granted under the Verdant Brands, Inc. 1996 Incentive and Stock
Option Plan.
The holders of Verdant Common Stock: (a) have equal ratable rights to
dividends from funds legally available therefor, when, as and if declared by the
Verdant Board; (b) are entitled to share ratably in all of the assets of Verdant
available for distribution to holders of Verdant Common Stock upon liquidation,
dissolution or winding up of the affairs of Verdant; (c) do not have preemptive,
subscription or conversion rights and there are no redemption or sinking fund
provisions applicable thereto; and (d) are entitled to one vote per share on all
matters which shareholders may vote on at all meetings of shareholders. All
shares of Verdant Common Stock now outstanding are fully paid and nonassessable.
The holders of Verdant Common Stock do not have cumulative voting
rights, which means that the holders of more than 50% of such outstanding shares
voting for the election of directors can elect all of the directors of Verdant
to be elected, if they so choose. In such event, the holders of the remaining
shares will not be able to elect any of Verdant's directors.
The payment by Verdant of dividends, if any, in the future rests within
the discretion of the Verdant Board and will depend, among other things, upon
Verdant's earnings, its capital requirements and its financial condition, as
well as other relevant factors. Due to its anticipated financial needs and
future plans, Verdant does not contemplate paying any dividends upon the Verdant
Common Stock in the foreseeable future.
PREFERRED STOCK
The Verdant Board is authorized, without further shareholder action, to
issue preferred stock in one or more series and to fix the voting rights,
liquidation preferences, dividend rights, repurchase rights, conversion rights,
redemption rights and terms, including sinking fund provisions, and certain
other rights and preferences, of the preferred stock. Although there is no
current intention to do so, the Verdant Board may, without shareholder approval,
issue shares of a class or series of preferred stock with voting and conversion
rights which could adversely affect the voting power of the holders of Verdant
Common Stock and may have the effect of delaying, deferring or preventing a
change in control of Verdant.
MINNESOTA BUSINESS CORPORATION ACT
Section 302A.671 of the Minnesota Statutes applies, with certain
exceptions, to any acquisition of voting stock of Verdant (from a person other
than Verdant, and other than in connection with certain mergers and exchanges to
which Verdant is a party) resulting in the beneficial ownership of 20% or more
of the voting stock then outstanding. Section 302A.671 requires approval of any
such acquisitions by a majority vote of the shareholders of Verdant prior to its
consummation. In general, shares acquired in the absence of such approval are
denied voting rights and are redeemable at their then fair market value by
Verdant within 30 days after the acquiring person has failed to give a timely
information statement to Verdant or the date the shareholders voted not to grant
voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any
business combination by Verdant, or any subsidiary of Verdant, with any
shareholder which purchases 10% or more of Verdant's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Verdant Board
before the interested shareholder's share acquisition date.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to Verdant Common Stock
is Norwest Bank Minnesota, National Association.
COMPARISON OF SHAREHOLDER RIGHTS
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The rights of the shareholders of Consep are governed by the Minnesota
Business Corporation Act (the "MBCA"), the Articles of Incorporation of Verdant
(the "Verdant Articles") and the Bylaws of Verdant (the "Verdant Bylaws"). The
rights of Consep shareholders are governed by the Oregon Business Corporation
Act (the "OBCA"), the Articles of Incorporation of Consep (the "Consep
Articles") and the Bylaws of Consep (the "Consep Bylaws"). The following is a
summary of certain material differences between the rights of shareholders of
Verdant and the rights of shareholders of Consep, as contained in provisions of
the MBCA and the OBCA, the Verdant Articles and the Verdant Bylaws, and the
Consep Articles and the Consep Bylaws. It does not purport to be a complete
statement of the rights of Verdant shareholders as compared with the rights of
Consep shareholders, and the identification of certain specific differences is
not meant to indicate that other equally or more significant differences to not
exist.
NUMBER OF DIRECTORS, VACANCIES AND CLASSIFICATION OF BOARD
Under the MBCA, the minimum number of directors is one. The actual
number of directors may be fixed by the articles of incorporation or bylaws, and
the number of directors may be increased or decreased by the shareholders or the
board as permitted by the articles of incorporation or bylaws. The Verdant
Bylaws provide that the number of directors can be increased or decreased by
resolution of the shareholders or, to the extent permitted by law, the Board of
Directors.
The MBCA states that, unless the articles of incorporation or bylaws
provide otherwise, vacancies resulting from the death, resignation, removal or
disqualification of a director may be filled by the affirmative vote of a
majority of the remaining directors, even though less than a quorum, and
vacancies resulting from a newly-created directorship may be filled by the
affirmative vote of a majority of the directors serving at the time of the
increase. The shareholders may elect a new director to fill a vacancy that is
created by the removal of a director by the shareholders. The Verdant Bylaws
provide that vacancies in the Board of Directors occurring by reason of death,
resignation, removal or disqualification will be filled for the unexpired term
by a majority of the remaining members of the Directors of the Board.
The MBCA permits, but does not require, a classified board of
directors, with the terms of any such classes to be provided for in the articles
of incorporation or bylaws. Neither the Verdant Articles nor the Verdant Bylaws
provide for the classification of the Board.
Under the OBCA, the number of directors is specified or fixed in
accordance with the articles of incorporation or bylaws. The Consep Articles
provide that the number of directors shall not be less than six nor more than
twelve, with the exact number to be fixed by the Board of Directors.
Vacancies on the Consep Board, however occurring, may be filled by the
shareholders or the Board of Directors (even if the remaining directors
constitute fewer than a quorum). A director elected to fill a vacancy in the
Board of Directors is duly elected until the next shareholders' meeting at which
directors are elected.
The OBCA allows, but does not require, the classification of the board
into classes provided that the articles of incorporation or bylaws provide for
at least six directors. The board may be divided into two or three classes, with
each class to be a nearly equal in number as possible. The Consep Bylaws provide
for the division of Board of Directors into three classes.
REMOVAL OF DIRECTORS
Under the MBCA, the shareholders may remove one or more director with
or without cause unless the articles of incorporation provide that directors may
be removed only for cause. The Verdant Bylaws permit any or all directors to be
removed at any time, with or without cause, by a majority vote of the
shareholders entitled to vote at an election of directors.
The OBCA also permits shareholders to remove one or more director with
or without cause unless the articles of incorporation provide that directors may
be removed only for cause. Shareholders may remove directors only at a meeting
called for that purpose. The Consep Articles provide that all or any number of
directors may be removed only for cause, at a meeting of shareholders called
expressly for that purpose, and by at least 75% of the votes entitled to be
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cast for the election of directors. The Consep Articles also provide that at any
meeting of shareholders at which directors are removed, a majority vote may fill
the vacancy created by such removal.
CUMULATIVE VOTING
The MBCA provides for cumulative voting by shareholders unless the
articles of incorporation provide otherwise. The Verdant Articles expressly opt
out of cumulative voting.
The OBCA provides that the articles of incorporation may allow
cumulative voting by shareholders. The Consep Articles do not provide for
cumulative voting.
SPECIAL MEETINGS OF SHAREHOLDERS
The Verdant Bylaws provide that a special meeting can be called for any
purpose at any time by the President, Treasurer, any two directors or a
shareholder or shareholders holding 10% or more of the shares entitled to vote
at the meeting. Under the MBCA, a special meeting for the purpose of any
business combination must be called by 25% or more of the voting power.
The Consep Bylaws provide that special meetings of shareholders may be
called by the President or by the Board of Directors, and shall be called by the
President at the request of the holders of not less than 10% of all the
outstanding shares of the corporation entitled to vote at the meeting.
QUORUMS FOR SHAREHOLDER MEETINGS
Under the MBCA, the holders of majority of the voting power constitutes
a quorum unless the articles of incorporation or the bylaws provide otherwise.
The Verdant Bylaws provide that the holders of a majority of the shares entitled
to vote constitute a quorum for the transaction of business at any regular or
special meeting.
The OBCA provides that holders of a majority of the voting power
constitute a quorum, although the articles of incorporation may provide for a
lesser or greater quorum requirement. However, in no event may a quorum consist
of less than one-third of the votes entitled to be cast on any matter by the
shareholders. Any amendment to the articles of incorporation that changes the
quorum or voting requirements must meet the quorum requirement and be adopted by
the vote of the shareholders required to take such action immediately prior to
the change. The Consep Bylaws provide that a majority of the votes entitled to
be cast on the matter by the voting group constitutes a quorum of that voting
group for action on that matter.
ACTION BY WRITTEN CONSENT OF SHAREHOLDERS
Under the MBCA, any action required or permitted to be taken in a
shareholder meeting may be taken without a meeting by a written action signed by
all of the shareholders. The Verdant Articles provide that any action that may
be taken at a meeting of shareholders may be taken without a meeting if done in
writing and signed by all of the shareholders entitled to vote on that action.
Both the OBCA and the Consep bylaws provide that actions required or
permitted to be taken at a shareholder's meeting may be taken by all the
shareholders entitled to vote on such actions if the action is evidenced by one
or more written consents describing the actions taken, signed by all of the
shareholders entitled to vote on such action and delivered to the corporation
for inclusion in the minutes or filing with the corporate records. Action taken
in this manner are effective when the shareholders signs the consent, unless the
consent specifies otherwise.
AMENDMENTS TO ARTICLES OF INCORPORATION
Under the MBCA, the articles of incorporation may be amended only by
the shareholders, subject to limited exceptions. The MBCA also entitles holders
of shares of a class or series to vote as a class or series on any amendment
that would change the number of authorized shares of such class or series,
change or adversely affect the rights and preferences of such class or series,
create a new class or series of shares with rights and preferences prior and
superior
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to such class or series, or increase the rights and preferences of any class or
series with rights and preferences prior and superior to such class or series.
The Verdant Articles do not provide specific provisions on amendments to the of
Articles of Incorporation.
The OBCA authorizes a corporation's board of directors to adopt certain
limited amendments to the corporation's Articles of Incorporation without
shareholder action, including, but not limited to, deleting the names and
addresses of the initial directors or the initial registered agent. The board of
directors may propose other amendments to the shareholders for approval. Under
the OBCA, unless Oregon law or the corporation's Articles of Incorporation
require a greater vote, an amendment to the Articles of Incorporation requiring
shareholder approval is approved if, upon approval by the board of directors and
referral to the shareholders, a quorum exists and the votes cast favoring the
amendment exceed the votes cast opposing the amendment, unless the amendment
would create dissenters' rights, in which case a majority of the votes entitled
to be cast is required for approval. Furthermore, certain amendments to the
Articles of Incorporation that particularly affect one class of shares, such as
amendments that change the rights, preferences, privileges or restrictions of
that class, must be approved by the holders of a majority of the outstanding
shares of that class. The Consep Articles do not contain specific provisions
regarding amendments to the Articles of Incorporation.
AMENDMENTS TO BYLAWS
The MBCA states that the bylaws may be adopted or amended by the board
of directors, unless the power is reserved exclusively for shareholders in the
articles of incorporation, and subject to certain instances in which
shareholders approval is required. After initial bylaws are adopted, the board
may not, without shareholder approval, adopt, amend or repeal a bylaw fixing a
quorum for meetings of shareholders, prescribing procedures for removing
directors or filling vacancies in the board, or fixing the number of directors
or their classifications, qualifications or terms of office except that the
board may adopt or amend a bylaw to increase the number of directors. The MBCA
also allows holders of three percent or more of the voting power to call for the
adoption, amendment or repeal of a bylaw. The Verdant Bylaws provide for the
amendment and repeal of the Bylaws by a majority vote of the Board of Directors,
subject to the statutory power of the shareholders to change or repeal such
Bylaws by a majority vote.
Under the OBCA, the board of directors may amend or repeal the bylaws
unless either the articles of incorporation reserve the power exclusively to the
shareholders, or the shareholders in amending a particular bylaw provide
expressively that the board of directors may not amend that bylaw. The Consep
Articles do not contain specific provisions on the amendment of the Bylaws. The
Consep Bylaws grant the board of directors the authority to alter, amend or
repeal, and adopt new Bylaws, subject to repeal or change by action of the
shareholders.
INDEMNIFICATION
The MBCA requires a corporation to indemnify persons acting within
their official capacity against judgments, penalties, fines, excise taxes,
settlements and reasonable expenses incurred in the proceeding. The articles or
the bylaws may prohibit indemnification or impose conditions on indemnification,
provided the prohibition or conditions apply equally to all persons or to all
persons within a given class. The Verdant Bylaws provide for indemnification in
accordance with the MBCA.
The OBCA provides that a corporation may indemnify directors, officers
or others against liability if the conduct of the individual was in good faith,
the individual reasonably believed that the conduct was not opposed to the best
interest of the corporation and, in the case of a criminal proceeding, the
individual did not have a reasonable cause to believe the conduct was unlawful.
The Consep Articles provide for indemnification to the fullest extent allowed by
the OBCA.
PREEMPTIVE RIGHTS
Both the MBCA and the OBCA provide that shareholders have preemptive
rights to subscribe for securities of the corporation, unless such rights are
denied or limited in the articles of incorporation. Both the Verdant Articles
and the Consep Articles deny such preemptive rights.
MERGERS, CONSOLIDATIONS AND OTHER BUSINESS COMBINATIONS
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The MBCA requires that, unless such rights are denied or limited in the
articles of incorporation, the disinterested shareholders must approve any
"control share acquisition" of stock of an "issuing public corporation" if an
acquirer exceeds specified levels of ownership (20%, 33-1/3% and 50%) of the
stock of the target corporation. This provision essentially requires a proxy
contest to approve such share acquisitions and delays the acquirer's purchase up
to 55 days while a special shareholders' meeting is held to vote on the
acquisition. The definition of "control share acquisition" excludes cash tender
offers for all outstanding shares if the offer has been approved in advance by
the board of directors of the target corporation and acquisitions by employee
benefit plans. The Verdant Articles expressly reject the application of the
control share acquisition provisions of the MBCA.
The MBCA also restricts transactions with an "interested shareholder"
acquiring 10% or more of the shares of a publicly-held "issuing public
corporation" unless the share acquisition or the transaction has been approved
by the corporation's board of directors prior to the acquisition of the 10%
interest. An "issuing public corporation" is a corporation which has at least 50
shareholders. For four years after the 10% threshold is exceeded (absent prior
board approval), the corporation cannot have a merger, sale of substantial
assets, loan, substantial issuance of stock, plan of liquidation or
reincorporation involving the interested stockholder or its affiliates. The
Verdant Articles expressly reject the application such business combination
provisions of the MBCA.
The Oregon Business Combination Statute contains provisions regulating
a broad range of business combinations, such as a mergers or consolidations,
between a "resident domestic corporation" and "interested shareholders" (defined
as any owner of 15% or more of the corporation's stock), or an affiliate or
associate of the interested shareholder, for three years after the date on which
such shareholder became an interested shareholder. These provisions apply unless
the acquisition that caused the person to become an interested shareholder, or
the business combination, was approved in advance by the corporation's board of
directors, the business combination was approved by the board of directors and
authorized at a meeting of shareholders by at least two-thirds of the
outstanding voting stock not owned by the interested shareholder or, upon
consummation of the transaction which resulted in the shareholder becoming an
interested shareholder, the interested shareholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares). The Consep Articles do not address this
statutory provision.
The provisions of the Oregon Control Share Act effectively deny voting
rights to shares of an Oregon corporation acquired in "control share
acquisitions" unless a resolution granting such voting rights is approved at a
meeting of shareholders by a majority vote of all outstanding shares entitled to
vote at such meeting by class if required by the terms of such shares, and
excluding all interested shares. A control share acquisition is one in which a
purchasing shareholder acquires more than 20%, 33-1/3% and 50%, under various
circumstances, of the voting power of the stock of an "issuing public
corporation." An "issuing public corporation" is an Oregon corporation with one
hundred or more shareholders, its principal place of business, principal office
or substantial assets in Oregon, and either more than 10% of its shareholders
reside in Oregon, more than 10% of its shares are owned by Oregon residents, or
10,000 shareholders reside in Oregon. The OBCA permits a corporation to opt out
of the application of the Oregon Control Share Act by appropriately amending its
articles of incorporation or bylaws. The Consep Articles do not contain specific
provisions regarding the control share act.
TRANSACTIONS WITH RELATED PARTY
Under the MBCA, a contract or other transaction between a corporation
and its director(s) is not void or voidable if (1) the contract or transaction
was fair and reasonable as to the corporation at the time it was authorized,
approved or ratified; (2) the material facts as to the director's interest are
fully disclosed to the shareholders and the contract is approved in good faith
by the holder of two-thirds of the voting power of the shares other than the
interested director(s), or the unanimous affirmative vote of the holders of all
outstanding shares; (3) the material facts as to the transaction and the
director's interest are fully disclosed to the board, or committee, excluding
the interested director authorizes, approves, or ratifies the transaction in
good faith. Neither the Verdant Bylaws nor the Verdant Articles provide specific
regulations regarding transactions with a related party.
Under the OBCA, a transaction with a related party is not voidable
solely because of a director's interest in the transaction, provided the
material facts of the transaction and the director's interest were disclosed and
known to the board of directors, the material facts of the transaction and the
interest of directors are known and disclosed to shareholders,
101
<PAGE>
who authorized, approved and ratified the transaction, and the transaction was
fair to the corporation. A conflict of interest transaction is authorized if it
receives a majority vote of the directors on the board of directors who have no
direct or indirect interest in the transaction. The Consep Bylaws provide that a
transaction in which a director of the corporation has an interest is valid if
the material facts of the transaction and the director's interest are disclosed
to the Board of Directors or an authorized committee thereof, and the Board of
Directors or the shareholders authorize, approve, or ratify the transaction by a
vote sufficient for that purposes excluding votes of the directors who has a
interest in the transaction.
SHAREHOLDERS' DISSENTERS' RIGHTS
Under the MBCA, shareholders may dissent in the event of any of the
following actions: (1) an amendment of the articles of incorporation that
materially and adversely affects the rights and preferences of the shares of the
dissenting shareholder; (2) a sale or transfer of all or substantially all of
the assets of the corporation; (3) a plan of merger to which the corporation is
a party; (4) a plan of exchange of shares to which the corporation is a party;
and (5) any other corporation action with respect to which the corporation's
articles of incorporation or bylaws give dissenting shareholders the right to
obtain payment for their shares. Neither the Verdant Articles nor the Verdant
Bylaws contain additional provisions concerning dissenter's rights.
Under the OBCA, shareholders are entitled to dissent in certain limited
situations. No dissenter's rights are available to holders of shares that have
been registered on a national securities exchange or quoted on the National
Association of Securities Dealers, Inc. Automated Quotation System-National
Market System on the record date for the meeting of shareholders at which the
corporate action giving rise to the dissenters' rights is to be approved.
Neither the Consep Articles nor the Consep Bylaws contain additional provisions
for dissenters' rights.
102
<PAGE>
PROPOSAL TO APPROVE AMENDMENT TO VERDANT
RESTATED ARTICLES OF INCORPORATION
The Verdant Board of Directors has proposed that the Articles be
amended in accordance with the MBCA to increase the number of authorized shares
of Verdant Common Stock from 25,000,000 to 50,000,000 (the "Charter Amendment").
The principal purpose and effect of the Charter Amendment is to authorize
additional shares of capital stock to create a sufficient number of shares of
Verdant Common Stock for issuance to Consep Shareholders in the Merger and to
authorize additional shares of Verdant Common Stock that may be issued upon the
approval of the Verdant Board without shareholder approval to accommodate
further issuances under employee benefit plans, for future equity financings, if
any, and for use in connection with other acquisitions, if any. The approval of
the Merger Agreement is contingent upon the approval of the Charter Amendment.
The Verdant Board recommends that Verdant Shareholders vote "FOR" the Charter
Amendment
As of the Verdant Record Date, there were 16,705,261 shares of Verdant
Common Stock outstanding and an additional 1,551,851 shares of Verdant Common
Stock were reserved for issuance. This leaves Verdant with 6,742,888 authorized
but unissued, unreserved and uncommitted shares of Verdant Common Stock
available for issuance. After giving effect to the Merger and the Charter
Amendment, approximately 28,409,181 shares of Verdant Common Stock will be
outstanding or reserved for issuance. Accordingly, Verdant will have
approximately 21,590,819 shares of Verdant Common Stock available for issuance
after the Merger. As of the Verdant Record Date, there were no preferred shares
of Verdant outstanding and no preferred shares of Verdant reserved for issuance.
Verdant had 5,000,000 authorized but unissued, unreserved and uncommitted
preferred shares available for issuance at the Verdant Record Date.
The additional shares of Verdant Common Stock for which authorization
is sought would be a part of the existing class of Verdant Common Stock and, if
and when issued, would have the same rights and privileges as the shares of
Verdant Common Stock presently outstanding. Such additional shares would not
(and the shares of Verdant Common Stock presently outstanding do not) entitle
holders thereof to preemptive or cumulative voting rights. The increase in
authorized shares will, in addition to providing sufficient capital stock for
issuance in connection with the Merger, provide additional shares for general
corporate purposes, including stock dividends, raising additional capital,
issuances pursuant to employee and shareholder stock plans and possible future
acquisitions. There are, however, no present plans, understandings or agreements
for issuing a material number of additional shares of Verdant Common Stock from
the additional shares of stock proposed to be authorized pursuant to the Charter
Amendment. Approximately 10,152,069 shares of Verdant Common Stock are expected
to be issued in the Merger.
The issuance of shares of Verdant Common Stock, including the
additional shares that would be authorized if the Charter Amendment is adopted,
may dilute the present equity ownership position of current holders of Verdant
Common Stock and may be made without shareholder approval, unless otherwise
required by applicable laws or stock exchange regulation. Under existing Nasdaq
National Market regulations, approval of the holders of a majority of the shares
of Verdant Common Stock would nevertheless be required in connection with any
transaction or series of related transactions that would result in the original
issuance of additional shares of Verdant Common Stock, other than in a public
offering for cash, if (1) the Verdant Common Stock (including securities
convertible into Verdant Common Stock) has, or will have upon issuance, voting
power equal to or in excess of 20% of the voting power outstanding before the
issuance of such Verdant Common Stock, (2) the number of shares of Verdant
Common Stock to be issued is or will be equal to or in excess of 20% of the
number of shares outstanding before the issuance of the Verdant Common Stock or
(3) the issuance would result in a change of control of Verdant.
The amendment might also have the effect of discouraging an attempt by
another person or entity, through the acquisition of a substantial number of
shares of Verdant Common Stock, to acquire control of Verdant with a view to
consummating a merger, sale of all or any part of Verdant's assets, or a similar
transaction, because the issuance of new shares could be used to dilute the
stock ownership of such person or entity.
103
<PAGE>
OWNERSHIP OF COMMON STOCK
VERDANT COMMON STOCK
The following table sets forth certain information as of July 31, 1998,
with respect to the beneficial ownership of Verdant's Common Stock by all
persons known by Verdant to be the beneficial owners of more than 5% of its
outstanding shares, by all directors, nominees for election as directors, by the
executive officers named in the executive compensation table and by all officers
and directors as a group. Unless noted below, the address of each of the
following shareholders is the same as Verdant.
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL
OF BENEFICIAL OWNER OWNERSHIP (1) PERCENT OF CLASS
- ------------------- ------------- ----------------
William J. DeMare 1,125,000 6.7
14702 Claredon Drive
Tampa, FL 33624
Benjamin F. Law 1,125,000 6.7
2755 Arden Rd, N.W.
Atlanta, GA 30327
D. David Bailey 1,125,000 6.7
2504 Gardener Court
Tampa, FL 33611
David K. Vansant 1,125,000 6.7
132 Princeton Drive
Macon, GA 31220
Parsnip River Company 1,005,388 6.0
4422 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Stanley Goldberg 366,130 2.2
Robert W. Fischer 112,001 *
Donald E. Lovness 35,550 *
Franklin Pass, M.D 25,000 *
Frederick F. Yanni, Jr. 38,300 *
104
<PAGE>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL
OF BENEFICIAL OWNER OWNERSHIP (1) PERCENT OF CLASS
- ------------------- ------------- ----------------
John F. Hetterick 35,000 *
Richard Mayo 25,000 *
Mark G. Eisenschenk 104,777 *
Scott A. Glatstein 18,333 *
Officers and directors as 2,930,041 17.5%
a group (1 persons) (1)
- ----------------------
*Less than one percent
(1) Includes for Stanley Goldberg, options to purchase 201,130 shares of
Verdant Common Stock which are exercisable within 60 days; for Robert
W. Fischer, options to purchase 25,000 shares of Verdant Common Stock
which are exercisable within 60 days; for Donald E. Lovness, options to
purchase 25,000 shares of Verdant Common Stock which are exercisable
within 60 days; for Franklin Pass, M.D., options to purchase 25,000
shares of Verdant Common Stock which are exercisable within 60 days;
for Frederick F. Yanni, Jr., options to purchase 35,000 shares of
Verdant Common Stock which are exercisable within 60 days; for John F.
Hetterick, options to purchase 35,000 shares of Verdant Common Stock
which are exercisable within 60 days; for Richard Mayo, options to
purchase 15,000 shares of Verdant Common Stock which are exercisable
within 60 days; for Mark G. Eisenschenk, options to purchase 50,000
shares of Verdant Common Stock which are exercisable within 60 days;
for Scott A. Glatstein, options to purchase 18,333 shares of Verdant
Common Stock which are exercisable in 60 days; and for all officers and
directors as a group, options to purchase 432,240 shares of Verdant
Common Stock which are exercisable within 60 days.
105
<PAGE>
CONSEP COMMON STOCK
The following table sets forth certain information with respect to the
beneficial ownership of Consep Common Stock as of August 1, 1998 by: (i) each
person known by Consep to beneficially own more than 5% of the outstanding
shares of Consep Common Stock, (ii) each of Consep's directors, (iii) each of
Consep's named executive officers, and (iv) all directors and executive officers
as a group. Except as otherwise indicated, Consep believes that each of the
following shareholders has sole voting and investment power with respect to the
shares beneficially owned by such shareholder.
<TABLE>
<CAPTION>
Shares of Percent of
Common Stock Common
Beneficially Stock
NAME AND ADDRESS OF BENEFICIAL OWNER Owned(1) Outstanding
- ------------------------------------ ------------ -----------
<S> <C> <C>
Heartland Advisors, Inc.(2)................................... 1,426,000 14.8%
790 North Milwaukee Street
Milwaukee, WI 53202
J.P. Morgan Investment Corporation(3)......................... 702,860 7.3
J.P. Morgan & Co. Incorporated(3)............................. 702,860 7.3
60 Wall Street
14th Floor
New York, NY 10260
Nazem & Company III, L.P.(4).................................. 692,470 7.2
645 Madison Avenue
12th Floor
New York, NY 10022
Volker G. Oakey(5)............................................ 500,030 5.1
Walter C. Babcock(6).......................................... 363,639 3.8
Philip E. Barak(7)............................................ 4,000 *
John A. Beaulieu(8)........................................... 4,000 *
Gordon D. Barker(9)........................................... 2,000 --
Kenneth D. MacKay(10)......................................... 4,000 *
Kenneth C. Rymer(11).......................................... 56,995 *
Steven R. Hartmeier(12)....................................... 57,784 *
All directors and executive officers
as a group (8 persons)(13).................................. 992,448 10.0
</TABLE>
- ----------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting and investment power with respect to
shares. Shares of Consep Common Stock subject to options or warrants
currently exercisable or exercisable within 60 days after August 1,
1998 are deemed outstanding for computing the percentage ownership of
the person holding such options or warrants, but are not deemed
outstanding for computing the percentage of any other person.
(2) This information as to beneficial ownership is based on a Schedule
13G/A filed by Heartland Advisors, Inc. with the Securities and
Exchange Commission on January 27, 1998. The Schedule 13G/A states that
as of December 31, 1997, Heartland Advisors, Inc. was the beneficial
owner of 1,426,000 shares of Concep Common Stock as to which it had
sole voting and dispositive power.
(3) Represents 702,860 shares beneficially owned by J.P. Morgan Investment
Corporation, which includes 23,167 shares issuable upon the exercise of
immediately exercisable warrants. J.P. Morgan & Co. Incorporated is the
indirect parent corporation of J.P. Morgan Investment Corporation and
therefore also beneficially owns shares owned by J.P. Morgan Investment
Corporation.
106
<PAGE>
(4) Includes 7,667 shares issuable upon the exercise of immediately
exercisable warrants.
(5) Includes 184,079 shares issuable upon exercise of stock options that
are exercisable within 60 days. Also includes 47,049 shares
beneficially owned by Mr. Oakey's wife and children. Mr. Oakey is a
director of Bend Research, Inc. Mr. Oakey disclaims beneficial
ownership of the (i) 316,466 shares beneficially owned by Bend
Research, Inc. and (ii) the 47,049 shares beneficially owned by Mr.
Oakey's wife and children.
(6) Includes 12,250 shares issuable upon the exercise of immediately
exercisable stock options. Also includes 880 shares beneficially owned
by Dr. Babcock's wife. Also includes 316,466 shares beneficially owned
by Bend Research, Inc. Dr. Babcock is President, Chief Executive
Officer, a shareholder and a director of Bend Research, Inc. Dr.
Babcock disclaims beneficial ownership of (i) the 316,466 shares
beneficially owned by Bend Research, Inc. and (ii) the 880 shares
beneficially owned by Dr. Babcock's wife.
(7) Represents 4,000 shares issuable upon exercise of stock options that
are exercisable within 60 days.
(8) Represents 4,000 shares issuable upon exercise of stock options that
are exercisable within 60 days.
(9) Represents 2,000 shares issuable upon exercise of stock options that
are exercisable within 60 days.
(10) Represents 4,000 shares issuable upon exercise of stock options that
are exercisable within 60 days.
(11) Represents 56,995 shares issuable upon exercise of stock options that
are exercisable within 60 days.
(12) Includes 37,784 shares issuable upon exercise of stock options that
are exercisable within 60 days.
(13) Includes 305,108 shares issuable upon exercise of stock options that
are exercisable within 60 days. Also includes shares that Messrs. Oakey
and Babcock, respectively, may be deemed to beneficially own, but as to
which each disclaims beneficial ownership. See notes (5) and(6).
107
<PAGE>
MANAGEMENT OF VERDANT AND CONSEP
MANAGEMENT OF VERDANT
EXECUTIVE OFFICERS. The following table lists the executive officers of
Verdant as of September 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stanley Goldberg 51 (Verdant) Chairman, Chief Executive
Officer and President
Mark G. Eisenschenk 40 (Verdant) Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
Patrick J. McGinnity, Ph.D. 43 (Verdant) Vice President and General
Manager - Safer and Verdant Products
Michael R. Goblet 51 (Verdant) Vice President - Sales
</TABLE>
See the biographical information regarding Mr. Goldberg under "MANAGEMENT
AND OPERATIONS AFTER THE MERGER--Board of Directors."
Mark G. Eisenschenk joined Verdant in January 1994 as Chief Financial
Officer, Vice President of Finance, Treasurer and Secretary. From 1991 to 1994,
Mr. Eisenschenk was the Vice President and Chief Financial Officer of ECM
Publishers, Inc. From 1986 to 1991, Mr. Eisenschenk was Director of Treasury,
Taxation and Accounting of Sinclair and Valentine, formerly a unit of
Allied-Signal, Inc. From 1981 to 1986, he was a certified public accountant with
Arthur Andersen & Co.
Patrick J. McGinnity, Ph.D. joined Verdant in September 1987 as Vice
President-Research and Development. From December 1983 to September 1987, Dr.
McGinnity was Senior Field Research and Development Specialist and Regional
Field Research and Development Manager at PPG Industries, Inc.
Michael R. Goblet joined Verdant in March 1993 as Vice President - Sales.
From 1982 to 1993, he was a regional manager at O.M. Scotts Company.
SUMMARY COMPENSATION TABLE. The table below shows the compensation awarded
or paid to, or earned by, Verdant's chief executive officer and each of its most
highly compensated executive officers who received salary and bonus of $100,000
or more (the "named executive officers") during each of the years in the
three-year period ended September 30, 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- -----------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS COMPENSATION(1)
- --------------------------- -------- ---------- ---------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Stanley Goldberg, 1997 $ 185,250 -- -- 90,000 $21,584(2)
Chairman, President and 1996 $ 178,500 $ 20,000 -- -- $22,227(2)
Chief Executive Officer 1995 $ 171,133 -- -- 225,000 $20,548(2)
Patrick J. McGinnity, 1997 $ 105,000 -- -- 5,000 --
Vice President and General Manager 1996 $ 104,167 -- -- -- --
Safer and Ringer Products 1995 $ 94,875 -- -- 35,000 --
Michael R. Goblet, 1997 $ 104,375 -- -- 5,000 --
</TABLE>
108
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Vice President of 1996 $ 102,083 $ 1,000 -- -- --
Sales 1995 $ 102,417 -- -- 17,000 --
Mark G. Eisenschenk, 1997 $ 103,542 -- -- 50,000 --
Executive Vice President, Chief 1996 $ 90,938 $ 7,500 -- -- --
Financial Officer, Treasurer and 1995 $ 81,333 $ 4,000 -- 50,000 --
Secretary
</TABLE>
- ---------------------
(1) Mr. Goldberg held 15,000 shares of restricted stock valued at $27,188 as of
September 30, 1997.
(2) Includes compensation of $7,343 in 1997, $7,087 in 1996 and $7,417 in 1995
relating to the purchase of disability insurance for Mr. Goldberg.
LONG-TERM INCENTIVE PLAN AWARDS. The following table summarizes the value
of the options held at the end of Fiscal 1997 by the named executive officers of
Verdant.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
--------------------------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT END OF FISCAL 1997 AT END OF FISCAL 1997
------------------------------------ -----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------------- ----------------- -----------------------------------
<S> <C> <C> <C> <C>
Stanley Goldberg 136,190 178,810 $ 68,095 $ 89,405
Patrick J. McGinnity 59,628 30,372 29,814 10,186
Mark G. Eisenschenk 48,000 2,000 24,000 1,000
Michael R. Goblet 42,442 11,558 21,221 5,779
</TABLE>
MANAGEMENT OF CONSEP
EXECUTIVE OFFICERS. The following table lists the executive officers of
Consep as of September 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Volker G. Oakey 57 (Consep) Chairman of the Board of Directors, President,
Chief Executive Officer, Chief Financial Officer
and Secretary
Kenneth C. "Curt" Rymer 46 (Consep) Vice President, Consumer Products
Steven R. Hartmeier 40 (Consep) Vice President, Commercial Agriculture Products
</TABLE>
See the biographical information regarding Mr. Oakey under "MANAGEMENT AND
OPERATIONS AFTER THE MERGER--Board of Directors."
Kenneth C. "Curt" Rymer joined Consep in February 1985, as Controller. Mr.
Rymer served as Controller until June 1987, at which time he was named National
Sales Manager of Consumer Products for Consep. In May 1994, Mr. Rymer was named
Vice President, Consumer Products, and became an executive officer of Consep.
Prior to joining Consep, Mr. Rymer served as Controller for Xytec Corporation
from February 1983 to January 1985. Prior to joining Xytec Corporation, Mr.
Rymer held various positions with Dean Witter Reynolds, Moss Adams, and Peat,
Marwick,
109
<PAGE>
Mitchell and Company. Mr. Rymer holds a B.S. in Business from the University of
Northern Colorado.
Steven R. Hartmeier was named Vice President, Commercial Agriculture
Products and became an officer of Consep in September 1996. Mr. Hartmeier served
as Consep's Director, Sales and Marketing, Agriculture Products from July 1994
to September 1996. From July 1991 to July 1994, Mr. Hartmeier held various
positions in Consep's distribution group, Pacoast, Inc., most recently as
Manager of Sales and Marketing. Mr. Hartmeier joined Consep in July 1991. Prior
to joining Consep, Mr. Hartmeier held various sales and marketing positions with
Monsanto Agricultural Company, focusing on both the agricultural and industrial,
turf and ornamental markets. Mr. Hartmeier holds a B.S. in Plant Science from
the University of California, Davis.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table
provides information concerning the compensation of Consep's chief executive
officer and each of the other executive officers of Consep (the "named executive
officers") for the fiscal years ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- --------------
STOCK
OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED
- ------------------------------------ -------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Volker G. Oakey 1997 $ 132,500 -- 57,438
Chairman, President, Chief 1996 $ 157,500 -- 25,000
Executive Officer, Chief 1995 $ 135,000 -- 15,000
Financial Officer and Secretary
Kenneth C. "Curt" Rymer 1997 $ 89,250 -- 15,000
Vice President, Consumer Products 1996 $ 89,250 -- 25,000
1995 $ 76,500 5,000 10,333
Steven R. Hartmeier(1) 1997 $ 90,000 -- 15,000
Vice President, Commercial 1996 $ 81,333 $ 5,000 35,000
Agricultural Products 1995 $ -- $ -- --
</TABLE>
- ---------------------
(1) Mr. Hartmeier first became an executive officer in September 1996.
STOCK OPTIONS. The following table sets forth information concerning
options granted to the named executive officers of Consep during the fiscal year
ended December 31, 1997 under Consep's 1997 Stock Incentive Plan.
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(2)
OPTIONS EMPLOYEES PRICE PER EXPIRATION -----------------------------
NAME GRANTED IN 1997 SHARE (1) DATE 5% 10%
- ----------------------------- ------------ --------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
VOLKER G. OAKEY.............. 57,438(3) 25.23% $1.50 12/31/2007 $54,183 $137,312
KENNETH C. "CURT" RYMER...... 15,000(3) 6.59 1.50 12/31/2007 14,150 35,859
STEVEN R. HARTMEIER.......... 15,000(3) 6.59 1.50 12/31/2007 14,150 35,859
</TABLE>
- -----------------
110
<PAGE>
(1) Options were granted at an exercise price equal to the fair market value of
Consep Common Stock, as determined by reference to the closing price reported on
the Nasdaq Stock Market on the last trading day prior to the date of the grant.
(2) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated price. The 5% and 10%
assumed rates of appreciation are derived from the rules of the commission and
do not represent consep's estimates or projections of the future Consep Common
Stock price. There can be no assurance that the consep common stock will
appreciate at any particular rate or at all in future years.
(3) Options become exercisable starting March 31, 1998, with one-quarter of the
options becoming exercisable at that time and with an additional one-quarter of
the options becoming exercisable on June 30, 1998, September 30, 1998 and
December 31, 1998, respectively.
Fiscal year end option values. The following table sets forth, for each
of the named executive officers of Consep, the number and value of unexercised
options as of december 31, 1997. None of the named executive officers of Consep
acquired any shares upon exercise of options in 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
------------------------------------- -------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
VOLKER G. OAKEY 139,000 63,438 $40,000 *
KENNETH C. "CURT" RYMER 40,326 27,340 * *
STEVEN R. HARTMEIER 25,734 37,400 * *
</TABLE>
- ---------------
(1) The value of unexercised in-the-money options is based on the difference
between $1.50, which was the closing price of Consep Common Stock on December
31, 1997, and the applicable exercise price.
* The indicated options were not in-the-money on December 31, 1997, in that the
applicable exercise price is greater than $1.50, which was the closing price of
the Consep Common Stock on December 31, 1997.
LEGAL OPINIONS
The validity of the shares of Verdant Common Stock offered hereby will
be passed upon for Verdant by Dorsey & Whitney LLP, Minneapolis, Minnesota.
The Merger Agreement provides that, as a condition to the obligation of
Consep to consummate the Merger, Consep shall have received the opinion of Ater
Wynne LLP, legal counsel to Consep, substantially to the effect that the Merger
will qualify as a "reorganization" under Section 368(a) of the Code.
EXPERTS
The consolidated financial statements of Verdant (formerly Ringer
Corporation) at September 30, 1997 and 1996 and for each of the years ended
September 30, 1997, 1996 and 1995, respectively, included in this Joint Proxy
Statement-Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been included in
reliance upon the report of such firm, given on the authority of said firm as
experts in auditing and accounting.
111
<PAGE>
The consolidated financial statements of Consep as of December 31, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997 have been included in this Joint Proxy Statement-Prospectus in reliance
upon the report of KPMG Peat Marwick, LLP, independent certified public
accountants, given upon the authority of said firm as experts in auditing and
accounting.
Representatives of Deloitte & Touche LLP are expected to be present at
the Verdant Special Meeting, and such representatives will have the opportunity
to make a statement if they so desire and are expected to be available to
respond to appropriate questions.
Representatives of KPMG Peat Marwick, LLP are expected to be present at
the Consep Special Meeting, and such representatives will have the opportunity
to make a statement if they so desire and are expected to be available to
respond to appropriate questions.
The consolidated financial statements of SRI as of October 3, 1997 and
September 27, 1996 and for each of the two years then ended have been included
herein in reliance upon the report of Smith & Howard, P.C., independent
certified public accountants, given upon the authority of said firm as experts
in auditing and accounting.
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in Verdant's proxy solicitation
materials for its 1999 annual meeting of shareholders, any shareholder proposal
to be considered at such meeting must be received by Verdant's Corporate
Secretary, at Verdant's main office, 9555 James Avenue South, Suite 200,
Bloomington, Minnesota 55431-2543, no later than December 16, 1998. Any such
proposal shall be subject to the requirements of the proxy rules adopted under
the Exchange Act.
OTHER MATTERS
As of the date of this Joint Proxy Statement-Prospectus, the Verdant
Board and the Consep Board know of no matters that will be presented for
consideration at the Verdant Annual Meeting or the Consep Special Meeting other
than as described in this Joint Proxy Statement-Prospectus. If any other matters
shall properly come before either shareholder meeting or any adjournments or
postponements thereof and be voted upon, the enclosed proxies will be deemed to
confer discretionary authority on the individuals named as proxies therein to
vote the shares represented by such proxies as to any such matters. The persons
named as proxies intend to vote or not to vote in accordance with the
recommendation of the respective managements of Verdant and Consep.
