<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to________________
Commission file number: 0-18921
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VERDANT BRANDS, INC.
--------------------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-0848688
--------- ----------
(State of incorporation or organization) (I.R.S. Employer Identification No.)
9555 James Avenue South, Suite 200, Bloomington, Minnesota 55431-2543
- ---------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(612) 703-3300
--------------
(Issuer's telephone number, including area code)
RINGER CORPORATION
------------------
(Former name)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
The number of shares outstanding of each of the registrant's classes of
capital stock, as of October 31, 1998, was:
Common Stock, $.01 par value 16,705,261 shares
Transitional Small Business Issuer format: [ ] Yes [X] No
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
VERDANT BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 131,450 $ 423,272
Accounts receivable 7,262,531 4,437,264
Inventories 10,686,359 8,803,909
Prepaid assets 674,534 1,180,250
------------ ------------
Total current assets 18,754,874 14,844,695
Assets held for sale 2,112,691 2,273,248
Property and equipment (net) 816,359 630,846
Intangible assets (net) 12,995,177 13,469,697
Other assets 122,964 204,893
------------ ------------
Total assets $ 34,802,065 $ 31,423,379
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 1,102,306 $ 3,024,910
Accounts payable 8,029,962 7,818,030
Accrued expenses 2,377,238 1,961,898
Current portion of long-term debt 277,247 1,538,866
------------ ------------
Total current liabilities 11,786,753 14,343,704
Long-Term Debt:
Bank line of credit 7,000,000 --
Other long-term debt 3,107,251 3,306,821
------------ ------------
Total long-term debt 10,107,251 3,306,821
Shareholders' Equity:
Common Stock, par value $.01 per share, authorized
25,000,000 shares, issued and outstanding
16,705,261 and 16,688,061 shares, respectively 167,053 166,881
Additional paid-in capital 37,888,585 37,866,182
Receivable from sale of stock (249,375) (262,500)
Accumulated deficit (24,615,486) (23,809,763)
Cumulative translation adjustment (282,716) (187,946)
------------ ------------
Total shareholders' equity 12,908,061 13,772,854
------------ ------------
Total liabilities and shareholders' equity $ 34,802,065 $ 31,423,379
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 7,564,474 $ 3,142,735 $39,309,762 $15,339,894
COST OF SALES 5,696,822 2,037,373 25,746,190 8,548,854
----------- ----------- ----------- -----------
Gross Profit 1,867,652 1,105,362 13,563,572 6,791,040
OPERATING EXPENSES:
Distribution 973,537 497,649 4,023,144 1,812,475
Sales & Marketing 1,632,675 582,052 5,159,657 2,996,256
General & Administration 675,954 456,237 2,207,039 1,331,923
Product Registration & Development 427,163 200,192 1,518,595 847,743
Amortization of Intangibles 220,574 118,536 617,068 353,873
----------- ----------- ----------- -----------
3,929,903 1,854,666 13,525,503 7,342,270
----------- ----------- ----------- -----------
INCOME (LOSS)BEFORE
OTHER EXPENSE (2,062,251) (749,304) 38,069 (551,230)
OTHER INCOME (EXPENSE), NET (257,569) 13,146 (843,792) (54,429)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (2,319,820) (736,158) (805,723) (605,659)
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET LOSS $(2,319,820) $ (736,158) $ (805,723) $ (605,659)
=========== =========== =========== ===========
Net loss per common share -
basic and diluted $(.14) $(.06) $(.05) $(.05)
=========== =========== =========== ===========
Shares used in calculating basic
and diluted net loss per share 16,703,777 12,181,270 16,693,695 11,744,168
=========== =========== =========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
VERDANT BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (805,723) $ (605,659)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,138,113 491,397
Loss on disposal of intangible assets 5,055 72,217
Loss on disposal of assets 5,263 29
Income from investment in joint venture (14,920) (10,078)
(Increase) decrease in assets:
Trade accounts and notes receivable (2,755,311) 4,160,729
Inventories (1,905,921) 1,191,911
Prepaid expenses 315,918 (17,690)
Increase (decrease) in liabilities:
Accounts payable 12,370 (3,472,038)
Accrued expenses 362,291 129,938
----------- -----------
Net cash provided by (used in)operating activities (3,642,865) 1,940,756
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (158,492) (73,195)
Proceeds from sale of equipment 3,767 7,205
Purchase of intangible assets (81,963) (31,908)
Net cash paid relating to acquisition of Dexol -- (82,343)
----------- -----------
Net cash used in investing activities (236,688) (180,241)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from bank line of credit 5,077,396 --
Cash received in Dexol acquisition -- 124,073
Proceeds from issuance of common stock 35,700 --
Principal payments on long-term debt (1,505,304) (12,168)
----------- -----------
Net cash provided by financing activities 3,607,792 111,905
Effect of exchange rate changes on cash (20,061) 805
----------- -----------
Increase (decrease) in cash and cash equivalents (291,822) 1,873,225
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 423,272 1,391,069
----------- -----------
END OF PERIOD $ 131,450 $ 3,264,294
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Note 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Verdant Brands, Inc. (formerly Ringer Corporation) (the "Company")
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 nine months ended
September 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>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Loss Per Share - Basic and Diluted
- ----------------------------------
Net loss $(2,319,820) $ (736,158) $ (805,723) $ (605,659)
----------- ----------- ----------- -----------
Weighted average shares 16,703,777 12,181,270 16,693,695 11,744,168
----------- ----------- ----------- -----------
Net loss per share $ (.14) $ (.06) $ (.05) $ (.05)
=========== =========== =========== ===========
</TABLE>
Note 2. CHANGE IN FISCAL YEAR
In February 1998, the Company announced a change in its 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.