112
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
VERDANT BRANDS, INC.:
Independent Auditor's Report........................................... F-2
Consolidated Balance Sheets as of September 30, 1996
and 1997............................................................. F-3
Consolidated Statements of Operations -- Years Ended September 30,
1995, 1996 and 1997.................................................. F-4
Consolidated Statements of Stockholders' Equity -- Years Ended
September 30, 1995, 1996 and 1997.................................... F-5
Consolidated Statements of Cash Flows -- Years Ended September 30,
1995, 1996 and 1997.................................................. F-6
Notes to Consolidated Financial Statements............................. F-7
Consolidated Balance Sheets (unaudited) at September 30, 1997 and
December 31, 1997.................................................... F-17
Consolidated Statements of Operations (unaudited) -- Three Months Ended
December 31, 1996 and 1997........................................... F-18
Consolidated Statements of Cash Flows (unaudited) -- Three Months Ended
December 31, 1996 and 1997........................................... F-19
Notes to Consolidated Financial Statements (unaudited) -- Three Months
Ended December 31, 1996 and 1997..................................... F-20
Consolidated Balance Sheets (unaudited) at December 31, 1997 and
June 30, 1998........................................................ F-24
Consolidated Statements of Operations (unaudited) -- Six Months Ended
June 30, 1997 and June 30, 1998...................................... F-25
Consolidated Statements of Cash Flows (unaudited) -- Six Months Ended
June 30, 1997 and June 30, 1998...................................... F-26
Notes to Consolidated Financial Statements (unaudited)................. F-27
Independent Auditor's Report (SRI)..................................... F-31
Consolidated Balance Sheets (SRI) at
September 27, 1996 and October 3, 1997............................... F-32
Consolidated Statements of Income and Retained
Earnings (SRI)--years Ended September 27,
1996 and October 31, 1997............................................ F-34
Consolidated Statements Cash Flows (SRI)--
years Ended September 27, 1996 and October 3, 1997................... F-35
Notes to Consolidated Financial Statements (SRI)....................... F-37
CONSEP, INC.:
Independent Auditor's Report........................................... F-44
Consolidated Balance Sheets at December 31, 1996 and 1997.............. F-45
Consolidated Statements of Operations -- Years Ended December 31, 1995,
1996 and 1997........................................................ F-46
Consolidated Statements of Shareholders' Equity -- Years Ended
December 31, 1995, 1996 and 1997..................................... F-47
Consolidated Statements of Cash Flows -- Years Ended December 31, 1995,
1996 and 1997........................................................ F-48
Notes to Consolidated Financial Statements............................. F-49
Consolidated Balance Sheets at December 31, 1997 and
June 30, 1998 (unaudited)............................................ F-62
Consolidated Statements of Operations -- Six Months Ended
June 30, 1997 and 1998 (unaudited)................................... F-63
Consolidated Statement of Shareholders' Equity -- Six Months Ended
June 30, 1998 (unaudited)............................................ F-64
Consolidated Statements of Cash Flows -- Six Months Ended
June 30, 1997 and 1998 (unaudited)................................... F-65
Notes to Interim Consolidated Financial Statements (unaudited)......... F-66
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Verdant Brands, Inc,
Bloomington, Minnesota
We have audited the accompanying consolidated balance sheets of Verdant Brands,
Inc., formerly Ringer Corporation, and subsidiary (the "Company"), as of
September 30, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. 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 generally accepted auditing
standards. 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. 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
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 consolidated financial position of Ringer
Corporation and subsidiary as of September 30, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 5, 1997 (September 29, 1998 as to Note 12)
F-2
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,264,294 $ 3,288,781
Trade accounts receivable, less allowance for doubtful
accounts of $134,000 and $126,000, respectively 1,153,271 992,198
Inventories (Note 3) 2,805,661 1,519,692
Prepaid expenses 221,186 133,746
------------ ------------
Total current assets 7,444,412 5,934,417
PROPERTY AND EQUIPMENT, net (Note 4) 430,138 238,297
INTANGIBLE ASSETS, at cost, less accumulated amortization
of $2,713,002 and $2,264,349, respectively (Note 1) 6,653,501 5,297,329
OTHER ASSETS 87,044
------------ ------------
$ 14,615,095 $ 11,470,043
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,273,570 $ 651,546
Accrued expenses:
Co-op advertising 280,475 319,691
Other accrued expenses 807,449 559,908
Current portion of long-term debt 23,207
------------ ------------
Total current liabilities 2,384,701 1,531,145
LONG-TERM DEBT (Note 6) 1,458,799
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 7):
Preferred stock, undesignated, par value $.01
per share, authorized 5,000,000 shares,
no shares issued and outstanding
Common stock, par value $.01 per share, authorized
25,000,000 shares, issued and outstanding
12,181,270 and 10,921,930 shares, respectively 121,813 109,219
Additional paid-in capital 33,683,587 32,036,675
Notes receivable from sale of common stock to officers (Note 10) (262,500)
Accumulated deficit (22,613,212) (22,067,276)
Cumulative translation adjustment (158,093) (139,720)
------------ ------------
10,771,595 9,938,898
------------ ------------
$ 14,615,095 $ 11,470,043
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $18,820,625 $14,672,784 $14,193,898
COST OF GOODS SOLD 10,255,353 7,647,293 6,990,175
----------- ----------- -----------
Gross profit 8,565,272 7,025,491 7,203,723
OPERATING EXPENSES:
Distribution and warehousing 2,199,586 1,555,897 1,886,770
Sales and marketing 3,813,795 3,332,333 4,810,648
General and administrative 1,656,996 1,331,266 1,445,110
Research and development 972,360 748,932 981,495
Amortization of intangibles 447,498 402,778 379,358
----------- ----------- -----------
9,090,235 7,371,206 9,503,381
----------- ----------- -----------
Loss before other
(expense) income (524,963) (345,715) (2,299,658)
OTHER (EXPENSE) INCOME:
Interest income 72,247 73,866 83,030
Interest expense (152,729) (68,250) (66,690)
Royalties, net (Note 6) 50,885 87,136 106,352
Other income (expense), net 8,624 (2,385) 3,862
Abandoned acquisition expenses (Note 2) (312,771)
----------- -----------
(20,973) (222,404) 126,554
----------- ----------- -----------
NET LOSS $ (545,936) $ ( 568,119) $(2,173,104)
=========== =========== ===========
NET LOSS PER WEIGHTED
AVERAGE COMMON SHARE - BASIC AND DILUTED $ (.05) $ (.05) $ (.20)
=========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 11,540,885 10,921,930 10,897,704
=========== =========== =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
-------------------------- Additional Receivables
Number of paid-in from sale
shares Amount capital of stock
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 10,786,013 $ 107,860 $31,835,805
Issuance of common stock in connection
with the purchase of Oxygen Plus 125,000 1,250 186,250
Issuance of common stock upon
exercise of stock options 917 9 1,595
Issuance of common stock as non-cash
compensation to officer 10,000 100 13,025
Foreign currency translation adjustments
Net loss
----------- ----------- ----------- ---------
BALANCE AT SEPTEMBER 30, 1995 10,921,930 109,219 32,036,675
Foreign currency translation adjustments
Net loss
----------- ----------- ----------- ---------
BALANCE AT SEPTEMBER 30, 1996 10,921,930 109,219 32,036,675
Issuance of common stock in connection
with the purchase of Dexol 1,059,340 10,594 1,386,412
Issuance of common stock upon
sale of stock to officers 200,000 2,000 260,500 $(262,500)
Foreign currency translation adjustments
Net loss
----------- ----------- ----------- ---------
BALANCE AT SEPTEMBER 30, 1997 12,181,270 $ 121,813 $33,683,587 $(262,500)
=========== =========== =========== =========
Cumulative
Accumulated translation
deficit adjustment Total
------------ ------------ -----------
BALANCE AT SEPTEMBER 30, 1994 $(19,326,053) $(131,619) $12,485,993
Issuance of common stock in connection
with the purchase of Oxygen Plus 187,500
Issuance of common stock upon
exercise of stock options 1,604
Issuance of common stock as non-cash
compensation to officer 13,125
Foreign currency translation adjustments 5,188 5,188
Net loss (2,173,104) (2,173,104)
------------ --------- -----------
BALANCE AT SEPTEMBER 30, 1995 (21,499,157) (126,431) 10,520,306
Foreign currency translation adjustments (13,289) (13,289)
Net loss (568,119) (568,119)
------------ --------- -----------
BALANCE AT SEPTEMBER 30, 1996 (22,067,276) (139,720) 9,938,898
Issuance of common stock in connection
with the purchase of Dexol 1,397,006
Issuance of common stock upon
sale of stock to officers --
Foreign currency translation adjustments (18,373) (18,373)
Net loss (545,936) (545,936)
------------ --------- -----------
BALANCE AT SEPTEMBER 30, 1997 $(22,613,212) $(158,093) $10,771,595
============ ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 10)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended September 30
-----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (545,936) $ (568,119) $ (2,173,104)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 616,079 514,940 519,928
Write-off of intangible assets 76,085 1,312 42,564
Stock issued as compensation for services 13,125
Income from investment in joint venture (10,078) (4,356)
(Gain) loss on sale of property
and equipment 29 (11,449) (5,786)
(Increase) decrease in assets:
Trade accounts receivable 1,605,348 205,861 313,494
Inventories 873,900 502,224 (748,040)
Prepaid expenses (152,426) 3,349 90,174
Increase (decrease) in liabilities:
Accounts payable (2,150,758) (194,464) 331,887
Accrued expenses (195,638) 249,746 (24,724)
------------ ------------ ------------
Net cash provided by (used in) operating activities 116,605 699,044 (1,640,482)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (140,008) (60,681) (101,536)
Purchase of intangible assets (42,401) (118,674) (106,288)
Proceeds from sale of property and equipment 8,889 20,849 24,958
Net cash paid relating to acquisition of Dexol (82,343)
Net cash paid relating to acquisition of Oxygen Plus (257,660)
------------ ------------ ------------
Net cash used in investing activities (255,863) (158,506) (440,526)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received in Dexol acquisition 124,073
Proceeds from issuance of common stock 1,604
Principal payments on long-term debt (12,168) (3,667)
------------ ------------ ------------
Net cash provided by (used in) financing activities 111,905 (2,063)
Effect of exchange rate changes on cash 2,866 (8,134) (8,175)
------------ ------------ ------------
(Decrease ) increase in cash and cash equivalents (24,487) 532,404 (2,091,246)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 3,288,781 2,756,377 4,847,623
------------ ------------ ------------
END OF YEAR $ 3,264,294 $ 3,288,781 $ 2,756,377
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - The Company develops, manufactures and markets pesticide and
fertilizer products for the retail and commercial lawn, garden and turf
management markets. Products are sold under several nationally
recognized brand names and a variety private labels.
Principles of consolidation - The consolidated financial statements
include the accounts of Verdant Brands, Inc. and Safer, Inc., its
wholly owned subsidiary (the Company). All material intercompany
accounts and transactions have been eliminated.
Revenue recognition - The Company recognizes revenue on the date of
shipment for sales other than "bill and hold" sales. Revenue on
infrequent "bill and hold" sales is recognized at the time that title
and risk of ownership passes to purchaser.
Translation of foreign financial statements - The Company's foreign
operations are translated from functional foreign currency to U.S.
dollars. Assets and liabilities are translated at year end rates of
exchange and the statements of operations are translated at the average
rates of exchange for the applicable reporting years. Gains and losses
resulting from translating foreign currency financial statements are
not included in operations but are accumulated as a separate component
of stockholders' equity.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and equipment - Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets of three to ten years.
Intangible assets and evaluation of potential impairment - Intangible
assets consist primarily of goodwill which represents the purchase
price and related acquisition costs in excess of the fair value of
identifiable assets acquired. Other intangible assets include patents
and trademarks. Intangible assets are amortized on a straight-line
basis over estimated lives of five to twenty years. The Company
regularly evaluates its intangible assets for potential permanent
impairment. Such evaluations take into consideration anticipated future
operating results and cash flows on an undiscounted basis. Anticipated
future operating results and cash flows are estimated based on current
product sales trends, expected sales from related products in
development, general market trends and other market and business
circumstances.
Concentration of credit risks - The percentage of consolidated net
sales in fiscal 1997 to U.S. retail and commercial markets totaled
87.3% and 2.5%, respectively. The percentage of consolidated net sales
in fiscal 1996 to U.S. retail and commercial markets totaled 79.3% and
4.4%, respectively. The percentage of consolidated net sales in fiscal
1995 to U.S. retail and commercial markets totaled 81.0% and 5.1%,
respectively. The remaining percentage of consolidated net sales in
fiscal 1997, 1996 and 1995 of 10.2%, 16.3% and 13.9%, respectively,
represent foreign sales, primarily in Canada. In fiscal 1997, 1996 and
1995, sales to one U.S. retail customer accounted for 12.8%, 15.3% and
14.5%, respectively, of consolidated net sales while sales during the
same periods to one distributor that resells to retailers accounted for
8.0%, 14.8% and 12.4%, respectively, of consolidated net sales.
Cash and cash equivalents - Cash and cash equivalents include cash on
hand and in banks and money market funds with maturities of three
months or less when acquired.
Fair value of financial instruments - The estimated fair values of
financial instruments approximate their carrying amounts in the
consolidated balance sheets.
Income taxes - The Company accounts for income taxes as required by
Statement of Financial Accounting
F-7
<PAGE>
Standards No. 109, "Accounting for Income Taxes." The Statement
requires recognition of deferred assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the differences
between the financial statements and the tax basis of assets and
liabilities using enacted tax rates in effect for the years in which
the differences are expected to reverse.
Effective December 15, 1997, the Company adopted Statement on Financial
Standard No. 128, "Earnings Per Share". Earnings or loss per share for
prior year periods have been restated for the adoption of SFAS No. 128.
The following table reflects the calculation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Year Ended
September 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Loss Per Share Net income (loss) $ (545,936) $ (568,119) $(2,173,104)
----------- ----------- -----------
Weighted average shares 11,540,885 10,921,930 10,897,704
----------- ----------- -----------
Loss per share $ (.05) $ (.05) $ (.20)
=========== =========== ===========
Loss Per Share - Assuming Dilution
Net income (loss) $ (545,936) $ (568,119) $(2,173,104)
----------- ----------- -----------
Weighted average shares 11,540,885 10,921,930 10,897,704
Dilutive impact of options and warrants [*] [*] [*]
Weighted average shares and potential dilutive
shares outstanding 11,540,885 10,921,930 10,897,704
----------- ----------- -----------
Net loss per share $ (.05) $ (.05) $ (.20)
=========== =========== ===========
</TABLE>
[*] The impact of options and warrants are excluded because their
effect would be antidilutive.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Change in estimates - Fiscal 1997 and 1996 includes the reversal of
approximately $227,000 and $198,000, respectively, in estimated co-op
advertising expenses, which were accrued in the previous fiscal year,
resulting from a change in estimate based on actual utilization of
co-op advertising allowances.
2. ACQUISITIONS
Acquisition of the assets of Plant Research Laboratories - On December
1, 1994, the Company issued 125,000 shares of its common stock with a
fair market value of $187,500 at December 1, 1994 and paid cash of
$257,660 to acquire substantially all of the assets of Plant Research
Laboratories ("PRL"), a California based developer and marketer of
water soluble fertilizers for the indoor houseplant and outdoor lawn
and garden markets. The acquisition was accounted for using the
purchase method using a combination of cash and the issuance of common
stock. The products, marketed under the Oxygen Plus(R) brand name, were
previously sold by PRL primarily in the western United States. The
historical annual sales of Oxygen Plus were less than one million
dollars. The 1995 pro forma impact on net loss and net loss per share
is immaterial.
Abandoned Acquisition Expenses - On May 30, 1996, the Company entered
into a letter of intent to acquire all outstanding stock of The Chas.
H. Lilly Company ("Lilly"), a Portland based developer and marketer of
lawn and garden fertilizers, pesticides and packet seeds. On December
12, 1996, the Company announced that it elected to discontinue efforts
to acquire Lilly. Accordingly, the costs associated with this
acquisition attempt, which amounted to $312,771, have been charged to
expense in the accompanying fiscal 1996 Consolidated Statement of
Operations and are included in other expense.
Acquisition of the assets of Dexol - In March 1997, the Company
completed the acquisition of substantially all of the assets of Dexol
Industries, Inc., a California based manufacturer and marketer of home
and garden pesticides sold under the Dexol(R) and various private label
brand names, for an aggregate purchase price of $3,012,790 (the "Dexol
acquisition"). The purchase price was comprised of the issuance of
1,059,340 shares of the Company's restricted common stock valued at
$1,397,006, the issuance of a promissory note to Dexol Industries, Inc.
with a principal amount of $1,477,000 bearing simple interest at an
annual rate of prime plus 3/4% and estimated transaction costs of
$138,785 and a performance based earnout of up to $455,000 if certain
contingencies are achieved.
The Dexol acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on their estimated fair
market values at the date of acquisition. The excess of purchase price
over estimated fair market value of net assets acquired ("goodwill") of
approximately $1,915,000 is being amortized on a straight-line basis
over twenty years. Since the acquisition, the Company has operated the
acquired business as its Dexol division and has continued marketing
Dexol products. Dexol division operations are included in the Company's
consolidated statements of operations from the effective date of the
acquisition of March 1, 1997.
The following unaudited pro forma condensed statement of operations
combines the results of operations of
F-8
<PAGE>
Verdant Brands, Inc. and Dexol Industries, Inc. as if the acquisition
had occurred on October 1, 1995. The pro forma financial information is
provided for illustrative purposes only and are not necessarily
indicative of future results of operations of the Company or of the
results of operations that would actually have occurred had the
acquisition been in effect during the periods presented. A balance
sheet in not presented because the acquisition has been reflected in
the Company's balance sheet herein.
Year Ended September 30,
(Unaudited)
-------------------
1997 1996
------- --------
Net sales $21,793 $ 27,392
Net (loss) $(1,128) $ (1,480)
======= ========
Net (loss) per share - basic and diluted $ (.09) $ (.12)
======= ========
3. INVENTORIES
Inventories consist of the following:
September 30
--------------------------
1997 1996
----------- -----------
Raw materials $ 1,697,454 $ 726,099
Finished goods 1,108,207 793,593
----------- -----------
$ 2,805,661 $ 1,519,692
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30
--------------------------
1997 1996
----------- -----------
Office furniture and equipment $ 680,454 $ 791,464
Machinery and equipment 801,974 786,442
Leasehold improvements 45,798 8,091
Transportation equipment 6,400 6,400
----------- -----------
1,534,626 1,592,397
Less accumulated depreciation (1,104,488) (1,354,100)
----------- -----------
$ 430,138 $ 238,297
=========== ===========
5. LINE OF CREDIT
On May 2, 1997, the Company secured a three-year, $25 million revolving
credit facility from GE Capital Services, which replaced a $5,000,000
bank line of credit from a previous lender. The facility is intended to
meet seasonal working capital needs of up to approximately $5,000,000
and to provide financing for future business acquisitions. The credit
facility is secured by substantially all of the assets of the Company
and its subsidiary. Borrowings under the facility are limited to a
borrowing base of 85% of eligible receivables and 50% of eligible
inventory, as defined in the credit agreement. Interest is at an Index
Rate (published rate for 30-day dealer-placed high-graded unsecured
commercial paper) plus 3 1/4 percentage points (9.0% at September 30,
1997). The Company is required to pay a commitment fee of 3/8% on any
unused portion of the line. There are no outstanding borrowings under
the line of credit as of September 30, 1997.
The Company's line of credit contains provisions which require the
Company to maintain certain minimum levels of Borrowing Base
availability and tangible net worth. In addition, there are
restrictions on the amount of fixed assets that may be purchased during
a loan year.
F-9
<PAGE>
6. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES
Long-Term Debt - Long-term debt at September 30, 1997 consists of a
note payable to Dexol Industries, Inc. and a capital lease obligation,
less current maturities which are classified as current liabilities.
The note payable and capital lease obligation have carrying values
equal to estimated fair values.
The note payable has a principal amount of $1,465,800 at September 30,
1997 and bears simple interest at prime plus 3/4% per annum (9.25% at
September 30, 1997). Current maturities total $19,200. The note
requires payments of $1,600 per month plus accrued interest with a
balloon payment of the remaining principal and interest in December
2000. Yearly principal maturities under the note for its term are
$19,200, $19,200, 19,200 and $1,408,202 for the fiscal years of 1998,
1999, 2000 and 2001, respectively.
The capital lease obligation totals $16, 206 at September 30, 1997 and
bears implicit interest at an annual rate of 5.4%. Current maturities
total $4,007. Future yearly principal payments under the capital lease
obligation are $4,007, $4,228, $4,463 and $3,508 for the fiscal years
of 1998, 1999, 2000 and 2,001, respectively.
Operating Leases - The Company leases office and warehouse space and
various vehicles and equipment under noncancellable operating leases.
In addition to minimum lease payments, these leases require the Company
to pay its proportionate share of real estate taxes, special
assessments and maintenance costs. The lease on the Company's corporate
offices expires in September 1999. The lease on the Company's warehouse
facility expires in December 2001. The Company is also required to
carry liability insurance on the premises.
Costs incurred under operating leases are recorded as rent expense and
totaled $344,587, $220,176 and $290,343 for the years ended September
30, 1997, 1996 and 1995, respectively.
Future minimum operating lease payments - The future minimum lease
payments due under non-cancellable operating leases are as follows:
Year ending September 30:
1998 $ 208,719
1999 184,644
2000 118,391
2001 112,623
2002 28,669
Thereafter --
-------------
Total minimum obligation $ 653,046
=============
Royalty agreements - The Company has paid royalties for the use of
technologies licensed under two agreements entered into in connection
with the acquisition of a water soluble fertilizer product line on
December 1, 1994. The licenses calls for royalty payments of from 2% to
5% of the net selling price of applicable water soluble fertilizers.
Payments under the agreements terminate in 1999 and 2011. Royalty
expense incurred under these agreements totaled $34,411, $18,197 and
$23,786 for the years ended September 30, 1997, 1996 and 1995,
respectively.
Royalty income of $85,296, $105,333 and $130,138 for the fiscal years
ended September 30, 1997, 1996 and 1995, respectively, was generated by
the Company through licensing pesticide technologies to certain foreign
and commercial pesticide distributors for a royalty fee.
Contingencies
The Company has a Contingency Retention Plan which provides for payment
to certain key employees of the Company, including all of the officers,
of a lump sum termination benefit plus continuation of life insurance,
health insurance and dental benefits for a period of time in the event
the employment of such employees is terminated within two years after a
"change of control," as defined. The amount of the lump sum termination
benefit varies from the equivalent of three months to two years of
salary and bonus at the time of termination.
F-10
<PAGE>
The period during which health and welfare benefits continue after
termination varies from three months to two years, but is terminated if
the employee obtains other employment with similar benefits. The
Contingency Retention Plan continues in effect unless terminated, prior
to a change in control, by a resolution approved by at least two-thirds
of the Board of Directors.
7. STOCKHOLDERS' EQUITY
Preferred stock - The Board of Directors of the Company is authorized
to issue preferred stock or other senior equity securities in one or
more series, and with certain limitations, to determine preferences as
to dividends, liquidation, conversion and redemption.
Stock warrants - As of September 30, 1997, a total of 1,000 shares of
common stock were reserved for currently exercisable outstanding
warrants described below.
Warrant
Expiration Shares Exercise Price
------------------ ------- --------------
September 20, 1998 1,000 $2.00
1996 Incentive and Stock Option Plan - The 1996 Incentive and Stock
Option Plan was adopted by the board of directors on November 25, 1996
and approved by shareholders at the Company's annual shareholder
meeting on February 18, 1997. A total of 500,000 shares of the
Company's common stock were initially reserved for issuance pursuant to
the exercise of options granted under the plan.
Under the terms of the 1996 Incentive and Stock Option plan, options to
purchase shares of the Company's common stock are granted at a price
not less than 100% of the fair market value of the stock at the date of
grant. Options have a vesting period of from three to five years and
expire ten years from the date of grant. Options become fully vested
upon the occurrence of a change in control, as defined. The weighted
average remaining contractual life of the outstanding options at
September 30, 1997 is 9.1 years. Activity under the plan is as follows:
Average
Option Exercise Price
Shares Per Share
------- ---------
Balance, September 30, 1996 -0-
Granted 61,600 $1.88
Revalued (*) (.57)
Canceled (16,100) 1.31(*)
-------
Balance, September 30, 1997 45,500 $1.31(*)
=======
Exercisable, September 30, 1997 12,938 $1.31
=======
(*) On April 29, 1997, the board of directors approved amendments to
all outstanding stock options to reduce the exercise price of each
option to $1.31 per share. Accordingly, options outstanding on that
date which were previously issued under the 1996 Plan for the purchase
of up to 61,600 shares of the Company's common stock were amended to
reduce the option exercise price from $1.88 per share to $1.31 per
share.
1986 Employee Incentive Stock Option Plan - The 1986 Employee Incentive
Stock Option Plan terminated according to its terms on September 17,
1996. After this date no further stock options may be granted under the
Plan although previously granted options remain outstanding and
exercisable under the terms of each option. At September 30, 1997, the
Company had reserved a total of 654,843 shares of common stock for
issuance upon the exercise of outstanding options previously granted
under the Plan.
Under the terms of the 1986 Employee Incentive Stock Option plan,
options to purchase shares of the Company's common stock were granted
at a price not less than 100% of the fair market value of the stock at
the date of grant. Options have a vesting period of from three to five
years and expire ten years from the date of grant. The weighted average
remaining contractual life of the outstanding options at September 30,
1997 is 6.5 years. Options become fully vested upon the occurrence of a
change in control, as defined. Activity under the
F-11
<PAGE>
plan is as follows:
<TABLE>
<CAPTION>
Average
Option Exercise Price
Shares Per Share
-------- ---------
<S> <C> <C>
Balance, September 30, 1994 (at $1.75 to $3.25 per share) 488,444 $2.32
Granted 512,050 1.98
Canceled (132,247) 2.34
Exercised (917) 1.75
--------
Balance, September 30, 1995 (at $1.75 to $2.70 per share) 867,330 2.13
Granted 28,500 1.58
Canceled (62,762) 1.98
--------
Balance, September 30, 1996 (at $1.50 to $2.70 per share) 833,068 2.11
Revalued (*) (.72)
Canceled (178,225) 2.39
--------
Balance, September 30, 1997 (at $1.31 per share) 654,843 $1.31(*)
========
Exercisable, September 30, 1997 409,202 $1.31
========
</TABLE>
(*) On April 29, 1997, the board of directors approved amendments to
all outstanding stock options to reduce the exercise price of each
option to $1.31 per share. Accordingly, options outstanding on that
date which were previously issued under the 1986 Plan for the purchase
of up to 660,201 shares of the Company's common stock were amended to
reduce the option exercise price from an average of $1.88 per share
(ranging from $1.50 to $2.13 per share) to $1.31 per share.
Stock Option Plan for Non-Employee Directors - The Company has reserved
200,000 shares of the Company's common stock for issuance upon the
exercise of stock options granted under the Stock Option Plan for Non-
Employee Directors.
Under provisions of the Plan, non-employee directors are granted, upon
election or appointment as a director of the Company, options for the
purchase of 10,000 shares of the Company's common stock. In addition,
non-employee directors receive, on the first day of each fiscal year
while the director remains in office, options to purchase 5,000 shares
of the Company's common stock. The exercise price of options granted
under the Plan is 100% of the fair market value of the Company's common
stock on the date of grant. Options are immediately exercisable in full
and may be exercised within five years of the date of grant. The
weighted average remaining contractual life of the outstanding options
at September 30, 1997 is 2.3 years. Activity under the plan is as
follows:
Average
Option exercise price
Shares per share
------- ---------
Balance, September 30, 1994 55,000 $2.01
Granted 30,000 2.13
Balance, September 30, 1995 85,000 2.05
Granted 30,000 2.13
Balance, September 30, 1996 115,000 2.07
Granted 40,000 1.88
Revalued (*) (.71)
-------
Balance, September 30, 1997 155,000 $1.31(*)
=======
(*) On April 29, 1997, the board of directors approved amendments to
all outstanding stock options to reduce the exercise price of each
option to $1.31 per share. Accordingly, options outstanding on that
date which were
F-12
<PAGE>
previously issued under the Plan for the purchase of up to 155,000
shares of the Company's common stock were amended to reduce the option
exercise price from an average of $2.03 per share (ranging from $1.56
to $2.13 per share) to $1.31 per share.
Sale of Common Stock to Officers - In exchange for full-recourse
promissory notes and the cancellation of certain incentive stock
options, in April 1997 the company sold, subject to shareholder
approval, 200,000 shares of its unregistered, restricted common stock
to two executive officers at a price of $1.3125 per share. The
promissory notes are secured by the stock purchased. Under certain
circumstances, the Company will provide bonuses to the two executives
sufficient to pay the annual debt service requirements of the
promissory notes, which have terms of three and five years. The Company
has recognized compensation expense relative to this matter in the
amount of $39,438 for the fiscal year ended September 30, 1997.
Stock Based Compensation - In fiscal 1997, the Company adopted
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." As permitted by SFAS 123,
the Company has elected to continue using the "intrinsic value method"
of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" for the measurement and recognition of stock-based
transactions with employees. Accordingly, no compensation costs have
been recognized for stock options issued under the Company's stock
option plans because the exercise price of options granted was equal to
the fair value of the Company's common stock on the date of grant. If
compensation cost for Company stock options plans had been determined
and recognized based on the "fair value method" under SFAS 123, the
Company's net loss and net loss per share would have been as follows:
1997 1996
--------- ---------
Net loss:
As reported $(545,936) $(568,119)
Pro forma $(571,433) $(593,619)
Pro forma per share - basic and diluted $ (.05) $ (.05)
The fair value of options granted under the Company stock options plans
during fiscal 1997 and 1996 was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted
average assumptions and results:
1997 1996
------- -------
Dividend yield 0 0
Expected volatility 41.48% 41.48%
Risk-free interest rate 6.55% 6.55%
Expected life of options 4 years 4 years
Average fair value per share
on date of grant $1.31 $1.84
8. PROFIT SHARING PLAN
The Company has a defined contribution plan which conforms to IRS
provisions for 401(k) plans. Employees are eligible to participate in
the plan providing they have attained the age of twenty-one and have
completed thirty days of service. Participants may contribute up to 10%
of their earnings. The Company can also make matching contributions, as
determined by the Board of Directors. The Company may also make
discretionary profit sharing contributions to the Plan as determined by
the Board of Directors. The Company made employer 401(k) matching
contributions of $44,996, $37,607 and none for the years ended
September 30, 1997, 1996 and 1995, respectively. There were no employer
discretionary profit sharing contributions for the years ended
September 30, 1997, 1996 and 1995.
9. INCOME TAXES
The Company accounts for income taxes as required by Statement of
Financial Standards No. 109, "Accounting for Income Taxes". The
Statement requires recognition of deferred assets and liabilities for
the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the differences
between the financial
F-13
<PAGE>
statements and the tax basis of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected
to reverse. Net deferred tax assets have been offset by valuation
allowances for the years ended September 30, 1997, 1996 and 1995
because it is more likely than not that the tax benefits, which can not
be carried back, could not be realized in future years.
Net deferred tax assets at September 30 are comprised of the following:
<TABLE>
<CAPTION>
Current: 1997 1996
----------- -----------
<S> <C> <C>
Prepaid expenses $ (29,000) $ (9,000)
Accrued expenses 184,000 185,000
Reserves for doubtful accounts 48,000 50,000
Inventory valuation reserves 63,000 55,000
Expenses capitalized to inventory for tax purposes 512,000 274,000
Sales returns and allowance reserves 26,000 69,000
Less valuation allowance (804,000) (624,000)
----------- -----------
$ -0- $ -0-
=========== ===========
Noncurrent:
Excess of tax over book depreciation $ (20,000) $ (11,000)
Packaging design costs 154,000 152,000
U.S. net operating loss carryforwards 8,394,000 8,398,000
Foreign net operating loss carryforwards 226,000 394,000
U.S. and foreign tax credit carryforwards 490,000 704,000
Less valuation allowances (9,284,000) (9,637,000)
----------- -----------
$ -0- $ -0-
=========== ===========
</TABLE>
At September 30, 1997, the Company has approximately $23,200,000 in
combined U.S. net operating loss carryforwards for federal income tax
purposes. These loss carryforwards expire between 1998 and 2013. Of the
total, approximately $4,100,000 are U.S. net operating loss
carryforwards of Safer, Inc., the Company's wholly owned subsidiary.
The use of the unexpired net operating loss carryforwards of Ringer
which were generated prior to September 30, 1990, totaling
approximately $10,200,000 as of September 30, 1997, are limited to
$2,025,000 in any one year under Internal Revenue Code Section 382
because of a significant ownership change resulting from the Company's
initial public offering. The use of net operating loss carryforwards of
Ringer generated after the ownership change are not limited.
The use of the net operating losses of Safer, Inc. are limited to
approximately $700,000 in any one year under Internal Revenue Code
Section 382 because of a significant ownership change resulting from
the Company's acquisition of Safer, Inc. in January 1991.
At September 30, 1997, the Company has approximately $565,000 net
operating loss carryforwards in Canada which expire between 1999 and
2002.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company (paid) and received cash for the following items:
Year ended September 30
1997 1996 1995
--------- --------- ------
Interest paid $ (152,727) $ (68,106) $ (66,690)
Interest received 71,687 69,908 82,064
Investing and financing transactions not affecting cash during the
years ended September 30, 1997, 1996 and 1995 are described below:
F-14
<PAGE>
o In 1997, the Company issued 1,059,340 shares of its common stock
and a promissory note in the amount of $1,477,000 as consideration
paid for the acquisition of substantially all of the assets of
Dexol Industries, Inc. In connection with this issuance of common
stock, the Company recorded $1,397,006 to common stock and
additional paid-in capital, which represented the fair market
value of the common stock on the date of issuance.
o In 1997, the Company received full-recourse secured promissory
notes in an aggregate amount of $262,500 as payment for the sale
of common stock to two executive officers of the Company.
o In 1995, the Company issued 125,000 shares of its common stock as
a portion of the total consideration paid for the acquisition of
substantially all of the assets of Plant Research Laboratories. In
connection with this issuance of common stock, the Company
recorded $187,500 to common stock and additional paid-in capital,
which represented the fair market value of the common stock on the
date of issuance. Additional acquisition costs included $257,660
in cash consideration and direct acquisition expenses.
o In 1995, the Company issued 10,000 shares of restricted common
stock to an officer in lieu of cash compensation and recorded a
$13,125 increase to compensation expense and to common stock and
additional paid-in capital which was the fair market value of the
restricted stock on the date of issuance.
11. FOREIGN OPERATIONS
International sales activity, consisting of sales outside the United
States, primarily in Canada, accounted for approximately 10%, 16% and
14% of total sales for the years ended September 30, 1997, 1996 and
1995, respectively. A reconciliation of fiscal 1997, 1996 and 1995
domestic and foreign activity for net sales, net income (loss) and
identifiable assets is as follows:
Fiscal 1997: Domestic Foreign Total
------------ ------------ ------------ ------------
Net Sales $ 16,892,897 $ 1,927,728 $ 18,820,625
Net Income (Loss) (528,136) (17,800) (545,936)
Identifiable Assets $ 13,805,008 $ 1,072,587 $ 14,877,595
Fiscal 1996: Domestic Foreign Total
------------ ------------ ------------ ------------
Net Sales $ 12,274,927 $ 2,397,857 $ 14,672,784
Net Income (Loss) (743,106) 174,987 (568,119)
Identifiable Assets $ 10,488,502 $ 981,541 $ 11,470,043
Fiscal 1995: Domestic Foreign Total
------------ ------------ ------------ ------------
Net Sales $ 12,223,014 $ 1,970,884 $ 14,193,898
Net Income (Loss) (2,231,595) 58,491 (2,173,104)
Identifiable Assets $ 10,621,910 $ 1,376,738 $ 11,998,648
12. SUBSEQUENT EVENT
On December 8, 1997, the Company completed a merger with Southern
Resources, Inc. ("SRI"), a previously privately-owned Georgia-based
holding company, with approximately $25 million in annual consolidated
sales, which owns 100% of the common stock of SureCo, Inc. ("SureCo"),
SRI's operating company, and Peach County Properties, Inc. ("PCP"), a
real estate subsidiary, both of which are located in Georgia. SureCo
manufactures and markets pesticides, which it sells under a variety of
proprietary and private label brand names to commercial and consumer
markets throughout North America. The merger will be accounted for
using the purchase method. The Company issued 4,500,000 shares of the
Company's restricted common stock, valued at $6,679,688, in exchange
for all of the outstanding common stock of SRI, which will be operated
as a wholly-owned subsidiary of the Company.
The following table sets forth unaudited combined net sales, net (loss)
and (loss) per share as if the business combination had been
consummated at the beginning date of the financial statements presented
herein. Amounts are in
F-15
<PAGE>
thousands, except loss per share. The 1997 and 1996 amounts include the
pro forma impact of the Dexol acquisition (Note 2).
Year Ended September 30,
1997 1996
----------- -----------
Net sales $ 46,760 $ 53,400
Net (loss) $ (1,895) $ (1,549)
========= ===========
Net (loss) per share - basic and
unaudited $ (.12) $ (.10)
========= ===========
F-16
<PAGE>
VERDANT BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 423,272 $ 3,264,294
Accounts receivable 4,437,264 1,153,271
Inventories 8,803,909 2,805,661
Prepaid assets 1,180,250 221,186
------------ ------------
Total current assets 14,844,695 7,444,412
Assets held for sale 2,273,248 --
Property, plant and equipment, net 630,846 430,138
Intangible assets, net 13,469,697 6,653,501
Other assets 204,893 87,044
------------ ------------
Total assets $ 31,423,379 $ 14,615,095
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 3,024,910 $ -
Accounts payable 7,818,030 1,273,570
Accrued expenses 1,961,898 1,087,924
Current portion of long-term debt 1,538,866 23,207
------------ ------------
Total current liabilities 14,343,704 2,384,701
Long-term debt 3,306,821 1,458,799
Shareholders' Equity:
Preferred stock, par value $.01 per share,
authorized 5,000,000 shares, no shares
issued and outstanding
Common stock, par value
$.01 per share, authorized
25,000,000 shares, issued
and outstanding 16,688,061 and 12,181,270
shares, respectively 166,881 121,813
Additional paid-in capital 37,603,682 33,421,087
Accumulated deficit (23,809,763) (22,613,212)
Cumulative translation adjustment (187,946) 158,093)
------------ ------------
Total shareholders' equity 13,772,854 10,771,595
------------ ------------
Total liabilities and shareholders' equity $ 31,423,379 $ 14,615,095
============ ============
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
VERDANT BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
--------------------------
1997 1996
----------- -----------
NET SALES $ 4,767,233 $ 3,480,731
COST OF SALES 3,130,958 1,706,499
----------- -----------
Gross Profit 1,636,275 1,774,232
OPERATING EXPENSES:
Distribution 511,727 387,111
Sales & Marketing 1,032,010 817,539
General & Administration 897,685 325,073
Research & Development 178,913 124,617
Amortization of intangibles 147,426 93,625
----------- -----------
2,767,761 1,747,965
----------- -----------
INCOME (LOSS) BEFORE OTHER INCOME (1,131,486) 26,267
OTHER INCOME (EXPENSE), NET (65,065) 33,456
----------- -----------
NET INCOME (LOSS) $(1,196,551) $ 59,723
=========== ===========
Net income (loss) per common
share - basic and diluted $ (.09) $ .01
=========== ===========
Shares used in calculating basic and
diluted net income (loss) per share 13,312,840 10,921,930
=========== ===========
See notes to consolidated financial statements.
F-18
<PAGE>
VERDANT BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,196,551) $ 59,723
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 243,071 124,682
Loss on sale of assets 3,819 3,868
(Increase) in assets:
Trade accounts and notes receivable (2,120,013) (2,555,381)
Inventories (707,341) (318,011)
Prepaid expenses (423,847) (134,736)
Increase (decrease) in liabilities:
Accounts payable 1,613,200 1,321,280
Accrued expenses 278,605 (325,576)
----------- -----------
Net cash used in operating activities (2,309,057) (1,824,151)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (259,852) (66,813)
Proceeds from sale of equipment 1,684
Purchase of intangible assets (13,227) (10,493)
Cash paid relating to acquisitions (164,495)
----------- -----------
Net cash used in investing activities (437,574) (75,622)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 8,913
Net borrowings on lines of credit 12,915
Payments on long-term debt (101,606)
----------- -----------
Net cash used in investing activities (79,778) --
Effect of exchange rate changes on cash (14,613) 2,061
----------- -----------
Decrease in cash and cash equivalents (2,841,022) (1,897,712)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 3,264,294 3,288,781
----------- -----------
END OF PERIOD $ 423,272 $ 1,391,069
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
VERDANT BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for the transition period financial information. They should be read in
conjunction with the annual financial statements included in the
Company's Annual Report on Form 10-KSB for the year ended September 30,
1997. In the opinion of management, the interim financial statements
include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the results for the interim
periods presented. Operating results for the period of October 1, 1997
through December 31, 1997 are not necessarily indicative of the
operating results to be expected in future periods.
Effective December 15, 1997, the Company adopted Statement on Financial
Standard No. 128, "Earnings Per Share". Earnings or loss per share for
prior year periods have been restated for the adoption of SFAS No. 128.
The following table reflects the calculation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Earnings (Loss) Per Share
Net income (loss) $(1,196,551) $ 59,723
----------- -----------
Weighted average shares 13,312,840 10,921,930
----------- -----------
Net income (loss) per share $ (.09) $ .01
=========== ===========
Earnings (Loss) Per Share - Assuming Dilution
Net income (loss) $(1,196,551) $ 59,723
----------- -----------
Weighted average shares 13,312,840 10,921,930
Dilutive impact of options and warrants [*] [**]
Weighted average shares and potential dilutive
shares outstanding 13,312,840 10,921,930
----------- -----------
Net income (loss) per share $ (.09) $ .01
=========== ===========
</TABLE>
[*] The impact of options and warrants are excluded because their
effect would be antidilutive.
[**] The impact of options and warrants are excluded because their
exercise prices exceeded the average market price for the period.
Note 2. CHANGE IN FISCAL YEAR
Management announced on February 9, 1998 the decision to change the
Company's fiscal year end from September 30 to December 31. In future
financial reports for reporting periods beginning January 1, 1998 the
prior year financial statements included for comparison will be
presented to conform to the period ends associated with the Company's
new fiscal year.
Note 3. ACQUISITIONS
F-20
<PAGE>
Merger with Southern Resources, Inc.
On December 8, 1997, the Company completed a merger with Southern
Resources, Inc. ("SRI"), a Georgia based corporation which, through its
wholly-owned subsidiary, SureCo, Inc., manufactures and markets
pesticides to the home and garden and professional pest control markets
under the Rigo/Black Leaf(R) and AllPro(R) brands and under various
private label brand names. The Company acquired all of the outstanding
stock of SRI in exchange for 4,500,000 shares of the Company's
unregistered, restricted common stock having an aggregate valuation of
$4,218,750. The Company intends to operate SRI as a stand-alone
subsidiary.
The SRI acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on their estimated fair
market values at the date of acquisition. The excess of purchase price
over the estimated fair market values of assets acquired and
liabilities assumed ("goodwill") was approximately $2,072,000. The
goodwill is being amortized on a straight-line basis over twenty years.
SRI's operations are included in the Company's consolidated statements
of operations from the effective date of the acquisition which, for
accounting purposes, is December 1, 1997. The Company is in the process
of validating fair values of assets acquired and liabilities assumed.
As part of this process, the Company has recorded a preliminary
allocation of the purchase price to the assets acquired and liabilities
assumed based on initial estimates of fair values. Upon completion of
this valuation process, the Company may adjust the preliminary
allocation of purchase price based on final determination of fair
values.
Acquisition of the assets of Dexol Industries, Inc.
In March 1997, the Company completed the acquisition of substantially
all of the assets of Dexol Industries, Inc. ("Dexol"), a California
based manufacturer and marketer of home and garden pesticides sold
under the Dexol(R) and various private label brand names, for an
aggregate purchase price of $3,012,790, plus a contingent performance
based earnout valued at up to $455,000, payable in shares of the
Company's restricted common stock (the "Dexol Acquisition"). The
purchase price was comprised of the issuance of 1,059,340 shares of the
Company's restricted common stock valued at $1,397,005, the issuance of
a promissory note to Dexol with a principal amount of $1,477,000
bearing simple interest at an annual rate of prime plus 3/4% and
estimated transaction costs of $138,785.
F-21
<PAGE>
The Dexol Acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on their estimated fair
market values at the date of acquisition. The excess of purchase price
over estimated fair market value of net assets acquired ("goodwill") of
approximately $1,685,000 is being amortized on a straight-line basis
over twenty years. Since the acquisition, the Company has operated the
acquired business as its Dexol division and has continued marketing
Dexol products. Dexol division operations are included in the Company's
consolidated statements of operations since the effective date of the
acquisition of March 1, 1997.
Note 4. Sales of the Company's products are generally greater during the period
of January 1 through June 30 of each year due to seasonal factors.
Note 5. All comparative data reflect application of consistent accounting
principles and contain no prior period adjustments.
Note 6. Inventory consists of the following:
December 31, September 30,
1997 1997
---------- -----------
Raw Materials $5,148,988 $ 1,697,454
Finished Goods 3,654,921 1,108,207
---------- -----------
$8,803,909 $ 2,805,661
========== ===========
Note 7. LONG-TERM DEBT
December 31,
1997
----------
Term loan $3,025,241
Notes payable 1,805,241
Capital lease obligations 15,205
Less current portion (1,538,866)
----------
$3,306,821
==========
F-22
<PAGE>
Note 8. Supplemental disclosure of cash flow information.
Cash paid (received) for interest during the period for:
Three Months Ended
December 31,
---------------------
1997 1996
-------- --------
Interest paid $ 93,255 $ 718
Interest received (28,570) (34,359)
As discussed in Note 3, the Company completed the acquisition of SRI in
a non-cash transaction by issuing 4,500,000 shares of the Company's
unregistered, restricted common stock.
Note 9. PRO FORMA FINANCIAL INFORMATION
The following table sets forth unaudited pro forma sales, net loss
before taxes, net loss and loss per share for the Company as if the
Verdant, Dexol and SRI businesses had been combined at the beginning of
the periods shown. This pro forma financial information is provided for
illustrative purposes only. It is not necessarily indicative of actual
operating results that would have occurred had the acquisition been in
effect for the periods presented and is not necessarily indicative of
results which may be obtained in the future.
Three Months Ended
December 31,
1997 1996
----------- ----------
Net Sales $ 6,111,102 $8,464,930
Net loss (3,858,321) (809,643)
Loss per share - basic and diluted $ (0.22) $ (0.05)
F-23
<PAGE>
VERDANT BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 159,115 $ 423,272
Accounts receivable 14,702,485 4,437,264
Inventories 11,068,799 8,803,909
Prepaid assets 747,287 1,180,250
------------ ------------
Total current assets 26,677,686 14,844,695
Assets held for sale 2,112,691 2,773,248
Property and equipment (net) 596,240 630,846
Intangible assets (net) 13,199,639 13,469,697
Other assets 150,967 204,893
------------ ------------
Total assets $ 42,737,223 $ 31,423,379
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 7,609,641 $ 3,024,910
Accounts payable 10,132,958 7,818,030
Accrued expenses 2,314,785 1,961,898
Current portion of long-term debt 301,703 1,538,866
------------ ------------
Total current liabilities 20,359,087 14,343,704
Long-Term Debt 7,123,003 3,306,821
Shareholders' Equity:
Common Stock, par value $.01 per share,
authorized 25,000,000 shares, issued and
outstanding 16,690,261 and 16,688,061
shares, respectively 166,903 166,881
Additional paid-in capital 37,869,047 37,603,682
Receivable from sale of stock (249,375)
Accumulated deficit (22,295,666) (23,809,763)
Cumulative translation adjustment (235,776) (187,946)
------------ ------------
Total shareholders' equity 15,255,133 13,772,854
------------ ------------
Total liabilities and shareholders' equity $ 42,737,223 $ 31,423,379
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
F-24
<PAGE>
VERDANT BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1998 1997
------------- -----------
<S> <C> <C>
NET SALES $ 31,745,288 $12,197,159
COST OF SALES 20,049,368 6,511,481
------------- -----------
Gross Profit 11,695,920 5,685,678
OPERATING EXPENSES:
Distribution 3,049,607 1,314,826
Sales & Marketing 3,526,982 2,414,204
General & Administration 1,927,579 1,111,023
Product Development & Registrations 1,091,432 647,551
------------- -----------
9,595,600 5,487,604
------------- -----------
INCOME BEFORE OTHER
EXPENSE 2,100,320 198,074
OTHER EXPENSE, NET (586,223) (67,575)
------------- -----------
INCOME BEFORE INCOME TAXES 1,514,097 130,499
INCOME TAXES
NET INCOME $ 1,514,097 $ 130,499
============= ===========
Net income per common
share - basic and diluted $ .09 $ .01
============= ===========
Shares used in calculating basic
net income per share 16,688,654 11,525,617
============= ===========
Shares used in calculating diluted
net income per share 16,870,346 11,554,577
============= ===========
</TABLE>
See notes to unaudited consolidated financial statements.
F-25
<PAGE>
VERDANT BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,514,097 $ 130,499
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 768,071 329,532
Loss on disposal of intangible assets 5,055 72,217
Loss on disposal of assets 7,144 1,529
(Increase) decrease in assets:
Trade accounts and notes receivable (10,169,598) 1,027,005
Inventories (2,275,694) 582,808
Prepaid expenses 232,809 (77,166)
Increase (decrease) in liabilities:
Accounts payable 2,552,839 (2,461,549)
Accrued expenses 129,037 527,068
------------- -------------
Net cash used in (provided by) operating activities (7,236,240) 131,943
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (96,269) (9,535)
Proceeds from sale of equipment 1,265 5,705
Purchase of intangible assets (75,707) (23,112)
------------- -------------
Net cash used in investing activities (170,711) (26,942)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from bank line of credit 8,584,731
Cash received in Dexol acquisition 124,073
Proceeds from issuance of common stock 16,012
Principal payments on long-term debt (1,449,791) (6,400)
------------- -------------
Net cash received from financing activities 7,150,952 117,673
Effect of exchange rate changes on cash (8,158) 505
------------- -------------
Increase (decrease) in cash and cash equivalents (264,157) 223,179
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 423,272 1,391,069
------------- -------------
END OF PERIOD $ 159,115 $ 1,614,248
============= =============
</TABLE>
See notes to unaudited consolidated financial statements.
F-26
<PAGE>
VERDANT BRANDS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Note 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Verdant
Brands, Inc. (formerly Ringer Corporation) have been prepared in
accordance with generally accepted accounting principles for interim
financial information. They should be read in conjunction with the
annual financial statements included in the Company's Annual Report on
Form 10-KSB for the prior fiscal year ended September 30, 1997 and the
Company's Transition Report on Form 10-QSB for the transition period
from October 1, 1997 through December 31, 1997. In the opinion of
management, the interim consolidated financial statements include all
adjustments (consisting of normal recurring accruals) necessary for a
fair presentation of the results for the interim periods presented.
Operating results for the six months ended June 30, 1998 are not
necessarily indicative of the operating results to be expected for the
fiscal year ending December 31, 1998. Certain reclassifications were
made to prior year financial statements to be consistent with those
classifications used in the current year. These reclassifications had
no effect on shareholders' equity or net income or loss as previously
reported.
Effective December 15, 1997, the Company adopted Statement on Financial
Standard No. 128, "Earnings Per Share". Earnings per share for prior
year periods have been restated for the adoption of SFAS No. 128. The
following table reflects the calculation of basic and diluted earnings
per share.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1998 1997
----------- -----------
Earnings Per Share - Basic
<S> <C> <C>
Net income $ 1,514,097 $ 130,499
----------- -----------
Weighted average shares 16,688,654 11,525,617
----------- -----------
Net income per share $ .09 $ .01
=========== ===========
Earnings Per Share - Assuming Dilution
Net income $ 1,514,097 $ 130,499
----------- -----------
Weighted average shares 16,688,654 11,525,617
Dilutive impact of options and warrants 181,692 28,960
----------- -----------
Weighted average shares and potential dilutive
shares outstanding 16,870,346 11,554,577
----------- -----------
Net income per share $ .09 $ .01
=========== ===========
</TABLE>
Note 2. CHANGE IN FISCAL YEAR
In February 1998, management announced its decision to change the
Company's fiscal year end from September 30 to December 31. In
connection therewith, the Company filed a Transition Report on Form
10-QSB for the period from October 1, 1997 through December 31, 1997 to
transition to the beginning of its new fiscal year which began on
January 1, 1998. Comparative prior period financial information has
been conformed to the new year end.
Note 3. ACQUISITIONS
F-27
<PAGE>
Merger with Southern Resources, Inc.
On December 8, 1997, a subsidiary of Verdant Brands, Inc. (the
"Company") merged with Southern Resources, Inc. ("SRI") which, on that
date, became a wholly-owned subsidiary of the Company. Prior to the
merger, SRI was privately held. SRI is a Fort Valley, Georgia-based
corporation with annual consolidated sales in 1997 of approximately $25
million, which, through its wholly-owned subsidiary, SureCo, Inc.,
manufactures and markets traditional liquid and granular pesticides.
Its products are sold under a variety of proprietary and private label
brand names to commercial and consumer retail markets throughout North
America. Commercial pesticides are sold principally under the AllPro(R)
brand to specialty agricultural, turf ornamental and professional pest
control distributors. Consumer products are sold into the consumer
retail market principally under the Rigo/Black Leaf(R) brand as well as
under various private label store brands. The Company is currently
operating SRI as a stand-alone subsidiary.
The Company acquired all of the outstanding stock of SRI in exchange
for 4,500,000 shares of the Company's restricted common stock with an
aggregate valuation of $4,218,750. The SRI acquisition was accounted
for using the purchase method of accounting rather than the
pooling-of-interest method as originally announced. The change in
accounting methods was required because of management's decision to
dispose of certain assets and activities of the combined business
entities. Such a disposal precludes the pooling of interest method of
accounting. The Company has not yet finalized its analysis of the full
financial impact associated with its disposal plans.
The SRI purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair market values at the
date of acquisition. The excess of purchase price over the estimated
fair market values of assets acquired and liabilities assumed
("goodwill") totals approximately $2,072,000. The goodwill is being
amortized on a straight-line basis over twenty years. SRI's operations
are included in the Company's consolidated statements of operations
subsequent to the effective date of the acquisition which, for
accounting purposes, is December 1, 1997. The Company is completing the
process of establishing fair values of assets acquired and liabilities
assumed. As part of this process, during the three months ended March
31, 1998, the Company reallocated $4,950,000 of the purchase price from
goodwill to product registrations and trademarks, which are being
amortized over twenty years. Since the Company has not formally
completed the valuation process, further adjustments to the allocation
of purchase price based on a final determination of fair values may
occur.
Acquisition of the assets of Dexol Industries, Inc.
In March 1997, the Company completed the acquisition of substantially
all of the assets of Dexol Industries, Inc. ("Dexol"), a
California-based manufacturer and marketer of home and garden
pesticides sold under the Dexol(R) and various private label brand
names, for an aggregate purchase price of approximately $3,012,790 (the
"Dexol Acquisition"). The purchase price was comprised of the issuance
of 1,059,340 shares of the Company's restricted common stock valued at
$1,397,005, the issuance of a promissory note to Dexol with a principal
amount of $1,477,000 bearing simple interest at an annual rate of prime
plus 3/4% and estimated transaction costs of $138,785.
The Dexol Acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on their estimated fair
market values at the date of acquisition. The excess of purchase price
over estimated fair market value of net assets acquired ("goodwill") of
approximately $1,840,000 is being amortized on a straight-line basis
over twenty years. Since the acquisition, the Company has operated the
acquired business as its Dexol division and has continued marketing
Dexol products. Dexol division operations are included in the Company's
consolidated statements of operations from the effective date of the
acquisition which, for accounting purposes, is March 1, 1997.
F-28
<PAGE>
Note 4. Sales of the Company's products are greater during the period of
January 1 through June 30 of each year due to seasonal factors.
Note 5. All comparative data reflect application of consistent accounting
principles. A total of $195,000 in estimated co-op advertising expense
accruals remaining from 1997 were reversed during the quarter based on
actual co-op claims received.
Note 6. Inventory consists of the following:
June 30, December 31,
1998 1997
----------- -----------
Raw Materials $ 7,219,360 $ 5,148,988
Finished Goods 3,849,439 3,654,921
----------- -----------
$11,068,799 $ 8,803,909
=========== ===========
Note 7. LONG-TERM DEBT
June 30, December 31,
1998 1997
----------- -----------
Line of credit, long-term portion $ 4,000,000
Term loans 1,587,418 $ 3,025,241
Notes payable 1,824,451 1,805,241
Capital lease obligations 12,837 15,205
Less current portion (301,703) (1,538,866)
----------- -----------
$ 7,123,003 $ 3,306,821
=========== ===========
Note 8. Supplemental disclosure of cash flow information.
Cash paid (received) for interest during the period for:
Six Months Ended
June 30,
------------------------------
1998 1997
----------- -----------
Interest paid $ 554,468 $ 116,164
Interest received (6,095) (14,198)
F-29
<PAGE>
Note 9. PRO FORMA FINANCIAL INFORMATION
The following table sets forth unaudited pro forma sales, net income
before taxes, net income and income per share for the Company as if the
Verdant Brands, Inc., Dexol and SRI businesses had been combined at the
beginning of the three months and six months periods ended June 30,
1997. This pro forma financial information is provided for illustrative
purposes only. It is not necessarily indicative of actual operating
results that would have occurred had the acquisition been in effect for
the periods presented and is not necessarily indicative of results
which may be obtained in the future. The operations of Dexol and SRI
are included in the Company's statements of operations for the six
months ended June 30, 1998, therefore pro forma information is not
applicable for those periods.
Six Months
Ended June 30,
1997
--------------
Net sales $ 29,373,000
Net income 801,000
Income per share-basic and diluted $ 0.05
NOTE 10. ACCOUNTING STANDARD
The Company has adopted Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income," for its fiscal year beginning
January 1, 1998. Total comprehensive income for the six month period
ended June 30, 1998 was $1,466,267. Components of comprehensive income
include net income and foreign currency translation adjustments.
NOTE 11. SUBSEQUENT EVENT
On September 8, 1998, the Company entered into a merger agreement
pursuant to which it will acquire Consep, Inc by exchanging 0.95 of one
share of its common stock for each outstanding share of common stock of
Consep, Inc. The proposed merger is subject to, among other things, the
approval of Consep's shareholders, the approval of Verdant's
shareholders and applicable third-party consents and approvals. The
merger is expected to be completed by the end of 1998.
****
F-30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- ----------------------------
Board of Directors
Southern Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Southern
Resources, Inc. and Subsidiaries as of October 3, 1997 and September 27, 1996,
and the related consolidated statements of income and retained earnings and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements preparation.
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 Southern Resources,
Inc. and Subsidiaries at October 3, 1997 and September 27, 1996, and the results
of operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 6, the Company is a party to a governmental action and
lawsuit related to contamination discovered on and near the Company's plant
site. Management believes that the contamination arose prior to the purchase of
the plant site by the company from an unaffiliated predecessor corporate owner.
The former owner of the plant site has cooperated with governmental authorities
and initiated remedial activities. Management believes that the governmental and
legal actions should not result in loss to the Company. Accordingly, no
provision for losses related to these actions have been made in the accompanying
consolidated financial statements.
As discussed in Note 9, all of the outstanding common stock of Southern
Resources, Inc. has been exchanged for common stock of a publicly traded
corporation subsequent to October 3, 1997.
SMITH & HOWARD, P.C.
Atlanta, Georgia
November 14, 1997, except for Note 9 as to which the date is December 8, 1997
F-31
<PAGE>
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 3, 1997 AND SEPTEMBER 27, 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
---- ----
<S> <C> <C>
Current Assets
Cash $ 2,780 $ 119,820
Accounts receivable - trade, less allowance for doubtful
accounts of $15,816 and $12,265 in 1997 and 1996,
respectively (Notes 4 and 5) 3,726,946 3,327,662
Inventories (Notes 2, 3, 4 and 5) 4,800,043 5,059,878
Prepaid expenses 260,067 295,324
Deferred income taxes (Note 7) 64,677 118,184
Prepaid income taxes 19,403 -
Other 159,971 99,749
----------- -----------
Total Current Assets 9,033,887 9,020,617
Property and Equipment, at Cost (Notes 3 and 5)
Land 43,879 43,879
Buildings and improvements 482,428 482,428
Machinery and equipment 2,989,961 2,833,509
----------- -----------
3,516,268 3,359,816
Less accumulated depreciation (1,589,848) (1,242,613)
----------- -----------
1,926,420 2,117,203
Other Assets (Note 3)
Trademarks, less accumulated amortization
of $40,540 and $30,000 in 1997 and 1996, respectively 111,952 120,000
Product registrations, less accumulated amortization
of $80,000 and $60,000 in 1997 and 1996, respectively 220,000 240,000
Deferred loan fees, less accumulated amortization
of $151,431 and $75,605 in 1997 and 1996, respectively 168,207 237,566
Deferred income taxes (Note 7) 12,646 -
Other 160,209 81,985
----------- -----------
686,214 679,551
----------- -----------
$11,633,321 $11,817,371
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-32
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current Liabilities
Accounts payable $ 3,884,607 $ 3,269,190
Accrued expenses and other current liabilities 445,161 546,969
Borrowings under lines of credit (Note 4) 3,859,355 -
Current portion of long-term debt (Note 5) 1,668,243 1,208,084
Due to stockholders (Note 8) 170,892 356,268
Income taxes payable - 9,539
----------- -----------
10,028,258 5,390,050
Borrowings Under Lines of Credit (Note 4) - 3,917,464
Long-Term Debt, Net of Current Portion (Note 5) 1,566,840 1,991,459
Note and Accrued Interest Payable - Stockholder
(Note 8) 327,127 232,372
Deferred Income Taxes (Note 7) - 165,748
Contingencies (Note 6)
Stockholders' Equity
Common stock - par value $1, authorized 100,000
shares, issued and outstanding 500 shares 500 500
Additional paid-in capital 500 500
Retained earnings (accumulated deficit) (289,904) 119,278
----------- -----------
(288,904) 120,278
----------- -----------
$11,633,321 $11,817,371
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-33
<PAGE>
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED OCTOBER 3, 1997 AND SEPTEMBER 27, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Sales $25,034,085 $20,791,647
Cost of Sales 20,786,922 17,097,731
----------- -----------
Gross Profit 4,247,163 3,693,916
Selling, General and Administrative Expenses 3,846,877 2,612,536
----------- -----------
Income from Operations 400,286 1,081,380
Other Income (Expense)
Interest expense (926,919) (688,607)
Loss on disposal of equipment - (1,543)
Other (7,436) 10,522
----------- -----------
(934,355) (679,628)
----------- -----------
Income (Loss) before Income Taxes (534,069) 401,752
Provision (Credit) for Income Taxes (Note 7)
Current - 12,373
Deferred (124,887) 125,538
----------- -----------
(124,887) 137,911
----------- -----------
Net Income (Loss) (409,182) 263,841
Retained Earnings (Accumulated Deficit) at
Beginning of Year 119,278 (144,563)
----------- -----------
Retained Earnings (Accumulated Deficit) at
End of Year $ (289,904) $ 119,278
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-34
<PAGE>
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 3, 1997 AND SEPTEMBER 27, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Cash received from customers $ 24,584,235 $ 20,663,058
Cash paid to suppliers and employees (23,436,561) (18,735,049)
Income taxes (paid) refunded (28,942) 2,077
Interest paid (854,308) (635,423)
Other income (expense) (7,436) 10,522
------------ ------------
Net Cash Provided by Operating Activities 256,988 1,305,185
------------ ------------
Cash Flows from Investing Activities
Cash paid in acquisition of Rigo/Black Leaf - (2,335,000)
Acquisitions of property and equipment (156,452) (111,457)
(Increase) decrease in other assets (173,838) (109,072)
------------ ------------
Net Cash Required by Investing Activities (330,290) (2,555,529)
------------ ------------
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 649,235 -
Principal payments on long-term debt (657,008) (318,603)
Borrowings (repayments) under lines of credit, net (58,109) 1,592,605
Increase in note payable - stockholder 22,144 56,854
------------ ------------
Net Cash Provided (Required) by
Financing Activities (43,738) 3,172,928
------------ ------------
Net Increase (Decrease) in Cash (117,040) 80,512
Cash at Beginning of Year 119,820 39,308
------------ ------------
Cash at End of Year $ 2,780 $ 119,820
============ ============
</TABLE>
(Continued)
The accompanying notes are an integral part of this financial statement.
F-35
<PAGE>
SOUTHERN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 3, 1997 AND SEPTEMBER 27, 1996
(Continued)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Reconciliation of Net Income (Loss) to Net Cash
Provided By Operating Activities
Net Income (Loss) $(409,182) $ 263,841
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Bad debts expense 50,566 80,161
Depreciation and amortization 583,569 413,884
Interest expense accrued as long-term debt 72,611 53,184
Loss on disposal of equipment - 1,543
Provision (credit) for deferred income taxes (124,887) 125,538
Increase in accounts receivable (449,850) (128,589)
Decrease in inventories 259,835 831,719
Increase in prepaid expenses and other current assets (24,965) (157,708)
(Increase) decrease in prepaid income taxes (19,403) 4,911
Increase (decrease) in accounts payable 615,417 (261,897)
Increase (decrease) in accrued liabilities (101,808) 69,059
Decrease in due to stockholders (185,376) -
Increase (decrease) in income taxes payable (9,539) 9,539
--------- ----------
Total Adjustments 666,170 1,041,344
--------- ----------
Net Cash Provided by Operating Activities $ 256,988 $1,305,185
========= ==========
</TABLE>
Supplementary Schedule of Non-Cash Investing and Financing Activities:
During the year ended October 3, 1997 the Company refinanced outstanding long-
term debt in the amount of $987,782 with a portion of the proceeds from a
$1,650,000 term note payable.
Further, the Company issued long-term debt of $2,177,072 bearing interest at 8%
as partial payment for the acquisition of the Rigo/Black Leaf consumer pesticide
division of Wilbur Ellis Company. The long-term debt calls for monthly principal
payments of $67,000 plus accrued interest.
During the year ended September 27, 1996, the Company financed the acquisition
of equipment through a capital lease in the amount of $68,452.
The accompanying notes are an integral part of this financial statement.
F-36
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Business Operations
---------------------------------------------
The accompanying consolidated financial statements include the accounts of
Southern Resources, Inc. and its wholly-owned subsidiaries SureCo, Inc. and
Peach County Property, Inc., collectively referred to herein as the
Company. All material inter-company transactions and balances have been
eliminated in consolidation.
The Company is engaged in the manufacture and marketing of specialty
pesticide products to consumer and commercial users and provides packing
services for companies marketing their own brands of consumer and
commercial pesticides. The Company's principal markets are throughout North
America and the Caribbean.
During the year ended October 3, 1997, 17% and 14% of the Company's sales
were to two separate customers, and 16% of the Company's purchases were
from one vendor.
Fiscal Year
-----------
The Company's fiscal year ends on the Friday nearest September 30. The
accompanying consolidated financial statements include results of
operations for fifty-three weeks for the year ended October 3, 1997 and
fifty-two weeks for the year ended September 27, 1996.
Inventories
-----------
Inventories are valued at the lower of cost, determined on a first-in,
first-out basis, or market.
Property and Equipment
----------------------
Property and equipment are recorded at cost, less accumulated depreciation.
When the assets are retired or otherwise disposed of, the costs less
accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in income.
Depreciation and amortization are provided over the estimated useful lives
using the straight-line method for financial reporting purposes and
primarily accelerated methods for income tax reporting purposes.
NOTE 2 - INVENTORIES
Inventories consisted of the following at October 3, 1997 and September 27,
1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $2,421,544 $2,506,802
Finished goods 2,378,499 2,553,076
---------- ----------
$4,800,043 $5,059,878
========== ==========
</TABLE>
NOTE 3 - ACQUIRED ASSETS
In April 1996, the Company acquired the inventories, certain equipment and
product registrations of the Rigo/Black Leaf division of Wilbur-Ellis
Company (Rigo/Black Leaf) for a total purchase price of
F-37
<PAGE>
NOTE 3 - ACQUIRED ASSETS (Continued)
$4,177,072. The purchase price was allocated to the inventories
($3,827,013), equipment ($119,092), and prepaid product registration cost
($230,967) based upon book values, which estimated their fair values, at
the acquisition date. The total purchase price for the aforementioned
assets was satisfied with a cash payment of $2,000,000 and the Company's
note payable to the seller for $2,177,072 (see Note 5). Included in the
assets purchased were inventories (products, labels, and packaging) used in
connection with the seller's seed treatment products. The seller must
repurchase, at the Company's cost, all such unused inventories at the
earlier of the satisfaction of the Company's note payable to the seller or
April 1999.
The acquisition was accounted for as a purchase business combination.
Rigo/Black Leaf operations are included in the Company's consolidated
statement of income from the effective date of the acquisition of April 28,
1996. The following table sets forth unaudited pro forma sales, income
before taxes and net income (loss) for the Company as if the Company and
Rigo/Black Leaf had been combined at the beginning of the periods shown.
This pro forma financial information is provided for illustrative purposes
only. It is not necessarily indicative of results which may be obtained in
the future (000s).
<TABLE>
<CAPTION>
(Unaudited)
Fiscal Year Ended
September 27, 1996
-------------------
<S> <C>
Net sales $28,209
Income before taxes 377
Income (loss) 229
</TABLE>
In connection with the Rigo/Black Leaf acquisition, four shareholders of
the Company owning all of the outstanding shares of the Company
collectively agreed to sell 20% of their shares of Company stock to an
employee who was previously employed by Rigo/Black Leaf's prior owner
which, if purchased by the employee, would result in his owning 20% of the
Company's outstanding common stock. As a condition precedent to purchase
such stock, the employee would be required to enter into certain agreements
under which the employee would be subject to cross guarantees and
indemnities to which the other shareholders are obligated. The purchase
price for such stock is initially $700,000 as of April 1996 and increases
thereafter by a factor of 6% per annum compounded monthly for each month of
time passing until the purchase date, which cannot be later than the date
at which there has been a change of control or April 1998 whichever is
later. For accounting purposes, the share purchase is a variable option
which is being accounted for over the period of the agreement. Management
believes the prescribed purchase price of the stock represented its
estimated fair market value as of April 1996 and September 1996.
NOTE 4 - LINES OF CREDIT
During 1996 the Company arranged a new $7,000,000 working capital facility,
increased to $8,000,000 during 1997, with another commercial finance
corporation which replaced its $2,500,000 line and provided funding in the
amount of $2,000,000 used to acquire assets (see Note 3). Advances under
the lines are limited to 80% of eligible trade accounts receivable and 60%
of eligible inventories, with advances related to inventories limited to
$2,600,000. Borrowings under the lines bear interest at the commercial
financial corporation's reference rate plus 2.25% (an effective interest
rate of 10.75% at October 3, 1997), are secured by accounts receivable,
inventories, and certain intangible assets including product registrations
and trademarks and are guaranteed by the stockholders of the Company. Since
the line of credit agreement is not subject to review until April 1998,
outstanding borrowings under the lines of $3,917,464 are classified as a
noncurrent liability at September 27, 1996, while outstanding borrowings
under the lines of $3,859,355 are classified as a current liability at
October 3, 1997.
F-38
<PAGE>
NOTE 4 - LINES OF CREDIT (Continued)
The lines of credit include covenants which limit management compensation
increases, loans to stockholders or employees and annual capital
expenditures. The Company was in compliance with the covenants for the year
ended October 3, 1997.
NOTE 5 - LONG-TERM DEBT
Long-term debt consisted of the following as of October 3, 1997 and
September 27, 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Term loan with a commercial lending company in the
amount of $1,650,000 secured by the Company's
machinery and equipment and securities pledged by one
of the Company's stockholders and guaranteed by the
Company and the Company's stockholders; principal and
interest payable monthly through October 2004.
Interest on the term loan is at a rate of the 13-week
Treasury Bills plus 5.5%. $ 1,650,000 $ -
Term loan in the amount of $2,177,072 issued in
connection with acquired assets (see Note 3); secured
by inventories and accounts receivable; monthly
principal installments of $67,000 plus interest at 8%
due through March 1998 with all remaining unpaid
principal ($703,072) and accrued interest due April
1998. This note is subject to a subordination
agreement in favor of the Company's working capital
lender which provides, among other things, that
service of this indebtedness can occur only after the
Company is current on the payment of all of its other
obligations for borrowed monies. 1,334,190 1,909,072
Term loan in the amount of $1,000,000 assumed in
connection with acquired assets of a Company in
October - 500,000 1993. Terms modified during 1996 to
provide that the loan be secured by certain
production equipment; monthly principal installments
of $8,333 plus accrued interest from January 1997
through December 1997, monthly principal installments
of $16,667 plus accrued interest from January 1998
through December 1999. Interest on the term loan is
at a rate of 10%. Outstanding principal and accrued
interest satisfied with a portion of the proceeds
received from the $1,650,000 term loan executed
during 1997. - 500,000
</TABLE>
F-39
<PAGE>
NOTE 5 - LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Term loan with bank secured by machinery and equipment;
principal and interest payments, $12,503 at September 27,
1996, due monthly through December 1998. Interest on the
term loan is at a rate of prime plus 1.5% adjusted quarterly
for changes in the prime rate. Outstanding principal and
accrued interest satisfied with a portion of the proceeds
received from the $1,650,000 term loan executed during
1997. - 302,020
Term loan with bank secured by machinery and equipment;
principal and interest payments, $1,723 at September 27,
1996, due monthly through October 2002. Interest on the
term loan is at a rate of prime plus 2% adjusted quarterly
for changes in the prime rate. Outstanding principal and
accrued interest satisfied with a portion of the proceeds
received from the $1,650,000 term loan executed during
1997. - 92,368
Term loan with bank secured by machinery and equipment;
principal and interest payments, $3,061 at September 27,
1996, due monthly through July 1999. Interest on the term
loan is at a rate of prime plus 2% adjusted quarterly for
changes in the prime rate. Outstanding principal and accrued
interest satisfied with a portion of the proceeds received from
the $1,650,000 term loan executed during 1997. - 87,690
Term loan with bank secured by real property; principal and
interest payments, $3,071 at September 27, 1996, due
monthly through February 2000. Interest on the loan is at a
rate of 10.5%. 74,931 102,938
Term loan with bank secured by securities pledged by one
of the Company's stockholders and guaranteed by the
Company's stockholders. Interest to be paid on the principal
balance at a rate of 10.5% through December 1997 when
loan is due in full. 100,100 -
Term loan with financial institution secured by equipment;
principal and interest payments, $1,269 at September 27,
1996, due monthly through February 2000. Interest on the
loan is at a rate of 11.6%. Outstanding principal and
accrued interest satisfied with a portion of the proceeds
received from the $1,650,000 term loan executed during
1997. - 41,964
Capital lease; principal and interest (at 12.52%) payments
totaling $1,541 due monthly through November 2000. 47,090 59,250
</TABLE>
F-40
<PAGE>
NOTE 5 - LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Capital lease; principal and interest (at 10.4%) payments
totaling $2,998 due monthly through September 1998.
Outstanding principal and accrued interest satisfied with a
portion of the proceeds received from the $1,650,000 term
loan executed during 1997. - 64,812
Capital lease; principal and interest (at 17.29%) payments
totaling $851 due monthly through April 2000. Outstanding
principal and accrued interest satisfied with a portion of the
proceeds received from the $1,650,000 term loan executed
during 1997. - 27,139
Other 28,772 12,290
----------- -----------
$3,235,083 $3,199,543
=========== ===========
</TABLE>
The above is categorized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Senior Long-Term Debt $1,900,893 $1,290,471
Subordinated Long-Term Debt 1,334,190 1,909,072
---------- ----------
3,225,083 3,199,543
Less: Current Portion 1,668,243 1,208,084
---------- ----------
$1,566,840 $1,991,459
========== ==========
</TABLE>
Aggregate maturities of long-term debt by fiscal year are as follows:
<TABLE>
<S> <C>
1998 $ 1,668,243
1999 238,501
2000 239,314
2001 234,224
2002 260,372
Thereafter 594,429
-----------
$ 3,235,083
===========
</TABLE>
The Company is subject to financial covenants under its term loan agreement
with a commercial lending company. Such covenants relate to working capital,
current ratio, and a ratio of net worth to total liabilities. The Company was
not in compliance with one of the covenants at October 3, 1997; however, the
lender has waived such noncompliance until March 31, 1998.
NOTE 6 - CONTINGENCIES
In August 1990 the United States Environmental Protection Agency (EPA) added
to its National Priorities List a site which is constituted in part by the
land on which the Company's Fort Valley, Georgia facility is located. In July
1993 the EPA advised the Company that it may be responsible for certain
contamination discovered both on and off this site. The Company denied
responsibility and advised the EPA that the Company did not cause the
contamination and that it had indemnities from the former owner who has since
cooperated with the EPA in completing the investigative activities and
initiating the remedial activities required by the EPA.
F-41
<PAGE>
NOTE 6 - CONTINGENCIES (Continued)
In August 1993 the Company and its affiliates were named co-defendants in a
lawsuit filed by neighbors of the site seeking unspecified monetary and
injunctive relief alleging property damage arising out of chemical formulation
activities at the Fort Valley, Georgia facility. Since the alleged property
damage arose prior to the facility being owned by the Company or its
affiliates, management of the Company denies any liability to the plaintiffs
and contends that any damage suffered by the plaintiffs arose out of action of
the prior owners of the facility.
The Company believes that the above actions are without merit and is
vigorously defending its position. Accordingly, no provision for losses or
expenses related to the above actions has been made in the accompanying
financial statements.
NOTE 7 - INCOME TAXES
Deferred income taxes are provided with respect to certain items which are
recognized in one period for financial reporting purposes and another period
for income tax purposes. Such temporary differences relate primarily to
depreciation of property and equipment, trademarks and product registration
costs, allowance for doubtful accounts, inventory reserves and carrying costs
and certain expense accruals.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred income tax (asset) liability as of October 3,
1997 and September 27, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred Income Tax (Asset) Liability:
Tax over book depreciation $ 338,671 $ 336,651
Trademarks and product registration costs 13,200 27,093
Net operating loss carryforwards (300,556) (134,035)
Alternative minimum tax credit carryforwards (63,961) (63,961)
---------- ----------
(12,646) 165,748
---------- ----------
Deferred Income Tax Asset:
Allowance for doubtful accounts 3,922 3,046
Inventory reserves 12,400 12,400
Inventory carrying costs 54,878 35,135
Expense accruals - 67,603
Other (6,523) -
---------- ----------
64,677 118,184
---------- ----------
Net Deferred Income Tax (Asset) Liability $ (77,323) $ 47,564
========== ==========
</TABLE>
F-42
<PAGE>
NOTE 7 - INCOME TAXES (Continued)
Significant components of the provision (credit) for income taxes in the
accompanying consolidated statement of income for the years ended October 3,
1997 and September 27, 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current
Federal $ - $ 10,826
State - 1,547
--------- --------
$ - $ 12,373
========= ========
Deferred
Federal $ (92,508) $ 92,990
State (32,379) 32,548
--------- --------
$(124,887) $125,538
========= ========
</TABLE>
The components of the net provision (credit) for deferred income taxes are as
follows for the years ended October 3, 1997 and September 27, 1996:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Tax over book depreciation $ 2,020 $ 45,488
Trademarks and product registration costs (13,893) (54)
Benefits of operating loss carryforwards (166,521) 26,016
Allowance for doubtful accounts (876) 5,093
Inventory reserves - (2,046)
Inventory carrying costs (19,743) (7,081)
Expense Accruals 67,603 70,495
Alternative minimum tax credit carryforwards - (12,373)
Other 6,523 -
--------- --------
$(124,887) $125,538
========= ========
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTIONS
Due to stockholders at October 3, 1997 and September 27, 1996 of $170,892 and
$356,268, respectively, represents cumulative management fees due two of the
Company's stockholders at September 30, 1994. Such amounts are noninterest
bearing and due on demand but have no specified payment dates.
The note and accrued interest payable - stockholder is due on demand and
includes interest at the same rate as the Company incurs under its lines of
credit (see Note 4). Since the noteholder's intent is not to demand payment
within twelve months, the amounts are included as noncurrent liabilities in
the accompanying consolidated balance sheets as of October 3, 1997 and
September 27, 1996.
NOTE 9 - SUBSEQUENT EVENT
During 1997, the Company entered into a letter of intent to exchange all of
the outstanding shares of the Company's common stock for those of Ringer
Corporation, a publicly-traded corporation in Bloomington, Minnesota. The
transaction was effected on December 8, 1997. As a result, the Company
continues as an independently operated, but wholly owned, subsidiary or Ringer
Corporation.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Consep, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Consep,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Consep, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations, and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 13, 1998
F-44
<PAGE>
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,615,773 $ 2,443,508
Short-term investments 69,334 103,167
Accounts receivable, net 4,733,525 3,601,912
Other receivables 458,283 296,358
Inventories, net (note 3) 9,316,144 7,993,706
Prepaid expenses 372,023 966,102
------------ ------------
Total current assets 16,565,082 15,404,753
Property, plant and equipment, net (note 4) 5,520,640 4,020,456
Notes receivable and other assets 57,620 258,865
Intangible assets, net (note 5) 1,519,344 1,545,246
Goodwill, net (note 2) 2,014,874 2,181,901
------------ ------------
Total assets $ 25,677,560 $ 23,411,221
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines (note 6) $ 1,492,973 $ 1,170,000
Accounts payable 4,581,462 2,526,325
Current portion of notes payable (note 7) 527,625 312,821
Current portion of obligations under capital lease (note 11) 31,647 34,369
Accrued liabilities 925,568 646,135
Customer deposits 734,148 282,581
------------ ------------
Total current liabilities 8,293,423 4,972,231
Notes payable, excluding current portion (note 7) 2,133,560 1,153,553
Obligations under capital lease, excluding current portion (note 11) 14,559 17,516
Deferred gain on sale of property (note 11) -- 238,075
Mandatory stock warrant obligation (note 8) 19,500 19,500
------------ ------------
Total liabilities 10,461,042 6,400,875
------------ ------------
Commitments and contingencies (notes 11, 12 and 13)
Shareholders' equity (note 8):
Preferred stock, $.01 par value. Authorized 3,000,000 shares, no
shares issued or outstanding at 1997 and 1996 -- --
Common stock, non-voting, $.01 par value. Authorized
657,601 shares, no shares issued or outstanding at 1997 and 1996 -- --
Common stock, $.01 par value. Authorized 15,000,000 shares,
issued and outstanding 9,460,151 and 9,431,203 shares at 1997
and 1996, respectively 94,602 94,312
Additional paid-in capital 44,313,127 44,256,367
Accumulated deficit (29,177,621) (27,355,600)
Foreign currency translation adjustment (13,590) 15,267
------------ ------------
Total shareholders' equity 15,216,518 17,010,346
------------ ------------
Total liabilities and shareholders' equity $ 25,677,560 $ 23,411,221
============ ============
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-45
<PAGE>
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (note 15) $ 39,204,329 $ 33,229,229 $ 30,843,734
Cost of revenues (note 15) 29,786,976 25,241,986 23,094,064
------------ ------------ ------------
Gross margin 9,417,353 7,987,243 7,749,670
------------ ------------ ------------
Operating expenses:
Research and development (note 12) 1,203,502 1,454,180 1,059,048
Selling, general and administrative 10,077,898 9,051,036 7,996,758
------------ ------------ ------------
Total operating expenses 11,281,400 10,505,216 9,055,806
------------ ------------ ------------
Operating loss (1,864,047) (2,517,973) (1,306,136)
------------ ------------ ------------
Other income (expense):
Interest expense (424,739) (324,017) (284,283)
Interest income 157,275 159,024 245,403
Other, net 309,490 200,079 58,537
------------ ------------ ------------
Net other income 42,026 35,086 19,657
------------ ------------ ------------
Net loss $ (1,822,021) $ (2,482,887) $ (1,286,479)
============ ============ ============
Basic and diluted net loss per share (note 1) $ (0.19) $ (0.31) $ (0.19)
============ ============ ============
Weighted average number of shares outstanding (note 1) 9,450,963 7,963,358 6,761,623
============ ============ ============
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-46
<PAGE>
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Additional Currency Total
Preferred Stock Common Stock Paid-In Accumulated Translation Shareholders'
Shares Amount Shares Amount Capital Deficit Adjustment Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -- $ -- 6,263,653 $ 62,636 $ 35,978,675 $(23,586,234) $(15,131) $ 12,439,946
Common stock issued in
secondary public offering -- -- 1,100,000 11,000 3,078,375 -- -- 3,089,375
Exercise of stock options -- -- 34,213 342 58,297 -- -- 58,639
Business acquisitions (note 2) -- -- 171,671 1,717 352,354 -- -- 354,071
Foreign currency translation
adjustment -- -- -- -- -- -- 25,928 25,928
Net loss -- -- -- -- -- (1,286,479) -- (1,286,479)
---- ------ ---------- -------- ------------ ------------ -------- ------------
Balance at December 31, 1995 -- -- 7,569,537 75,695 39,467,701 (24,872,713) 10,797 14,681,480
Common stock issued in
secondary public offering -- -- 1,755,563 17,556 4,587,399 -- -- 4,604,955
Exercise of stock options -- -- 85,698 857 152,686 -- -- 153,543
Common stock issued under
Employee Stock Purchase
Plan -- -- 20,405 204 48,581 -- -- 48,785
Foreign currency translation
adjustment -- -- -- -- -- -- 4,470 4,470
Net loss -- -- -- -- -- (2,482,887) -- (2,482,887)
---- ------ ---------- -------- ------------ ------------ -------- ------------
Balance at December 31, 1996 -- -- 9,431,203 94,312 44,256,367 (27,355,600) 15,267 17,010,346
Exercise of stock options -- -- 4,400 44 1,056 -- -- 1,100
Common stock issued under
Employee Stock Purchase
Plan -- -- 24,548 246 55,704 -- -- 55,950
Foreign currency translation
adjustment -- -- -- -- -- -- (28,857) (28,857)
Net loss -- -- -- -- -- (1,822,021) -- (1,822,021)
---- ------ ---------- -------- ------------ ------------ -------- ------------
Balance at December 31, 1997 -- $ -- 9,460,151 $ 94,602 $ 44,313,127 $(29,177,621) $(13,590) $ 15,216,518
==== ====== ========== ======== ============ ============ ======== ============
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-47
<PAGE>
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,822,021) $(2,482,887) $(1,286,479)
Adjustments to reconcile net loss to
net cash provided by (used) in operating activities:
Depreciation and amortization 1,171,893 1,071,925 881,784
Provision for bad debts 228,144 40,171 164,544
Inventory reserve 275,428 383,307 148,042
(Gain) loss on disposal of equipment 2,188 16,526 (50,467)
Other non-cash items 240,574 (10,890) (31,507)
Changes in assets and liabilities, net of amounts acquired:
Short-term investments 33,833 33,332 1,514,864
Accounts receivable (1,421,268) (292,239) (244,658)
Other receivables (161,925) (77,379) 58,210
Inventories (1,627,104) (450,769) (2,097,823)
Prepaid expenses 587,164 (580,053) 46,091
Accounts payable 2,086,009 85,409 (460,477)
Accrued liabilities 319,921 63,070 (324,627)
Other assets (28,873) (3,000) 66,667
Customer deposits 451,573 (168,646) (110,866)
----------- ----------- -----------
Net cash provided by (used) in operating activities 335,536 (2,372,123) (1,726,702)
----------- ----------- -----------
INVESTING ACTIVITIES:
Acquisition of intangible assets (226,439) (289,818) (396,915)
Acquisition of property, plant and equipment (1,423,012) (1,077,473) (477,404)
Acquisition of subsidiary companies, net of cash acquired -- -- (74,136)
Net proceeds from sale of property, plant and equipment 14,400 8,350 88,050
(Increase) decrease in notes receivable, net of payments received 286,663 273,265 (34,900)
----------- ----------- -----------
Net cash used in investing activities (1,348,388) (1,085,676) (895,305)
----------- ----------- -----------
FINANCING ACTIVITIES:
Increase (decrease) in bank lines 323,391 (541,533) 233,897
Increase in notes payable 250,000 215,000 141,516
Principal payments on notes payable and capital
lease obligations (445,020) (650,149) (584,997)
Proceeds from sale of common stock, net 57,050 4,807,283 3,148,014
----------- ----------- -----------
Net cash provided by financing activities 185,421 3,830,601 2,938,430
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents (304) 1,111 (613)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (827,735) 373,913 315,810
Cash and cash equivalents at beginning of period 2,443,508 2,069,595 1,753,785
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,615,773 $ 2,443,508 $ 2,069,595
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 432,646 $ 324,818 $ 295,915
=========== =========== ===========
Cash paid during the period for taxes $ 14,661 $ 10,446 $ 12,403
=========== =========== ===========
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-48
<PAGE>
CONSEP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. Similar investments with original maturities beyond
three months are considered short-term investments and are carried at cost,
which approximates market value.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Consep,
Inc. and its wholly-owned subsidiaries, Pacoast, Inc. (Pacoast), Valley Green
Center, Inc., Consep de Mexico, S.A. de C.V. (CdM), Chemfree Environment Inc.
(Chemfree), Richard Hunt, Inc., d.b.a. Sierra Ag Chemical (Sierra Ag), Consep
GmbH, and Farchan Laboratories, Inc. (Farchan). All significant intercompany
transactions and balances have been eliminated in consolidation.
(c) ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of
$920,785 and $857,775 at December 31, 1997 and 1996, respectively. The Company
sells its products through agribusiness distributors, consumer products
distributors and retailers and to agricultural growers, primarily in the Central
Valley of California. The Company performs continuing credit evaluations of its
customers and generally does not require collateral.
(d) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and depreciated
using the straight-line method over the estimated useful lives of the assets
ranging from three to twenty years. Leasehold improvements are amortized over
the shorter of the estimated life of the asset or the term of the related lease.
(f) PATENTS, TRADEMARKS, TECHNOLOGY AND REGISTRATIONS
Patents are amortized over seventeen years, technology over five to ten
years, catalog rights over five years, and trademarks and product registrations
over their useful lives, all using the straight-line method.
(g) GOODWILL
Goodwill, which represents the excess of the purchase price over the
fair value of net assets acquired, is amortized over periods ranging from twenty
to twenty-five years using the straight-line method. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
discounted projected future cash flows of the operations or assets from which
the goodwill arose. Amortization charged to operations was $114,290, $123,641
and $125,571 for the years ended December 31, 1997, 1996 and 1995, respectively.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
F-49
<PAGE>
respective tax bases and operating loss and has credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(i) NET LOSS PER COMMON SHARE
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128. Accordingly, "basic net loss per share" and "dilutive net
loss per share" for the year ended December 31, 1997 and for all prior periods
presented were computed using the weighted average number of common shares
outstanding during each year, with diluted net income per share including the
effect of potentially dilutive common shares.
Potentially dilutive common shares related to stock options are
anti-dilutive in a net loss situation and, therefore, were not included in
diluted net loss per share in the accompanying financial statements.
(j) FOREIGN CURRENCY TRANSLATION
The Canadian dollar is the functional currency of Chemfree, the
Company's Canadian subsidiary. Assets and liabilities of Chemfree are translated
to U.S. dollars at current exchange rates, and revenues and expenses are
translated using weighted average rates of exchange. Adjustments arising from
foreign currency translation are included as a separate component of
shareholders' equity. Foreign currency transaction gains and losses are included
as a component of other income and expense and arise primarily from
U.S.-dollar-based amounts held by Chemfree and Mexican-peso-based amounts held
by CdM, the Company's Mexican subsidiary. There are no foreign currency
translation effects arising from CdM as the U.S. dollar is the functional
currency of this subsidiary.
(k) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(l) RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying
consolidated financial statements for 1995 and 1996 to conform with the 1997
presentation.
(m) STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996 the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. As allowed under SFAS No. 123, the Company has continued to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1994 and
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied.
(n) FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents, short-term investments, trade
receivables, accounts payable, customer deposits and short-term borrowings
approximate fair value because of the short-term nature of these instruments.
The fair market value of the Company's long-term debt approximates its carrying
value as the interest rates on borrowings are based on floating rate or the
interest rates approximate the current market interest rate.
F-50
<PAGE>
(2) ACQUISITION
In February 1995, the Company acquired all of the outstanding capital
stock of Farchan, a Florida-based specialty chemicals manufacturer which is
currently supplying pheromones, a major raw material used in the Company's
proprietary products, to the Company. The purchase price of the acquisition was
approximately $589,000, consisting of 171,671 shares of the Company's common
stock valued at $354,000, a non-competition agreement with the former majority
shareholder of Farchan valued at approximately $161,000, and direct costs of the
acquisition of approximately $74,000.
Pursuant to the Agreement and Plan of Merger, the Company covenants
that the 171,671 shares issued to effect the merger (the "Original Shares") will
have an aggregate market value of at least $1 million (the "Guaranteed Value")
for at least three consecutive trading days during the period from February 1,
1997 to January 31, 1998. If the Original Shares do not reach the Guaranteed
Value during the period specified, then the following shall apply: (i) if as of
January 31, 1998, the Original Shares have an aggregate market value of less
than the Guaranteed Value but more than $950,000, then the Company shall issue
additional shares of its common stock to the extent necessary to make the
aggregate value of the Original Shares, plus the additional shares, equal to $1
million; (ii) if as of January 31, 1998, the Original Shares have an aggregate
market value of less than $950,000 but more than $500,000, then the Company
shall, at the Company's option, either (a) issue additional shares of its common
stock, up to a maximum of 171,670 additional shares, to the extent necessary to
make the aggregate value of the Original Shares, plus the additional shares,
equal to $1 million, or (b) deliver the acquired Farchan shares to the previous
Farchan shareholders in exchange for the Original Shares; (iii) if as of January
31, 1998, the Original Shares have an aggregate market value of less than
$500,000, then either (a) the Company shall issue an additional 171,670 shares
of its common stock to the previous Farchan shareholders, or (b) if the Company
does not elect to deliver such additional shares by February 15, 1998, then the
previous Farchan shareholders shall have the option to elect between the
remedies provided in (ii)(a) and (ii)(b) above. Such election by the previous
Farchan shareholders must occur before March 1, 1998. Pursuant to this agreement
the Company issued an additional 171,671 shares on February 12, 1998 to conclude
this transaction and preclude any future obligations.
The aggregate purchase price, less the fair market value of net assets
acquired of approximately $482,000, has been recognized as goodwill and is being
amortized over 20 years on a straight-line basis. The operating results of
Farchan are included in the Company's consolidated results from February 1,
1995.
The above acquisition was accounted for as a purchase.
(3) INVENTORIES
Inventories consist of the following:
DECEMBER 31,
------------
1997 1996
---- ----
Raw materials $ 1,998,509 $ 2,196,006
Work in process -- 44,963
Finished goods--proprietary 4,640,578 3,528,880
Finished goods--distribution 3,227,485 2,717,836
---------- ----------
9,866,572 8,487,685
Less reserve for obsolescence 550,428 493,979
---------- ----------
$ 9,316,144 $ 7,993,706
========== ==========
F-51
<PAGE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
------------
1997 1996
---- ----
Land $ 872,986 $ 502,481
Buildings 2,397,184 1,308,625
Machinery and equipment 3,538,533 2,860,568
Furniture and fixtures 1,203,284 1,088,977
Vehicles 1,082,250 927,892
Leasehold improvements 124,615 314,876
--------- ---------
9,218,852 7,003,419
Less accumulated depreciation
and amortization 3,698,212 2,982,963
--------- ---------
$5,520,640 $4,020,456
========= =========
(5) INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
------------
USEFUL LIVES 1997 1996
------------ ---- ----
Patents, technology and trademarks 5 - 20 years $1,011,483 $ 928,939
Product registrations 10 - 20 years 891,564 798,466
Other 3 - 10 years 462,886 436,946
--------- ---------
2,365,933 2,164,351
Less accumulated amortization 846,589 619,105
--------- ---------
$1,519,344 $1,545,246
========= =========
(6) BANK LINES
In December 1997, the Company renewed its $7.5 million bank line of
credit which matures December 10, 1998 and is secured by substantially all of
the Company's current assets. Maximum borrowings under the credit line cannot
exceed 70% of eligible accounts receivable and between 40% and 50% of eligible
inventory from certain of the Company's distribution operations. Interest is
payable monthly at the bank's prime rate (8.50% at December 31, 1997) plus 1.5%.
At December 31, 1997, the Company had approximately $1.5 million outstanding
under this line.
In addition to the $7.5 million bank line of credit, the Company's
Chemfree subsidiary has a working capital bank line of credit of approximately
$37,000. Interest is payable monthly at the bank's prime rate (6.00% at December
31, 1997) plus 2.0%. At December 31, 1997, there was approximately $14,000
outstanding under this line.
Under the terms of the $7.5 million credit agreement, the Company is
required to maintain certain financial ratios and other financial conditions. At
December 31, 1997, $1,479,000 was outstanding under this line of credit and the
Company was not in complete compliance with the financial covenants. The Company
has obtained a waiver of compliance for the quarter ended December 31, 1997.
F-52
<PAGE>
(7) NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Mortgages payable at interest rates ranging from prime plus 1.5% to
8.85%, secured, payable in monthly installments through June, 2007 $ 1,682,530 $ 595,160
Various notes payable at interest rates ranging from 6.9% to 12.9%,
secured by equipment and vehicles, payable in monthly installments
with various maturity dates through July, 2002 463,236 411,122
Notes payable at interest rates of prime plus 1.5%, secured by
substantially all of the Company's current assets with the outstanding
balances at December 31, 1997 reducing the amount available under the
$7.5 million bank line of credit, payable in monthly installments
through July, 2000 357,709 206,042
Notes payable at an interest rate of 10%, unsecured, payable
upon demand 21,917 39,917
Notes payable to former shareholders of Sierra Ag and Farchan, interest
ranging from 8% to 9%, payable semi-monthly or in annual
installments with maturity dates through 2000 (The former shareholders
of Sierra Ag and Farchan are currently employed by those subsidiaries.) 135,793 214,133
---------- ----------
2,661,185 1,466,374
Less current maturities 527,625 312,821
---------- ----------
Notes payable, excluding current maturities $ 2,133,560 $ 1,153,553
========== ==========
</TABLE>
The aggregate maturities of notes payable for the five years ending
after December 31, 1997 are as follows: 1998 - $527,625; 1999 - $455,478; 2000 -
$347,397; 2001 - $195,609; and 2002 - $180,922.
(8) SHAREHOLDERS' EQUITY
(a) COMMON STOCK
In October 1995, the Company completed a secondary public offering of
its common stock. This offering resulted in net proceeds to the Company of
approximately $3.1 million upon the sale of 1,100,000 shares of common stock.
In October 1996, the Company completed a follow-on public offering of
its common stock. This offering resulted in net proceeds to the Company of
approximately $4.6 million upon the sale of 1,755,563 shares of common stock.
(b) STOCK OPTION PLANS
Under the Company's 1992 Stock Incentive Plan (the "1992 Plan"),
options may be granted to employees and certain other individuals to purchase a
maximum of 339,267 shares of common stock. Both incentive and nonqualified stock
options may be granted under the 1992 Plan. Options granted pursuant to the 1992
Plan become exercisable in various increments determined at the time of grant
and generally expire ten years from the date of grant.
Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"),
options may be granted to employees and certain other individuals to purchase a
maximum of 370,000 shares of common stock. Both incentive and nonqualified stock
options may be granted under the 1993 Plan. Options granted pursuant to the 1993
Plan become exercisable in various increments determined at the time of grant
and generally expire ten years from the date of grant.
Under the Company's 1993 Stock Option Plan for Nonemployee Directors
(the "1993 Director Plan"), options are automatically granted to certain
nonemployee directors immediately following the Company's annual shareholders'
meetings. Annually, each eligible nonemployee director receives an option to
purchase 2,000 shares of the Company's common stock under the 1993 Director
Plan. Options granted under the 1993 Director Plan are exercisable upon grant
and expire ten years from date of grant. The annual number of shares of common
stock for which options may be granted under the 1993 Director Plan is limited
to 24,000.
F-53
<PAGE>
Under the Company's 1997 Stock Incentive Plan (the "1997 Plan"),
options may be granted to employees and certain other individuals to purchase a
maximum of 300,000 shares of common stock. Both incentive and nonqualified stock
options may be granted under the 1997 Plan. Options granted pursuant to the 1997
Plan become exercisable in various increments determined at the time of grant
and generally expire ten years from the date of grant. In February 1998, the
Company's Board of Directors authorized an amendment to the 1997 Plan, subject
to shareholder approval, whereby the number of shares reserved for future
issuance under the 1997 Plan was increased by 300,000.
At December 31, 1997, the Company has reserved an aggregate of 980,756
of its common stock for future issuance upon exercise of stock options pursuant
to the 1992 Plan, the 1993 Plan, the 1993 Director Plan and the 1997 Plan.
Options under the Company's four plans specified above are generally granted at
no less than the market value of the Company's common stock at the date of
grant.
Stock options outstanding and transactions involving the Company's
stock option plans are summarized as follows:
AGGREGATE EXERCISE
EXERCISE PRICE PER
NUMBER PRICE SHARE
------- ----------- ------------
Balance at December 31, 1994 429,729 $ 891,591 $ 0.25- 5.25
Options granted 140,749 406,591 2.63- 3.00
Options canceled (7,900) (22,550) 2.25- 3.25
Options exercised (34,213) (58,639) 0.25- 2.25
------- ----------- ------------
Balance at December 31, 1995 528,365 $ 1,216,993 $ 0.25- 5.25
Options granted 181,566 589,599 2.25- 4.25
Options canceled (92,200) (288,702) 1.75- 5.25
Options exercised (85,698) (153,543) 0.25- 3.25
------- ----------- ------------
Balance at December 31, 1996 532,033 $ 1,364,347 $ 0.25- 4.63
Options granted 235,626 367,439 1.50- 3.25
Options canceled (16,000) (46,850) 2.25- 3.25
Options exercised (4,400) (1,100) 0.25- 0.25
------- ----------- ------------
Balance at December 31, 1997 747,259 $ 1,683,836 $ 0.50- 4.63
======= =========== ============
At December 31, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $0.50 - $4.63 and 7.84
years, respectively. At December 31, 1997 and 1996, the number of options
exercisable was 384,312 and 280,712, respectively, and the weighted average
exercise price of those options was $2.35 and $2.06, respectively.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date as prescribed
by SFAS No. 123, net loss and loss per share would have been increased to the
pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $(1,822,021) $(2,482,887) $(1,286,479)
Net loss - pro forma (1,857,419) (2,577,593) (1,324,853)
Net loss per share - basic and diluted - as reported $ (0.19) $ (0.31) $ (0.19)
Net loss per share - basic and diluted - pro forma (0.20) (0.32) (0.20)
</TABLE>
F-54
<PAGE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
DECEMBER 31,
------------
1997 1996
---- ----
Expected dividend yield 0.00% 0.00%
Expected stock price volatility 94.63% 92.15%
Risk-free interest rate 5.56% 5.57%
Expected life of options 7 years 7 years
The weighted average fair value of options granted during 1997 and 1996
is $1.56 and $3.25 per share, respectively.
(c) STOCK WARRANTS
In 1988, the Company issued warrants for $250,000 to purchase 28,571
shares of its preferred stock. The warrants carry a mandatory repurchase element
which converts to term debt if the Company is unable to meet the repurchase
schedule. The repurchase price of the warrants exceeded the initial issuance
price, therefore, the difference has been accreted to additional paid-in capital
over the term of the warrants. As of December 31, 1997, the Company has
repurchased 25,571 of these warrants. The remaining 3,000 warrants, which were
converted into warrants to purchase common stock in conjunction with the
Company's IPO in February 1994, carry an exercise price of $6.50 per share and
are required to be repurchased by the Company in April 1999 for $19,500.
The Company has also issued warrants to purchase 48,000 shares of its
preferred stock, which were converted into warrants to purchase 48,000 shares of
the Company's common stock upon the closing of the Company's February 1994 IPO.
The exercise price of these warrants is $6.25 per share. Warrants to purchase
19,200 shares of the Company's common stock expired unexercised on February 1,
1995. Of the remaining warrants to purchase 28,800 shares of the Company's
common stock, 16,000 expire October 20, 1999 and 12,800 expire February 1, 2000.
All such remaining warrants were exercisable as of December 31, 1997.
In December 1993, the Company issued warrants to purchase 50,001 shares
of its common stock at an exercise price of $6.00 per share. These warrants were
issued in conjunction with a $3 million loan commitment provided by certain of
the Company's shareholders. The loan commitment expired unused upon the closing
of the Company's IPO in February 1994. The warrants, all of which were
outstanding and none of which had been exercised as of December 31, 1997, expire
December 20, 1998.
In October 1996, the Company issued warrants to purchase 175,556 shares
of common stock to an investment banking firm in connection with underwriting
services rendered to the Company with respect to its follow-on public offering
in October 1996. These warrants carry an exercise price of $3.60 per share and
expire October 23, 2001. These warrants became exercisable on October 23, 1997
and all were outstanding and none had been exercised as of December 31, 1997.
(d) EMPLOYEE STOCK PURCHASE PLAN
During 1995, the Company established an employee stock purchase plan
(the "Plan") whereby eligible employees are able to purchase shares of the
Company's common stock at prices no less than 85% of the fair market value of
the Company's common stock determined at certain specified dates. At December
31, 1997, the Company has reserved 150,000 shares of its common stock for
issuance under the Plan. During 1997 and 1996, 24,548 and 20,405 shares,
respectively, were purchased pursuant to the Plan. During 1995, there were no
shares purchased under this plan.
F-55
<PAGE>
(9) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax effects
of significant items comprising the Company's deferred tax assets and
liabilities at December 31, 1997 and 1996 were as follows:
DECEMBER 31,
------------
1997 1996
---- ----
Deferred tax assets:
Inventories $ 1,091,000 $ 707,000
Allowance for doubtful accounts 163,000 206,000
Tax credit carryforwards 291,000 283,000
Net operating loss carryforwards 8,498,000 8,459,000
Valuation allowance (9,820,000) (9,256,000)
Other 186,000 106,000
--------- ----------
Total deferred tax assets 409,000 505,000
--------- ----------
Deferred tax liabilities:
Tax basis depreciation and amortization 409,000 505,000
--------- ----------
Total deferred tax liabilities 409,000 505,000
--------- ----------
Net deferred tax assets $ -- $ --
========= ==========
The valuation allowance for deferred tax assets as of January 1, 1996
was $8,209,500. The net change in total valuation allowance for the years ended
December 31, 1997 and 1996 was an increase of $564,000 and $1,046,500,
respectively.
The provision for income taxes differs from the "expected" tax benefit
(computed by applying the federal statutory income tax rate to net loss before
taxes) as follows:
DECEMBER 31,
------------
1997 1996
---- ----
Expected statutory federal tax benefit (34)% (34)%
Change in valuation allowance 35 42
State income tax, net of federal (5) (5)
Expiration of state net operating losses 4 --
Other -- (3)
------ ------
Effective tax rate -- % -- %
====== ======
F-56
<PAGE>
The Company has available at December 31, 1997 unused investment
credits, research and development tax credits, and operating loss carryforwards,
which may reduce taxable income in future periods and expire as follows:
STATE FEDERAL
------------- --------------------------------------
RESEARCH
OPERATING AND OPERATING
YEAR OF LOSS INVESTMENT DEVELOPMENT LOSS
EXPIRATION CARRYFORWARDS CREDITS CREDITS CARRYFORWARDS
- ---------- ------------- ---------- ----------- -------------
1998 $ 1,244,000 $ -- $ -- $ --
1999 1,035,000 600 18,000 1,358,000
2000 180,000 14,000 50,000 1,696,000
2001 388,000 3,600 31,000 971,000
2002 -- -- -- 789,000
2003 278,000 -- -- 1,076,000
2004 1,028,000 -- -- 1,240,000
2005 603,000 -- 39,000 484,000
2006 417,000 -- 16,000 1,614,000
2007 784,000 -- 39,000 2,776,000
2008 1,219,000 -- -- 4,074,000
2009 1,133,000 -- 43,000 3,471,000
2010 200,000 -- 10,000 710,000
2011 430,000 -- 37,000 1,435,000
2012 -- -- 8,000 --
----------- ------- -------- -----------
$ 8,939,000 $ 18,200 $ 291,000 $ 21,694,000
=========== ======= ======== ===========
In addition, the Company has available a combined foreign net operating
loss carryforward of approximately $1,592,000 in Austria, Canada and Mexico
which will expire in various years.
A provision of the Tax Reform Act of 1986 required the utilization of
net operating losses and credits be limited when there is a change of more than
50% in ownership of the Company. Such a change occurred with the sales of stock
in 1988, 1989, 1992 and 1996. Accordingly, the utilization of the net operating
loss carryforwards generated from periods prior to March 25, 1988, the period
March 26, 1988 to November 14, 1989, the period November 15, 1989 to July 15,
1992 and the period July 16, 1992 to October 29, 1996 is limited; the amounts
subject to the limitation are approximately $4,200,000, $1,500,000, $5,000,000
and $10,700,000, respectively.
(10) EMPLOYEE SAVINGS PLAN
The Company sponsors a defined contribution plan (the "Plan") covering
all full-time domestic employees. Employees may contribute up to 15% of their
compensation to the Plan. The Company may also make discretionary contributions
to the Plan for the benefit of all eligible employees. Company matching
contributions vest over six years.
(11) LEASES
The Company leases certain assets under various capital leasing
arrangements. Included in property, plant and equipment in the accompanying
consolidated balance sheets are $146,235 and $128,810 of assets under capital
lease at December 31, 1997 and 1996, respectively, net of related accumulated
amortization of $67,164 and $67,910, respectively.
F-57
<PAGE>
Capital lease obligations are summarized as follows:
DECEMBER 31,
------------
1997 1996
---- ----
Leases of certain manufacturing equipment with lease
periods expiring through February 2000, with interest $ 46,206 $ 49,650
ranging from 15.0% to 35.0%
Lease of certain office and computer equipment with lease
period expiring in March 1997, at interest of 13.7% -- 2,235
------- -------
Total obligations under capital lease 46,206 51,885
Less current portion 31,647 34,369
------- -------
Obligations under capital lease, less current portion $ 14,559 $ 17,516
======= =======
During February 1994, the Company sold and leased back the Company's
headquarters building. The selling price was $1,250,000 and the lease term for
the lease-back is ten years. The sale/lease-back transaction resulted in a
deferred gain of approximately $396,000, which was being amortized as an offset
to operating expenses over the term of the lease on a straight-line basis. The
lease included annual payments of approximately $140,000 for the initial three
years of the lease, with three percent increases in years four, seven and ten of
the lease. In June 1997, the Company re-purchased the facility for approximately
$1,500,000 and the remaining deferred gain of approximately $195,000 was applied
against the purchase price of the facility.
The Company also leases certain office and operating facilities, and
certain other equipment under operating leases with
remaining terms ranging from one to five years. Rental expense for all operating
leases, net of the deferred gain amortization related to the sale/lease-back
transaction discussed above, amounted to $234,699, $288,685 and $296,369 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Minimum lease payments under leases expiring subsequent to December 31,
1997 with original terms of one year or more are as follows:
OPERATING
YEAR ENDING DECEMBER 31, CAPITAL LEASES LEASES
------------------------ -------------- ---------
1998 $ 36,792 $ 130,574
1999 12,192 97,835
2000 4,141 30,683
2001 -- 22,232
2002 -- 103
------- --------
Total minimum lease payments 53,125 $ 281,427
========
Less amount representing interest (6,919)
-------
Present value of net minimum lease payments $ 46,206
=======
(12) COMMITMENTS
In November 1993, the Company entered into a License Agreement ("the
Agreement") with Bend Research, Inc. ("Bend Research") whereby the Company will
fund certain research performed by Bend Research and will obtain exclusive
licenses to sell products utilizing the technology developed through the
research provided under the Agreement. Under the terms of the Agreement, the
Company is to fund a minimum of $600,000 of research annually through the term
of the Agreement, which is twenty years. The Agreement can be terminated upon 60
days prior notice by the Company. Bend Research invoiced the Company $78,011,
$246,804 and $375,565 for research and development work performed during the
years ended December 31, 1997, 1996 and 1995, respectively. Payments by the
Company to Bend Research for research and development services provided to the
Company totaled $77,673 in 1997, which amount has been acknowledged by Bend
Research to satisfy the Company's obligation to Bend Research for research and
development services. For certain products sold by the Company utilizing
technology provided under the Agreement, the Company is required to pay
royalties to Bend Research based upon a percentage of product margins
attributable to the provided technology as defined in the Agreement. During
January 1995, royalties for the term of the Agreement related to certain
products incorporating technology provided by Bend Research were prepaid by the
Company. Such prepaid royalties totaled $121,000 and are being amortized as the
related products are sold by the Company. In addition, Bend Research and the
Company agreed to reduce the annual commitment described above from $600,000 to
$191,500 in 1996 and from $600,000 to $125,000 in 1997. During 1998, the annual
commitment was waived with no minimum requirement. For years subsequent to 1998,
the $600,000 annual commitment will again be in effect.
F-58
<PAGE>
The Company was incorporated by Bend Research in 1984. Bend Research
owns less than 5% of the Company's common stock as of December 31, 1997. Walter
C. Babcock, the President, Chief Executive Officer, and Chairman of the Board of
Bend Research, is also a director of the Company and serves on the Company's
Scientific Advisory Board. Dr. Babcock is also a shareholder of Bend Research
and the Company. Volker G. Oakey, the President, Chief Executive Officer, and
Chairman of the Board of the Company is also a director of Bend Research and is
a shareholder of the Company.
In April 1996, the Company entered into a five-year purchase agreement
with a supplier in exchange for exclusive selling rights to this product in the
United States, Canada and Mexico. The agreement requires the Company to purchase
approximately $200,000 per year of this product for five years. The agreement
automatically renews every three years thereafter for an additional three-year
term.
During October 1994, the Company entered into a license agreement to
make, use, and sell certain consumer products. Pursuant to this license
agreement, the Company is required to pay the licensor guaranteed minimum
royalties of $25,000 per year through September 1999.
During 1993, the Company entered into a non-compete agreement with a
previous shareholder of a business acquired by the Company. Pursuant to this
non-compete agreement, the Company is required to make quarterly payments of
$5,000 through January 2000.
(13) CONTINGENCIES
In October 1996, a building owned by the Company's Farchan subsidiary
was destroyed by fire and the Company has not reached a settlement with its
former insurance carrier for the claims associated with its additional expenses
for outside pheromone purchases. As a result, the Company has filed a lawsuit
against the insurance carrier in the United States District Court to recover its
claims.
(14) NON-CASH INVESTING AND FINANCING ACTIVITIES
The following is a summary of non-cash investing and financing
activities for the three years ended December 31, 1997, 1996 and 1995:
DECEMBER 31, 1997:
During the year ended December 31, 1997, the Company acquired a
building for $1,495,000, of which $1,125,000 was financed by the issuance of a
note payable. The Company also acquired vehicles and equipment for $259,371
through the issuance of notes and capital leases payable. In addition, during
1997, the Company wrote down the carrying value of an unfinished specialty
chemicals facility held for re-sale by $200,000.
DECEMBER 31, 1996:
During the year ended December 31, 1996, the Company acquired a
building for $396,055 and acquired vehicles for $182,045 through the issuance of
notes payable. Also, during 1996, the Company converted $499,959 of trade
accounts receivable to notes receivable.
DECEMBER 31, 1995:
Effective February 1, 1995, the Company acquired all of the outstanding
capital stock of Farchan as follows:
Fair value of assets acquired $ 1,135,684
Issuance of 171,671 shares of the Company's common stock 354,071
Issuance of notes payable in conjunction with non-compete
agreement 160,816
Cash paid 74,136
----------
Liabilities assumed $ 546,661
==========
During the year ended December 31, 1995, the Company also acquired
$103,088 of equipment through the issuance of notes payable.
F-59
<PAGE>
(15) BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into three business
segments: domestic proprietary products, foreign proprietary products and
distribution operations. Proprietary products include products manufactured by
the Company, and distribution operations include the distribution and sale of
agrichemicals and other agricultural products by the Company's distribution
subsidiaries. Proprietary products manufactured by the Company which are sold
through the Company's wholly-owned distribution subsidiaries are included in
proprietary products in the following table. Summarized financial information by
business segment for the years ended December 31, 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
PROPRIETARY PRODUCTS DISTRIBUTION
DOMESTIC FOREIGN OPERATIONS (1) TOTAL
-------- ------- -------------- -----
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Revenues $ 10,351,905 $ 2,610,677 $ 26,241,747 $ 39,204,329
Cost of revenues 6,359,843 1,930,883 21,496,250 29,786,976
Operating income (loss) (2,263,589) (613,747) 1,013,289 (1,864,047)
Transfers 1,918,309 1,454,410 174 3,372,893
Total assets 12,370,484 3,067,331 10,239,745 25,677,560
Depreciation and amortization 662,221 109,787 399,885 1,171,893
Capital expenditures 2,180,755 60,118 371,510 2,612,383
DECEMBER 31, 1996:
Revenues $ 8,431,056 $ 1,987,476 $ 22,810,697 $ 33,229,229
Cost of revenues 5,278,965 1,406,346 18,556,675 25,241,986
Operating income (loss) (2,654,365) (839,605) 975,997 (2,517,973)
Transfers 1,414,402 231,003 3,925 1,649,330
Total assets 11,764,452 3,374,907 8,271,862 23,411,221
Depreciation and amortization 610,226 89,612 372,087 1,071,925
Capital expenditures 1,245,375 91,024 304,616 1,641,015
DECEMBER 31, 1995:
Revenues $ 7,611,108 $ 1,774,004 $ 21,458,622 $ 30,843,734
Cost of revenues 4,467,421 1,011,406 17,615,237 23,094,064
Operating income (loss) (1,866,238) (29,204) 589,306 (1,306,136)
Transfers 1,093,833 99,644 3,957 1,197,434
Total assets 10,395,536 2,486,026 8,677,012 21,558,574
Depreciation and amortization 414,909 82,282 384,593 881,784
Capital expenditures 398,247 34,864 147,382 580,493
</TABLE>
(1) The distribution operations business segment consists only of domestic
distribution operations.
During the years ended December 31, 1997, 1996 and 1995, export sales
of the Company's proprietary products and sales of proprietary products
occurring outside of the United States totaled $3,332,346, $2,522,164 and
$2,217,266, respectively.
F-60
<PAGE>
(16) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OTHER OF PERIOD
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ 857,775 228,144 165,134 (1) -- 920,785
Inventory valuation reserve 493,979 275,428 218,979 (2) -- 550,428
Product warranty reserve 7,834 94,469 87,202 (3) -- 15,101
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts $ 834,128 40,171 16,524 (1) -- 857,775
Inventory valuation reserve 261,883 383,307 151,211 (2) -- 493,979
Product warranty reserve 58,292 52,329 102,787 (3) -- 7,834
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful accounts $ 681,198 164,544 11,614 (1) -- 834,128
Inventory valuation reserve 227,239 148,042 113,398 (2) -- 261,883
Product warranty reserve 82,179 83,494 107,381 (3) -- 58,292
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Deductions primarily represent accounts written off during the period.
(2) Deductions primarily represent inventory scrapped during the period.
(3) Deductions primarily represent warranty credits given to customers for
products returned under warranty.
F-61
<PAGE>
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 437,576 $ 1,615,773
Short-term investments 68,334 69,334
Accounts receivable, net 9,926,168 4,733,525
Other receivables 489,470 458,283
Inventories, net (note 2) 9,987,821 9,316,144
Prepaid expenses 484,994 372,023
------------ -----------
Total current assets 21,394,363 $16,565,082
Property, plant and equipment, net 5,680,683 5,520,640
Notes receivable and other assets 60,571 57,620
Intangible assets, net 1,447,379 1,519,344
Goodwill, net 1,957,811 2,014,874
------------ -----------
Total assets $ 30,540,807 $25,677,560
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines (note 3) $ 3,975,000 $ 1,492,973
Accounts payable 7,324,376 4,581,462
Current portion of notes payable and leases payable 495,897 559,272
Accrued liabilities 1,365,015 925,568
Customer deposits 171,575 734,148
------------ -----------
Total current liabilities 13,331,863 8,293,423
Notes and leases payable, excluding current maturities 2,042,051 2,148,119
Mandatory stock warrant obligation 19,500 19,500
------------ -----------
Total liabilities 15,393,414 10,461,042
------------ -----------
Shareholders' equity:
Common stock 96,577 94,602
Additional paid-in capital 44,226,742 44,313,127
Accumulated deficit (29,117,120) (29,177,621)
Foreign currency translation adjustment (58,806) (13,590)
------------ -----------
Total shareholders' equity 15,147,393 15,216,518
Total liabilities and shareholders' equity $ 30,540,807 $25,677,560
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-62
<PAGE>
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 22,777,724 $ 24,605,875
Cost of revenues 16,922,542 17,739,937
------------ ------------
Gross margin 5,855,182 6,865,938
------------ ------------
Operating expenses (note 4):
Research and development 824,808 614,116
Selling, general and administrative 4,763,350 5,427,297
------------ ------------
Total operating expenses 5,588,158 6,041,413
------------ ------------
Operating income 267,024 824,525
------------ ------------
Other income (expense):
Interest expense (291,639) (170,703)
Interest income 63,207 51,997
Other, net 21,909 208,184
------------ ------------
Net other income (loss) (206,523) 89,478
------------ ------------
Net income $ 60,501 $ 914,003
============ ============
Basic and diluted net income per share (note 5) $ 0.01 $ 0.10
============ ============
Weighted average number of shares used in the computation of (note 5):
Basic earnings per share 9,606,574 9,443,793
============ ============
Diluted earnings per share 9,639,608 9,543,889
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-63
<PAGE>
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Additional Currency Total
Preferred Stock Common Stock Paid-In Accumulated Translation Shareholders'
Shares Amount Shares Amount Capital Deficit Adjustment Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 -- $ -- 9,460,151 $ 94,602 $ 44,313,127 $(29,177,621) $(13,590) $ 15,216,518
Additional shares issued under
Farchan merger agreement -- -- 171,671 1,717 (1,717) -- -- --
Exercise of stock options -- -- 12,000 120 44,880 -- -- 45,000
Additional costs related to the
acquisition of Sierra Ag -- -- -- -- (150,000) -- -- (150,000)
Common stock issued under
Employee Stock Purchase
Plan -- -- 13,842 138 20,452 -- -- 20,590
Foreign currency translation
adjustment -- -- -- -- -- -- (45,216) (45,216)
Net income -- -- -- -- -- 60,501 -- 60,501
---- ------ ---------- -------- ------------ ------------ -------- ------------
Balance at June 30, 1998 -- $ -- 9,657,664 $ 96,577 $ 44,226,742 $(29,117,120) $(58,806) $ 15,147,393
==== ====== ========== ======== ============ ============ ======== ============
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-64
<PAGE>
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 60,501 $ 914,003
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 635,647 574,015
Provision for bad debts 188,842 72,038
Inventory reserve 75,113 61,077
(Gain) loss on disposal of equipment 6,636 (362)
Other non-cash items 47,651 184,102
Changes in assets and liabilities, net of amounts acquired:
Short-term investments 1,000 500
Accounts receivable (5,413,684) (6,379,108)
Other receivables (31,187) (388,664)
Inventories (761,571) (2,186,403)
Prepaid expenses (114,138) 555,944
Accounts payable 2,773,746 3,125,248
Accrued liabilities 440,400 458,091
Other assets 1,263 6,461
Customer deposits (562,574) (185,346)
----------- -----------
Net cash used in operating activities (2,652,355) (3,188,404)
----------- -----------
INVESTING ACTIVITIES:
Acquisition of intangible assets (67,152) (39,920)
Acquisition of property, plant and equipment (575,107) (934,047)
Additional costs related to acquisitions of subsidiaries (177,744) --
Net proceeds from sale of property, plant and equipment 5,500 --
(Increase) decrease in notes receivable, net of payments received (5,428) 51,216
----------- -----------
Net cash used in investing activities (819,931) (922,751)
----------- -----------
FINANCING ACTIVITIES:
Increase in bank lines 2,482,017 4,414,340
Increase in notes payable 75,000 250,000
Principal payments on notes payable and capital
lease obligations (300,918) (196,228)
Proceeds from sale of common stock, net 65,590 31,819
----------- -----------
Net cash provided by financing activities 2,321,689 4,499,931
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (27,600) 54
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,178,197) 388,830
Cash and cash equivalents at beginning of period 1,615,773 2,443,508
----------- -----------
Cash and cash equivalents at end of period $ 437,576 $ 2,832,338
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-65
<PAGE>
CONSEP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the statements include all
adjustments necessary (which are of a normal and recurring nature) for the fair
presentation of the results of the interim periods presented. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 1997, as included in the
Company's 1997 Annual Report to Shareholders.
NOTE 2 - INVENTORIES
Inventories, stated at the lower of cost or market, consist of:
June 30, December 31,
1998 1997
---- ----
Raw materials $ 2,024,768 $ 1,998,509
Finished goods - proprietary 4,595,788 4,640,578
Finished goods - distribution 3,953,069 3,227,485
---------- ---------
10,573,625 9,866,572
Less reserve for obsolescence 585,804 550,428
---------- ---------
$ 9,987,821 $ 9,316,144
========== =========
NOTE 3 - BANK LINES
The Company has operated under a $7.5 million bank line of credit which matures
in December 1998 and is secured by substantially all of the Company's current
assets. Maximum borrowings under the credit line cannot exceed 70% of eligible
accounts receivable and between 40% and 50% of eligible inventory from certain
of the Company's distribution operations. Under the terms of the credit
agreement, the Company is required to maintain certain financial ratios and
other financial conditions. At June 30, 1998, $3,975,000 was outstanding under
this line of credit and the Company was not in compliance with the tangible net
worth, the debt to tangible net worth ratio and the quick ratio covenants. The
Company has obtained a waiver of compliance for the quarter ended June 30, 1998.
In connection with the Bank's waiver, the line of credit has been reduced to
$5.0 million from the $7.5 million originally available.
NOTE 4 - OPERATING EXPENSES
Research and development and selling, general and administrative expenses are
allocated to the Company's proprietary product operations. Distribution expenses
consist entirely of selling, general and administrative costs of the Company's
distribution operations.
F-66
<PAGE>
NOTE 5 - NET INCOME PER COMMON SHARE
For the six months ended June 30, 1998 and 1997, basic net income per common
share is based upon the weighted average number of common shares outstanding
during each period, with diluted net income per share including the effect of
potentially dilutive common shares.
NOTE 6 - COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and display
of comprehensive income and its components. The following is a reconciliation of
net income to comprehensive income:
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, June 30,
1998 1997
--------- ---------
<S> <C> <C>
Net income $ 60,501 $ 914,003
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments (45,215) (10,272)
--------- ---------
Comprehensive income $ 15,286 $ 903,731
========= =========
</TABLE>
NOTE 7 - SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURES
Cash paid for interest and income taxes was as follows:
Six Months Ended Income
June 30, Interest Taxes
-------- -------- -----
1998 $ 289,601 $ 5,062
1997 $ 172,392 $ 11,844
Following is a summary of non-cash investing and financing activities of the
Company for the six months ended June 30, 1998 and 1997:
During the six months ended June 30, 1998, the Company acquired
vehicles for $55,455 through the issuance of notes payable.
During the six months ended June 30, 1997, the Company acquired
equipment and vehicles for $178,393 through the issuance of notes and
leases payable. In June 1997, the Company completed the purchase of
its headquarters and manufacturing facility which was partially
financed by a $1,125,000 note payable to a bank.
In addition, as a result of the Company's intention to sell its
unfinished specialty chemicals manufacturing plant in Alachua,
Florida, the Company recorded a $175,000 write down to adjust the
facility's carrying value to the estimated fair market value.
F-67
<PAGE>
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Statement changes the way public companies report segment information in annual
financial statements and also requires those companies to report selected
segment information in interim financial reports to shareholders. The Company
plans to adopt the statement for the year ended December 31, 1998.
NOTE 9 - SUBSEQUENT EVENTS
On September 8, 1998 the Company entered into an Agreement and Plan of Merger
with Verdant Brands, Inc., (formerly Ringer Corporation) providing for the
merger of the Company with a wholly-owned subsidiary of Verdant Brands, Inc. in
a 0.95 for one stock swap. The proposed merger is subject to, among other
things, the approval of Consep's shareholders, the approval of Verdant's
shareholders and applicable third-party consents and approvals. The proposed
merger is expected to be completed by December 31, 1998.
F-68
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated September 8, 1998, (the
"AGREEMENT DATE") by and among Verdant Brands, Inc., a Minnesota corporation
("PARENT"), Consep Acquisition, Inc., an Oregon corporation and wholly owned
subsidiary of Parent ("MERGER SUB"), and Consep, Inc., a Oregon corporation (the
"COMPANY").
WHEREAS, the respective boards of directors of the Company,
Parent and Merger Sub have determined that it is in the best interests of
Company, Parent and Merger Sub and their respective shareholders to consummate
the merger of Merger Sub and the Company (the "MERGER") upon the terms and
subject to the conditions of this Agreement;
WHEREAS, as a result of the Merger, all of the outstanding
common stock, $.01 par value, of the Company ("COMPANY COMMON STOCK"), will be
converted into the right to receive common stock, $.01 par value, of Parent
("PARENT COMMON STOCK");
WHEREAS Parent, Merger Sub, and the Company desire to make
certain representations, warranties, covenants, and agreements in connection
with the Merger and also to prescribe various conditions to the Merger; and
WHEREAS, for federal income Tax purposes, it is intended that
the Merger shall qualify as a reorganization under the provisions of Section
368(a) of the United States Internal Revenue Code of 1986, as amended (the
"CODE");
NOW, THEREFORE, in consideration of the representations,
warranties, covenants, and agreements, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth
in this Agreement, at the Effective Time, Merger Sub shall be merged with and
into the Company in accordance with the Business Corporation Act of the State of
Oregon ("OREGON LAW"), whereupon the separate existence of Merger Sub shall
cease, and the Company shall continue as the surviving corporation (the
"SURVIVING CORPORATION").
1.2 Articles of Merger; Effective Time. As soon as practicable after
satisfaction or, to the extent permitted hereunder, waiver of all conditions to
the Merger set forth in Article VII, the parties shall cause the Merger to be
consummated by filing articles of merger (the "ARTICLES OF MERGER") with the
Secretary of State of the State of Oregon and make all other filings or
recordings required by Oregon Law in connection with the Merger and the
transactions contemplated by this Agreement. The Merger shall become effective
at such time as the Articles of Merger are duly filed with the Secretary of
State of the State of Oregon or at such later time as may be agreed by the
parties in writing and specified in the Articles of Merger (the "EFFECTIVE
TIME").
1.3 Effect of Merger. From and after the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, powers, and franchises and
be subject to all of the restrictions, disabilities, and duties of the Company
and Merger Sub, all as provided under Oregon Law.
1.4 Closing. The closing of the Merger (the "CLOSING") will take place
at 10:00 a.m., Pacific time, on a date to be specified by the parties, which
shall be no later than the second business day after satisfaction or waiver of
the conditions set forth in Article VII (the "CLOSING DATE"), at a time and
place and by a method mutually agreed to by the parties.
A-1
<PAGE>
1.5 Articles of Incorporation; Bylaws. At the Effective Time, the
articles of incorporation and bylaws of the Merger Sub as in effect immediately
prior to the Effective Time, shall be the articles of incorporation and bylaws
of the Surviving Corporation, except that Article I of such articles of
incorporation shall be amended to read as follows:
"The name of the corporation is Consep, Inc."
1.6 Officers and Directors. The officers of the Company immediately
prior to the Effective Time shall be the initial officers of the Surviving
Corporation. The initial directors of the Surviving Corporation shall be Stanley
Goldberg, Volker G. Oakey and Mark G. Eisenschenk.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
2.1 Conversion of Securities. As of the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any shares of
Company Common Stock or any shares of capital stock of Merger Sub:
(a) Exchange Ratio. Subject to the provisions of Section 2.4,
each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than (i) any shares to be canceled
pursuant to Section 2.1(b)) shall be converted, subject to the
provisions of Section 2.5(e), into the right to receive ninety-five one
hundredths (0.95) of one share (the "EXCHANGE RATIO") of Parent Common
Stock (such shares of Parent Common Stock being hereinafter referred to
as the "MERGER CONSIDERATION").
(b) Cancellation of Shares. Each share of Company Common Stock
issued and outstanding immediately prior to the Effective Time and
owned by Parent, Merger Sub or the Company or any direct or indirect
subsidiary of Parent, Merger Sub or the Company shall be canceled and
extinguished without any conversion thereof and no payment shall be
made with respect thereto.
(c) Stock of Merger Sub. Each share of common stock, $.01 par
value per share, of Merger Sub ("MERGER SUB COMMON STOCK") issued and
outstanding immediately prior to the Effective Time shall be converted
into one validly issued, fully paid and nonassessable share of Common
Stock of the Surviving Corporation.
2.2 Rights of Holders of Company Common Stock. On and after the
Effective Time and until surrendered for exchange, each outstanding stock
certificate which immediately prior to the Effective Time represented shares of
Company Common Stock shall, except as provided in Section 2.4(e), be deemed for
all purposes to evidence ownership of and to represent the right to receive the
number of whole shares of Parent Common Stock into which such shares of Company
Common Stock shall have been converted. The record holder of such outstanding
certificate shall, after the Effective Time, be entitled to vote the shares of
Parent Common Stock into which such shares of Company Common Stock shall have
been converted on any matters on which the holders of record of Parent Common
Stock, as of any date subsequent to the Effective Time, shall be entitled to
vote. In any matters relating to such certificates, Parent may rely conclusively
upon the record of shareholders maintained by the Company containing the names
and addresses of the holders of record of Company Common Stock at the Effective
Time.
2.3 Adjustments to Exchange Ratio. The Exchange Ratio set forth in
Section 2.1 shall be adjusted to reflect fully the effect of any stock split,
reverse split, stock dividend (including any dividend or distribution of
securities convertible into Company Common Stock or Parent Common Stock),
reorganization, recapitalization or other like change with respect to Company
Common Stock or Parent Common Stock occurring after the Agreement Date and prior
to the Effective Time.
2.4 Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, Parent shall
deposit with Norwest Bank Minnesota, National Association or such other
bank or trust company as may be designated by Parent and as is
A-2
<PAGE>
reasonably acceptable to the Company (the "Exchange Agent")
certificates representing the shares of Parent Common Stock issuable
pursuant to Section 2.1 (such shares of Parent Common Stock, together
with any dividends or distributions with respect thereto, being
hereinafter referred to as the "EXCHANGE FUND"). The Exchange Agent
shall hold the Exchange Fund for the benefit of holders of shares of
Company Common Stock. The Exchange Agent shall distribute the Exchange
Fund pursuant to Section 2.1 in exchange for outstanding shares of
Company Common Stock (other than Dissenting Shares). Except as
contemplated by Section 2.4(f), the Exchange Fund shall not be used for
any other purpose. Parent shall make available to the Exchange Agent
from time to time as needed, cash sufficient to pay cash in lieu of
fractional shares pursuant to Section 2.4(e).
(b) Exchange Procedures. As promptly as practicable after the
Effective Time, Parent shall cause the Exchange Agent to mail to each
holder of record of a certificate or certificates which immediately
prior to the Effective Time represented outstanding shares of Company
Common Stock (the "CERTIFICATES") whose shares were converted into the
right to receive shares of Parent Common Stock pursuant to Section
2.1(a) a letter of transmittal in customary form. The letter of
transmittal shall specify that delivery of Certificates shall be
effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent. The
Exchange Agent shall accompany the letter of transmittal with
instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock.
Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, and such other
documents as the Exchange Agent may reasonably require, the holder of
such Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Parent Common
Stock (rounded down to the nearest whole share) which such holder has
the right to receive pursuant to the provisions of this Article II
(after taking into account all the shares of Company Common Stock then
held by such holder under all such Certificates so surrendered), cash
in lieu of fractional shares of Parent Common Stock to which such
holder is entitled pursuant to Section 2.4(e), and any dividends or
other distributions to which such holder is entitled pursuant to
Section 2.4(c). The Exchange Agent shall forthwith cancel the
Certificates so surrendered. If there is a transfer of share ownership
which is not registered in the transfer records of the Company, a
certificate representing the proper number of shares of Parent Common
Stock may be issued to a person other than the person in whose name the
Certificate so surrendered is registered, if, upon presentation to the
Exchange Agent, such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the person requesting such
payment shall pay any transfer or other Taxes required by reason of the
issuance of shares of Parent Common Stock to a person other than the
registered holder of such Certificate or establish to the reasonable
satisfaction of Parent that such Tax has been paid or is not
applicable. Except as provided in Section 2.4, until surrendered as
contemplated by this Section 2.4(b), each Certificate shall be deemed
at any time after the Effective Time to represent only the right to
receive upon such surrender the Certificate representing shares of
Parent Common Stock, cash in lieu of any fractional shares of Parent
Common Stock as contemplated by this Section 2.4, and any dividends or
other distributions to which such holder is entitled pursuant to
Section 2.4(c). No interest will be paid or will accrue on any cash
payable pursuant to Sections 2.4(c) or 2.4(e).
(c) Distributions with Respect to Unexchanged Shares. Parent
will pay no dividends and make no other distributions with respect to
Parent Common Stock with a record date after the Effective Time to the
holder of any unsurrendered Certificate with respect to the shares of
Parent Common Stock represented thereby, and Parent will make no cash
payment in lieu of fractional shares to any such holder pursuant to
Section 2.4(e) until the holder of record of such Certificate
surrenders such Certificate. Following surrender of any such
Certificate, the Exchange Agent, on behalf of Parent, shall pay to the
record holder of the Certificate representing whole shares of Parent
Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any cash payable in lieu of a
fractional share of Parent Common Stock to which such holder is
entitled pursuant to Section 2.4(e) and the amount of dividends or
other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common
Stock and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time but
prior to such surrender and a payment date subsequent to such surrender
payable with respect to such whole shares of Parent Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All
shares of Parent Common Stock issued upon the surrender for exchange of
shares of Company Common Stock in accordance with the terms hereof
A-3
<PAGE>
(including any cash paid pursuant to Section 2.4(c) or 2.4(e)) shall be
deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Company Common Stock.
(e) No Fractional Shares.
(i) No certificates or scrip representing fractional
shares of Parent Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional
share interests will not entitle the owner thereof to vote or
to any rights of a shareholder of Parent.
(ii) Notwithstanding any other provision of this
Agreement, each holder of shares of Company Common Stock
exchanged for shares of Parent Common Stock pursuant to the
Merger who would otherwise have been entitled to receive a
fraction of a share of Parent Common Stock (after taking into
account all Certificates delivered by such holder) shall
receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of Parent Common
Stock multiplied by the closing price of Parent Common Stock
on the Closing Date.
(f) Termination of Exchange Fund. The Exchange Agent shall
deliver any portion of the Exchange Fund that remains undistributed to
the holders of the Certificates for two years after the Effective Time
to Parent, upon demand. Any holders of the Certificates who have not
theretofore complied with this Article II shall thereafter look only to
Parent for payment of their claim for Parent Common Stock, any cash in
lieu of fractional shares of Parent Common Stock, and any dividends or
distributions with respect to Parent Common Stock.
(g) No Liability. None of Parent, Merger Sub, the Company or
the Exchange Agent shall be liable to any person in respect of any
shares of Parent Common Stock (or dividends or distributions with
respect thereto) or cash in the Exchange Fund delivered to a public
official pursuant to any applicable abandoned property, escheat, or
similar law.
(h) Investment of Exchange Fund. The Exchange Agent shall
invest any cash included in the Exchange Fund in deposit accounts, as
directed by Parent, on a daily basis. The Exchange Agent shall pay any
interest and other income resulting from such investments to Parent.
(i) Lost Certificates. If any Certificate shall have been
lost, stolen, or destroyed, upon the making of an affidavit of that
fact by the person claiming such Certificate to be lost, stolen, or
destroyed, and, if required by the Surviving Corporation, upon the
delivery to the Exchange Agent of a bond in such sum as the Surviving
Corporation may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will
issue in exchange for such lost, stolen, or destroyed Certificate the
shares of Parent Common Stock and any cash in lieu of fractional
shares, and unpaid dividends and distributions on shares of Parent
Common Stock deliverable in respect thereof, pursuant to this
Agreement.
2.5 Stock Options.
(a) Company Stock Options Outstanding. Each option to purchase
shares of Company Common Stock (a "COMPANY OPTION") under the Company's
1992 Stock Incentive Plan, 1993 Stock Incentive Plan, 1993 Stock Option
Plan for Nonemployee Directors, or 1997 Stock Incentive Plan, each as
amended (the "OPTION PLANS"), outstanding immediately prior to the
Effective Time shall remain outstanding following the Effective Time.
(b) Assumption by Parent. At the Effective Time, Parent shall
assume each Company Option by virtue of the Merger and without any
further action on the part of the Company or the holders thereof.
Parent shall assume each such option in such manner that Parent (i) is
a corporation "assuming a stock option in a transaction to which
Section 424(a) applies" within the meaning of Section 424 of the Code
or (ii) to the extent that Section 424 of the Code does not apply to
any such Company Option, would be such a corporation were Section 424
of the Code applicable to such Company Option. In the case of any
Company Option to which Section 422 of the Code applies, the
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option price per share, the number of shares purchasable pursuant to
such Company Option and the terms and conditions of exercise thereof
shall be determined in order to comply with Section 424(a) of the Code.
(c) Terms of Company Options. From and after the Effective
Time, all references to the Company in the Company Options and the
related stock option agreements shall be deemed to refer to Parent.
After the Effective Time, each Company Option assumed by Parent shall
be exercisable upon the same terms and conditions as were in effect
under the Company Options and the related option agreements immediately
prior to the Effective Time, except that (i) each Company Option shall
be exercisable for that whole number of shares of Parent Common Stock
(rounded down to the nearest whole share) equal to the number of shares
of Company Common Stock subject to such Company Option immediately
prior to the Effective Time multiplied by the Exchange Ratio, and (ii)
the option price per share of Parent Common Stock shall be an amount
equal to the option price per share of Company Common stock subject to
such Company Option in effect immediately prior to the Effective Time
divided by the Exchange Ratio (the option price per share, as so
determined, being rounded upward to the nearest full cent).
2.6 Warrants.
(a) Company Warrants Outstanding. Each outstanding warrant to
purchase shares of Company Common Stock (a "COMPANY WARRANT")
outstanding immediately prior to the Effective Time shall remain
outstanding following the Effective Time. To the extent permitted by
the terms of the Company Warrants, at the Effective Time, Parent shall
assume each Company Warrant, by virtue of the Merger and without any
further action on the part of the Company or the holders thereof.
(b) Terms of Company Warrants. To the extent permitted by the
terms of the Company Warrants, from and after the Effective Time, all
references to the Company in the Company Warrants and the related
warrant agreements shall be deemed to refer to Parent. After the
Effective Time, each Company Warrant assumed by Parent shall be
exercisable upon the same terms and conditions as were in effect under
the Company Warrants and the related warrant agreements immediately
prior to the Effective Time, except that, to the extent permitted by
the terms of the Company Warrants, (i) each Company Warrant shall be
exercisable for that whole number of shares of Parent Common Stock
(rounded down to the nearest whole share) equal to the number of shares
of Company Common Stock subject to such Company Warrant immediately
prior to the Effective Time multiplied by the Exchange Ratio and (ii)
the warrant price per share of Parent Common Stock shall be an amount
equal to the warrant price per share of Company Common stock subject to
such Company Warrant in effect immediately prior to the Effective Time
divided by the Exchange Ratio (the warrant price per share, as so
determined, being rounded upward to the nearest full cent).
2.7 Notices to Option and Warrant Holders. As soon as practicable
after the Effective Time, Parent shall deliver to each holder of a Company
Option or Company Warrant, an appropriate notice setting forth such holder's
rights pursuant thereto. Parent shall notify such holders that the Company
Option or Company Warrant, as the case may be, shall continue in effect on the
same terms and conditions (including anti-dilution provisions, and subject to
the adjustments required by Sections 2.5 and 2.6 after giving effect to the
Merger). Parent shall comply with the terms of each Company Option or Company
Warrant. Parent shall use reasonable efforts to ensure that each Company Option
and Company Warrant, to the extent it qualifies for special Tax treatment prior
to the Effective Time (including, without limitation, Section 422 of the Code),
shall continue so to qualify after the Effective Time. Parent shall take all
corporate action necessary to reserve for issuance a sufficient number of shares
of Parent Common Stock for delivery pursuant to the terms set forth in Sections
2.5 and 2.6. After the Effective Time (but in no event later than 90 days after
the Effective Time), Parent shall file a Registration Statement on Form S-8 with
respect to the shares of Parent Common Stock subject to Company Options, and
shall use its reasonable efforts to maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus
contained therein) for so long as such options remain outstanding.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
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The Company represents and warrants to Parent and Merger Sub that,
except as set forth in, and qualified by, the Company disclosure schedules
attached to this Agreement (the "COMPANY DISCLOSURE SCHEDULES"), which schedules
identify exceptions by specific section reference):
3.1 Corporate Existence and Power. The Company is a corporation duly
organized and existing under the laws of the State of Oregon. The Company has
all corporate power required to carry on its business as now conducted. The
Company is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the character of the property it owns or
leases or the nature of its activities makes such qualification necessary,
except for those jurisdictions in which the failure to be so qualified would not
have a material adverse effect on the Company and its subsidiaries, taken as a
whole (a "COMPANY MATERIAL ADVERSE EFFECT"). For purposes of this Agreement, a
"Company Material Adverse Effect" means (i) a material adverse effect on the
business, assets (including intangible assets), liabilities, financial
condition, or results of operations of the Company and any of its subsidiaries,
taken as a whole, or on the ability of the Surviving Corporation following the
Merger to continue the business of the Company and any of its subsidiaries,
taken as a whole, substantially as currently conducted or proposed to be
conducted, or (ii) a material impairment of the ability of the Company to
perform any of its obligations under this Agreement or to consummate the Merger.
The Company has delivered to Parent correct and complete copies of the Company's
articles of incorporation and bylaws in effect as of the Agreement Date.
3.2 Subsidiaries. Schedule 3.2 lists each subsidiary of the Company,
together with its jurisdiction of incorporation or organization. All outstanding
shares of capital stock of each such subsidiary have been duly authorized and
validly issued and are fully paid and nonassessable. The Company owns all of
such shares, free and clear of pledges, claims, Liens, charges, encumbrances,
and security interests of any nature whatsoever (each, a "LIEN"). No options,
warrants, or other rights to acquire any securities of any type of any of such
subsidiaries are outstanding as of the Agreement Date. Except for the capital
stock of its subsidiaries and except for ownership interests set forth in
Schedule 3.2, the Company does not own, directly or indirectly, any capital
stock or other ownership interest in any corporation, partnership, joint
venture, or other entity.
3.3 Corporate Authorization. The Company's execution, delivery, and
performance of this Agreement and its consummation of the transactions
contemplated hereby are within its corporate powers. Except for approval by the
affirmative vote of the holders of a majority of the outstanding shares of
Company Common Stock required for the Merger, the Company has duly authorized
the Merger. The Company has duly and validly executed and delivered this
Agreement. Assuming this Agreement constitutes the valid and binding agreement
of Parent and Merger Sub, this Agreement constitutes a valid and binding
agreement of the Company enforceable against the Company in accordance with its
terms.
3.4 Governmental Authorization. Except as set forth on Schedule 3.4,
the Company's execution, delivery and performance of this Agreement and its
consummation of the Merger require no action by, or in respect of, or filing
with, any federal, state, local, or foreign governmental body, agency, official,
or authority (including courts, administrative agencies, commissions,
self-regulatory agencies, or authorities or other governmental authorities or
instrumentalities) (each, a "GOVERNMENTAL ENTITY") other than: (a) filing the
Articles of Merger in accordance with Oregon Law; (b) compliance with applicable
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder (the "EXCHANGE ACT"); (c) compliance with
the rules or regulations of the NASDAQ National Market; and (d) compliance with
the securities laws of various states.
3.5 Non-Contravention. The Company's execution, delivery, and
performance of this Agreement does not, and its consummation of the transactions
contemplated hereby will not: (a) contravene or conflict with the articles of
incorporation or bylaws of the Company; (b) assuming compliance with the matters
referred to in Section 3.4, contravene, conflict with, or constitute a violation
of any provision of any law, regulation, judgment, injunction, order, or decree
binding on or applicable to the Company, other than such as would not,
individually or in the aggregate, have a Company Material Adverse Effect; (c)
assuming compliance with the matters set forth in Section 3.4 constitute a
breach, violation, or a default under, or give rise to a right of termination,
cancellation, or acceleration of any right or obligation of the Company or to a
loss of any benefit to which the Company is entitled under any provision of, any
agreement, contract, or other instrument binding upon the Company or any
license, franchise, permit or other similar
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authorization held by the Company, other than such as would not, individually or
in the aggregate, have a Company Material Adverse Effect; or (d) result in the
creation or imposition of any Lien on any asset of the Company, other than such
as would not, individually or in the aggregate, have a Company Material Adverse
Effect. Schedule 3.5 sets forth a complete, and correct list of all consents,
approvals, and authorizations the Company is required to obtain from any
non-Governmental Entity in connection with this Agreement, the Merger, and the
transactions contemplated hereby, other than those with respect to which the
failure of the Company to obtain such consent, approval, or authorization,
individually or in the aggregate, would not have a Company Material Adverse
Effect.
3.6 Capitalization. The authorized capital stock of the Company
consists of 15,000,000 shares of Company Common Stock, 657,601 shares of
non-voting common stock, $.01 par value ("NON-VOTING COMMON STOCK") and
3,000,000 shares of preferred stock, $.01 par value ("COMPANY PREFERRED STOCK"
and, together with Company Common Stock and the Non-Voting Common Stock,
"COMPANY CAPITAL STOCK"). As of the Agreement Date, 9,667,357 shares of Company
Common Stock are outstanding and no shares of Non-Voting Common Stock or Company
Preferred Stock are outstanding. As of the Agreement Date, Company Options to
purchase an aggregate of 735,359 shares of Company Common Stock are outstanding,
and Company Warrants to purchase an aggregate of 257,357 shares of Company
Common Stock are outstanding. The Company has duly reserved for issuance
pursuant to the exercise of options under existing plans or warrants a total of
1,526,113 shares of Company Common Stock, including 992,716 shares for issuance
upon exercise of the Company Options and Company Warrants. All outstanding
shares of Company Capital Stock have been duly authorized and validly issued and
are fully paid and nonassessable. The Company issued all such shares in
compliance with all applicable federal and state securities laws. The Company
Common Stock is registered pursuant to Section 12(g) of the Exchange Act and has
been approved for listing on the NASDAQ National Market. Except as set forth in
this Section 3.6 and except for changes since the Agreement Date resulting from
the exercise of the Company Options outstanding on the Agreement Date, (i) no
shares of Company Capital Stock or other voting securities of the Company are
outstanding, (ii) no securities of the Company convertible into or exchangeable
for shares of Company Capital Stock or other voting securities of the Company
are outstanding, and (iii) no options or other rights to acquire from the
Company, and no obligation of the Company to issue, any Company Capital Stock,
voting securities or securities convertible into or exchangeable for Company
Capital Stock or other voting securities of the Company are outstanding (the
items in clauses (i), (ii) and (iii) being referred to collectively as the
"COMPANY SECURITIES").
3.7 SEC Documents. The Company has filed all required reports,
schedules, forms, statements, and other documents with the Securities and
Exchange Commission (the "SEC") since July 1, 1994 (together with subsequent
documents filed by the Company before the Agreement Date that revise or
supersede such earlier filed documents, the "COMPANY SEC DOCUMENTS"). As of
their respective dates, the Company SEC Documents complied as to form in all
material respects with the requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT") or the Exchange Act, as the case may be, and the
rules and regulations of the SEC promulgated thereunder applicable to such
Company SEC Documents. As of their respective dates none of the Company SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the Company
SEC Documents complied as of their respective dates of filing with the SEC as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles (except, in
the case of unaudited statements, as permitted by Form 10-Q of the Exchange Act)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto), and fairly present the consolidated financial
position of the Company and its consolidated subsidiaries as of the dates
thereof and the consolidated results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). Except as set forth in the Company SEC Documents,
and except for liabilities and obligations incurred in the ordinary course of
business consistent with past practice, the Company has no liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by generally accepted accounting principles to be set forth on a
consolidated balance sheet of the Company or in the notes thereto which,
individually or in the aggregate, would have a Company Material Adverse Effect.
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3.8 Absence of Certain Changes or Events. Except as disclosed in the
Company SEC Documents, and except as expressly contemplated by this Agreement or
set forth in Schedule 3.8, since the date of the most recent audited financial
statements included in the Company SEC Documents, the Company and each of its
subsidiaries have conducted their respective businesses only in the ordinary
course, and neither the Company nor any of its subsidiaries has:
(a) with the exception of seasonal business changes in the
ordinary course, suffered any material adverse change in the assets,
financial condition, operating results, distributor, customer, employee
or supplier relations, business condition or prospects of the Company
or any of its subsidiaries, nor any other event or occurrence or
development of a state of circumstances or facts which has had a
Company Material Adverse Effect;
(b) borrowed any amount or incurred or become subject to any
liability in excess of $5,000, except (i) current liabilities incurred
in the ordinary course of business and (ii) liabilities under contracts
entered into in the ordinary course of business;
(c) mortgaged, pledged or subjected to any Lien any of its
assets with a fair market value in excess of $5,000, except (i) Liens
for current property Taxes not yet delinquent, (ii) Liens imposed by
law and incurred in the ordinary course of business for obligations not
yet delinquent with respect to claims by carriers, warehousemen,
laborers, materialmen and the like, (iii) Liens in respect of pledges
or deposits under workers' compensation laws, or (iv) Liens voluntarily
created in the ordinary course of business, all of which Liens
aggregate less than $25,000;
(d) discharged or satisfied any Lien or paid any liability, in
each case with a value in excess of $5,000, other than current
liabilities (including the current portion of long-term liabilities)
paid in the ordinary course of business;
(e) sold, assigned or transferred (including, without
limitation, transfers to any employees, affiliates or shareholders) any
tangible assets with a fair market value in excess of $5,000, or
canceled any debts or claims, in each case in the ordinary course of
business;
(f) sold, assigned or transferred (including, without
limitation, transfers to any employees, affiliates or shareholders) any
patents, trademarks, trade names, copyrights, trade secrets or other
intangible assets;
(g) disclosed, to any person other than Parent or Merger Sub
and authorized representatives of Parent or Merger Sub, any proprietary
confidential information, other than pursuant to a confidentiality
agreement prohibiting the use or further disclosure of such
information, which agreement is identified in the Schedule 3.8 and is
in full force and effect on the date hereof;
(h) waived any rights of material value or suffered any
extraordinary losses or adverse changes in collection loss experience,
whether or not in the ordinary course of business or consistent with
past practice;
(i) declared or paid any dividends or other distributions with
respect to any shares of its capital stock other than to the Company or
a Subsidiary or redeemed or purchased, directly or indirectly, any
shares of its capital stock or any options, warrants or other rights to
purchase the same;
(j) with the exception of securities issued upon the exercise
of options and warrants to purchase such securities, issued, sold or
transferred any of its equity securities, securities convertible into
or exchangeable for its equity securities or options, warrants or other
rights to acquire its equity securities, or any bonds or debt
securities;
(k) taken any other action or entered into any other
transaction other than in the ordinary course of business and in
accordance with past custom and practice, or entered into any
transaction with any Insider (as defined in Section 3.20 other than
employment arrangements otherwise disclosed in this Agreement and the
Company Disclosure Schedules, or the transactions expressly
contemplated by this Agreement;
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(l) suffered any material theft, damage, destruction or loss
of or to any property or properties owned or used by it, whether or not
covered by insurance;
(m) made or granted any bonus, or any wage, salary or
compensation increase to any director, officer, employee or consultant
whose annual compensation in the preceding fiscal year exceeded
$50,000, or made or granted any increase in any employee benefit plan
or arrangement, or amended or terminated any existing employee benefit
plan or arrangement, or adopted any new employee benefit plan or
arrangement or made any commitment or incurred any liability to any
labor organization;
(n) made any single capital expenditure or commitment therefor
in excess of $5,000;
(o) made any loans or advances to, or guarantees for the
benefit of, any persons in excess of $5,000;
(p) made any charitable contributions or pledges in excess of
$5,000;
(q) made any change in accounting principles or practices from
those utilized in the preparation of the Company SEC Documents;
(r) experienced any amendment, modification or termination of
any existing, or entered into any new, contract, agreement, plan,
lease, license, permit or franchise which is, either individual or in
the aggregate, material to its business, operations, financial position
or prospects, other than in the ordinary course of business;
(s) experienced any labor dispute;
(t) experienced any change in any assumption underlying or
method of calculating any bad debt, inventory, contingency or other
reserve;
(u) written off as uncollectible any note or account
receivable, or canceled any debts, other than in the ordinary course of
business and consistent with past practice;
(v) failed to replace or replenish inventory or supplies as
such inventory or supplies may have been depleted from time to time,
collect accounts receivable, pay accounts payable and has not shortened
or lengthened the customary payment cycles for any of its payables or
receivables or otherwise managed its working capital accounts other
than in the ordinary course of business and in a manner consistent with
past practice;
(w) experienced any writedown or writeup of (or failed to
writedown or writeup in accordance with GAAP) the value of any
inventories, receivables or other assets, or revalued any of its
assets;
(x) failed to maintain all material assets in accordance with
good business practice and in good operating condition and repair,
ordinary wear and tear excepted;
(y) experienced any lapse or termination of any material
permit that was issued or relates to its business, including any
failure to renew any such permit; or
(z) discontinued or altered, in any material respect, its
advertising or promotional activities or its pricing and purchasing
policies.
3.9 Title to Properties.
(a) The real property listed as owned ("COMPANY OWNED
PROPERTY") or leased ("COMPANY LEASED PROPERTY") in Schedule 3.9
constitutes all of the real property now used or occupied by the
Company or any Subsidiary, and ever owned used or occupied in the past
by the Company or any Subsidiary (including any and all
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structures, fixtures or other improvements thereon, the "COMPANY REAL
PROPERTY"). Schedule 3.9 includes the record title holder, location,
uses thereof and the Company or any subsidiary indebtedness thereon, if
any, for all Company Real Property. The Company or one of its
subsidiaries has good and marketable fee simple title to all Company
Owned Property, except for recorded easements, covenants and other
restrictions; utility easements; building restrictions; zoning
restrictions; and other easements, covenants and restrictions existing
generally with respect to properties of a similar character, all of
which are shown on Schedule 3.9 and there are no outstanding options to
purchase the Company Owned Property. The Company Real Property has
access, sufficient for the conduct of the business of the Company as
now conducted or as presently proposed to be conducted, to public roads
and to all utilities, including electricity, sanitary and storm sewer,
potable water, natural gas and other utilities, used in the operation
of the business of the Company at that location. All structures,
fixtures and other improvements on all Company Owned Property are
within the lot lines and do not encroach on the properties of any other
Person, and the use and operation of all Company Owned Property are not
in violation of any applicable building, zoning, safety, environmental,
subdivision and other laws, ordinances, regulations, codes, permits,
licenses and certificates and all restrictions and conditions affecting
title. Except as described in Schedule 3.9, no portion of any Company
Owned Property is located in a flood plain, flood hazard area or
designated wetlands area. Since January 1, 1992, neither the Company
nor any Subsidiary has received any written or oral notice of
assessments for public improvements against any Company Owned Property
or any written or oral notice or order by any governmental body, any
insurance company that has issued a policy with respect to any of such
properties or any board of fire underwriters or other body exercising
similar functions (other than as disclosed in the insurance reports
disclosed hereunder) that (i) relates to material violations of
building, safety or fire ordinances or regulations, (ii) claims any
material defect or deficiency with respect to any of such properties or
(iii) requests that performance of any material repairs, alterations or
other work to or in any of such properties or in the streets bounding
the same. Complete and correct copies of all material written reports
on such matters from any insurance company that has issued a policy
with respect to any of such properties since January 1, 1992 have been
delivered to Parent. To the knowledge of the Company, there is no
pending condemnation, expropriation, eminent domain or similar
proceeding affecting all or any portion of the Company Real Property.
(b) The leases for the Company Leased Property (the "COMPANY
LEASES") are in full force and effect, and the Company or one of its
subsidiaries holds a valid and existing leasehold interest under each
of the Company Leases for the term set forth in Schedule 3.9. the
Company has delivered to Parent complete and accurate copies of each of
the Company Leases, and none of the Company Leases has been modified in
any respect, except to the extent that such modifications are disclosed
by the copies delivered to Parent. Neither the Company nor any of its
subsidiaries is in material default, and to the knowledge of the
Company no circumstances exist which, if unremedied, would, either with
or without notice or the passage of time or both, result in such
default under any of the Company Leases; nor to the knowledge of the
Company is any other party to any of the Company Leases in default.
(c) The Company or one of its subsidiaries owns good and
marketable title to each of the tangible properties and tangible assets
reflected on the most recent audited financial statements included in
the Company SEC Documents or acquired since the date thereof, free and
clear of all Liens and encumbrances, except for (i) Liens for current
Taxes not yet delinquent, (ii) Liens set forth in Schedule 3.9, (iii)
the properties subject to the Company Leases, (iv) assets disposed of
since the date of the most recent audited financial statements included
in the Company SEC Documents in the ordinary course of business, (v)
Liens imposed by law and incurred in the ordinary course of business
for obligations not yet due to carriers, warehousemen, laborers and
materialmen and (vi) Liens in respect of pledges or deposits under
workers' compensation laws, all of which Liens aggregate less than
$25,000.
(d) All of the buildings, machinery, equipment, tools, jigs,
fixtures, vehicles and other tangible assets necessary for the conduct
of the business of the Company and its subsidiaries are in reasonable
working condition and repair, ordinary wear and tear excepted, and are
usable in the ordinary course of business. There are no defects in such
assets or other conditions relating thereto which adversely affect the
operation or value of such assets. The Company or one of its
subsidiaries owns or leases under valid leases, all buildings,
machinery, equipment and other tangible assets necessary for the
conduct of its business as presently conducted, except for defects of
title that do not materially affect the use of such assets by the
Company or its subsidiaries and except for such assets that can be
purchased or leased for nominal expenditures.
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3.10 Accounts Receivable. The accounts receivable reflected on most
recent unaudited financial statements included in the Company SEC Documents and
those arising thereafter are valid receivables, are not subject to valid
counterclaims or set-offs, and are collectible in accordance with their terms,
except to the extent of the bad debt reserve reflected on such financial
statements.
3.11 Inventory. The inventory of raw materials, work in process and
finished goods of the Company and each of its subsidiaries consists of items of
a cost, quality and quantity usable and, with respect to finished goods only,
salable at the normal profit levels of the Company and such subsidiaries in the
ordinary course of the business of the Company and such subsidiaries. The
inventory of finished goods of the Company and each of its subsidiaries is not
slow-moving as determined in accordance with past practices, obsolete or damaged
and is merchantable and fit for its particular use. The Company and each of its
subsidiaries has on hand or has ordered and expects timely delivery of such
quantities of raw materials, and has on hand such quantities of work in process
and finished goods, in each case as are reasonably required to timely fill
current orders on hand which require delivery within 60 days and to maintain the
manufacture and shipment of products at its normal level of operations. As of
the date of the most recent unaudited financial statements included in the
Company SEC Documents, the values at which such inventory is carried are in
accordance with GAAP. Schedule 3.11 contains a materially complete and accurate
summary of the Company's and each of its subsidiaries' inventory of raw
materials, work in progress, finished goods and reserve for obsolete and other
inventory allowance or accrual calculation schedules as of June 30, 1998.
3.12 Tax Matters. The Company, its subsidiaries and each affiliated,
consolidated, combined or unitary group of which the Company or any of its
subsidiaries is a member (a "COMPANY AFFILIATED GROUP"), has filed all Tax
Returns and reports required to be filed by it and has paid (or the Company has
paid on its behalf) all Taxes required to be paid by it (other than Taxes, the
failure to pay which would not, individually or in the aggregate, have a Company
Material Adverse Effect). All other Taxes of the Company which will be due and
payable, whether now or hereafter, for any period ending on, including, or
ending prior to the Closing Date, have been paid by or on behalf of the Company
or are reflected on the Company's books as an accrued Tax liability, either
current or deferred. The most recent financial statements contained in the
Company SEC Documents reflect an adequate reserve for all material Taxes payable
by the Company and any of its subsidiaries for all Taxable periods and portions
thereof through the date of such financial statements. No deficiencies for any
Taxes have been proposed, asserted, or assessed against the Company or any
Company Affiliated Group (other than deficiencies, the liability for which would
not, individually or in the aggregate, have a Company Material Adverse Effect).
No extensions nor requests for waivers or extensions of the time to assess any
Taxes have been granted or are pending. None of the assets or properties of the
Company or its subsidiaries is subject to any Tax Lien (other than Liens for
Taxes that are not yet due) except for Liens which would not, individually or in
the aggregate, have a Company Material Adverse Effect. The Company is not under
audit with respect to any Taxable period for any federal, state, local, or
foreign Taxes (including income and franchise Taxes but not including real or
personal property Taxes) by the Internal Revenue Service ("IRS") or other
applicable Tax authority. Neither the Company nor any of its subsidiaries is a
party to any agreement, contract or arrangement that would result, separately or
in the aggregate, in the payment of any "excess parachute payments" within the
meaning of Section 280G of the Code. As used in this Agreement, "TAXES" shall
include all federal, state, local and foreign income, property, premium,
payroll, sales, excise, and other taxes, tariffs, or governmental charges of any
nature whatsoever, including any interest, penalties, or additions with respect
thereto, and "RETURNS" shall include all returns, reports, information returns,
and information statements with respect to Taxes required to be filed by the IRS
or any other Tax authority.
3.13 Contracts and Commitments.
(a) To the extent they are not listed elsewhere in the Company
Disclosure Schedules, Schedule 3.13 lists the following agreements,
whether written or, to the Company's knowledge, oral, to which the
Company or any of its subsidiaries is a party (or by which the Company
or any of its subsidiaries or their assets are bound): (i) collective
bargaining agreement or contract with any labor union; (ii) bonus,
pension, profit sharing, retirement or other form of deferred
compensation plan, other than as described in Schedule 3.18; (iii)
hospitalization insurance or other welfare benefit plan or practice,
whether formal or informal, other than as described in Schedule 3.18;
(iv) stock purchase or stock option plan; (v) contract for the
employment of any officer, individual employee or other person on
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a full-time or consulting basis or relating to severance pay for any
such person, other than the Company's and its subsidiaries' normal
employment practices generally affecting all employees or classes of
employees (such as hourly or salaried classes of employees); (vi)
agreement with employees and with consultants, vendors, customers or
other third parties requiring confidential treatment of the Company's
or any of its subsidiaries' confidential information or transfer to the
Company or any of its subsidiaries of intellectual property rights
created by employees and with consultants, vendors, customers or other
third parties; (vii) contract, agreement or understanding relating to
the voting of the Company's or any of its subsidiaries' capital stock
or the election of directors of the Company or any of its subsidiaries;
(viii) agreement or indenture relating to the borrowing of money, to
letters of credit or to mortgaging, pledging or otherwise placing a
Lien on any of the assets of the Company or any of its subsidiaries;
(ix) guaranty of any obligation for borrowed money or otherwise; (x)
lease or agreement under which it is lessee of, or holds or operates
any property, real or personal, owned by any other party; (xi) other
than as described in Schedule 3.9, lease or agreement under which it is
lessor of, or permits any third party to hold or operate, any property,
real or personal, for which the annual rental exceeds $5,000; (xii)
contract or group of related contracts with the same party (other than
any contract or group of related contracts for the purchase or sale of
products or services) continuing over a period of more than six months
from the date or dates thereof, not terminable by it on 30 days' or
less notice without penalty and involving more than $5,000; (xiii)
contract which prohibits the Company or any of its subsidiaries from
freely engaging in business anywhere in the world; (xiv) contract for
the distribution of the products of the Company or any of its
subsidiaries (including any distributor, sales and original equipment
manufacturer contract); (xv) franchise agreement; (xvi) license
agreement or agreement providing for the payment of royalties or other
compensation by the Company or any of its subsidiaries in connection
with intellectual property rights licensed from third parties; (xvii)
license agreement or agreement providing for the receipt of royalties
or other compensation by the Company or any of its subsidiaries in
connection with intellectual property rights owned, controlled or
otherwise licensable by the Company or any of its subsidiaries; (xviii)
contract or commitment for capital expenditures in excess of $5,000;
(xix) agreement for the sale of any capital asset in excess of $5,000;
(xx) contract with any affiliate which in any way relates to the
Company or any of its subsidiaries (other than for employment on
customary terms); (xxi) agreement with vendors, customers or other
third parties requiring confidential treatment of confidential
information of such vendors, customers or other third parties; or(xxii)
other agreement which is either material to the business of the Company
or any of its subsidiaries or was not entered into in the ordinary
course of business.
(b) Schedule 3.13 lists the following agreements, whether oral
or written, to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of their
assets are bound: (i) contract or group of related contracts with the
same party for the purchase of products or services by the Company or
any of its subsidiaries under which the undelivered balance of such
products or services is in excess of $5,000; (ii) contract or group of
related contracts with the same party for the sale of products or
services by the Company or any of its subsidiaries under which the
undelivered balance of such products or services (including, without
limitation, any free upgrades or ongoing services) has a sales price in
excess of $5,000; and (iii) sales agreement or other customer
commitment (other than the standard form of purchase order) which
entitles any purchaser to a rebate or right of set-off, to return any
product of the Company or any of its subsidiaries after acceptance
thereof or to delay the acceptance thereof, to receive future services,
upgrades or enhancements, or which varies in any material respect from
the Company's or any of its subsidiaries' standard form agreements for
sales.
(c) The Company and each of its subsidiaries has performed all
material obligations required to be performed through the date hereof
by it in connection with the contracts or commitments required to be
disclosed in Schedule 3.13 and has not been notified of any claim of
material default under any contract or commitment required to be
disclosed in Schedule 3.13; neither the Company nor any Subsidiary has
any present expectation or intention of not fully performing any
material obligation pursuant to any contract or commitment required to
be disclosed in Schedule 3.13; and neither the Company nor any
Subsidiary has knowledge of any material breach or anticipated material
breach by any other party to any contract or commitment required to be
disclosed in Schedule 3.13.
(d) Prior to the date of this Agreement, Parent has been
supplied with a correct and complete copy of each written contract or
commitment referred to in Schedule 3.13, together with all known
amendments, waivers or other changes thereto.
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3.14 Intellectual Property Rights.
(a) Schedule 3.14 describes: (i) all patents and all
registrations for trademarks, service marks, trade names, corporate
names, copyrights and mask works that have been issued to the Company
or any of its subsidiaries; and (ii) each pending patent application or
application for registration for trademarks, service marks, trade
names, corporate names, copyrights and mask works that the Company or
any of its subsidiaries has made with respect to intellectual property
owned by, or otherwise controlled by, the Company or any of its
subsidiaries and used in, developed for use in or necessary to the
conduct of the business of the Company or any of its subsidiaries as
now conducted or as planned to be conducted as described herein (the
"COMPANY OWNED INTELLECTUAL PROPERTY RIGHTS"). Except as set forth in
Schedule 3.14, the Company and each of its subsidiaries owns and
possesses all right, title and interest, or holds such other interest
as is identified in the Disclosure Schedule, in and to the rights set
forth under such caption free and clear of all Liens, security
interests or other encumbrances and has the full right to exploit such
Company Owned Intellectual Property Rights without payment of
compensation to any other party.
(b) Schedule 3.14 describes all agreements granting to the
Company or any of its subsidiaries rights in patents, patent
applications, trademarks, service marks, trade names, corporate names,
copyrights, mask works, trade secrets or other intellectual property
rights used in or necessary to the conduct of the business of the
Company as now conducted or as planned to be conducted as described
herein (the "COMPANY LICENSED-IN INTELLECTUAL PROPERTY RIGHTS"). All
such agreements are in force and neither the Company nor any of its
subsidiaries is in breach of any such agreement.
(c) Schedule 3.14 describes all products marketed or that have
been marketed by the Company or any of its subsidiaries within the past
two years and identifies the method(s) of intellectual property
protection utilized by the Company or any of its subsidiaries with
respect to such products.
(d) Schedule 3.14 describes all agreements granting to third
parties any rights in Company Owned Intellectual Property Rights and
any agreements to grant intellectual property rights that the Company
or any of its subsidiaries may acquire in the future.
(e) Except as disclosed in Schedule 3.14, all of the Company
Owned Intellectual Property Rights will be assumed by, and will become
intellectual property rights of, the Surviving Corporation in the
Merger, without the requirement that any consent to assignment be
obtained or any payment (other than government filing or registration
fees) be made. Except as disclosed in Schedule 3.14, all licenses of
the Company Licensed-In Intellectual Property Rights will be assumed
by, and will become valid agreements of, the Surviving Corporation in
the Merger, without the requirement that any consent to assignment be
obtained or any payment be made (other than future royalties as
provided n such agreements).
(f) The Company and each of its subsidiaries have taken all
commercially reasonable steps to acquire, protect and maintain the
Company Owned Intellectual Property Rights. Without limiting the
generality of the foregoing, (i) all employees, contract workers,
consultants and other agents of the Company and each of its
subsidiaries have executed agreements sufficient to vest in the Company
or such subsidiary ownership or the right to use the Company Owned
Intellectual Property Rights on which they have performed services in
the business of the Company or such subsidiary as currently conducted
without the payment of royalties or penalties; (ii) all maintenance,
annuity, renewal and other such fees and filings due on Company Owned
Intellectual Property Rights have been paid or made; and (ii) the
Company has no knowledge of any defects in the Company Owned
Intellectual Property Rights that would lead to any of them becoming
invalid or unenforceable.
(g) Except as disclosed in Schedule 3.14, neither the Company
nor any of its subsidiaries has received any notice of, nor are there
any facts known to the Company or any of its subsidiaries which
indicate a likelihood of, any infringement or misappropriation by, or
conflict with, any third party with respect to the Company Owned
Intellectual Property Rights or any Company Licensed-In Intellectual
Property Rights that are exclusively licensed to the Company or any of
its subsidiaries; and no claim by any third party contesting the
validity of any
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Company Owned Intellectual Property Rights has been made, is currently
outstanding or, to the knowledge of the Company, is threatened;
(h) Except as disclosed in Schedule 3.14, neither the Company
nor any of its subsidiaries has received any notice of any
infringement, misappropriation or violation by the Company or any of
its subsidiaries of any intellectual property rights of any third
parties and neither the Company nor any of its subsidiaries, to its
knowledge, has infringed, misappropriated or otherwise violated any
such intellectual property rights; and to the knowledge of the Company,
no infringement, misappropriation or violation of any intellectual
property rights of any third parties has occurred or will occur with
respect to products currently being sold by the Company or any of its
subsidiaries or with respect to the products currently under
development (in their present state of development) or with respect to
the conduct of the business of the Company or any of its subsidiaries
as now conducted.
(i) Except as disclosed in Schedule 3.14, neither the Company
nor any of its subsidiaries has entered into any agreement restricting
the Company or any of its subsidiaries from selling, leasing or
otherwise distributing any of its current products or products under
development to any class of customers, in any geographic area, during
any time period or in any segment of the market.
(j) To the Company's knowledge, the Company and each of its
subsidiaries has the right to make available to the Surviving
Corporation all trade secrets and other confidential information
entrusted to the Company or any of its subsidiaries by third parties.
(k) There are no known quality defects in the designs
contained in the Company Owned Intellectual Property Rights or Company
Licensed-In Intellectual Property Rights (including defects relating to
the Year 2000 issue) and such designs comply with all applicable laws.
3.15 Litigation. Except as disclosed in the Company SEC Documents,
there is no action, suit, investigation, or proceeding pending against or, to
the knowledge of the Company, overtly threatened against or affecting, the
Company or any of its properties (other than any such suit, action, or
proceeding challenging the acquisition by Parent or Sub of the shares of Company
Common Stock or any provision of this Agreement or seeking to restrain or
prohibit the consummation of the Merger) before any Governmental Entity or by
any Governmental Entity that, individually or in the aggregate, would reasonably
be expected to have a Company Material Adverse Effect.
3.16 Warranties; Products. Schedule 3.16 lists all claims outstanding,
pending or, to the knowledge of the Company, threatened for breach of any
warranty relating to any products sold by the Company or any of its subsidiaries
prior to the date hereof. The description of the product warranties and other
material terms of sale of the Company and each of its subsidiaries set forth in
Schedule 3.16 are correct and complete. The reserves for warranty claims on the
date of the most recent audited financial statements included in the Company SEC
Documents are consistent with the Company's and each of its subsidiaries' prior
practices and are fully adequate to cover all warranty claims made or to be made
against any products of the Company or any of its subsidiaries sold prior to the
date thereof.
3.17 Employees. (a) To the knowledge of the Company, no executive
employee of the Company or any of its subsidiaries and no group of the employees
of the Company or any of its subsidiaries has any plans to terminate his, her or
their employment; (b) the Company and each of its subsidiaries has complied with
all laws relating to the employment of labor, including provisions thereof
relating to wages, hours, equal opportunity, collective bargaining and the
payment of social security and other Taxes; (c) neither the Company nor any of
its subsidiaries has any labor relations problem pending and the Company's labor
relations are satisfactory; (d) there are no workers' compensation claims
pending against the Company or any of its subsidiaries nor is the Company or any
of its subsidiaries aware of any facts that would give rise to such a claim; (e)
no employee of the Company or any of its subsidiaries is subject to any secrecy
or noncompetition agreement or any other agreement or restriction of any kind
that would impede in any way the ability of such employee to carry out fully all
activities of such employee in furtherance of the business of the Company or any
of its subsidiaries; and (f) no employee or former employee of the Company or
any of its subsidiaries, or any predecessor has any claim with respect to any
Company Owned Intellectual Property Rights. Schedule 3.17 lists, as of the date
set forth in such Schedule, each employee of the Company or any of its
subsidiaries. Schedule 3.17 also
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states the position, title, remuneration (including any scheduled salary or
remuneration increases), date of employment and accrued vacation pay of each
such employee as of such date.
3.18 Employee Benefit Plans.
(a) Schedule 3.18 sets forth each employee benefit plan with
respect to which the Company or its ERISA Affiliates, as hereinafter
defined, sponsors or otherwise has any obligation (the "COMPANY
EMPLOYEE BENEFIT PLANS"). For purposes of this Agreement, "ERISA" means
the Employee Retirement Income Security Act of 1974, as amended, and
"ERISA AFFILIATES" means any trade or business (whether or not
incorporated) that is part of the same controlled group, or under
common control with, or part of an affiliated service group that
includes, the Company within the meaning of Section 414(b), (c), (m) or
(o) of the Code.
(b) Except as disclosed in Schedule 3.18:
(i) No Company Employee Benefit Plan is subject to
Title IV of ERISA.
(ii) No Company Employee Benefit Plan promises or
provides health or life benefits to retirees or former
employees except as required by federal continuation of
coverage laws or similar state laws.
(iii) Each Company Employee Benefit Plan has at all
times been operated in substantial compliance with ERISA, the
Code, any other applicable law (including all reporting and
disclosure requirements thereunder) and the terms of the plan.
Each Company Employee Benefit Plan that is intended to be Tax
qualified under Section 401(a) of the Code has received a
favorable determination letter from the IRS stating that the
Plan (and all amendments) is Tax qualified and that any trust
associated with the plan is Tax exempt under Section 501(a) of
the Code. To the knowledge of the Company, there is no reason
why such qualified status would be revoked.
(iv) To the knowledge of the Company, no state of
facts or conditions exist which reasonably could be expected
to subject the Company to any material liability (other than
routine claims for benefits) with respect to any Company
Employee Benefit Plan under the terms of the Company Employee
Benefit Plan or applicable law.
(v) The Company has not committed to make any
material increase in contributions or benefits under any
Company Employee Benefit Plan and has not committed to
establish any new plan.
(vi) There are no material unfunded liabilities as of
the Closing Date associated with any Company Employee Benefit
Plan. All contributions to each Company Employee Benefit Plan
that are required to be made with respect to periods ending on
or before the Closing Date (including periods from the first
day of the then current plan or policy year to the Closing
Date) have been made or accrued before the Closing Date.
(vii) With respect to each Company Employee Benefit
Plan (to the extent applicable), the Company has delivered to
Parent copies of the plan documents, plan amendments, summary
plan descriptions, the most recent Tax qualified determination
letters from the IRS, the three most recent Form 5500 Annual
Reports, including related schedules and audited financials,
and a list of assets associated with each Company Employee
Benefit Plan.
(viii) The benefits to be provided to participants
under each Company Employee Benefit Plan, other than a Tax
qualified plan under Code Section 401(a), are to be provided
exclusively through insurance or from the general assets of
the Company.
3.19 Insurance. Schedule 3.19 lists and briefly describes each
insurance policy maintained by the Company or any of its subsidiaries with
respect to the properties, assets and operations of the Company or such
subsidiary and
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sets forth the date of expiration of each such insurance policy. All of such
insurance policies are in full force and effect. Neither the Company nor any of
its subsidiaries is in default with respect to its obligations under any of such
insurance policies.
3.20 Affiliate Transactions. Other than as described in the Company SEC
Documents or otherwise pursuant to this Agreement, no officer, director or
employee of the Company or any of its subsidiaries or any member of the
immediate family of any such officer, director or employee, or any entity in
which any of such persons owns any beneficial interest (other than any publicly
held corporation whose stock is traded on a national securities exchange or in
the over-the-counter market and less than one percent of the stock of which is
beneficially owned by any of such persons) (collectively "INSIDERS"), has any
agreement with the Company or any of its subsidiaries (other than normal
employment arrangements) or any interest in any property, real, personal or
mixed, tangible or intangible, used in or pertaining to the business of the
Company or any of its subsidiaries (other than ownership of capital stock of the
Company). None of the Insiders has any direct or indirect interest (other than
beneficial ownership of less than one percent of the stock of a publicly held
corporation whose stock is traded on a national securities exchange or in the
over-the-counter market) in any competitor, supplier or customer of the Company
or any of its subsidiaries or in any person, firm or entity from whom or to whom
the Company or any of its subsidiaries leases any property. For purposes of this
Section 3.20 the members of the immediate family of an officer, director or
employee shall consist of the spouse, parents, children, siblings, mothers- and
fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law of
such officer, director or employee. All agreements and transactions between the
Company or any of its subsidiaries and any Insider identified in Schedule 3.20
were made for bona fide business purposes on terms comparable to what could be
obtained from an unaffiliated third party.
3.21 Customers and Suppliers. Schedule 3.21 lists the 15 largest
distributors and the 15 largest suppliers of the Company and each of its
subsidiaries for the 12-month period ended June 30, 1998, and sets forth
opposite the name of each such customer or supplier the approximate amount of
gross sales or purchases by such Subsidiary attributable to such customer or
supplier for such period. Except as set forth on Schedule 3.21, since June 30,
1998, no customer or supplier listed in Schedule 3.21 has informed the Company
or any of its subsidiaries that it will stop or materially decrease the rate of
business done with the Company or any of its subsidiaries.
3.22 Distributors. Schedule 3.22 lists (a) all former distributors of
the Company or any of its subsidiaries that have been terminated since January
1, 1995 and the circumstances surrounding such termination; (b) all litigation
and disputes between the Company or any of its subsidiaries and any of their
past or present distributors, including any claims initiated by any distributor
against the Company or any of its subsidiaries, whether such litigation dispute
resulted in a settlement, financial payment or not; (c) to the Company's
knowledge, all buying consortium arrangements by which any distributor of the
Company or any of its subsidiaries purchases goods (including wholegoods, parts,
supplies or other goods) or services from the Company or any of its
subsidiaries; and (d) all distributors of the Company or any of its subsidiaries
that, to the Company's knowledge, sell or distribute goods or services other
than those of the Company or any of its subsidiaries. There are no enforceable
agreements with any distributor except as set forth in Schedule 3.22. Each
distributor of the Company and each of its subsidiaries may be terminated
without penalty or other liability other than the repurchase of inventory and
potential liability for floor plan exposure upon at least 30 days' prior written
notice, except as otherwise provided by distributor protection laws in some
states.
3.23 Officers and Directors; Bank Accounts. Schedule 3.23 lists all
officers and directors of the Company and each of its subsidiaries and all of
the bank accounts of the Company and each of its subsidiaries (designating each
authorized signer).
3.24 Labor Matters. Neither the Company nor any of its subsidiaries is
a party to any collective bargaining agreement or other labor union contract
applicable to persons employed by the Company or any of its subsidiaries.
3.25 Compliance with Laws. Except as disclosed in the Company SEC
Documents, neither the Company nor any of its subsidiaries (a) is in violation
of, nor has it violated, any applicable provisions of any laws, statutes,
ordinances or regulations, or (b) has received any notice from any Governmental
Entity or any other person that the Company or any of its subsidiaries is in
violation of, or has violated, any applicable provisions of any laws, statutes,
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ordinances or regulations, except in the case of clauses (a) and (b), for
violations, individually or in the aggregate, which have not had and would not
reasonably be expected to have a Company Material Adverse Effect. Each of the
Company and each of its subsidiaries has all permits, licenses, and franchises
from Governmental Entities required to conduct its business as now being
conducted, except for such permits, licenses, and franchises the absence of
which would not, individually or in the aggregate, have a Company Material
Adverse Effect.
3.26 Brokers. Other than Pacific Crest Securities, Inc., no broker,
investment banker, financial advisor, or other person is entitled to any
broker's, finder's, financial advisor's, or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company.
3.27 Tax Matters. Neither the Company nor, to its knowledge, any of its
affiliates, has taken or agreed to take any action, or knows of any
circumstances, that (without regard to any action taken or agreed to be taken by
Parent or any of its affiliates) would prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
3.28 Certain Business Matters. Neither the Company nor, to its
knowledge, any of its affiliates has (a) made or agreed to make any
contribution, payment or gift to any customer, supplier, governmental official,
employee or agent where either the contribution, payment or gift or the purpose
thereof was illegal under any applicable law, (b) established or maintained any
unrecorded fund or asset of the Company or any of its subsidiaries for any
improper purpose or made any false entries on its books and records for any
reason, (c) made or agreed to make any contribution, or reimbursed any political
gift or contribution made by any other person, to any candidate for federal,
state or local public office in violation of any applicable law, or (d) engaged
in any activity constituting fraud or abuse under applicable laws relating to
health care, insurance or the regulation of professional corporations.
3.29 Certain Contract Matters.
(a) Schedule 3.29 sets forth, as of the Agreement Date, a list
of each contract to which the Company, its subsidiaries, or any of its
affiliates (other than individuals) is a party limiting the right of
the Company prior to the Closing Date, or Parent or any of its
subsidiaries, or affiliates (other than individuals), at or after the
Closing Date, to engage in, or to compete with any person in, any
business, including each contract containing exclusivity provisions
restricting the geographical area in which, or the method by which, any
business may be conducted by the Company, its subsidiaries, or any of
its affiliates (other than individuals) prior to the Closing Date, or
by Parent, its subsidiaries, or affiliates (other than individuals)
after the Closing Date. Each such contract is in full force and effect,
each is a legal, valid and binding contract, and there is no material
default (or any event which, with the giving of notice or lapse of time
or both, would be a material default) by the Company or any of its
subsidiaries, in the timely performance of any material obligation to
be performed or paid under any such contract.
3.30 Environmental Matters.
(a) As used in this Agreement, the following terms shall have
the following meanings:
(i) "HAZARDOUS MATERIALS" means any dangerous, toxic
or hazardous pollutant, contaminant, chemical, waste, material
or substance as defined in or governed by any federal, state
or local law, statute, code, ordinance, regulation, rule or
other requirement relating to such substance or otherwise
relating to the environment or human health or safety,
including without limitation any waste, material, substance,
pollutant or contaminant that might cause any injury to human
health or safety or to the environment or might subject a
party to any imposition of costs or liability under any
Environmental Law.
(ii) "ENVIRONMENTAL LAWS" means all applicable
federal, state, local and foreign laws, rules, regulations,
codes, ordinances, orders, decrees, directives, permits,
licenses and judgments relating to pollution, contamination or
protection of the environment (including, without limitation,
all applicable federal, state, local and foreign laws, rules,
regulations, codes, ordinances, orders, decrees, directives,
permits, licenses and judgments relating to Hazardous
Materials in effect as of the Agreement Date).
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(iii) "RELEASE" shall mean the spilling, leaking,
disposing, discharging, emitting, depositing, ejecting,
leaching, escaping or any other release or threatened release,
however defined, whether intentional or unintentional, of any
Hazardous Material.
(b) The Company, each of its subsidiaries and the Company Real
Property are in material compliance with all applicable Environmental
Laws.
(c) The Company has obtained, and maintained in full force and
effect, all environmental permits, licenses, certificates of
compliance, approvals and other authorizations (collectively, the
"ENVIRONMENTAL PERMITS") necessary to conduct its business and operate
the Company Real Property. A true and correct copy of each of such
Environmental Permit has been provided by the Company to Parent. The
Company has conducted its business in compliance with all terms and
conditions of the Environmental Permits. The Company has filed all
reports and notifications required to be filed under and pursuant to
all applicable Environmental Laws.
(d) Except as set forth in Schedule 3.30: (i) no Hazardous
Materials have been generated, treated, contained, handled, located,
used, manufactured, processed, buried, incinerated, deposited, stored,
or released on, under or about any part of the Company's Property
during the period the Company was in possession thereof, (ii) the
Company's Property and any improvements thereon, contain no asbestos,
urea, formaldehyde, radon at levels above natural background,
polychlorinated biphenyls (PCBs) or pesticides, and (iii) no
aboveground or underground storage tanks are located on, under or about
the Company's Property.
(e) Except as set forth in Schedule 3.30, the Company has not
received notice alleging in any manner that any of them is, or might be
potentially responsible for any Release of Hazardous Materials, or any
costs arising under or violation of Environmental Laws.
(f) To the knowledge of the Company, no expenditure outside
the ordinary course of business will be required in order for Parent,
Merger Sub or the Surviving Corporation to comply with any
Environmental Laws in effect at the Effective Time in connection with
the operation or continued operation of the business of the Company or
the Company's Property in a manner consistent with the current
operation thereof by the Company.
(g) The Company and the Company Real Property are not and have
not been listed on the United States Environmental Protection Agency
National Priorities List of Hazardous Waste Sites, or any other list,
schedule, law, inventory or record of hazardous or solid waste sites
maintained by any federal, state or local agency.
(h) The Company has disclosed and delivered to Parent all
environmental reports and investigations which the Company has obtained
or ordered with respect to the business of the Company and the Company
Real Property.
(i) To the knowledge of the Company, no part of the business
of the Company and none of the Company Real Property has been used as a
landfill, dump or other disposal, storage, transfer, handling or
treatment area for Hazardous Materials, or as a gasoline service
station or a facility for selling, dispensing, storing, transferring,
disposing or handling petroleum or petroleum products.
(j) No Lien has been attached or filed against the Company or
the Company Real Property in favor of any governmental or private
entity for (i) any liability or imposition of costs under or violation
of any applicable Environmental Law; or (ii) any Release of Hazardous
Materials.
3.31 Disclosure. No representation or warranty contained in this
Agreement, in the Company Disclosure Schedules, or in any document delivered by
the Company to Parent pursuant to Article VII of this Agreement, contains, or
will at the Effective Time contain, any untrue statement of a material fact or
omits or will at, the Effective Time, omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were
or will be made, not misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND SUB
Parent and Merger Sub represent and warrant to the Company that, except
as set forth in, and qualified by, the Parent disclosure schedules attached to
this Agreement (the "PARENT DISCLOSURE SCHEDULES"), which schedules identify
exceptions by specific section reference):
4.1 Corporate Existence and Power. Each of Parent and Merger Sub is a
corporation duly organized and validly existing under the laws of the
jurisdiction of its incorporation. Each of Parent and Merger Sub has all
corporate powers required to carry on its business as now conducted. Each of
Parent and Merger Sub is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction in which the character of the
property that they own or lease or the nature of their respective activities
makes such qualification necessary, except for those jurisdictions in which the
failure to be so qualified would not have a material adverse effect on Parent or
any of its subsidiaries (a "PARENT MATERIAL ADVERSE EFFECT"). For purposes of
this Agreement, a "Parent Material Adverse Effect" means (i) a material adverse
effect on the business, assets (including intangible assets), liabilities,
financial condition or results of operations of Parent and any of its
subsidiaries, taken as a whole, or (ii) a material impairment of the ability of
Parent and any of its subsidiaries to perform any of their respective
obligations under this Agreement or to consummate the Merger. Parent and Merger
Sub have heretofore made available to the Company correct and complete copies of
the articles of incorporation and bylaws of Parent and Merger Sub as currently
in effect.
4.2 Subsidiaries. Schedule 4.2 lists each subsidiary of the Parent,
together with its jurisdiction of incorporation or organization. All outstanding
shares of capital stock of each such subsidiary have been duly authorized and
validly issued and are fully paid and nonassessable. The Parent owns all of such
shares, free and clear of any Lien. No options, warrants, or other rights to
acquire any securities of any type of any of such subsidiaries are outstanding
as of the Agreement Date. Except for the capital stock of its subsidiaries and
except for ownership interests set forth in Schedule 4.2, the Parent does not
own, directly or indirectly, any capital stock or other ownership interest in
any corporation, partnership, joint venture, or other entity.
4.3 Corporate Authorization. Except for the requirement to authorize
additional shares in accordance with the Charter Amendment (as defined in
Section 6.1 hereof), Parent's and Merger Sub's execution, delivery and
performance of this Agreement and their consummation of the transactions
contemplated hereby are within their respective corporate powers. Except for
approval by the affirmative vote of the holders of a majority of the shares of
Parent Common Stock required for the Merger and the Charter Amendment, Parent
and Merger Sub each has duly authorized the Merger. Parent and Merger Sub each
has duly and validly executed and delivered this Agreement. This Agreement
constitutes a valid and binding agreement of each of Parent and Merger Sub and
is enforceable in accordance with its terms. Parent has taken all actions as may
be necessary, in its capacity as sole shareholder of Merger Sub, to authorize
the Merger.
4.4 Governmental Authorization. Parent's and Merger Sub's execution,
delivery, and performance of this Agreement and their consummation of the
transactions contemplated hereby require no action by, or in respect of, or
filing with, any federal, state, local, or foreign Governmental Entity other
than the following: (a) the filing of the Articles of Merger in accordance with
Oregon Law; (b) the filing of the Charter Amendment under Minnesota Law; (c)
compliance with applicable requirements of the Securities Act; (d) compliance
with the Exchange Act and the rules and regulations promulgated thereunder; (e)
compliance with the rules or regulations of the Nasdaq National Market; and (f)
compliance with the securities laws of various states.
4.5 Non-Contravention. Except to the extent the Charter Amendment is
required to be approved and filed, Parent's and Merger Sub's execution, delivery
and performance of this Agreement does not, and Parent's and Merger Sub's
consummation of the transactions contemplated hereby will not: (a) contravene or
conflict with the articles or articles of incorporation or bylaws of Parent and
Merger Sub; (b) assuming compliance with the matters referred to in Section 4.4,
contravene or conflict with or constitute a violation of any provision of any
law, regulation, judgment, injunction, order, or decree binding upon or
applicable to Parent and Merger Sub, other than such as would not, individually
or in the aggregate, have a Parent Material Adverse Effect; (c) constitute a
breach or violation of, or a
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default under or give rise to a right of termination, cancellation, or
acceleration of any right or obligation of Parent or Merger Sub or to a loss of
any benefit to which Parent or Merger Sub is entitled under any provision of,
any agreement, contract, or other instrument binding upon Parent or Merger Sub
or any license, franchise, permit, or other similar authorization held by Parent
or Merger Sub, other than such as would not, individually or in the aggregate,
have a Parent Material Adverse Effect; or (d) result in the creation or
imposition of any Lien on any asset of Parent or Merger Sub, other than such as
would not, individually or in the aggregate, have a Parent Material Adverse
Effect. Schedule 4.5 sets forth a correct and complete list of all consents,
approvals, and authorizations required to be obtained by Parent and Merger Sub
from any non-Governmental Entity in connection with this Agreement, the Merger
and the transactions contemplated hereby, other than those with respect to which
the failure of Parent and Merger Sub to obtain such consent, approval or
authorization, individually or in the aggregate, would not have a Parent
Material Adverse Effect.
4.6 Capitalization.
(a) The authorized capital stock of Parent consists of
25,000,000 shares of Parent Common Stock, $.01 par value, and 5,000,000
shares of preferred stock, $.01 par value ("PARENT PREFERRED STOCK" and
together with Parent Common Stock, "PARENT CAPITAL STOCK"). As of the
Agreement Date, 16,705,261 shares of Parent Common Stock are
outstanding and no shares of Parent Preferred Stock are outstanding. As
of the Agreement Date, options to purchase an aggregate of 963,747
shares of Parent Common Stock (each a "PARENT OPTION") are outstanding
and warrants to purchase an aggregate of 6,000 shares of Parent Common
Stock (the "PARENT WARRANTS") are outstanding. Parent has duly reserved
for issuance pursuant to the exercise of options under existing plans
or Warrants a total of 1,551,851 shares of Parent Common Stock,
including 969,747 shares of Parent Common Stock for issuance of the
Parent Options and Parent Warrants. All outstanding shares of Parent
Capital Stock have been duly authorized and validly issued and are
fully paid and nonassessable. Parent issued all such shares in
compliance with all applicable federal and state securities laws. The
Parent Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and has been approved for listing on the NASDAQ National
Market. Parent owns, beneficially and of record, all issued and
outstanding shares of common stock of Merger Sub, which shares are
validly issued, fully paid, and non-assessable, and free and clear of
all Liens. Except as set forth in this Section and except for changes
since the Agreement Date resulting from the exercise of employee and
director options outstanding on the Agreement Date, (i) no shares of
Parent Capital Stock or other voting securities of Parent are
outstanding, (ii) no securities of Parent convertible into or
exchangeable for shares of capital stock or voting securities of Parent
are outstanding, and (iii) no options or other rights to acquire from
Parent, and no obligation of Parent to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital
stock or voting securities of Parent are outstanding (the items in
clauses (i), (ii), and (iii) being referred to collectively as the
"PARENT SECURITIES"). No obligations of Parent to repurchase, redeem,
or otherwise acquire any Parent Securities are outstanding.
4.7 SEC Documents. Parent has filed all required reports, schedules,
forms, statements, and other documents with the SEC since July 1, 1994 (together
with later filed documents that revise or supersede earlier filed documents, the
"PARENT SEC DOCUMENTS"). As of their respective dates, the Parent SEC Documents
complied as to form in all material respects with the requirements of the
Securities Act, or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such Parent SEC
Documents. None of the Parent SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Parent included in the Parent SEC Documents complied as of their
respective dates of filing with the SEC as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of unaudited statements, as
permitted by Form 10-QSB of the Exchange Act) applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto),
and fairly present the consolidated financial position of Parent and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the Parent SEC Documents, and except for liabilities and
obligations incurred in the ordinary course of business consistent with past
practice, neither Parent nor any of its subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by generally accepted accounting principles to be set forth on a
consolidated balance sheet of
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Parent and its consolidated subsidiaries or in the notes thereto which,
individually or in the aggregate, would have a Parent Material Adverse Effect.
4.8 Absence of Certain Changes or Events. Except as disclosed in Parent
SEC Documents, and except as expressly contemplated by this Agreement or set
forth in Schedule 4.8, since the date of the most recent audited financial
statements included in Parent SEC Documents, Parent and each of its subsidiaries
have conducted their respective businesses only in the ordinary course, and
neither Parent nor any of its subsidiaries has experienced, agreed to, or
effected, as the case may be:
(a) with the exception of seasonal business changes in the
ordinary course, suffered any material adverse change in the assets,
financial condition, operating results, distributor, customer, employee
or supplier relations, business condition or prospects of Parent or any
of its subsidiaries, nor any other event or occurrence or development
of a state of circumstances or facts which has had a Company Material
Adverse Effect;
(b) borrowed any amount or incurred or become subject to any
liability in excess of $5,000, except (i) current liabilities incurred
in the ordinary course of business and (ii) liabilities under contracts
entered into in the ordinary course of business;
(c) mortgaged, pledged or subjected to any Lien any of its
assets with a fair market value in excess of $5,000, except (i) Liens
for current property Taxes not yet delinquent, (ii) Liens imposed by
law and incurred in the ordinary course of business for obligations not
yet delinquent with respect to claims by carriers, warehousemen,
laborers, materialmen and the like, (iii) Liens in respect of pledges
or deposits under workers' compensation laws, or (iv) Liens voluntarily
created in the ordinary course of business, all of which Liens
aggregate less than $25,000;
(d) discharged or satisfied any Lien or paid any liability, in
each case with a value in excess of $5,000, other than current
liabilities (including the current portion of long-term liabilities)
paid in the ordinary course of business;
(e) sold, assigned or transferred (including, without
limitation, transfers to any employees, affiliates or shareholders) any
tangible assets with a fair market value in excess of $5,000, or
canceled any debts or claims, in each case, except in the ordinary
course of business;
(f) sold, assigned or transferred (including, without
limitation, transfers to any employees, affiliates or shareholders) any
patents, trademarks, trade names, copyrights, trade secrets or other
intangible assets;
(g) disclosed, to any person other than Company or Merger Sub
and authorized representatives of Company or Merger Sub, any
proprietary confidential information, other than pursuant to a
confidentiality agreement prohibiting the use or further disclosure of
such information, which agreement is identified in the Schedule 4.8 and
is in full force and effect on the date hereof;
(h) waived any rights of material value or suffered any
extraordinary losses or adverse changes in collection loss experience,
whether or not in the ordinary course of business or consistent with
past practice;
(i) declared or paid any dividends or other distributions with
respect to any shares of its capital stock other than to Parent or a
Subsidiary or redeemed or purchased, directly or indirectly, any shares
of its capital stock or any options, warrants or other rights to
purchase the same;
(j) with the exception of securities issued upon the exercise
of options and warrants to purchase such securities, issued, sold or
transferred any of its equity securities, securities convertible into
or exchangeable for its equity securities or options, warrants or other
rights to acquire its equity securities, or any bonds or debt
securities;
(k) taken any other action or entered into any other
transaction other than in the ordinary course of business and in
accordance with past custom and practice, or entered into any
transaction with any Insider (as defined
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in Section 4.20 other than employment arrangements otherwise disclosed
in this Agreement and Parent Disclosure Schedules, or the transactions
expressly contemplated by this Agreement;
(l) suffered any material theft, damage, destruction or loss
of or to any property or properties owned or used by it, whether or not
covered by insurance;
(m) made or granted any bonus, or any wage, salary or
compensation increase to any director, officer, employee or consultant
whose annual compensation in the preceding fiscal year exceeded
$50,000, or made or granted any increase in any employee benefit plan
or arrangement, or amended or terminated any existing employee benefit
plan or arrangement, or adopted any new employee benefit plan or
arrangement or made any commitment or incurred any liability to any
labor organization;
(n) made any single capital expenditure or commitment therefor
in excess of $5,000;
(o) made any loans or advances to, or guarantees for the
benefit of, any persons in excess of $5,000;
(p) made any charitable contributions or pledges in excess of
$5,000;
(q) made any change in accounting principles or practices from
those utilized in the preparation of Parent SEC Documents;
(r) experienced any amendment, modification or termination of
any existing, or entered into any new, contract, agreement, plan,
lease, license, permit or franchise which is, either individual or in
the aggregate, material to its business, operations, financial position
or prospects, other than in the ordinary course of business;
(s) experienced any labor dispute;
(t) experienced any change in any assumption underlying or
method of calculating any bad debt, inventory, contingency or other
reserve;
(u) written off as uncollectible any note or account
receivable, or canceled any debts, other than in the ordinary course of
business and consistent with past practice;
(v) failed to replace or replenish inventory or supplies as
such inventory or supplies may have been depleted from time to time,
collect accounts receivable, pay accounts payable and has not shortened
or lengthened the customary payment cycles for any of its payables or
receivables or otherwise managed its working capital accounts other
than in the ordinary course of business and in a manner consistent with
past practice;
(w) experienced any writedown or writeup of (or failed to
writedown or writeup in accordance with GAAP) the value of any
inventories, receivables or other assets, or revalued any of its
assets;
(x) failed to maintain all material assets in accordance with
good business practice and in good operating condition and repair,
ordinary wear and tear excepted;
(y) experienced any lapse or termination of any material
permit that was issued or relates to its business, including any
failure to renew any such permit; or
(z) discontinued or altered, in any material respect, its
advertising or promotional activities or its pricing and purchasing
policies.
4.9 Title to Properties.
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(a) The real property listed as owned ("PARENT OWNED
PROPERTY") or leased ("PARENT LEASED PROPERTY") in Schedule 4.9
constitutes all of the real property now used or occupied by Parent or
any Subsidiary, and ever owned used or occupied in the past by Parent
or any Subsidiary (including any and all structures, fixtures or other
improvements thereon, the "PARENT REAL PROPERTY"). Schedule 4.9
includes the record title holder, location, uses thereof and Parent or
any subsidiary indebtedness thereon, if any, for all Company Real
Property. Parent or one of its subsidiaries has good and marketable fee
simple title to all Company Owned Property, except for recorded
easements, covenants and other restrictions; utility easements;
building restrictions; zoning restrictions; and other easements,
covenants and restrictions existing generally with respect to
properties of a similar character, all of which are shown on Schedule
4.9 and there are no outstanding options to purchase Parent Owned
Property. Parent Real Property has access, sufficient for the conduct
of the business of Parent as now conducted or as presently proposed to
be conducted, to public roads and to all utilities, including
electricity, sanitary and storm sewer, potable water, natural gas and
other utilities, used in the operation of the business of Parent at
that location. All structures, fixtures and other improvements on all
Company Owned Property are within the lot lines and do not encroach on
the properties of any other Person, and the use and operation of all
Company Owned Property are not in violation of any applicable building,
zoning, safety, environmental, subdivision and other laws, ordinances,
regulations, codes, permits, licenses and certificates and all
restrictions and conditions affecting title. Except as described in
Schedule 4.9, no portion of any Company Owned Property is located in a
flood plain, flood hazard area or designated wetlands area. Since
January 1, 1992, neither Parent nor any Subsidiary has received any
written or oral notice of assessments for public improvements against
any Company Owned Property or any written or oral notice or order by
any governmental body, any insurance company that has issued a policy
with respect to any of such properties or any board of fire
underwriters or other body exercising similar functions (other than as
disclosed in the insurance reports disclosed hereunder) that (i)
relates to material violations of building, safety or fire ordinances
or regulations, (ii) claims any material defect or deficiency with
respect to any of such properties or (iii) requests that performance of
any material repairs, alterations or other work to or in any of such
properties or in the streets bounding the same. Complete and correct
copies of all material written reports on such matters from any
insurance company that has issued a policy with respect to any of such
properties since January 1, 1992 have been delivered to Company. To the
knowledge of Parent, there is no pending condemnation, expropriation,
eminent domain or similar proceeding affecting all or any portion of
Parent Real Property.
(b) The leases for Parent Leased Property (the "PARENT
LEASES") are in full force and effect, and Parent or one of its
subsidiaries holds a valid and existing leasehold interest under each
of Parent Leases for the term set forth in Schedule 4.9. Parent has
delivered to Company complete and accurate copies of each of Parent
Leases, and none of Parent Leases has been modified in any respect,
except to the extent that such modifications are disclosed by the
copies delivered to Company. Neither Parent nor any of its subsidiaries
is in material default, and to the knowledge of Parent no circumstances
exist which, if unremedied, would, either with or without notice or the
passage of time or both, result in such default under any of Parent
Leases; nor to the knowledge of Parent is any other party to any of
Parent Leases in default.
(c) Parent or one of its subsidiaries owns good and marketable
title to each of the tangible properties and tangible assets reflected
on the most recent audited financial statements included in Parent SEC
Documents or acquired since the date thereof, free and clear of all
Liens and encumbrances, except for (i) Liens for current Taxes not yet
delinquent, (ii) Liens set forth in Schedule 4.9, (iii) the properties
subject to Parent Leases, (iv) assets disposed of since the date of the
most recent audited financial statements included in Parent SEC
Documents in the ordinary course of business, (v) Liens imposed by law
and incurred in the ordinary course of business for obligations not yet
due to carriers, warehousemen, laborers and materialmen and (vi) Liens
in respect of pledges or deposits under workers' compensation laws, all
of which Liens aggregate less than $25,000.
(d) All of the buildings, machinery, equipment, tools, jigs,
fixtures, vehicles and other tangible assets necessary for the conduct
of the business of Parent and its subsidiaries are in reasonable
working condition and repair, ordinary wear and tear excepted, and are
usable in the ordinary course of business. There are no defects in such
assets or other conditions relating thereto which adversely affect the
operation or value of such assets. Parent or one of its subsidiaries
owns or leases under valid leases, all buildings, machinery, equipment
and other tangible assets necessary for the conduct of its business as
presently conducted, except for defects of title that do not materially
affect
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the use of such assets by Parent or its subsidiaries and except for
such assets that can be purchased or leased for nominal expenditures.
4.10 Accounts Receivable. The accounts receivable reflected on most
recent unaudited financial statements included in Parent SEC Documents and those
arising thereafter are valid receivables, are not subject to valid counterclaims
or set-offs, and are collectible in accordance with their terms, except to the
extent of the bad debt reserve reflected on such financial statements.
4.11 Inventory. The inventory of raw materials, work in process and
finished goods of Parent and each of its subsidiaries consists of items of a
cost, quality and quantity usable and, with respect to finished goods only,
salable at the normal profit levels of Parent and such subsidiaries in the
ordinary course of the business of Parent and such subsidiaries. The inventory
of finished goods of Parent and each of its subsidiaries is not slow-moving as
determined in accordance with past practices, obsolete or damaged and is
merchantable and fit for its particular use. Parent and each of its subsidiaries
has on hand or has ordered and expects timely delivery of such quantities of raw
materials, and has on hand such quantities of work in process and finished
goods, in each case as are reasonably required to timely fill current orders on
hand which require delivery within 60 days and to maintain the manufacture and
shipment of products at its normal level of operations. As of the date of the
most recent unaudited financial statements included in Parent SEC Documents, the
values at which such inventory is carried are in accordance with GAAP. Schedule
4.11 contains a materially complete and accurate summary of Parent's and each of
its subsidiaries' inventory of raw materials, work in progress, finished goods
and reserve for obsolete and other inventory allowance or accrual calculation
schedules as of June 30, 1998.
4.12 Tax Matters. Parent, its subsidiaries and each affiliated,
consolidated, combined or unitary group of which Parent or any of its
subsidiaries is a member (a "PARENT AFFILIATED GROUP"), has filed all Tax
Returns and reports required to be filed by it and has paid (or Parent has paid
on its behalf) all Taxes required to be paid by it (other than Taxes, the
failure to pay which would not, individually or in the aggregate, have a Company
Material Adverse Effect). All other Taxes of Parent which will be due and
payable, whether now or hereafter, for any period ending on, including, or
ending prior to the Closing Date, have been paid by or on behalf of Parent or
are reflected on Parent's books as an accrued Tax liability, either current or
deferred. The most recent financial statements contained in Parent SEC Documents
reflect an adequate reserve for all material Taxes payable by Parent and any of
its subsidiaries for all Taxable periods and portions thereof through the date
of such financial statements. No deficiencies for any Taxes have been proposed,
asserted, or assessed against Parent or any Company Affiliated Group (other than
deficiencies, the liability for which would not, individually or in the
aggregate, have a Company Material Adverse Effect). No extensions nor requests
for waivers or extensions of the time to assess any Taxes have been granted or
are pending. None of the assets or properties of Parent or its subsidiaries is
subject to any Tax Lien (other than Liens for Taxes that are not yet due) except
for Liens which would not, individually or in the aggregate, have a Company
Material Adverse Effect. Parent is not under audit with respect to any Taxable
period for any federal, state, local, or foreign Taxes (including income and
franchise Taxes but not including real or personal property Taxes) by the IRS or
other applicable Tax authority. Neither Parent nor any of its subsidiaries is a
party to any agreement, contract or arrangement that would result, separately or
in the aggregate, in the payment of any "excess parachute payments" within the
meaning of Section 280G of the Code.
4.13 Contracts and Commitments.
(a) To the extent they are not listed elsewhere in the Parent
Disclosure Schedules, Schedule 4.13 lists the following agreements,
whether written or, to Parent's knowledge, oral, to which Parent or any
of its subsidiaries is a party (or by which Parent or any of its
subsidiaries or their assets are bound): (i) collective bargaining
agreement or contract with any labor union; (ii) bonus, pension, profit
sharing, retirement or other form of deferred compensation plan, other
than as described in Schedule 4.18; (iii) hospitalization insurance or
other welfare benefit plan or practice, whether formal or informal,
other than as described in Schedule 4.18; (iv) stock purchase or stock
option plan; (v) contract for the employment of any officer, individual
employee or other person on a full-time or consulting basis or relating
to severance pay for any such person, other than Parent's and its
subsidiaries' normal employment practices generally affecting all
employees or classes of employees (such as hourly or salaried classes
of employees); (vi)
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agreement with employees and with consultants, vendors, customers or
other third parties requiring confidential treatment of Parent's or any
of its subsidiaries' confidential information or transfer to Parent or
any of its subsidiaries of intellectual property rights created by
employees and with consultants, vendors, customers or other third
parties; (vii) contract, agreement or understanding relating to the
voting of Parent's or any of its subsidiaries' capital stock or the
election of directors of Parent or any of its subsidiaries; (viii)
agreement or indenture relating to the borrowing of money, to letters
of credit or to mortgaging, pledging or otherwise placing a Lien on any
of the assets of Parent or any of its subsidiaries; (ix) guaranty of
any obligation for borrowed money or otherwise; (x) lease or agreement
under which it is lessee of, or holds or operates any property, real or
personal, owned by any other party; (xi) other than as described in
Schedule 4.9, lease or agreement under which it is lessor of, or
permits any third party to hold or operate, any property, real or
personal, for which the annual rental exceeds $5,000; (xii) contract or
group of related contracts with the same party (other than any contract
or group of related contracts for the purchase or sale of products or
services) continuing over a period of more than six months from the
date or dates thereof, not terminable by it on 30 days' or less notice
without penalty and involving more than $5,000; (xiii) contract which
prohibits Parent or any of its subsidiaries from freely engaging in
business anywhere in the world; (xiv) contract for the distribution of
the products of Parent or any of its subsidiaries (including any
distributor, sales and original equipment manufacturer contract); (xv)
franchise agreement; (xvi) license agreement or agreement providing for
the payment of royalties or other compensation by Parent or any of its
subsidiaries in connection with intellectual property rights licensed
from third parties; (xvii) license agreement or agreement providing for
the receipt of royalties or other compensation by Parent or any of its
subsidiaries in connection with intellectual property rights owned,
controlled or otherwise licensable by Parent or any of its
subsidiaries; (xviii) contract or commitment for capital expenditures
in excess of $5,000; (xix) agreement for the sale of any capital asset
in excess of $5,000; (xx) contract with any affiliate which in any way
relates to Parent or any of its subsidiaries (other than for employment
on customary terms); (xxi) agreement with vendors, customers or other
third parties requiring confidential treatment of confidential
information of such vendors, customers or other third parties; or(xxii)
other agreement which is either material to the business of Parent or
any of its subsidiaries or was not entered into in the ordinary course
of business.
(b) Schedule 4.13 lists the following agreements, whether oral
or written, to which Parent or any of its subsidiaries is a party or by
which Parent or any of its subsidiaries or any of their assets are
bound: (i) contract or group of related contracts with the same party
for the purchase of products or services by Parent or any of its
subsidiaries under which the undelivered balance of such products or
services is in excess of $5,000; (ii) contract or group of related
contracts with the same party for the sale of products or services by
Parent or any of its subsidiaries under which the undelivered balance
of such products or services (including, without limitation, any free
upgrades or ongoing services) has a sales price in excess of $5,000;
and (iii) sales agreement or other customer commitment (other than the
standard form of purchase order) which entitles any purchaser to a
rebate or right of set-off, to return any product of Parent or any of
its subsidiaries after acceptance thereof or to delay the acceptance
thereof, to receive future services, upgrades or enhancements, or which
varies in any material respect from Parent's or any of its
subsidiaries' standard form agreements for sales.
(c) Parent and each of its subsidiaries has performed all
material obligations required to be performed through the date hereof
by it in connection with the contracts or commitments required to be
disclosed in Schedule 4.13 and has not been notified of any claim of
material default under any contract or commitment required to be
disclosed in Schedule 4.13; neither Parent nor any Subsidiary has any
present expectation or intention of not fully performing any material
obligation pursuant to any contract or commitment required to be
disclosed in Schedule 4.13; and neither Parent nor any Subsidiary has
knowledge of any material breach or anticipated material breach by any
other party to any contract or commitment required to be disclosed in
Schedule 4.14.
(d) Prior to the date of this Agreement, Company has been
supplied with a correct and complete copy of each written contract or
commitment referred to in Schedule 4.13, together with all known
amendments, waivers or other changes thereto.
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4.14 Intellectual Property Rights.
(a) Schedule 4.14 describes: (i) all patents and all
registrations for trademarks, service marks, trade names, corporate
names, copyrights and mask works that have been issued to Parent or any
of its subsidiaries; and (ii) each pending patent application or
application for registration for trademarks, service marks, trade
names, corporate names, copyrights and mask works that Parent or any of
its subsidiaries has made with respect to intellectual property owned
by, or otherwise controlled by, Parent or any of its subsidiaries and
used in, developed for use in or necessary to the conduct of the
business of Parent or any of its subsidiaries as now conducted or as
planned to be conducted as described herein (the "PARENT OWNED
INTELLECTUAL PROPERTY RIGHTS"). Except as set forth in Schedule 4.14,
Parent and each of its subsidiaries owns and possesses all right, title
and interest, or holds such other interest as is identified in such
Schedule, in and to the rights set forth under such caption free and
clear of all Liens, security interests or other encumbrances and has
the full right to exploit such Parent Owned Intellectual Property
Rights without payment of compensation to any other party.
(b) Schedule 4.14 describes all agreements granting to Parent
or any of its subsidiaries rights in patents, patent applications,
trademarks, service marks, trade names, corporate names, copyrights,
mask works, trade secrets or other intellectual property rights used in
or necessary to the conduct of the business of Parent as now conducted
or as planned to be conducted as described herein (the "PARENT
LICENSED-IN INTELLECTUAL PROPERTY RIGHTS"). All such agreements are in
force and neither Parent nor any of its subsidiaries is in breach of
any such agreement.
(c) Schedule 4.14 describes all products marketed or that have
been marketed by Parent or any of its subsidiaries within the past two
years and identifies the method(s) of intellectual property protection
utilized by Parent or any of its subsidiaries with respect to such
products.
(d) Schedule 4.14 describes all agreements granting to third
parties any rights in Parent Owned Intellectual Property Rights and any
agreements to grant intellectual property rights that Parent or any of
its subsidiaries may acquire in the future.
(e) Except as disclosed in Schedule 4.14, all of Parent Owned
Intellectual Property Rights will be assumed by, and will become
intellectual property rights of, the Surviving Corporation in the
Merger, without the requirement that any consent to assignment be
obtained or any payment (other than government filing or registration
fees) be made. Except as disclosed in Schedule 4.14, all licenses of
Parent Licensed-In Intellectual Property Rights will be assumed by, and
will become valid agreements of, the Surviving Corporation in the
Merger, without the requirement that any consent to assignment be
obtained or any payment be made (other than future royalties as
provided n such agreements).
(f) Parent and each of its subsidiaries have taken all
commercially reasonable steps to acquire, protect and maintain Parent
Owned Intellectual Property Rights. Without limiting the generality of
the foregoing, (i) all employees, contract workers, consultants and
other agents of Parent and each of its subsidiaries have executed
agreements sufficient to vest in Parent or such subsidiary ownership or
the right to use Parent Owned Intellectual Property Rights on which
they have performed services in the business of Parent or such
subsidiary as currently conducted without the payment of royalties or
penalties; (ii) all maintenance, annuity, renewal and other such fees
and filings due on Company Owned Intellectual Property Rights have been
paid or made; and (ii) Parent has no knowledge of any defects in Parent
Owned Intellectual Property Rights that would lead to any of them
becoming invalid or unenforceable.
(g) Except as disclosed in Schedule 4.14, neither Parent nor
any of its subsidiaries has received any notice of, nor are there any
facts known to Parent or any of its subsidiaries which indicate a
likelihood of, any infringement or misappropriation by, or conflict
with, any third party with respect to Parent Owned Intellectual
Property Rights or any Parent Licensed-In Intellectual Property Rights
that are exclusively licensed to Parent or any of its subsidiaries; and
no claim by any third party contesting the validity of any Parent Owned
Intellectual Property Rights has been made, is currently outstanding
or, to the knowledge of Parent, is threatened;
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(h) Except as disclosed in Schedule 4.14, neither Parent nor
any of its subsidiaries has received any notice of any infringement,
misappropriation or violation by Parent or any of its subsidiaries of
any intellectual property rights of any third parties and neither
Parent nor any of its subsidiaries, to its knowledge, has infringed,
misappropriated or otherwise violated any such intellectual property
rights; and to the knowledge of Parent, no infringement,
misappropriation or violation of any intellectual property rights of
any third parties has occurred or will occur with respect to products
currently being sold by Parent or any of its subsidiaries or with
respect to the products currently under development (in their present
state of development) or with respect to the conduct of the business of
Parent or any of its subsidiaries as now conducted.
(i) Except as disclosed in Schedule 4.14, neither Parent nor
any of its subsidiaries has entered into any agreement restricting
Parent or any of its subsidiaries from selling, leasing or otherwise
distributing any of its current products or products under development
to any class of customers, in any geographic area, during any time
period or in any segment of the market.
(j) To Parent's knowledge, Parent and each of its subsidiaries
has the right to make available to the Surviving Corporation all trade
secrets and other confidential information entrusted to Parent or any
of its subsidiaries by third parties.
(k) There are no known quality defects in the designs
contained in Parent Owned Intellectual Property Rights or Parent
Licensed-In Intellectual Property rights (including defects relating to
the Year 2000 issue) and such designs comply with all applicable laws.
4.15 Litigation. Except as disclosed in the Parent SEC Documents, there
is no action, suit, investigation, or proceeding pending against or, to the
knowledge of Parent, overtly threatened against or affecting, Parent or any of
its properties (other than any such suit, action, or proceeding challenging the
acquisition by Parent or Sub of the shares of Company Common Stock or any
provision of this Agreement or seeking to restrain or prohibit the consummation
of the Merger) before any Governmental Entity or by any Governmental Entity
that, individually or in the aggregate, would reasonably be expected to have a
Parent Material Adverse Effect.
4.16 Warranties; Products. Schedule 4.16 lists all claims outstanding,
pending or, to the knowledge of Parent, threatened for breach of any warranty
relating to any products sold by Parent or any of its subsidiaries prior to the
date hereof. The description of the product warranties and other material terms
of sale of Parent and each of its subsidiaries set forth in Schedule 4.16 are
correct and complete. The reserves for warranty claims on the date of the most
recent audited financial statements included in Parent SEC Documents are
consistent with parent and each of its subsidiaries' prior practices and are
fully adequate to cover all warranty claims made or to be made against any
products of Parent or any of its subsidiaries sold prior to the date thereof.
4.17 Employees. (a) To the knowledge of Parent, no executive employee
of Parent or any of its subsidiaries and no group of the employees of Parent or
any of its subsidiaries has any plans to terminate his, her or their employment;
(b) Parent and each of its subsidiaries has complied with all laws relating to
the employment of labor, including provisions thereof relating to wages, hours,
equal opportunity, collective bargaining and the payment of social security and
other Taxes; (c) neither Parent nor any of its subsidiaries has any labor
relations problem pending and Parent's labor relations are satisfactory; (d)
there are no workers' compensation claims pending against Parent or any of its
subsidiaries nor is Parent or any of its subsidiaries aware of any facts that
would give rise to such a claim; (e) no employee of Parent or any of its
subsidiaries is subject to any secrecy or noncompetition agreement or any other
agreement or restriction of any kind that would impede in any way the ability of
such employee to carry out fully all activities of such employee in furtherance
of the business of Parent or any of its subsidiaries; and (f) no employee or
former employee of Parent or any of its subsidiaries, or any predecessor has any
claim with respect to any Company Owned Intellectual Property Rights. Schedule
4.17 lists, as of the date set forth in such Schedule, each employee of Parent
or any of its subsidiaries. Schedule 4.17 also states the position, title,
remuneration (including any scheduled salary or remuneration increases), date of
employment and accrued vacation pay of each such employee as of such date.
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4.18 Employee Benefit Plans.
(a) Schedule 4.18 sets forth each employee benefit plan with
respect to which Parent or its ERISA Affiliates, as hereinafter
defined, sponsors or otherwise has any obligation (the "PARENT EMPLOYEE
BENEFIT PLANS").
(b) Except as disclosed in Schedule 4.18:
(i) No Parent Employee Benefit Plan is subject to
Title IV of ERISA.
(ii) No Parent Employee Benefit Plan promises or
provides health or life benefits to retirees or former
employees except as required by federal continuation of
coverage laws or similar state laws.
(iii) Each Parent Employee Benefit Plan has at all
times been operated in substantial compliance with ERISA, the
Code, any other applicable law (including all reporting and
disclosure requirements thereunder) and the terms of the plan.
Each Parent Employee Benefit Plan that is intended to be Tax
qualified under Section 401(a) of the Code has received a
favorable determination letter from the IRS stating that the
Plan (and all amendments) is Tax qualified and that any trust
associated with the plan is Tax exempt under Section 501(a) of
the Code. To the knowledge of Parent, there is no reason why
such qualified status would be revoked.
(iv) To the knowledge of Parent, no state of facts or
conditions exist which reasonably could be expected to subject
Parent to any material liability (other than routine claims
for benefits) with respect to any Company Employee Benefit
Plan under the terms of Parent Employee Benefit Plan or
applicable law.
(v) Parent has not committed to make any material
increase in contributions or benefits under any Parent
Employee Benefit Plan and has not committed to establish any
new plan.
(vi) There are no material unfunded liabilities as of
the Closing Date associated with any Parent Employee Benefit
Plan. All contributions to each Parent Employee Benefit Plan
that are required to be made with respect to periods ending on
or before the Closing Date (including periods from the first
day of the then current plan or policy year to the Closing
Date) have been made or accrued before the Closing Date.
(vii) With respect to each Parent Employee Benefit
Plan (to the extent applicable), Parent has delivered to the
Company copies of the plan documents, plan amendments, summary
plan descriptions, the most recent Tax qualified determination
letters from the IRS, the three most recent Form 5500 Annual
Reports, including related schedules and audited financials,
and a list of assets associated with each Parent Employee
Benefit Plan.
(viii) The benefits to be provided to participants
under each Parent Employee Benefit Plan, other than a Tax
qualified plan under Code Section 401(a), are to be provided
exclusively through insurance or from the general assets of
Parent.
4.19 Insurance. Schedule 4.19 lists and briefly describes each
insurance policy maintained by Parent or any of its subsidiaries with respect to
the properties, assets and operations of Parent or such subsidiary and sets
forth the date of expiration of each such insurance policy. All of such
insurance policies are in full force and effect. Neither Parent nor any of its
subsidiaries is in default with respect to its obligations under any of such
insurance policies.
4.20 Affiliate Transactions. Other than as described in the Parent SEC
Documents or otherwise pursuant to this Agreement, no Insider has any agreement
with Parent or any of its subsidiaries (other than normal employment
arrangements) or any interest in any property, real, personal or mixed, tangible
or intangible, used in or pertaining to the business of Parent or any of its
subsidiaries (other than ownership of capital stock of Parent). None of the
Insiders
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has any direct or indirect interest (other than beneficial ownership of less
than one percent of the stock of a publicly held corporation whose stock is
traded on a national securities exchange or in the over-the-counter market) in
any competitor, supplier or customer of Parent or any of its subsidiaries or in
any person, firm or entity from whom or to whom Parent or any of its
subsidiaries leases any property. For purposes of this Section 4.230 the members
of the immediate family of an officer, director or employee shall consist of the
spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and
daughters-in-law, and brothers- and sisters-in-law of such officer, director or
employee. All agreements and transactions between Parent or any of its
subsidiaries and any Insider identified in Schedule 4.20 were made for bona fide
business purposes on terms comparable to what could be obtained from an
unaffiliated third party.
4.21 Customers and Suppliers. Schedule 4.21 lists the 15 largest
distributors and the 15 largest suppliers of Parent and each of its subsidiaries
for the 12-month period ended June 30, 1998, and sets forth opposite the name of
each such customer or supplier the approximate amount of gross sales or
purchases by such Subsidiary attributable to such customer or supplier for such
period. Except as set forth on Schedule 4.21, since June 30, 1998, no customer
or supplier listed in Schedule 4.21 has informed Parent or any of its
subsidiaries that it will stop or materially decrease the rate of business done
with Parent or any of its subsidiaries.
4.22 Distributors. Schedule 4.22 lists (a) all former distributors of
Parent or any of its subsidiaries that have been terminated since January 1,
1995 and the circumstances surrounding such termination; (b) all litigation and
disputes between Parent or any of its subsidiaries and any of their past or
present distributors, including any claims initiated by any distributor against
Parent or any of its subsidiaries, whether such litigation dispute resulted in a
settlement, financial payment or not; (c) to Parent's knowledge, all buying
consortium arrangements by which any distributor of Parent or any of its
subsidiaries purchases goods (including wholegoods, parts, supplies or other
goods) or services from Parent or any of its subsidiaries; and (d) all
distributors of Parent or any of its subsidiaries that, to Parent's knowledge,
sell or distribute goods or services other than those of Parent or any of its
subsidiaries. There are no enforceable agreements with any distributor except as
set forth in Schedule 4.22. Each distributor of Parent and each of its
subsidiaries may be terminated without penalty or other liability other than the
repurchase of inventory and potential liability for floor plan exposure upon at
least 30 days' prior written notice, except as otherwise provided by distributor
protection laws in some states.
4.23 Officers and Directors; Bank Accounts. Schedule 4.23 lists all
officers and directors of Parent and each of its subsidiaries and all of the
bank accounts of Parent and each of its subsidiaries (designating each
authorized signer).
4.24 Labor Matters. Neither Parent nor any of its subsidiaries is a
party to any collective bargaining agreement or other labor union contract
applicable to persons employed by Parent or any of its subsidiaries.
4.25 Compliance with Laws. Except as disclosed in Parent SEC Documents,
neither Parent nor any of its subsidiaries (a) is in violation of, nor has it
violated, any applicable provisions of any laws, statutes, ordinances or
regulations, or (b) has received any notice from any Governmental Entity or any
other person that Parent or any of its subsidiaries is in violation of, or has
violated, any applicable provisions of any laws, statutes, ordinances or
regulations, except in the case of clauses (a) and (b), for violations,
individually or in the aggregate, which have not had and would not reasonably be
expected to have a Company Material Adverse Effect. Each of Parent and each of
its subsidiaries has all permits, licenses, and franchises from Governmental
Entities required to conduct its business as now being conducted, except for
such permits, licenses, and franchises the absence of which would not,
individually or in the aggregate, have a Company Material Adverse Effect.
4.26 Brokers. No broker, investment banker, financial advisor, or other
person is entitled to any broker's, finder's, financial advisor's, or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent.
4.27 Tax Matters. Neither Parent nor, to its knowledge, any of its
affiliates, has taken or agreed to take any action, or knows of any
circumstances, that (without regard to any action taken or agreed to be taken by
Company
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or any of its affiliates) would prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
4.28 Certain Business Matters. Neither Parent nor, to its knowledge,
any of its affiliates has (a) made or agreed to make any contribution, payment
or gift to any customer, supplier, governmental official, employee or agent
where either the contribution, payment or gift or the purpose thereof was
illegal under any applicable law, (b) established or maintained any unrecorded
fund or asset of Parent or any of its subsidiaries for any improper purpose or
made any false entries on its books and records for any reason, (c) made or
agreed to make any contribution, or reimbursed any political gift or
contribution made by any other person, to any candidate for federal, state or
local public office in violation of any applicable law, or (d) engaged in any
activity constituting fraud or abuse under applicable laws relating to health
care, insurance or the regulation of professional corporations.
4.29 Certain Contract Matters.
(a) Schedule 4.29 sets forth, as of the Agreement Date, a list
of each contract to which Parent, its subsidiaries, or any of its
affiliates (other than individuals) is a party limiting the right of
Parent prior to the Closing Date, or Parent or any of its subsidiaries
or affiliates (other than individuals), at or after the Closing Date,
to engage in, or to compete with any person in, any business, including
each contract containing exclusivity provisions restricting the
geographical area in which, or the method by which, any business may be
conducted by Parent, its subsidiaries, or any of its affiliates (other
than individuals) prior to the Closing Date, or by Parent, its
subsidiaries or affiliates (other than individuals) after the Closing
Date. Each such contract is in full force and effect, each is a legal,
valid and binding contract, and there is no material default (or any
event which, with the giving of notice or lapse of time or both, would
be a material default) by Parent or any of its subsidiaries, in the
timely performance of any material obligation to be performed or paid
under any such contract.
4.30 Environmental Matters.
(a) Parent, each of its subsidiaries and the Parent Real
Property are in material compliance with all applicable Environmental
Laws.
(b) Parent has obtained, and maintained in full force and
effect, all Environmental Permits necessary to conduct its business and
operate Parent Real Property. A true and correct copy of each of such
Environmental Permit has been provided by Parent to Company. Parent has
conducted its business in compliance with all terms and conditions of
the Environmental Permits. Parent has filed all reports and
notifications required to be filed under and pursuant to all applicable
Environmental Laws.
(c) Except as set forth in Schedule 4.30: (i) no Hazardous
Materials have been generated, treated, contained, handled, located,
used, manufactured, processed, buried, incinerated, deposited, stored,
or released on, under or about any part of the Parent Real Property
during the period Parent was in possession thereof, (ii) Parent's Real
Property and any improvements thereon, contain no asbestos, urea,
formaldehyde, radon at levels above natural background, polychlorinated
biphenyls (PCBs) or pesticides, and (iii) no aboveground or underground
storage tanks are located on, under or about the Parent Real Property.
(d) Except as set forth in the Schedule 4.30, Parent has not
received notice alleging in any manner that any of them is, or might be
potentially responsible for any Release of Hazardous Materials, or any
costs arising under or violation of Environmental Laws.
(e) To the knowledge of Parent, no expenditure outside the
ordinary course of business will be required in order for Parent,
Merger Sub or the Surviving Corporation to comply with any
Environmental Laws in effect at the Effective Time in connection with
the operation or continued operation of the business of Parent or the
Parent Real Property in a manner consistent with the current operation
thereof by Parent.
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(f) Except as set forth in Schedule 4.30, Parent and the
Parent Real Property are not and have not been listed on the United
States Environmental Protection Agency National Priorities List of
Hazardous Waste Sites, or any other list, schedule, law, inventory or
record of hazardous or solid waste sites maintained by any federal,
state or local agency.
(g) Parent has disclosed and delivered to Company all
environmental reports and investigations which Parent has obtained or
ordered with respect to the business of Parent and the Parent Real
Property.
(h) To the knowledge of Parent, no part of the business of
Parent and none of the Parent Real Property has been used as a
landfill, dump or other disposal, storage, transfer, handling or
treatment area for Hazardous Materials, or as a gasoline service
station or a facility for selling, dispensing, storing, transferring,
disposing or handling petroleum or petroleum products.
(i) No Lien has been attached or filed against Parent or the
Parent Real Property in favor of any governmental or private entity for
(i) any liability or imposition of costs under or violation of any
applicable Environmental Law; or (ii) any Release of Hazardous
Materials.
4.31 Disclosure. No representation or warranty contained in this
Agreement, in the Parent Disclosure Schedules, or in any document delivered by
Parent to the Company pursuant to Article VII of this Agreement, contains, or
will at the Effective Time contain, any untrue statement of a material fact or
omits or will at, the Effective Time, omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were
or will be made, not misleading.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 Conduct of Business by the Company. Except as contemplated by this
Agreement, from the Agreement Date until the Effective Time, each of the Company
and each of its subsidiaries shall conduct its business in the ordinary course
consistent with past practice and shall use reasonable efforts to preserve
intact its business organization and relationships with third parties and to
keep available the services of its present officers and employees. Without
limiting the generality of the foregoing, except as provided in this Agreement
from the Agreement Date until the Effective Time, neither the Company nor any of
its subsidiaries, without the prior written approval of Parent, will:
(a) amend its articles of incorporation, bylaws, or other
comparable charter or organizational documents;
(b) (i) declare or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any
of their capital stock, (ii) split, combine, or reclassify any of their
capital stock, or issue or authorize the issuance of any other
securities in respect of shares of their capital stock, or (iii)
purchase, redeem, or otherwise acquire any shares of capital stock or
any other securities or any rights, warrants, or options to acquire any
such shares or other securities;
(c) issue, grant, award, sell, pledge, or otherwise encumber
any shares of their capital stock, any other voting securities, or any
securities convertible into or any rights, warrants, or options to
acquire, any such shares, voting securities, or convertible securities,
other than the issuance of shares of Company Common Stock upon the
exercise of Company Options or Company Warrants in accordance with
their present terms;
(d) acquire or agree to acquire by merger, consolidation,
asset purchase, or any other manner, (i) any corporation, partnership,
joint venture, association or other business organization, or any
division thereof or (ii) any assets that are material, individually or
in the aggregate, to the Company, except purchases of inventory in the
ordinary course of business consistent with past practice;
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(e) sell, lease, license, mortgage, subject to any Lien, or
otherwise dispose of any of its assets that are material, individually
or in the aggregate, except sales of inventory in the ordinary course
of business consistent with past practice;
(f) (i) incur any indebtedness, issue or sell any debt
securities or warrants or other rights to acquire any debt securities
of the Company or a subsidiary, guarantee any debt or debt security of
another person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another person or enter
into any arrangement having the economic effect of any of the
foregoing, except for short-term borrowings incurred in the ordinary
course of business consistent with past practice, or (ii) make any
loans, advances, or capital contributions to, or investments in, any
other person, other than (A) to the Company or its subsidiaries or (B)
advances to employees consistent with past practice;
(g) make or agree to make any new capital expenditure or
expenditures which, individually, is in excess of $5,000 or, in the
aggregate, are in excess of $25,000;
(h) make any Tax election or settle or compromise any Tax
liability, or make any change in any method of accounting for Taxes or
accounting policy or practice with respect to Taxes;
(i) pay, discharge, settle, or satisfy any material claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge,
settlement, or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements (or the notes thereto) of
the Company included in the Company SEC Documents or incurred in the
ordinary course of business consistent with past practice, or waive any
material benefits of, or agree to modify in any material respect, any
confidentiality, standstill or similar agreements to which the Company
or a subsidiary is a party;
(j) except in the ordinary course of business, modify, amend,
or terminate any material contract or agreement to which the Company is
a party or waive, release, or assign any material rights or claims;
(k) enter into any contract or agreement with any sales
representative or distributor;
(l) except as required by applicable law or in the ordinary
course of business, (i) adopt, enter into, terminate, or amend any
bonus, profit sharing, thrift, compensation, stock option, stock
purchase, restricted stock, pension, retirement, or deferred
compensation or other plan, trust arrangement or fund for the benefit
or welfare of any director, officer or current or former employee
(each, a "BENEFIT PLAN"), (ii) increase in any manner the compensation
or fringe benefits of, or pay any bonus to, any director or employee
(except for normal increases or bonuses in the ordinary course of
business consistent with past practice), (iii) pay any benefit not
provided for under any Benefit Plan, (iv) except as permitted in clause
(ii), grant any awards, or remove any existing restrictions, under any
bonus, incentive, performance or other compensation plan or arrangement
or Benefit Plan, or (v) take any action to fund or in any other way
secure the payment of compensation or benefits under any employee plan,
agreement, or arrangement or Benefit Plan;
(m) make any change in any method of accounting or accounting
practice or policy other than those required by generally accepted
accounting principles;
(n) take any action that (without regard to any action taken
or agreed to be taken by the Company or any of its affiliates) would
prevent the Merger from qualifying as a reorganization within the
meaning of Sections 368(a) of the Code;
(o) pay any fees of any legal or Tax adviser retained in
connection with the Merger calculated on a basis other than an hourly
basis at the maximum agreed rates per hour;
(p) enter into any written employment agreement with any
employee or any verbal agreement providing for benefits not equivalent
to employees of similar position in the Company;
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(q) accelerate the vesting of any Company Options; or
(r) authorize any of, or commit or agree to take any of, the
foregoing actions.
5.2 Conduct of Business by Parent. Except as provided in this
Agreement, from the Agreement Date until the Effective Time, each of Parent and
Merger Sub shall conduct its business in the ordinary course consistent with
past practice and shall use reasonable efforts to preserve intact its business
organization and relationships with third parties and to keep available the
services of its present officers and employees. Without limiting the generality
of the foregoing neither Parent nor any of its subsidiaries, without the prior
written approval of the Company, will:
(a) except for the Charter Amendment, amend its articles of
incorporation, bylaws, or other comparable charter or organizational
documents;
(b) (i) declare or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any
of their capital stock, (ii) split, combine, or reclassify any of their
capital stock, or issue or authorize the issuance of any other
securities in respect of shares of their capital stock, or (iii)
purchase, redeem, or otherwise acquire any shares of capital stock or
any other securities or any rights, warrants, or options to acquire any
such shares or other securities;
(c) issue more than 2,500,000 shares of Parent Capital Stock,
any other voting securities, or any securities convertible into or any
rights, warrants or options to acquire any such shares, voting
securities or convertible securities, at a price equivalent that is
less than 75% of the market price of the Parent Common Stock on the
date of issuance;
(d) make any acquisition or take any other action which would
materially adversely affect its ability to consummate the transactions
contemplated by this Agreement;
(e) take any action that (without regard to any action taken
or agreed to be taken by the Company or any of its affiliates) would
prevent the Merger from qualifying as a reorganization within the
meaning of Sections 368(a) of the Code;
(f) authorize either of, or commit or agree to take either of,
the foregoing actions.
5.3 No Solicitation of Transactions. Except as expressly contemplated
by this Agreement or otherwise consented to in writing by Parent, from the
Agreement Date until the Effective Time, the Company shall not participate in
any discussions with, provide any information to, enter into any agreement or
understanding with, or otherwise cooperate in any other way with any person
(other than Parent and its directors, officers, employees, representatives, and
agents) concerning any "COMPANY COMPETING TRANSACTION," or permit or authorize
any of the directors, officers, employees, shareholders or representatives
(including, without limitation, any financial advisor, attorney, or accountant)
of the Company or any of its subsidiaries to take any such action. The Company
shall promptly notify Parent when it receives, or becomes aware that any
subsidiary or any director, officer, employee, or representative of the Company
or any subsidiary has received any inquiries, proposals, or requests for
information concerning a Company Competing Transaction. For purposes of this
Agreement, "Company Competing Transaction" shall mean any of the following
involving the Company (other than the transactions contemplated by this
Agreement): (a) any tender or exchange offer, proposal for a merger,
consolidation or other business combination involving the Company or any
proposal or offer to acquire in any manner 20% or more of the voting equity
securities of the Company in a single transaction or series of related
transactions; (b) any sale, lease, exchange, mortgage, pledge, transfer, or
other disposition of 25% or more of the assets of the Company on a consolidated
basis, in a single transaction or a series of related transactions; or (c) any
agreement to, or public announcement by the Company of a proposal, plan, or
intention to, do any of the foregoing, in each case other than in accordance
with this Agreement. Notwithstanding the foregoing, nothing contained in this
Agreement shall prevent the Company or its board of directors from furnishing
non-public information to, or entering into discussions or negotiations with,
any person or entity in connection with an unsolicited bona fide written
proposal or inquiry concerning a Company Competing Transaction by such person or
entity or recommending an unsolicited bona fide written proposal concerning a
Company Competing Transaction to the
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shareholders of the Company, if and only to the extent that (i) the board of
directors of the Company believes in good faith that such Company Competing
Transaction would, if consummated, result in a transactoin more favorable to the
Company's shareholders from a financial point of view than the transaction
contemplated by this Agreement (any such more favorable Company Competing
Transaction being referred to in this Agreement as a "Superior Proposal") and
the board of directors of the Company determines in good faith after
consultation with outside legal counsel that such action is necessary for the
Company to comply with its fiduciary duties to shareholders under applicable
law, and (ii) prior to furnishing such non-public information to, or entering
into discussions or negotiations with, such person or entity, the board of
directors of the Company receives from such person or entity an executed
confidentiality agreement with terms no more favorable to such party than those
contained in the Confidentiality Agreement dated June 30, 1998, between Parent
and the Company.
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ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Shareholder Approvals. Each of the Company and Parent shall take,
in accordance with applicable law, applicable NASDAQ rules and its respective
certificate or articles of incorporation and by-laws, all action necessary to
convene, respectively, (i) an appropriate meeting of shareholders of Parent to
consider and vote upon (A) the approval and adoption of this Agreement and the
Merger (including the issuance of the shares of Parent Common Stock to be issued
in the Merger pursuant to this Agreement), (B) an amendment to the articles of
incorporation of Parent to increase the number of authorized shares of Parent
Common Stock to 50,000,000 shares (the "CHARTER AMENDMENT"), and (C) any other
matters required to be approved by Parent shareholders for consummation of the
Merger, and (ii) an appropriate meeting of shareholders of the Company to
consider and vote upon the approval and adoption of this Agreement and the
Merger and any other matters required to be approved by the Company's
shareholders for consummation of the Merger as promptly as practicable after the
Form S-4 is declared effective. The board of directors of Parent and the board
of directors of the Company shall recommend such approval, and each of Parent
and the Company shall take all reasonable lawful action to solicit such approval
by its respective shareholders.
The Company and Parent shall coordinate and cooperate with respect to the
timing of the shareholder meetings and shall use their respective best efforts
to hold such meetings on the same day as soon as practicable after the Agreement
Date.
6.2 Preparation of Form S-4 and the Proxy Statement; Shareholders'
Meetings. As soon as practicable following the Agreement Date, (i) the Company
and Parent shall cooperate in the preparation of a registration statement on
Form S-4 (the "FORM S-4") to be filed by Parent in connection with the issuance
of Parent Common Stock in the Merger (including the joint proxy statement and
prospectus and other proxy solicitation materials of the Company and Parent
constituting a part thereof (the "JOINT PROXY STATEMENT")). Each of the Company
and Parent shall use reasonable efforts to have the Form S-4 declared effective
under the Securities Act as promptly as practicable after such filing and to
maintain such effectiveness until the shares covered thereby have been issued.
Parent shall provide the Company with copies of all filings made pursuant to
this Section 6.2 and shall consult with the Company on any responses to comments
made by the staff of the SEC with respect thereto. The Company and Parent will
use reasonable efforts to cause the Joint Proxy Statement to be mailed to their
respective shareholders as promptly as practicable after the Form S-4 is
declared effective under the Securities Act. Parent shall, at its expense, also
take any action required to be taken under any applicable state securities laws
in connection with the issuance of Parent Common Stock in the Merger.
6.3 Information Supplied by the Company. None of the information
supplied or to be supplied by the Company specifically for inclusion or
incorporation by reference in (a) the Form S-4 will, at the time the Form S-4 is
filed with the SEC, at any time it is amended or supplemented and, at the time
it becomes effective under the Securities Act and at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading, and (b)
the Joint Proxy Statement will, at the date it is first mailed to the Company's
shareholders and at the time of the shareholders' Meetings, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. If at any time
prior to the Effective Time any event or circumstance relating to the Company,
or its officers or directors, should be discovered by the Company which should
be set forth in an amendment to the Form S-4 or a supplement to the Joint Proxy
Statement, the Company shall promptly inform Parent. All documents, if any, that
the Company is responsible for filing with the SEC in connection with the
transactions contemplated herein will comply as to form and substance in all
material respects with the applicable requirements of the Exchange Act and the
rules and regulations thereunder.
6.4 Information Supplied by Parent. None of the information supplied or
to be supplied by Parent specifically for inclusion or incorporation by
reference in (i) the Form S-4 will, at the time the Form S-4 is filed with the
SEC, at any time it is amended or supplemented, at the time it becomes effective
under the Securities Act and at the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading, and (ii) the Joint
Proxy Statement will, at the date it is first mailed to the Company's
shareholders and at the time of the shareholders' Meetings, contain any untrue
statement of a material fact or omit to state any material fact
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required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. If at any time prior to the Effective Time any event or circumstance
relating to Parent or its officers and directors, should be discovered by Parent
which should be set forth in an amendment to the Form S-4 or a supplement to the
Joint Proxy Statement, Parent shall promptly inform the Company and shall
promptly prepare such supplement or amendment and file such amendment to the
Form S-4. All documents that Parent is responsible for filing with the SEC in
connection with the transactions contemplated herein will comply as to form and
substance in all material respects with the applicable requirements of the
Securities Act and the rules and regulations thereunder. Prior to the Closing
Date, Parent shall use reasonable efforts to cause the shares of Parent Common
Stock to be issued pursuant to the Merger to be registered or qualified under
all applicable securities or blue sky laws of each of the states and territories
of the United States, and to take any other actions which may be necessary to
enable the Parent Common Stock to be issued pursuant to the Merger to be
distributed in each such jurisdiction.
6.5 Access to Information. Subject to Section 6.8, from the Agreement
Date to the Effective Time, Parent and the Company shall each, upon reasonable
notice and during normal business hours, provide to the other access to all
information and documents which the other may reasonably request regarding the
business, assets, liabilities, employees and other aspects of the other party,
other than the information and documents that in the opinion of such other
party's legal counsel may not be disclosed under applicable law.
6.6 Confidentiality. The parties will, and will cause their respective
directors, officers, employees, accountants, consultants, legal counsel, and
other representatives to, comply with all of their respective obligations under
the confidentiality agreement between Parent and the Company, dated June 30,
1998 (the "CONFIDENTIALITY AGREEMENT"). Without limiting the generality of the
obligations set forth in the Confidentiality Agreement, both parties to this
Agreement agree that, without the consent of the other party, neither party will
solicit or cause to be solicited for employment any employee, sales agent or
sales representative of the other party, or hire any employee, sales agent or
sales representative with whom such party had contact in the course of
evaluating the Merger, prior to the Effective Time and for a period of 18 months
after any termination of this Agreement. Any such consent granted by a party is
revocable at any time. For purposes of this paragraph, solicitation shall not
include solicitation of employees, sales agents or sales representatives (i) who
first solicit employment or relationship from the party in question, or (ii) who
are solicited (A) by advertising in periodicals of general circulation, or (B)
by an employee search firm on a party's behalf, so long as such party does not
direct or encourage such firm to solicit such employee or any other employees of
the other party.
6.7 Public Announcements. Each of Parent and the Company will consult
with the other party before issuing any press release or making any public
statement with respect to this Agreement and the transactions contemplated
hereby and, except as may be required by applicable law or any listing agreement
with any national securities exchange, will not issue any such press release or
make any such public statement prior to such consultation. The parties have
agreed on the text of a joint press release by which Parent and the Company will
announce the execution of this Agreement.
6.8 Appropriate Action; Consents; Filings.
(a) The Company and Parent shall use reasonable efforts to (i)
take, or cause to be taken, all appropriate action necessary under
applicable law or required to be taken by any Governmental Entity to
consummate the Merger and the transactions contemplated by this
Agreement as promptly as practicable, (ii) obtain from any Governmental
Entities any licenses, waivers, or approvals required to be obtained by
the Company or Parent or any of their respective subsidiaries in
connection with the authorization, execution, and delivery of this
Agreement and the consummation of the transactions contemplated hereby,
(iii) give any notices to non-Governmental Entities and obtain any
third party consents, (A) necessary to consummate the Merger and the
transactions contemplated by this Agreement, (B) disclosed or required
to be disclosed in the schedules to this Agreement, or (C) required to
prevent a Company Material Adverse Effect or a Parent Material Adverse
Effect, and (iv) as promptly as practicable, make all necessary
filings, and thereafter make any other required submissions, with
respect to this Agreement and the Merger required under (A) the
Securities Act, the Exchange Act, and any other applicable federal or
state securities laws, and (B) any other applicable law; provided that
Parent and the Company shall cooperate with each other in connection
with the making of all such filings, including providing copies of all
such documents to the non-filing party and its advisors prior
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to filing and, if requested, to accept all reasonable additions,
deletions or changes suggested in connection therewith. In the event
that either Parent or the Company shall fail to perform any action
listed in (i), (ii), (iii), or (iv) above, it shall use reasonable
efforts, and shall take any such actions reasonably requested by the
other party, to minimize any adverse effect upon the Company and
Parent, their respective subsidiaries and their respective businesses
resulting, or which could reasonably be expected to result after the
Effective Time, from the failure to perform such action. The Company
and Parent shall use reasonable efforts to furnish to each other all
information required for any application or other filing to be made
pursuant to the rules and regulations of any applicable law (including
all information required to be included in the Form S-4 and the Joint
Proxy Statement) in connection with the transactions contemplated by
this Agreement.
(b) Except as otherwise permitted by this Agreement, none of
the Company, Parent or Merger Sub will knowingly take any action, or
omit to take any action, if such action or omission would, or would
reasonably be expected to, result in any of its representations or
warranties set forth herein being or becoming untrue, or in any of the
conditions to the Merger set forth in this Agreement not being
satisfied.
(c) From the Agreement Date until the Effective Time, each of
Parent, and the Company shall promptly notify the other of any pending
or threatened action, proceeding or investigation by any Governmental
Entity or any other person (i) challenging or seeking material damages
in connection with the Merger or the conversion of the Company Common
Stock into Parent Common Stock pursuant to the Merger or (ii) seeking
to restrain or prohibit the consummation of the Merger or otherwise
limit the right of Parent or any of its subsidiaries to own or operate
all or any portion of the businesses or assets of the Company.
6.9 Directors' and Officers' Indemnification and Insurance.
(a) Right to Indemnification. From and after the Effective
Time, Parent shall, and shall cause the Company to, jointly and
severally, indemnify, defend and hold harmless the present and former
officers and directors of the Company and persons who become officers
or directors prior to the Effective Time (collectively, the
"INDEMNITEES") against all losses, expenses, (including reasonable
attorney's fees) claims, damages, liabilities, costs or judgments or
amounts that are paid in settlement with the approval of Parent (which
approval shall not be unreasonably withheld) arising out of actions or
omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement) to
the full extent permitted or required as of the Agreement Date by the
Company's articles of incorporation and bylaws (and shall also advance
expenses as incurred to the fullest extent permitted or required as of
the Agreement Date under the Company's articles of incorporation and
bylaws, provided that the person to whom expenses are advanced provides
the undertaking to repay such advances if and as contemplated by
applicable law or such articles of incorporation and bylaws). The
Company shall use reasonable efforts to obtain extended reporting
endorsements (tail coverage) on the fiduciary liability, professional
liability, and directors and officers liability policies currently
covering the Company or any of the Indemnitees required to be
indemnified by Parent at a commercially reasonable cost, effective as
of and following the Effective Time; provided that such coverage and
the cost thereof shall be subject to Parent's approval, which approval
shall not be unreasonably withheld. In connection with such efforts,
the Company will complete accurately in all material respects any
insurance applications and forms of the applicable insurer and take any
reasonable steps to preserve any claims, including submitting a full
and complete list of any potential claims of which the Company has
knowledge, under the policy issued by such insurer. In the event the
Company is unable to obtain such extended reporting coverage under the
Company's existing directors and officers liability insurance policies
at a commercially reasonable cost, Parent shall use reasonable efforts
to provide similar coverage for those Indemnitees that it is required
to indemnify under policies then maintained by Parent; provided that
such similar coverage is available to Parent at a commercially
reasonable cost. Notwithstanding any provisions of this Section
6.11(a), failure by the Company or Parent, despite use of their
respective reasonable efforts, to obtain such extended reporting
endorsements or to provide such similar coverage under Parent's
policies shall not in any way affect, lessen or excuse Parent from its
obligation to indemnify, defend and hold harmless the Indemnitees to
the extent required by this Section 6.9.
(b) Claims. In the event any claim, action, suit, proceeding
or investigation (a "D&O CLAIM") for which indemnification is provided
under this Section 6.9 is brought against an Indemnitee (whether
arising before or after the Effective Time) after the Effective Time
(i) such Indemnitee may retain counsel satisfactory to it (subject to
approval by the indemnifying party, which approval shall not be
unreasonably withheld, and subject to the terms and
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conditions of the applicable directors and officers liability insurance
or fiduciary liability insurance policies), (ii) the indemnifying party
shall pay all reasonable fees and expenses of such counsel for such
Indemnitee promptly as statements therefor are received (subject to the
ability of the indemnifying party to receive such information relative
to the legal services provided as is customarily provided and
reasonably requested by the indemnifying party and provided that
nothing in this Section 6.9 shall prevent the indemnifying party from
disputing any fees it reasonably believes are not reasonable), and
(iii) the indemnifying party will use all reasonable efforts to assist
in the vigorous defense of any such matter, provided that the
indemnifying party shall not be liable for any settlement of any D&O
Claim effected without its written consent, which consent shall not be
unreasonably withheld. Any Indemnitee wishing to claim indemnification
under this Section 6.9, upon learning of any such D&O Claim, shall
notify the appropriate indemnifying party (but the failure so to notify
such indemnifying party shall not relieve the indemnifying party from
any liability which it may have under this Section 6.9 except to the
extent such failure materially prejudices such indemnifying party), and
shall deliver to such indemnifying party the undertaking contemplated
by applicable law. The Indemnitees as a group may retain only one law
firm to represent them with respect to each such matter unless there
is, under applicable standards of professional conduct, a conflict on
any significant issue between the positions of any two or more
Indemnitees.
(c) This Section 6.9 is intended to benefit the Indemnitees,
shall be enforceable by each Indemnitee and his or her heirs and
representatives, and shall be binding on all successors and assigns of
the Company and Parent.
(d) In the event that Parent or the Surviving Corporation or
any of their respective successors and assigns consolidates with or
merges into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger or
transfers and conveys all or substantially all of its property and
assets to any person, then, and in each case, proper provisions shall
be made so that the successor and assigns of Parent and the Surviving
Corporation assume the obligations set forth in this Section 6.9.
6.10 Obligations of Merger Sub. Parent shall take all action necessary
to cause Merger Sub to perform its obligations under this Agreement and to
consummate the Merger on the terms and subject to conditions set forth in this
Agreement.
6.11 Company Affiliates.
(a) Identification; Restrictions. Promptly following the
Agreement Date, the Company shall deliver to Parent a list of names and
addresses of those persons who are affiliates of the Company within the
meaning of Rule 145 of the rules and regulations promulgated under the
Securities Act (each such person, a "COMPANY AFFILIATE"). The Company
shall provide Parent such information and documents as Parent shall
reasonably request for purposes of reviewing such list. The Company
shall use its best efforts to deliver or cause to be delivered to
Parent, on or prior to the Effective Time, an affiliate letter in the
form attached hereto as Exhibit A, executed by each of the Company
Affiliates identified in the foregoing list. Parent shall be entitled
to place legends as specified in such affiliate letters on the
certificates evidencing any of the Parent Common Stock to be received
by such Company Affiliates pursuant to the terms of this Agreement, and
to issue appropriate stop transfer instructions to the transfer agent
for the Parent Common Stock, consistent with the terms of such letters.
(b) Parent Obligations. For so long as resales of shares of
Parent Common Stock issued pursuant to the Merger are subject to the
resale restrictions set forth in Rule 145 under the Securities Act,
Parent will use its best efforts to comply with Rule 144(c)(1) under
the Securities Act.
6.12 NASDAQ Listing. Parent shall promptly prepare and submit a listing
application in accordance with the rules of the NASDAQ National Market covering
the shares of Parent Common Stock to be issued in connection with the Merger and
to be issued in connection with the exercise of Company Options and Company
Warrants to be assumed by Parent hereunder. Parent shall use reasonable efforts
to have such application approved by the NASDAQ National Market prior to the
Effective Time.
6.13 Employee Benefits.
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(a) Parent reserves the right to request in writing at least
15 days prior to the Closing Date, that the Company cease contributing
to one or more of the Company Employee Benefit Plans effective as of
the Closing Date.
(b) If Parent requests that the Company cease contributions to
or terminate a qualified plan under Section 401(k) of the Code (the
"COMPANY'S 401(K) PLAN"), the Company shall (i) adopt written
resolutions, the form and substance of which shall be satisfactory to
Parent, to terminate the Company's 401(k) Plan and to fully (100%) vest
all participants under the Company's 401(k) Plan no later than the
third business day preceding the Closing Date; provided, however, that
such plan termination may be made contingent upon the consummation of
the Merger and distribution of benefits may be made contingent upon the
receipt of a favorable determination letter from the IRS with respect
to the termination of the Company's 401(k) Plan, (ii) deliver, prior to
the Closing Date, notice of the Company's 401(k) Plan termination to
any trustees and custodians of the Company's 401(k) Plan and/or its
assets, (iii) appoint (if not already appointed) an institutional
trustee of the Company's 401(k) Plan, and (iv) prepare IRS Form 5310,
with full disclosure of the Merger and the existence of Parent's 401(k)
Savings Plan ("PARENT'S 401(K) PLAN") and the fact that Company
employees participating in the Company's 401(k) Plan as of the Closing
Date shall become participants in Parent's 401(k) Plan immediately
following the Closing Date. The Company shall take all actions
necessary to cause such IRS Form 5310, in a form satisfactory to
Parent, to be filed with the IRS on, or as soon as practicable
following the Effective Time. If a favorable determination letter is
received from the IRS with respect to the termination of the Company's
401(k) Plan and distributions of benefits thereunder, Parent shall take
all actions necessary to cause distributions on account of termination
of the Plan to be made as soon as administratively feasible thereafter.
If the IRS fails to issue a favorable determination letter, the
Company's 401(k) Plan shall, at Parent's option, be (i) merged into
Parent's 401(k) Plan, or (ii) maintained as a separate frozen qualified
plan. In the event that Parent elects, in accordance with the preceding
sentence, to continue the Company's 401(k) Plan, then the Company's
401(k) Plan shall be operated in a manner generally consistent with
Parent's 401(k) Plan, in terms of available investment options, payment
of expenses and other plan features.
(c) The Company shall suspend the Company's 1995 Employee
Stock Purchase Plan effective as of August 1, 1998 and no further
contributions or purchases shall be made under such plan.
(d) Parent acknowledges and agrees that the Merger constitutes
a "Change of Control" as defined in the Change of Control Agreements
dated as of December 31, 1997, between the Company and the individuals
listed on Schedule 6.15.
6.16 Preparation of Tax Returns.
(a) The Company shall file (or cause to be filed) at its own
expense, on or prior to the due date, all Tax Returns, including all
Company Employee Benefit Plan Returns and reports, for all Tax periods
ending on or before the Closing Date where the due date for such
Returns or reports (taking into account valid extensions of the
respective due dates) falls on or before the Closing Date; provided,
however, that the Company shall provide Parent with a copy of
appropriate workpapers, schedules drafts and final copies of each
federal and state income Tax return or election of the Company
(including Returns of all Company Employee Benefit Plans) at least ten
days before filing such return or election and shall reasonably
cooperate with any request by Parent in connection therewith.
(b) Parent, in its sole and absolute discretion, will file (or
cause to be filed) all Tax Returns of the Company due after the Closing
Date. After the Closing Date, Parent, in its sole and absolute
discretion and to the extent permitted by law, shall have the right to
amend, modify or otherwise change all Tax Returns of the Company for
all Tax periods.
6.17 Directors of Parent. Parent agrees that, to the extent permitted
by applicable law, commencing at the first meeting of the Board of Directors of
Parent following the Effective Time, Parent will cause Volker G. Oakey and
Walter C. Babcock to be appointed to the Board of Directors of Parent, and
thereafter at the next annual meeting of
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Parent's shareholders,will cause Messrs. Oakey and Babcock to be nominated, and
will use its best efforts to cause them to be elected, to serve on such Board of
Directors.
ARTICLE VII
CONDITIONS TO THE MERGER
7.1 Conditions of Each Party's Obligation to Effect the Merger. The
respective obligations of the Company, Parent and Merger Sub to consummate the
Merger are subject to the satisfaction upon or prior to the Closing of the
following conditions:
(a) Shareholder Approval. The holders of a majority of shares
of outstanding Company Common Stock shall have approved this Agreement
and the Merger in accordance with Oregon Law and the articles of
incorporation and bylaws of the Company and the holders of a majority
of shares of Parent Common Stock shall have approved this Agreement and
the Charter Amendment in accordance with Minnesota Law and the articles
of incorporation and bylaws of Parent.
(b) Governmental Entity Approvals. All authorizations,
consents, orders or approvals of, or declarations or filings with, or
expiration of waiting periods imposed by, any Governmental Entity
necessary for the consummation of the transactions contemplated by this
Agreement shall have been filed, expired or been obtained.
(c) Form S-4; Proxy Statement. The Form S-4 shall have become
effective under the Securities Act, shall not be the subject of any
stop order or proceedings seeking a stop order, and the Joint Proxy
Statement shall not at the Effective Time of the Merger be subject to
any proceedings commenced or threatened by the SEC.
(d) No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
Governmental Entity of competent jurisdiction nor other legal restraint
or prohibition preventing the consummation of the Merger shall be in
effect.
(e) Charter Amendment. The Charter Amendment shall have been
filed with the Secretary of State for the State of Minnesota.
7.2 Conditions of Obligations of Parent and Merger Sub. The obligations
of Parent and Merger Sub to effect the Merger are subject to the satisfaction
prior to or upon the Closing of the following conditions, unless waived by
Parent and Merger Sub:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and
correct in all material respects as of the Closing Date, as though made
on and as of such date (provided that those representations or
warranties made as of a particular date need only be true and correct
as of such date). Parent shall have received a certificate signed on
behalf of the Company by the chief executive officer and the chief
financial officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company
shall have performed in all material respects all obligations and
covenants required to be performed by it under this Agreement prior to
or as of the Closing Date, and Parent shall have received a certificate
signed on behalf of the Company by the chief executive officer and the
chief financial officer of the Company to such effect.
(c) Consents. The consents, approvals and authorizations
described in Schedule 3.5 shall have been obtained in form and in
substance reasonably satisfactory to each of Parent and Merger Sub,
except for such consents, approvals and authorizations with respect to
which the failure to obtain would not have a Company Material Adverse
Effect.
(d) Letters from Company Affiliates. Parent shall have
received from each Company Affiliate an executed copy of an agreement
substantially in the form of Exhibit A.
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7.3 Conditions of Obligation of the Company. The obligation of the
Company to effect the Merger is subject to the satisfaction prior to or upon the
Closing of the following conditions, unless waived by the Company:
(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub set forth in this Agreement shall
be true and correct in all material respects as of the Closing Date, as
though made on and as of such date (provided that those representations
or warranties made as of a particular date need only be true and
correct as of such date). The Company shall have received a certificate
signed on behalf of Parent by the chief executive officer and the chief
financial officer of Parent to such effect.
(b) Performance of Obligations of Parent and Merger Sub.
Parent and Merger Sub shall have performed in all material respects all
obligations and covenants required to be performed by them under this
Agreement prior to or as of the Closing Date, and the Company shall
have received a certificate signed on behalf of Parent by the chief
executive officer and the chief financial officer of Parent to such
effect.
(c) Consents. The consents, approvals and authorizations
described in Schedule 4.4 shall have been obtained in form and
substance reasonably satisfactory to the Company, except for such
consents, approvals and authorizations with respect to which the
failure to obtain would not have a Parent Material Adverse Effect.
(d) NASDAQ Listing. The shares of Parent Common Stock
constituting the Merger Consideration shall have been approved for
listing on the NASDAQ National Market System.
(e) Tax Opinion. The Company shall have received an opinion
dated as of the Effective Time in form and substance satisfactory to
the Company of Ater Wynne LLP, to the effect that (i) the Merger will
be treated for federal income Tax purposes as a reorganization within
the meaning of Section 368(a) of the Code, (ii) Parent, Merger Sub and
the Company will each be a party to that reorganization within the
meaning of Section 368(b) of the Code (iii) no income, gain or loss
will be recognized for federal income Tax purposes by the Company as a
result of the consummation of the Merger, and (iv) no income, gain or
loss will be recognized for federal income Tax purposes by shareholders
of the Company upon the exchange in the Merger of shares of Company
Common Stock solely for shares of Parent Common Stock (except to the
extent of any cash received in lieu of fractional shares). In
connection with such opinion, counsel shall be entitled to rely upon
certain representations and covenants of the Company, Parent, Merger
Sub, and such other persons as such counsel deems appropriate.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, notwithstanding any requisite
approval of this Agreement and the Merger by the shareholders of the Company:
(a) by mutual written consent of each of Parent, Merger Sub
and the Company;
(b) by either Parent, Merger Sub or the Company if either (i)
the Effective Time shall not have occurred on or before December 31,
1998, provided, however, that the right to terminate this Agreement
under this Section 8.1(b)(i) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Effective Time to occur on
or before such date, or (ii) there shall be any law that makes
consummation of the Merger illegal or otherwise prohibited or if any
court of competent jurisdiction or Governmental Entity shall have
issued an order, decree, ruling, or taken any other action restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and unappealable;
(c) by either Parent or Merger Sub if the board of directors
of the Company withdraws, modifies, or changes its recommendation of
this Agreement or the Merger in a manner adverse to Parent or Merger
Sub or shall have resolved to do any of the foregoing, for any reason
other than the occurrence of an event or discovery of the falsity
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of a representation or warranty relating to Parent which has a Parent
Material Adverse Effect, or the board of directors of the Company shall
have recommended to the shareholders of the Company any Company
Competing Transaction or resolved to do so;
(d) by the Company if the board of directors of Parent
withdraws, modifies, or changes its recommendation of this Agreement or
the Merger in a manner adverse to the Company or shall have resolved to
do any of the foregoing, for any reason other than the occurrence of an
event or discovery of the falsity of a representation or warranty
relating to the Company which has a Company Material Adverse Effect;
(e) by either Parent, Merger Sub or the Company if the
Company's shareholders' Meeting shall have been held and the
shareholders of the Company shall have failed to approve this Agreement
and the Merger at such meeting (including any adjournment or
postponement thereof);
(f) by either Parent, Merger Sub, or the Company, if Parent's
shareholders' Meeting shall have been held and the shareholders of
Parent shall have failed to approve this Agreement, the Merger and the
Charter Amendment at such meeting (including any adjournment or
postponement thereof);
(g) by the Company, in the event of a material breach by
Parent or Merger Sub of any representation, warranty, covenant or
agreement contained herein (other than a breach of Parent or Merger Sub
due to the occurrence of a Parent Material Adverse Effect arising
solely due to the public announcement of the Merger) which has not been
cured or is not curable by December 31, 1998; or
(h) by Parent, in the event of a material breach by the
Company of any representation, warranty, covenant or agreement
contained herein (other than a breach of Company due to the occurrence
of a Company Material Adverse Effect arising solely due to the public
announcement of the Merger) which has not been cured or is not curable
by December 31, 1998.
8.2 Effect of Termination. Except as provided in Section 8.3, in the
event of the termination of this Agreement pursuant to Section 8.1,
this Agreement shall forthwith become void, there shall be no liability
under this Agreement on the part of Parent, Merger Sub, or the Company
or any of their respective officers or directors and all rights and
obligations of any party shall cease, subject to the remedies of the
parties set forth in Section 8.3.
8.3 Remedies.
(a) Company Termination Fee. If this Agreement is terminated
(i) pursuant to Section 8.1(c), (ii) pursuant to Section 8.1(e) and a
Company Competing Transaction exists on the date of the Company's
shareholders' Meeting, or (iii) pursuant to Section 8.1(h) and the
breach giving rise to such termination is a result of a Company
Competing Transaction, the Company shall pay Parent a fee of $1,000,000
and shall reimburse Parent and Merger Sub for all of its out-of-pocket
costs and expenses incurred in connection with the transactions
contemplated by this Agreement (such fee and expenses being referred to
herein as the "COMPANY TERMINATION FEE"). Such Company Termination Fee
shall be due and payable within thirty (30) days of termination of this
Agreement; provided that, in no event shall the Company be required to
pay the Company Termination Fee to Parent if, immediately prior to the
termination of this Agreement, Parent was in breach of any of its
material obligations under this Agreement. In the event that the
Company shall fail to pay the Company Termination Fee when due, there
shall also be paid the costs and expenses actually incurred or accrued
by Parent or Merger Sub (including, without limitation, reasonable fees
and expenses of counsel) in connection with the collection under and
enforcement of this Section 8.3(a), together with interest on such
unpaid Company Termination Fee, commencing on the date that such
Company Termination Fee becomes due, at a rate equal to the prime rate
of interest published in the Wall Street Journal plus 2%.
(b) Transaction Costs. Except as set forth in this Section
8.3, all costs and expenses incurred in connection with this Agreement
and the Merger shall be paid by the party incurring such costs or
expenses, whether or not the Merger is consummated.
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(d) Other Remedies. Nothing in this Section 8.3 precludes a
party from seeking such other remedies at law or equity as it deems
appropriate.
ARTICLE IX
GENERAL PROVISIONS
9.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time; provided, however,
that this Section 9.1 shall not limit any agreement or covenant of the parties
which by its terms contemplates performance after the Effective Time.
9.2 Notices. All notices, requests, claims, demands and other
communications to any party hereunder shall be in writing (including telecopy or
similar writing) and shall be deemed given if delivered personally, by
facsimile, certified mail (postage prepaid, return receipt requested) or sent by
overnight courier (in each case, providing proof of delivery) to the parties at
the following addresses (or such other address for a party as shall be specified
in like notice):
if to Parent or Merger Sub, to:
Verdant Brands, Inc.
9555 James Avenue South
Suite 200
Bloomington, MN 55431-2543
Attention: Mark Eisenschenk
Facsimile: (612) 887-1300
with a copy to:
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
Attention: Michael Trucano
Facsimile - (612) 340-8827
if to the Company, to:
Consep, Inc.
213 Southwest Columbia Street
Bend, Oregon 97702
Attention: Volker G. Oakey
Facsimile: (541) 388-3705
with a copy to:
Ater Wynne LLP
Suite 1800
222 SW Columbia Street
Portland, OR 97201-6618
Attention: Michael W. Shackelford
Facsimile: (503) 226-0079
9.3 Amendment. This Agreement may be changed or modified by the parties
only by action taken by or on behalf of their respective boards of directors,
reflected in a written amendment signed by the parties, at any time prior to the
Effective Time; provided, however, that, after the approval of this Agreement
and the Merger by the shareholders
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of the Company, no amendment may be made which would reduce the amount or change
the type of consideration into which each Share shall be converted upon
consummation of the Merger.
9.4 Waiver. At any time prior to the Effective Time, any party may (a)
extend the time for the performance of any obligation or other act of any other
party, (b) waive any inaccuracy in the representations and warranties contained
herein or in any document delivered pursuant to this Agreement and (c) waive
compliance with any agreement or condition contained herein. Any such extension
or waiver shall be valid only if set forth in any instrument in writing signed
by the party or parties to be bound thereby.
9.5 Entire Agreement. This Agreement (including the Exhibits and
Schedules) and the other documents referenced herein (including the
Confidentiality Agreement) contain the entire agreement between the parties with
respect to the subject matter hereof and supersede all prior arrangements and
understandings, both written and oral, with respect thereto including, without
limitation, the Letter of Intent dated July 10, 1998.
9.6 Severability. It is the desire and intent of the parties that the
provisions of this Agreement be enforced to the fullest extent permissible under
the law and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, in the event that any provision of this Agreement would be
held in any jurisdiction to be invalid, prohibited or unenforceable for any
reason, such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn so
as not to be invalid, prohibited or unenforceable in such jurisdiction, it
shall, as to such jurisdiction, be so narrowly drawn, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
9.7 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns, provided that no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the
consent of the other parties.
9.8 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Section 6.9 (which is intended to be for the benefit of
the persons covered by the indemnification provisions contained therein and may
be enforced by such persons).
9.9 Governing Law. This Agreement shall be construed in accordance with
and governed by the law of the State of Minnesota, without giving effect to the
principles of conflict of laws thereof.
9.10 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument.
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This Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
VERDANT BRANDS, INC.
By /s/ Stanley Goldberg
Name: Stanley Goldberg
Title: President and CEO
CONSEP ACQUISITION, INC.
By /s/ Mark G. Eisenschenk
Name: Mark G. Eisenschenk
Title: President
CONSEP, INC.
By /s/ Volker G. Oakey
Name: Volker G. Oakey
Title: President and CEO
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APPENDIX B
OPINION OF PIPER JAFFRAY INC.
September 30, 1998
The Board of Directors
Verdant Brands, Inc.
9555 James Avenue South, Suite 200
Bloomington, MN 55431-2543
Attention: Stanley Goldberg
Chairman, President and Chief Executive Officer
Members of the Board:
You have requested our opinion as of September 8, 1998 as to the fairness, from
a financial point of view, to Verdant Brands, Inc. ("Verdant" or the "Company),
of the consideration to be paid by the Company for the acquisition of the common
stock (the "Transaction") of Consep, Inc. ("Consep") pursuant to an Agreement
and Plan of Merger dated September 8, 1998 (the "Agreement"), by and among
Verdant, Consep and Consep Acquisition, Inc., a wholly owned merger subsidiary
of Verdant. Pursuant to the Agreement, each share of Consep common stock will be
converted into the right to receive 0.95 shares of registered Verdant common
stock (the "Exchange Ratio"). The Agreement also states that the Transaction is
contingent upon (i) approval of the Transaction by Verdant's shareholders, (ii)
approval of the Transaction by Consep's shareholders and (iii) Verdant
shareholders' authorization of additional common shares. The other terms and
conditions of the Transaction are more fully set forth in the Agreement.
Piper Jaffray Inc., as a customary part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, underwritings and secondary
distributions of securities, private placements and valuations for estate,
corporate and other purposes. We will receive a fee for our services in
rendering this opinion that is not contingent upon the consummation of the
Transaction. Verdant has also agreed to indemnify us against certain liabilities
in connection with our services. We make a market in Verdant's common stock and
provide research coverage on Verdant. We also acted as the Company's exclusive
financial advisor for an acquisition in September 1996. In the ordinary course
of our business, we and our affiliates may actively trade the securities of
Verdant for our own account or the account of our customers and, accordingly,
may at any time hold a long or short position in such securities.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have (i) reviewed the Agreement, (ii) reviewed certain publicly
available and internal financial and other information related to Consep
provided to us by Consep management, (iii) reviewed certain financial
information for Consep on both a stand-alone basis and in combination with
Verdant furnished to us by the management of Verdant, (iv) reviewed, to the
extent publicly available, the financial terms of certain acquisition
transactions involving companies deemed comparable with Consep, (v) performed
certain valuation analyses using the financial information of selected public
companies deemed comparable to Consep, (vii) performed certain discounted cash
flow valuation analyses based on the stand-alone financial performance of Consep
and (viii) reviewed certain internal and publicly available financial and
securities data for Verdant. In addition, we had discussions with members of the
management of Consep concerning the financial condition, operating results and
business outlook for Consep on (a) a stand-alone basis and (b) a
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pro forma basis in combination with Verdant. We also met with the management of
Verdant to discuss the estimated pro forma operating results and business
outlook for Consep in combination with Verdant.
We have relied upon and assumed the accuracy, completeness and fairness of the
financial statements and other information provided to us by Consep, Verdant, or
otherwise made available to us, and have not assumed responsibility
independently to verify such information. We have relied upon the assurances of
the management of Consep and Verdant that the information provided to us by
each, either directly or through their respective representatives, has been
prepared on a reasonable basis, and, with respect to financial planning data and
other business outlook information, reflects the best currently available
estimates and judgments, and that they are not aware of any information or facts
that would make the information provided to us incomplete or misleading. We have
assumed no material adverse change in Consep's assets, financial condition,
results of operations, business or prospects since the date of the information
furnished to us.
In arriving at our opinion, we have not performed any appraisals or valuations
of any specific assets or liabilities of Consep, have not been furnished with
any such appraisals or valuations and have made no physical inspection of the
properties or assets of Consep. We express no opinion regarding the liquidation
value of any entity.
This opinion is necessarily based upon the information available to us and facts
and circumstances as they exist and are subject to evaluation on the date
hereof; events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion. We are not expressing any opinion
herein as to the prices at which shares of Verdant common stock have traded or
may trade at any future time. We have not undertaken to reaffirm or revise this
opinion or otherwise comment upon any events occurring after the date hereof and
do not have any obligation to update, revise or reaffirm this opinion.
This opinion is directed to the Board of Directors of Verdant in connection with
the Transaction and is not intended to be and does not constitiute a
recommendation to any shareholder of Verdent. We were not requested to opine as
to, and this opinion does not address, the basic business decision to proceed
with or effect the Transaction. Except as provided in our engagement letter,
this opinion shall not be published or otherwise used, nor shall any public
references to us be made, without our prior written approval.
Based upon and subject to the foregoing and based upon such other factors as we
consider relevant, it is our opinion that, as of September 8, 1998, the
consideration proposed to be paid by Verdant for the common stock of Consep
Consep pursuant to the Agreement is fair, from a financial point of view, to
Verdant.
Sincerely,
/S/ PIPER JAFFRAY INC.
PIPER JAFFRAY INC.
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APPENDIX C
OPINION OF PACIFIC CREST SECURITIES INC.
September 8, 1998
The Board of Directors
Consep, Inc.
213 SW Columbia Street
Bend, Oregon 97702
Members of the Board:
You have asked us to advise you with respect to the fairness to the
common shareholders of Consep, Inc. ("Consep" or the "Company"), from a
financial point of view, of the exchange ratio (the "Exchange Ratio") of one
share of Common Stock of the Company for .95 shares of Common Stock of Verdant
Brands, Inc. ("Verdant"), pursuant to the Merger (the "Merger") of the Company
with and into Verdant as provided in the Agreement and Plan of Merger, dated
September 8, 1998.
Pacific Crest Securities Inc. is an investment banking firm that performs
financial advisory services. We have acted as financial advisor to the Board of
Directors in connection with the Merger and will receive a fee for our services
We have in the past provided investment banking services to the Company and have
received customary fees for the rendering of such services. In addition, in the
ordinary course of our business, we have actively traded the common stock of the
Company for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or a short position in such securities.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and Verdant. We have
reviewed certain other information, including financial forecasts, provided to
us by the Company and Verdant, and have met with the Company's management to
discuss the business and prospects of the Company. We have also discussed with
Verdant's management the business and prospects of Verdant.
We have considered certain financial data of the Company and Verdant, and
compared the data with similar data for publicly held companies with similar
operations. Additionally, we have considered the financial terms of certain
other business combinations in the agricultural and specialty chemical industry
that have recently been effected. We have considered certain pro forma combined
financial information of the Company and Verdant. We also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria that we deemed relevant.
In connection with our review, we have not independently verified any of
the foregoing information and have relied on its being complete and accurate in
all material respects. With respect to the financial forecasts, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the Company's and Verdant's management as
to the future financial performance of the Company and Verdant. In addition, we
have not made an independent evaluation or appraisal of any of the assets of the
Company or Verdant.
We were retained by the Board of Directors of the Company and our opinion
as expressed herein is
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limited to the fairness, from a financial point of view to the common
stockholders of the Company, of the Merger and does not address the Company's
underlying business decision to proceed with the Merger. Our opinion is
necessarily based on conditions as they exist and can be evaluated on the date
hereof and the information made available to us through the date hereof. This
letter does not constitute a recommendation to the Board of Directors or to any
common stockholder of the Company with respect to any approval of Merger.
We agree to the inclusion of this opinion letter in the Proxy
Statement/Prospectus relating to the Merger. The opinion may not, however, be
summarized, excerpted from or otherwise publicly referred to without our prior
written consent.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the Exchange Ratio is fair to the common stockholders of the
Company from a financial point of view.
Very truly yours,
PACIFIC CREST SECURITIES, INC.
By: /s/ David S. Kalez
--------------------------
David S. Kalez
Senior Vice President
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 302A.521, subd. 2, of the Minnesota Statutes requires Verdant
to indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
Verdant, against judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of Verdant, or, in the case of performance by
a director, officer or employee of Verdant involving service as a director,
officer, partner, trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not opposed to the best
interests of Verdant. In addition, Section 302A.521, subd. 3, requires payment
by Verdant, upon written request, of reasonable expenses in advance of final
disposition of the proceeding in certain instances. A decision as to required
indemnification is made by a disinterested majority of the Board of Directors
present at a meeting at which a disinterested quorum is present, or by a
designated committee of the Board, by special legal counsel, by the
shareholders, or by a court.
The Restated Bylaws of Verdant provide that the officers and directors
of Verdant and certain others shall be indemnified to substantially the same
extent permitted by Minnesota law.
Section 302A.521 of the Minnesota Business Corporation Act provides
that a corporation shall indemnify any person who was or is made or is
threatened to be made a party to any proceeding, by reason of the former or
present official capacity (as defined) of such person, against judgments,
penalties, fines, settlements and reasonable expenses, including attorneys' fees
and disbursements, incurred by such person in connection with the proceeding if
certain statutory standards are met. "Proceeding" means a threatened, pending or
complete civil, criminal, administrative, arbitration or investigative
proceeding, including one by or in the right of the corporation. Section
302A.521 contains detailed terms regarding such right of indemnification and
reference is made thereto for a complete statement of such indemnification
rights.
Verdant maintains a standard policy of officers' and directors'
liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated as of September 8, 1998 by and
among Verdant Brands, Inc., Consep Acquisition, Inc. and Consep, Inc.
(included as Exhibit A to the Proxy Statement- Prospectus that forms a
part of this Registration Statement on Form S-4).
3.1 Restated Articles of Incorporation of Verdant, as amended to date
(incorporated by reference to Exhibit 3.2 of Verdant's Registration
Statement on Form S-18, SEC File No. 33-36205-C).
3.2 Proposed form of Articles of Amendment reflecting Charter Amendment.
3.3 Bylaws of Verdant, as amended to date (incorporated by reference to
Exhibit 3.3 of Verdant's Registration Statement on Form S-18, SEC File
No. 33-36205-C).
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4.1 Specimen certificate of Common Stock, $.01 par value (incorporated by
reference to Exhibit 4.1 of Verdant's Registration Statement on Form
S-18, SEC File No. 33-36205-C).
5.1 Opinion of Dorsey & Whitney LLP regarding validity of securities.
8.1 Form of opinion of Ater Wynne LLP regarding tax treatment.
10.1 1986 Employee Incentive Stock Option Plan (incorporated by reference
to Exhibit 4.4 of Verdant's Registration Statement on Form S-8, SEC
File No. 33-37806).
10.2 Amendment No.1 dated January 1, 1988, Amendment No. 2 dated September
9, 1992 and Amendment No. 3 dated January 4, 1995 to Verdant's 1986
Employee Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.2 of Verdant's Quarterly Report on Form 10-QSB dated March
31, 1998, SEC File No. 0-18921).
10.3 Stock Option Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.2 of Verdant's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1993, SEC File No. 0-18921).
10.4 Amendment No.1 to Verdant's Stock Option Plan for Non-Employee
Directors dated December 8, 1997 (incorporated by reference to Exhibit
10.4 of Verdant's Quarterly Report on Form 10-QSB dated March 31,
1998, SEC File No. 0-18921).
10.5 Lease Agreement between Verdant and 94th Street Associates, a
Minnesota Partnership, dated August 15, 1996 (incorporated by
reference to Exhibit 10.3 of Verdant's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1996, SEC File No. 0-18921).
10.6 Lease Agreement between Verdant and MEPC American Properties, Inc., a
Delaware corporation, dated August 16, 1996 (incorporated by reference
to Exhibit 10.4 of Verdant's Annual Report on Form 10-KSB for the
fiscal year ended September 30, 1996).
10.7 Employment Agreement between Verdant and Stanley Goldberg dated
September 13, 1992 (incorporated by reference to Exhibit 10.6 of
Verdant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992, SEC File No. 0-18921).
10.8 Amendment of Employment Agreement between Verdant and Stanley
Goldberg, dated December 5, 1997 (incorporated by reference to Exhibit
10.6 of Verdant's Amended Annual Report on Form 10- KSB/A for the
fiscal year ended September 30, 1997, SEC File No. 0-18921).
10.9 Employment Agreement between Verdant and Mark G. Eisenschenk, dated
December 5, 1997 (incorporated by reference to Exhibit 10.7 of
Verdant's Amended Annual Report on Form 10- KSB/A for the fiscal year
ended September 30, 1997, SEC File No. 0-18921).
10.10 Stock Purchase Agreement, and related documents, between Verdant and
Stanley Goldberg, dated April 29, 1997 (incorporated by reference to
Exhibit 10.8 of Verdant's Amended Annual Report on Form 10-KSB/A for
the fiscal year ended September 30, 1997, SEC File No. 0-18921).
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10.11 Stock Purchase Agreement, and related documents, between Verdant and
Mark G. Eisenschenk, dated April 29, 1997 (incorporated by reference
to Exhibit 10.9 of Verdant's Amended Annual Report on Form 10-KSB/A
for the fiscal year ended September 30, 1997, SEC File No. 0-18921).
10.12 Credit Agreement between Verdant and General Electric Capital
Corporation dated May 2, 1997 (incorporated by reference to Exhibit
10.6 of Verdant's Quarterly Report on Form 10-QSB for the third fiscal
quarter ended June 30, 1997, SEC File No. 0-18921).
10.13 Consent and First Amendment to Credit Agreement, dated December 9,
1997, between Verdant and General Electric Capital Corporation dated
May 2, 1997 (incorporated by reference to Exhibit 10.13 of Verdant's
Quarterly Report on Form 10-QSB for the second fiscal quarter ended
June 30, 1998, SEC File No. 0-18921).
10.14 Consent to Credit Agreement, dated December 11, 1997, between Verdant
and General Electric Capital Corporation dated May 2, 1997
(incorporated by reference to Exhibit 10.14 of Verdant's Quarterly
Report on Form 10-QSB for the second fiscal quarter ended June 30,
1998, SEC File No. 0-18921).
10.15 Second Amendment, dated April 22, 1997, to Credit Agreement between
Verdant and General Electric Capital Corporation dated May 2, 1997
(incorporated by reference to Exhibit 10.15 of Verdant's Quarterly
Report on Form 10-QSB for the second fiscal quarter ended June 30,
1998, SEC File No. 0-18921).
10.16 Stock Subscription Warrant between Verdant and Robert W. Fischer Co.,
Inc. dated July 18, 1990 (incorporated by reference to Exhibit 10.16
of Verdant's Registration Statement on Form S-18, SEC File No.
33-36205-C).
10.17 Cross-Licensing and Joint Licensing/Sale Agreement between Verdant
and Mycogen Corporation, dated May 31, 1994 (incorporated by reference
to Exhibit 10.1 of Verdant's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1994, SEC File No. 0-18921).
10.18 Patent License Agreement between Verdant, Mycogen Corporation and
Monsanto Company, dated June 29, 1994 (incorporated by reference to
Exhibit 10.2 of Verdant's Quarterly Report on Form 10- QSB for the
fiscal quarter ended June 30, 1994, SEC File No. 0-18921).
10.19 Verdant 1996 Employee Stock Option Plan (incorporated by reference to
Exhibit 10.15 of Verdant's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1996).
10.20 Form of Affiliate Agreement by and among Verdant and certain
shareholders of Consep.
21.1 Subsidiaries of Verdant.
23.1 Consent of Deloitte & Touche LLP with respect to financial statements
of Verdant.
23.2 Consent of KPMG Peat Marwick LLP with respect to financial statements
of Consep.
23.3 Consent of Smith & Howard, P.C. with respect to financial statements
of Southern Resources, Inc.
23.4 Consent of Dorsey & Whitney LLP (included on Exhibit 5.1).
23.5 Consent of Ater Wynne LLP.
24.1 Power of Attorney.
99.1 Consent of Piper Jaffray, Inc. with respect to the fairness of the
Merger.
99.2 Consent of Pacific Crest Securities, Inc. with respect to the fairness
of the Merger.
99.4 Form of Proxy Card for the Special Meeting of Verdant.
99.5 Form of Proxy Card for Special Meeting of Consep.
(b) Financial Statement Schedules.
Not Applicable.
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ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) To respond to requests for information that is incorporated by
reference into the Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(d) To supply by means of a post-effective amendment all information
concerning a transaction, and Consep being acquired involved therein, that was
not the subject of and included in the Registration Statement when it became
effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this a
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Bloomington, State of Minnesota, on September
29, 1998.
VERDANT BRANDS, INC.
By /s/ Stanley Goldberg
--------------------------------
Stanley Goldberg
President and CEO
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on September 30, 1998.
Signature Title
--------- -----
/s/ Stanley Goldberg Chairman, President and CEO
- ----------------------------- (principal executive officer)
Stanley Goldberg
/s/ Mark G. Eisenschenk Executive Vice President and
- ----------------------------- Chief Financial Officer
Mark G. Eisenschenk (principal financial officer)
/s/ Joseph R. Price Vice President Finance
- ----------------------------- (principal accounting officer)
Joseph R. Price
Gordon F. Stofer* Chairman of the Board and Director
Robert W. Fischer* Director
Donald E. Lovness* Director
Richard Mayo* Director
Dr. Franklin Pass* Director
John F. Hetterick* Director
Frederick F. Yanni, Jr.* Director
*By /s/ Stanley Goldberg Attorney-in-fact
- -----------------------------
Stanley Goldberg
II-5
<PAGE>
Exhibit 3.2
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
VERDANT BRANDS, INC.
1. The name of the corporation is Verdant Brands, Inc., a Minnesota
corporation.
2. The amendment adopted is: The first sentence of Article ___ of the Amended
and Restated Articles of Incorporation of the corporation, as heretofore
amended, is hereby amendedin its entirety to read as follows:
The aggregated number of shares of capital stock which this
corporation is authorized to issue is 25,000,000, of which 50,000,000
shares shall be common shares with a par value of $.01 per share, and
of which 5,000,000 shall be preferred shares with a par value of $.01
per share.
3. The amendment has been adopted pursuant to Chapter 302A of the Minnesota
Business Corporation Act.
IN WITNESS WHEREOF, the undersigned, the secretary of Verdant Brands, Inc.,
being duly authorized on behalf of Verdant Brands, Inc., has executed this
document this day of ________________, 1998.
---------------------------
Mark G. Eisenschenk
Secretary
<PAGE>
Exhibit 5.1
[DORSEY & WHITNEY LLP OPINION LETTERHEAD]
September 30, 1998
Verdant Brands, Inc.
9555 James Avenue South, Suite 200
Bloomington, Minnesota 55431
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to Verdant Brands, Inc., a Minnesota
corporation (the "Company"), in connection with a Registration Statement on Form
S-4 (the "Registration Statement"), relating to shares of Common Stock, $.01 par
value (the "Common Stock"), of the Company to be issued in connection with the
merger (the "Merger") of Consep Acquisition, Inc., an Oregon corporation and a
wholly-owned subsidiary of the Company, with and into Consep, Inc., a Oregon
corporation, as described in the Joint Proxy Statement-Prospectus (the "Joint
Proxy Statement-Prospectus") constituting part of the Registration Statement.
We have examined such documents and have reviewed such questions of law
as we have considered necessary and appropriate for the purposes of our opinions
set forth below.
In rendering our opinions set forth below, we have assumed the
authenticity of all documents submitted to us as originals, the genuineness of
all signatures, and the conformity to authentic originals of all documents
submitted to us as copies. We have also assumed the legal capacity for all
purposes relevant hereto of all natural persons and, with respect to all parties
to agreements or instruments relevant hereto other than the Company, that such
parties had the requisite power and authority (corporate or otherwise) to
execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties, and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to questions of fact material to our opinions, we have relied
upon certificates of officers of the Company and of public officials.
Based on the foregoing, we are of the opinion that the shares of the
Common Stock to be issued in connection with the Merger, when issued in
accordance with the terms of the Merger Agreement (as defined in the Joint
Proxy-Prospectus), will be duly authorized, validly issued, fully paid and
nonassessable.
Our opinions expressed above are limited to the application of the laws
of the state of Minnesota.
<PAGE>
Verdant Brands, Inc.
September 30, 1998
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to this firm under the heading
"Legal Opinions" in the Joint Proxy-Prospectus.
Very truly yours
/S/ Dorsey & Whitney LLP
Dorsey & Whitney LLP
MT
<PAGE>
Exhibit 8.1
October , 1998
------------------
Consep, Inc.
213 S.W. Columbia
Bend, OR 97702
Gentlemen and Ladies:
We are acting as tax counsel to Consep, Inc. ("Consep") in connection
with a proposed transaction (the "Merger") involving Consep, a corporation
organized under the laws of the State of Oregon, Consep Acquisition, Inc.
("Merger Sub"), a corporation organized under the laws of the State of Oregon,
and Verdant Brands, Inc. ("Verdant"), a corporation organized under the laws of
the State of Minnesota.
The Merger is structured as a statutory merger of Merger Sub with and
into Consep, in which Consep will be the surviving entity (Consep, following the
Merger will be referred to as the "Surviving Corporation"), in accordance with
that certain Agreement and Plan of Merger by and among Verdant, Merger Sub and
Consep, dated as of September 8, 1998, and the exhibits thereto (the
"Agreement"). Except as otherwise indicated herein, capitalized terms used in
this opinion are defined in the Agreement.
For purposes of rendering this opinion, we have examined and are
relying upon (without any independent investigation or review thereof) the truth
and accuracy, at all relevant times, of the statements, representations and
warranties contained in the following documents:
1. The Agreement (including exhibits thereto);
2. A Certificate of Consep, dated October , 1998, signed
by an authorized officer of Consep and delivered to
us by Consep and incorporated herein by reference;
3. A Certificate of Verdant, dated October , 1998,
signed by an authorized officer of Verdant and
delivered to us by Verdant and incorporated herein by
reference;
4. A Certificate of Merger Sub, dated October , 1998,
signed by an authorized officer of Merger Sub, and
delivered to us by Merger Sub and incorporated herein
by reference;
5. Such other instruments and documents related to the
formation, organization and operation of Consep,
Merger Sub and Verdant or the consummation of the
Merger and the transactions contemplated thereby as
we have deemed necessary or appropriate.
<PAGE>
Consep, Inc.
October , 1998
- --------
Page 2
In rendering this opinion, we have assumed or obtained representations
and are relying thereon (without any independent investigation or review
thereof) that:
1. Original documents (including signatures) are
authentic, documents submitted to us as copies
conform to the original documents, and there has been
(or will be by the Effective Time) due execution and
delivery of all documents where due execution and
delivery are prerequisites to effectiveness thereof;
2. Any representation or statement referred to above
made "to the best of knowledge" or otherwise
similarly qualified is correct without such
qualification;
3. The Merger will be effective under the applicable
states' laws;
4. In the Merger, Consep Common Stock representing
control of Consep will be exchanged solely for voting
stock of Verdant. For this purpose, "control" means
the direct ownership of stock possessing at least 80
percent of the total combined voting power for the
election of directors of all classes of Consep stock
entitled to vote and at least 80 percent of the total
number of shares of each nonvoting class of stock of
Consep. For this purpose, Consep Common Stock
exchanged for cash or other property originating with
Verdant will be treated as outstanding Consep Common
Stock on the date of the Effective Time.
5. At the Effective Time, Consep will not have
outstanding any warrants, options, convertible
securities, or any other type of right pursuant to
which any person could acquire Consep Common Stock
that, if exercised or converted, would affect
Verdant's acquisition or retention of control of the
Surviving Corporation. For this purpose, "control"
means the direct ownership of stock possessing at
least 80 percent of the total combined voting power
for the election of directors of all classes of the
Surviving Corporation stock entitled to vote and at
least 80 percent of the total number of shares of
each nonvoting class of stock of the Surviving
Corporation.
<PAGE>
Consep, Inc.
October , 1998
- --------
Page 3
6. The fair market value of Verdant Common Stock and
other consideration received by each Consep
shareholder in the Merger will be approximately equal
to the fair market value of the Consep Common Stock
surrendered in exchange therefor.
7. There is no intercorporate indebtedness existing
between Verdant and Consep or Merger Sub and Consep
that was issued, acquired, or will be settled at a
discount.
8. On the date of the Effective Time, the fair market
value of the assets of Consep will exceed the sum of
its liabilities, plus the amount of liabilities, if
any, to which the assets of Consep are subject.
9. Any liabilities of Consep in existence at the
Effective Time and any liabilities to which the
assets of Consep are subject as of the Effective Time
were incurred by Consep in the ordinary course of
business.
10. Verdant, Merger Sub, Consep and the Consep
shareholders will pay their respective expenses, if
any, with respect to the Merger.
11. Neither Verdant nor Consep is an investment company
as defined in Section 368(a)(2)(F)(iii) and (iv) of
the Internal Revenue Code.
12. Consep is not under the jurisdiction of a court in a
case under Title 11 of the United States Code, or a
receivership, foreclosure, or similar proceeding in a
federal or state court.
13. Neither Consep, a related party to Consep, a
partnership of which Consep is a partner, nor a
predecessor of Consep has redeemed or purchased any
of Consep's outstanding common stock or preferred
stock during the past five years. For this purpose,
"related party" means (i) any corporation that is a
member of the same affiliated group as Consep as
defined in Section 1504 of the Internal Revenue Code
(determined without regard to Section 1504(b)),
either before or after the Merger, or (ii) any
corporation in which Consep owns, directly or
indirectly, at least 50 percent of the total combined
voting power of all classes of stock entitled to
vote, or at least
<PAGE>
Consep, Inc.
October , 1998
- --------
Page 4
50 percent of the total value of shares of all
classes of stock, either before or after the Merger.
14. In the Merger, the Consep shareholders will receive
Verdant Common Stock with an aggregate value, as of
the date of the Merger, of not less than 50 percent
of the value of all the formerly outstanding Consep
Common Stock as of the same date. For this purpose,
(i) shares of Consep Common Stock exchanged for cash
or other property will be treated as outstanding
Consep Common Stock on the date of the Merger, and
(ii) shares of Verdant Common Stock received by a
Consep shareholder and subsequently sold, exchanged,
or otherwise transferred to a related party of
Verdant or a partnership of which Verdant is a
partner will not be treated as received in the Merger
by such Consep shareholder. For purposes of this
representation, "related party" means (i) any
corporation that is a member of the same affiliated
group as Verdant as defined in Section 1504 of the
Internal Revenue Code (determined without regard to
Section 1504(b)), either before or after the Merger,
or (ii) any corporation in which Verdant owns,
directly or indirectly, at least 50 percent of the
total combined voting power of all classes of stock
entitled to vote, or at least 50 percent of the total
value of shares of all classes of stock, either
before or after the Merger.
15. Consep has not made any extraordinary distributions
to its shareholders subsequent to the commencement of
negotiations with Verdant regarding the Merger or in
anticipation of the Merger.
16. No outstanding indebtedness of Consep has or will
represent equity for tax purposes; no outstanding
equity of Consep has represented indebtedness for tax
purposes; no outstanding security, instrument,
agreement or arrangement that provides for, contains,
or represents a right to acquire Consep Common Stock
(or to share in the appreciation thereof) constitutes
"stock" for purposes of Section 368(c) of the Code.
17. Verdant, Merger Sub and Consep are participating in
the Merger for valid business purposes and not for
the purpose of tax avoidance, and the terms of the
Merger are the product of arm's length negotiations.
<PAGE>
Consep, Inc.
October , 1998
- --------
Page 5
18. None of the compensation received by any
shareholder-employees of Consep will be separate
consideration for, or allocable to, any of their
shares of Consep Common Stock; none of the shares of
Verdant Common Stock or received by any
shareholder-employees will be separate consideration
for, or allocable to, any employment agreements or
covenants not to compete; and the compensation paid
to any shareholder- employees will be for services
actually rendered and will be commensurate with
amounts paid to third parties bargaining at arm's
length for similar services.
19. Prior to and up to the Effective Time of the Merger,
Consep has conducted and intends to continue to
conduct its historic business.
20. The Agreement (together with its exhibits and
schedules) represents the entire agreement and
understanding of Consep and Verdant with respect to
the Merger, and the Merger will be consummated in
accordance with the terms of the Agreement.
21. Each of the representations made by Consep or Verdant
in the Agreement, the Joint Proxy Statement and any
other documents associated therewith is true and
accurate.
22. Following the Merger, the Surviving Corporation will
hold at least (a) 90 percent of the fair market value
of the net assets held by Consep and Merger Sub
immediately prior to the Merger, and (b) 70 percent
of the fair market value of the gross assets held by
Consep and Merger Sub immediately prior to the
Merger. For purposes of this representation, the
assets of Consep and Merger Sub shall include assets
disposed of by Consep or Merger Sub, respectively,
prior to or subsequent to the Merger and in
contemplation thereof (including without limitation
any asset disposed of by Consep or Merger Sub, other
than in the ordinary course of business, pursuant to
a plan or intent existing during the period ending on
the Effective Time and beginning with the
commencement of negotiations (whether formal or
informal) with Verdant regarding the Merger). For
purposes of this representation, any amounts paid by
Consep or Merger Sub to Consep shareholders who
receive cash or other property, any
<PAGE>
Consep, Inc.
October , 1998
- --------
Page 6
amounts used by Consep or Merger Sub to pay expenses
related to the Merger, and all redemptions or
distributions (except for regular, normal dividends)
made by Consep or Merger Sub will be included as
assets of Consep or Merger Sub, respectively,
immediately prior to the Merger.
23. Following the Merger, the Surviving Corporation will
continue the historic business of Consep or use a
significant portion of Consep's historic business
assets in a business. For purposes of this
representation, the Surviving Corporation will be
deemed to satisfy this requirement if (a) the members
of Verdant's qualified group (as defined in Treasury
Regulations Section 1.368-1(d)(4)(ii)), in the
aggregate, continue the historic business of Consep
or use a significant portion of Consep's historic
business assets in a business, or (b) the foregoing
activities are undertaken by a partnership as
contemplated by Treasury Regulations Section 1.368-
1(d)(4)(iii).
24. Verdant has no present plan or intention to liquidate
the Surviving Corporation; to merge the Surviving
Corporation with or into another corporation; to sell
or otherwise dispose of the stock of the Surviving
Corporation (other than as permitted under Treasury
Regulations Section 1.368-2(k)(2)); or to sell or
otherwise dispose of any of the assets of the
Surviving Corporation or of any of the assets
acquired from Merger Sub except for dispositions made
in the ordinary course of business or transfers of
assets to a corporation controlled by the Surviving
Corporation. For this purpose, a "corporation
controlled by the Surviving Corporation" is a
corporation in which the Surviving Corporation
directly owns stock possessing 80 percent of the
total combined voting power for the election of
directors of the corporation and at least 80 percent
of the total number of shares of each nonvoting class
of stock of the corporation.
25. Prior to the Merger, Verdant will be in control of
Merger Sub. For this purpose, "control" means the
direct ownership of stock possessing at least 80
percent of the total combined voting power for the
election of directors of all classes of Merger Sub
stock entitled to vote and at least 80 percent of the
total number of shares of each nonvoting class of
stock of Merger Sub.
<PAGE>
Consep, Inc.
October , 1998
- --------
Page 7
26. Merger Sub has been formed solely in order to
consummate the transactions contemplated by the
Agreement, and Merger Sub has not conducted and will
not conduct any business activities or other
operations of any kind other than the issuance of its
stock to Verdant, prior to the Effective Time.
27. Neither Verdant, nor a related party to Verdant, nor
a partnership of which Verdant is a partner owns, nor
has it owned during the past five years, any Consep
Common Stock. For purposes of this representation,
"related party" means (i) any corporation that is a
member of the same affiliated group as Verdant as
defined Section 1504 of the Internal Revenue Code
(determined without regard to Section 1504(b)),
either before or after the Merger, or (ii) any
corporation in which Verdant owns, directly or
indirectly, at least 50 percent of the total combined
voting power of all classes of stock entitled to
vote, or at least 50 percent of the total value of
shares of all classes of stock, either before or
after the Merger.
28. Other than amounts paid in lieu of fractional shares,
the only consideration to be received, directly or
indirectly, by Consep shareholders in the Merger for
their Consep Common Stock is Verdant Common Stock.
Verdant has not agreed to assume, nor will it
directly or indirectly assume, any expense or
liability, whether contingent or fixed, of any holder
of Consep Common Stock. Verdant has no present plan
or intention to contribute any additional capital to
Consep or the Surviving Corporation or to make any
loans to Consep or the Surviving Corporation for the
purpose of directly or indirectly paying any
additional consideration to any holders of Consep
Common Stock. None of the Consep Common Stock
exchanged in the Merger for Verdant Common Stock will
be subject to any liabilities. No part of the
consideration to be exchanged for Consep Common Stock
will be received by a Consep shareholder as a
creditor, employee, or in any capacity other than
that of a Consep shareholder.
29. No Consep shareholder is acting as an agent for
Verdant in connection with the Merger or approval
thereof, and Verdant will not reimburse any Consep
shareholder for Consep Common Stock such shareholder
may
<PAGE>
Consep, Inc.
October , 1998
- --------
Page 8
have purchased or for other obligations such
shareholder may have incurred.
30. Any purchase of Consep Common Stock by Verdant
stockholders prior to the Merger was made by such
Verdant stockholders on their own behalf and with
their own funds and not as a representative, or for
the benefit of, Verdant.
31. Verdant has no present plan or intention to cause the
Surviving Corporation to issue additional shares of
Surviving Corporation stock that would result in
Verdant losing control of the Surviving Corporation.
For this purpose, "control" means the direct
ownership of stock possessing at least 80 percent of
the total combined voting power for the election of
directors of all classes of Surviving Corporation
stock entitled to vote and at least 80 percent of the
total number of shares of each nonvoting class of
stock of Surviving Corporation.
32. Neither Verdant, nor a related party to Verdant, nor
a partnership of which Verdant is a partner has a
present plan or intention to reacquire any of the
Verdant Common Stock issued in the Merger to Consep
shareholders. For this purpose, "related party" means
(i) any corporation that is a member of the same
affiliated group as Verdant as defined in Section
1504 of the Internal Revenue Code (determined without
regard to Section 1504(b)), either before or after
the Merger, or (ii) any corporation in which Verdant
owns, directly or indirectly, at least 50 percent of
the total combined voting power of all classes of
stock entitled to vote, or at least 50 percent of the
total value of shares of all classes of stock, either
before or after the Merger.
33. Any payments of cash by Verdant to Consep
shareholders in lieu of fractional shares of Verdant
Common Stock will be made by Verdant solely for the
purpose of saving Verdant the expense and
inconvenience of issuing and transferring fractional
shares and is not separately bargained-for
consideration.
<PAGE>
Consep, Inc.
October , 1998
- --------
Page 9
34. No liabilities of Merger Sub will be assumed by
Consep or the Surviving Corporation, and Merger Sub
will not transfer to Consep or the Surviving
Corporation any assets subject to liabilities.
Based on the foregoing documents, materials, assumptions and
information, and subject to the qualifications and assumptions set forth herein,
it is our opinion that, if the Merger is consummated in accordance with the
provisions of the Agreement and the exhibits thereto:
(1) the Merger of Merger Sub with and into Consep, with Consep
surviving the Merger, will qualify as a reorganization within the meaning of
Section 368(a) of the Code;
(2) each of Verdant, Merger Sub, and Consep will be a party to
a reorganization within the meaning of Section 368(b) of the Code;
(3) no income, gain or loss will be recognized for federal
income tax purposes by the Company as a result of the consummation of the
Merger; and
(4) no income gain or loss will be recognized for federal
income tax purposes by the shareholders of Consep upon the exchange in the
Merger of shares of Consep Common Stock solely for shares of Verdant Common
Stock (except to the extent of any cash received in lieu of fractional shares).
Our opinions set forth above are based on the existing provisions of
the Code, Treasury Regulations (including Temporary and Proposed Treasury
Regulations) promulgated under the Code, published Revenue Rulings, Revenue
Procedures and other announcements of the Internal Revenue Service (the "IRS")
and existing court decisions, any of which could be changed at any time. Any
such changes might be retroactive with respect to transactions entered into
prior to the date of such changes and could significantly modify the tax results
described in the opinions set forth above. We undertake no responsibility to
advise you of any subsequent developments in the application, operation or
interpretation of the federal income tax laws.
Our opinion concerning certain of the federal income tax consequences
of the Merger is limited to the specific federal income tax consequences
presented above. No opinion is expressed as to any transaction other than the
Merger, including any transaction undertaken in connection with the Merger. In
addition, this opinion does not address any estate, gift, state, local or
foreign tax consequences that may result from the Merger. In particular, we
express no opinion
<PAGE>
Consep, Inc.
October , 1998
- --------
Page 10
regarding (1) the amount, existence, or availability after the Merger, of any of
the federal income tax attributes of Consep, Merger Sub or Verdant (including,
without limitation, foreign tax credits or net operating loss carryforwards, if
any, of Consep, Merger Sub, or Verdant); (2) any transaction in which Consep
Common Stock is acquired or Verdant Common Stock is disposed of, (3) the
potential application of the "disqualifying disposition" rules of Section 421 of
the Code to dispositions of Consep Common Stock; (4) the effects of any Consep
Common Stock acquired by the holder thereof in exchange for stock acquired
subject to the provisions of Section 83(a) of the Code; (5) the effects of the
Merger on any payment that is or may be subject to Section 280G of the Code; (6)
the effects of the Merger on a holder of options to acquire Consep Common Stock,
whether vested or nonvested, compensatory or noncompensatory, incentive stock
options or nonqualified stock options; or (7) the effects of the Merger on a
holder of a warrant to purchase shares of Consep Common Stock.
In addition to your request for our opinion on these specific matters
of federal income tax law, you have asked us to review the discussion of federal
income tax issues contained in the Registration Statement filed with the
Securities and Exchange Commission on , 1998, on Form S-4 (as amended any time
up to and including the date hereof, the "Registration Statement"). We have
reviewed the discussion entitled "Certain Federal Income Tax Consequences"
contained in the Registration Statement and believe that such information fairly
presents the current federal income tax law applicable to the Merger, and the
material federal income tax consequences to Consep, Merger Sub, Verdant, and
Consep shareholders as a consequence of the Merger.
No ruling has or will be requested from the IRS concerning the federal
income tax consequences of the Merger. In reviewing this opinion, you should be
aware that the opinions set forth above represent our conclusions regarding the
application of existing federal income tax law to the Merger. If the facts vary
from those relied upon (including if any representations, covenants, warranties
or assumptions upon which we have relied are inaccurate, incomplete, breached or
ineffective), our opinions contained herein could be inapplicable. You should be
aware that an opinion of counsel represents only the best legal judgment of
counsel, and has no binding official status of any kind, and that no assurance
can be given that contrary positions may not be taken by the IRS or that a court
considering the issues would not hold otherwise.
This opinion is being delivered solely for the purposes of (1) being
included as an exhibit to the Registration Statement, and (2) satisfying the
conditions set forth in Section 7.3(e) of the Agreement; it may not be relied
upon or utilized for any other purpose or by any other person or
<PAGE>
Consep, Inc.
October , 1998
- --------
Page 11
entity, and may not be made available to any other person or entity, without our
prior written consent. We do however, consent to (a) the use of this opinion to
satisfy the conditions set forth in Section 7.3(e) of the Agreement, (b) the use
of this opinion as an exhibit to the Registration Statement (c) the reliance
upon this opinion by holders of Consep Common Stock and holders of options or
warrants to acquire Consep Common Stock, and (d) to the use of our name in the
Registration Statement wherever it appears. In giving such consent, we do not
hereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
ATER WYNNE LLP
SES:LDC:tld
<PAGE>
Exhibit 10.20
FORM OF COMPANY AFFILIATE LETTER
Verdant Brands, Inc.
9555 James Avenue South
Suite 200
Bloomington, MN 55431-2543
Ladies and Gentlemen:
I have been advised that, as of the date of this letter, I may be
deemed to be an "affiliate" of Consep, Inc., a Oregon corporation (the
"Company"), as the term "affiliate" is (i) defined for purposes of paragraphs
(c) and (d) of Rule 145 of the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission ("Commission") under the
Securities Act of 1933, as amended (the "Act"), and/or (ii) used in and for
purposes of Accounting Series, Releases 130 and 135, as amended, of the
Commission. Pursuant to the terms of the Agreement and Plan of Merger dated as
of September 8, 1998 (the "Merger Agreement") among Verdant Brands, Inc., a
Minnesota corporation ("Parent"), Consep Acquisition, Inc., a Oregon corporation
and wholly owned subsidiary of Parent ("Merger Sub"), and the Company, the
Company will be merged with and into Merger Sub ("Merger").
As a result of the Merger, I may receive shares of common stock, par
value $0.01 per share, of Parent (the "Parent Securities"). I would receive such
shares in exchange for any shares owned by me of Company Common Stock (the
"Company Securities").
I represent, warrant, and covenant to Parent that, in the event I
receive any Parent Securities as a result of the Merger:
1. I shall not make any sale, transfer, or other disposition
of the Parent Securities in violation of the Act or the Rules and
Regulations.
2. I have carefully read this letter and the Merger Agreement
and discussed the requirements of such documents and other applicable
limitations upon my ability to sell, transfer, or otherwise dispose of
Parent Securities to the extent I felt necessary, with my counsel or
counsel for the Company.
3. I have been advised that the issuance of Parent Securities
to me pursuant to the Merger has been or will be prior to their
issuance registered with the Commission under the Act on a Registration
Statement on Form S-4. However, I have also been advised that, since at
the time the Merger Agreement was or will be submitted for a vote of
the shareholders of the Company, I may be deemed to be an affiliate of
the Company and the distribution by me of the Parent Securities has not
been and will not be registered under the Act, I may not sell,
transfer, or otherwise dispose of Parent Securities issued to
<PAGE>
Verdant Brands, Inc.
Page 2
me in the Merger unless (i) such sale, transfer, or other disposition
has been registered under the Act, (ii) such sale, transfer, or other
disposition is made in conformity with the volume and other limitations
of Rule 145 promulgated by the Commission under the Act, or (iii) in
the opinion of counsel reasonably acceptable to Parent, such sale,
transfer, or other disposition is otherwise exempt from registration
under the Act.
4. I understand that Parent is under no obligation to register
the sale, transfer, or other disposition of the Parent Securities by me
or on my behalf under the Act or to take any other action necessary in
order to make compliance with an exemption from such registration
available.
5. I also understand that stop transfer instructions will be
given to Parent's transfer agent with respect to the Parent Securities
and that there will be placed on the certificates for the Parent
Securities issued to me, or any substitutions therefor, a legend
stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES
ACT OF 1933 APPLIES. THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH THE
TERMS OF A LETTER AGREEMENT DATED ________ BETWEEN THE HOLDER
AND VERDANT BRANDS, INC., A COPY OF WHICH AGREEMENT IS ON FILE
AT THE PRINCIPAL OFFICES OF VERDANT BRANDS, INC."
It is understood and agreed that the legends set forth in paragraphs E
and F above shall be removed by delivery of substitute certificates without such
legend if the undersigned shall have delivered to Parent a copy of a letter from
the staff of the Commission, or an opinion of counsel in form and substance
reasonably satisfactory to Parent, to the effect that such legend is not
required for purposes of the Act.
It is understood that this Letter Agreement shall terminate and be of
no further force or effect if the Merger Agreement is terminated pursuant to the
terms thereof.
<PAGE>
Verdant Brands, Inc.
Page 3
Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of the Company as described in the first paragraph
of this letter, or as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
Very truly yours,
Name: _________________________
Accepted this ___ day of ________, 1998
by Verdant Brands, Inc.
By: ___________________________
Title: __________________________
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Safer, Inc.: A wholly owned subsidiary of Verdant Brands, Inc.,
incorporated under the laws of the State of
Delaware.
Safer, Ltd.: A wholly owned subsidiary of Safer, Inc.,
incorporated under the laws of Canada.
Southern Resources, Inc.: A wholly owned subsidiary of Verdant Brands, Inc.
SureCo, Inc.: A wholly owned subsidiary of Southern Resources,
Inc.
Peach County Property, Inc.: A wholly owned subsidiary of Southern Resources,
Inc.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We hereby consent to the use in this Registration Statement on Form S-4
of Verdant Brands, Inc. of our report dated December 5, 1997 (September 29, 1998
as to Note 12), appearing in the Prospectus, which is part of this Registration
Statement. We also consent to the reference to us under the heading "EXPERTS" in
such Prospectus.
/S/ Deloitte & Touche LLP
Minneapolis, MN
September 29, 1998
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
The Board of Directors
Consep, Inc.
We consent to the use of our report dated February 13, 1998 included in the
Registration Statement and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Portland, Oregon
September 28, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use of our report dated November 14, 1997 included in
this Registration Statement on Form S-4 of Verdant Brands, Inc. and the
reference to our firm under the heading "Experts" in the Joint Proxy Statement-
Prospectus.
/S/ SMITH & HOWARD, P.C.
-------------------------------
Smith & Howard, P.C.
Atlanta, Georgia
September 30, 1998
<PAGE>
Exhibit 23.5
The Board of Directors
Consep, Inc.
We hereby consent to the use of our opinion regarding tax treatment as an
exhibit to the Registration Statement, and to the reference to this firm in the
Joint Proxy Statement-Prospectus wherever it appears. In giving such consent,
we do not hereby admit that we are in the category of persons whose consent in
required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Ater Wynne LLP
ATER WYNNE LLP
September 29, 1998
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Stanley Goldberg and Mark G.
Eisenschenk his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign a Registration Statement on Form S-4 of Verdant
Brands, Inc., and any and all amendments thereto, including post-effective
amendments, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or the
substitutes for such attorneys-in-fact and agents, may lawfully do or cause to
be done by virtue hereof.
Signature Date
--------- ----
By /s/ Stanley Goldberg Dated: September 30, 1998
-----------------------------
Stanley Goldberg
Chairman, President and Chief
Executive Officer
By /s/ Gordon F. Stofer Dated: September 30, 1998
-----------------------------
Gordon F. Stofer
Director
By /s/ Robert W. Fischer Dated: September 30, 1998
-----------------------------
Robert W. Fischer
Director
By /s/ Donald E. Lovness Dated: September 30, 1998
-----------------------------
Donald E. Lovness
Director
By /s/ Franklin Pass Dated: September 30, 1998
-----------------------------
Franklin Pass, M.D.
Director
By /s/ Frederick F. Yanni, Jr. Dated: September 30, 1998
-----------------------------
Frederick F. Yanni, Jr.
Director
By /s/ John F. Hetterick Dated: September 30, 1998
-----------------------------
John F. Hetterick
Director
By /s/ David K. Vansant Dated: September 30, 1998
-----------------------------
David K. Vansant
Director
By /s/ Richard Mayo Dated: September 30, 1998
-----------------------------
Richard Mayo
Director
<PAGE>
Exhibit 99.1
The Board of Directors
Verdant Brands, Inc.
9555 James Avenue South, Suite 200
Bloomington, Minnesota 55431
Members of the Board of Directors:
We hereby consent to the inclusion in this Registration Statement on
Form S-4 of our opinion our opinion as Appendix B to the Joint Proxy
Statement-Prospectus and to the reference to our firm under the headings
"Opinion of Verdant's Financial Advisor" and "Summary" in the Joint Proxy
Statement-Prospectus.
/s/ Piper Jaffray, Inc.
Piper Jaffray, Inc.
September 30, 1998
<PAGE>
Exhibit 99.2
The Board of Directors
Consep, Inc.
213 Southwest Columbia Street
Bend, Oregon 97702
Members of the Board of Directors:
We hereby consent to the use in this Registration Statement on Form S-4
of our opinion as to the fairness, from a financial point of view, to the common
shareholders of Consep, Inc. of the Exchange Ratio, to the inclusion of our
opinion as Appendix C to the Joint Proxy Statement-Prospectus included in the
Registration Statement, and to the reference to our firm under the headings
"Opinion of Consep's Financial Advisor" and "Summary" in the Joint Proxy
Statement-Prospectus.
/s/ Pacific Crest Securities Inc.
Pacific Crest Securities Inc.
September 28, 1998
<PAGE>
Exhibit 99.4
VERDANT BRANDS, INC.
9555 JAMES AVENUE SOUTH
SUITE 200
BLOOMINGTON, MN 55431
SPECIAL MEETING OF SHAREHOLDERS--DECEMBER 17, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of Verdant Brands, Inc. ("Verdant")
acknowledges receipt of the Joint Proxy Statement-Prospectus of Verdant and the
undersigned revokes all prior proxies and appoints Stanley Goldberg and Mark
Eisenschenk, and each of them individually, proxies for the undersigned to vote
all shares of Common Stock of Verdant that the undersigned would be entitled to
vote at the Special Meeting of Shareholders to be held at 11:00 a.m. local time,
on December 17, 1998, at the offices of Verdant at 9555 James Avenue South,
Suite 200, Bloomington, Minnesota 55431, and any adjournments, postponements or
reschedulings thereof, on those matters referred to in the Joint Proxy
Statement-Prospectus.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE. IF
NO SPECIFICATIONS ARE MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSALS REFERRED
TO IN (1) AND (2) PROVIDED THAT YOU HAVE SIGNED AND DATED THE PROXY CARD.
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING ON BEHALF OF THE UNDERSIGNED.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1 AND 2.
1. THE MERGER. To approve and adopt the Agreement and Plan of Merger
dated as of September 8, 1998 among Verdant, Consep Acquisition, Inc. and
Consep, Inc. as described in the accompanying Joint Proxy Statement-Prospectus.
/ / FOR / / AGAINST / / ABSTAIN
PLEASE SIGN AND DATE THIS PROXY CARE ON THE REVERSE
SIDE AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
(CONTINUED ON REVERSE SIDE)
<PAGE>
2. APPROVAL OF AMENDMENT TO RESTATED ARTICLES OF INCORPORATION. To
approve an amendment to the Restated Articles of Incorporation to increase
authorized common stock from 25,000,000 to 50,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
Dated:________________, 1998 ____________________________________________
SIGNATURE OF SHAREHOLDER
(Title, if any)
____________________________________________
SIGNATURE OF SHAREHOLDER
(if held jointly)
Please sign exactly as your name or names
appear hereon. If shares are held jointly,
each shareholder should sign. When signing
as attorney, executor, administrator,
trustee or guardian, please give full title
as such. If a corporation, please sign in
full corporate name by president or other
authorized officer. If a partnership, please
sign in partnership name by authorized
person.
[Reverse of Card]
- 2 -
<PAGE>
Exhibit 99.5
CONSEP, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of Consep, Inc., an Oregon corporation (the
"Company"), hereby appoints Volker G. Oakey and Walter C. Babcock, or either of
them, with full power of substitution in each, as proxies to cast all votes
which the undersigned shareholder is entitled to cast at the Special Meeting of
Shareholders (the "Special Meeting") to be held at 9:00 a.m. local time, on
Thursday, December 17, 1998 at 213 SW Columbia Street, Bend, Oregon 97702, and
any adjournments or postponements thereof upon the matters listed herein.
1. Approval and adoption of the Agreement and Plan of Merger,
dated as of September 8, 1998, by and among the Company,
Verdant Brands, Inc., a Minnesota corporation ("Verdant"), and
Consep Acquisition Corp, Inc., an Oregon corporation and a
wholly-owned subsidiary of Verdant ("Merger Sub"), and
approval of the merger of Merger Sub into the Company.
FOR AGAINST ABSTAIN
--- ------- -------
[ ] [ ] [ ]
2. In their discretion, the proxies are authorized to vote upon
such other matters as may properly come before the meeting or
any adjournments or postponements thereof.
(CONTINUED, AND TO BE SIGNED AND DATED ON THE REVERSE SIDE)
- -------------------------------------------
(CONTINUED FROM REVERSE SIDE)
PLEASE SIGN, DATE AND RETURN THIS PROXY CARD TODAY, USING THE ENCLOSED ENVELOPE.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. UNLESS DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1 AND IN ACCORDANCE WITH THE RECOMMENDATIONS OF A MAJORITY OF
THE BOARD OF DIRECTORS AS TO OTHER MATTERS. The undersigned hereby acknowledges
receipt of the Company's Proxy Statement and hereby revokes any proxy or proxies
previously given.
Please sign below exactly as your name appears on this Proxy Card. If shares are
registered in more than one name, the signatures of all such persons are
required. A corporation should sign in its full corporate name by a duly
authorized officer, stating his/her title. Trustees, guardians, executors and
administrators should sign in their official capacity, giving their full title
as such. If a partnership, please sign in the partnership name by authorized
person(s).
If you receive more than one Proxy Card, please sign and return all such cards
in the accompanying envelope.
---------------------------------------
Typed or Printed Name(s)
---------------------------------------
Authorized Signature
---------------------------------------
Title or Authority, if Applicable
---------------------------------------
Date