5
<PAGE>
Note 3. ACQUISITIONS
Merger with Southern Resources, Inc.
------------------------------------
On December 8, 1997, a subsidiary of 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 a privately
held corporation. 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 use of 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 certain assets acquired and
liabilities assumed, consequently, 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 using 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.
6
<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 nine months
ended September 30, 1998 based on actual co-op claims received.
Note 6. Assets held for sale consist of land, buildings and equipment at the
Company's Fort Valley, Georgia plant. The Company is transferring
production from its Fort Valley plant to its manufacturing venture
partner in St. Joseph, Missouri and to other subcontract
manufacturers. Upon completion of this transfer, the Company plans to
sell the Fort Valley plant.
Note 7. Inventory consists of the following:
September 30, December 31,
1998 1997
------------ -----------
Raw Materials $ 6,066,352 $ 5,148,988
Finished Goods 4,620,007 3,654,921
----------- -----------
$10,686,359 $ 8,803,909
=========== ===========
Note 8. LONG-TERM DEBT
September 30, December 31,
1998 1997
----------- -----------
Line of credit, long-term portion $ 7,000,000
Term loans 1,537,720 $ 3,025,241
Notes payable 1,834,956 1,805,241
Capital lease obligations 11,822 15,205
Less current portion (277,247) (1,538,866)
----------- -----------
$10,107,251 $ 3,306,821
=========== ===========
Note 9. LINE OF CREDIT
The Company has a line of credit agreement with GE Capital Services
("GE") to fund seasonal cash needs. At September 30, 1998, outstanding
borrowings on the line of credit totaled $8,102,306 of which
$7,000,000 is classified as long-term debt, and the Company was not in
compliance with the interest coverage ratio covenant contained in the
line-of-credit agreement. The Company is in the process of obtaining a
waiver of compliance for the quarter ended September 30, 1998 and,
based on conversations with the lender, expects soon to receive such a
waiver.
Note 10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) for interest during the period for:
Nine Months Ended
September 30,
-------------------
1998 1997
-------- --------
Interest paid $842,290 $152,009
Interest received (7,671) (37,328)
Note 11. 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 nine months periods ended
September 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
7
<PAGE>
SRI are included in the Company's statements of operations for the
three months and nine months ended September 30, 1998, therefore pro
forma information is not applicable for those periods.
1997
--------------------------------
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
--------------- ---------------
Net sales $ 8,530,103 $37,903,587
Net loss before taxes (1,591,206) (916,802)
Net loss (1,466,313) (791,909)
Loss per share-basic and diluted $ (.09) $ (.05)
NOTE 12. 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 (loss) for the three month
and nine month periods ended September 30, 1998 was $(2,366,760) and
$(900,493), respectively. Components of comprehensive income (loss)
include net income (loss) and foreign currency translation
adjustments.
NOTE 13. PENDING ACQUISITION OF CONSEP, INC.
On September 8, 1998, the Company entered into a merger agreement
whereby the Company's intends to acquire Consep, Inc. ("Consep").
Consep is an Oregon based developer, manufacturer and marketer of
environmentally sensitive pest control products for the commercial
agricultural and consumer home, lawn and garden markets. Consep also
owns and operates full-line agrochemical distributors located
principally in California. Under the merger agreement, the proposed
merger is expected to be accomplished by exchanging 0.95 of one share
of the Company's common stock for each outstanding share of common
stock of Consep. The proposed merger is subject to, among other
things, the approval of Consep's shareholder's, the approval of the
Company's shareholders and applicable third-party consents and
approvals. The proposed merger is expected to be completed by the end
of 1998.
****
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
-----------------------------------
Name Change to Verdant Brands, Inc.
- -----------------------------------
At the Company's 1998 Annual Shareholders Meeting, the shareholders
approved a proposal to change the Company's name from Ringer Corporation to
Verdant Brands, Inc. The Company 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, the Company 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 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 a privately held corporation. 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, specifically as it relates to the Company's Fort
Valley, Georgia manufacturing activities and facilities. (See Note 6 to the
financial statements herein.) Such a disposal precludes the use of 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. 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.
<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, 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.
Pending Merger with Consep, Inc.
- --------------------------------
On September 8, 1998, the Company entered into a merger agreement whereby
the Company's intends to acquire Consep, Inc. ("Consep"). Consep is an Oregon
based developer, manufacturer and marketer of environmentally sensitive pest
control products for the commercial agricultural and consumer home, lawn and
garden markets. Consep also owns and operates full-line agrochemical
distributors located principally in California. Under the merger agreement, the
proposed merger is expected to be accomplished by exchanging 0.95 of one share
of the Company's 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 the Company's shareholders and
applicable third-party consents and approvals. In connection with the proposed
merger, the Company and Consep filed a joint proxy statement dated October 26,
1998. A special shareholders' meeting is scheduled at each respective company on
December 7, 1998 to vote on the proposed merger.
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the consolidated statements of operations of the Company as a
percentage of net sales:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ---------------
1998 1997 1998 1997
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 75.3 64.8 65.5 55.7
----- ----- ----- -----
Gross profit 24.7 35.2 34.5 44.3
Operating expenses:
Distribution 12.9 15.8 10.2 11.8
Sales & Marketing 21.6 18.5 13.1 19.6
General & Administrative 11.9 18.3 7.2 11.0
Product Development & Registration 5.6 6.4 3.9 5.5
----- ----- ----- -----
52.0 59.0 34.4 47.9
----- ----- ----- -----
Income (loss) before other expense (27.3) (23.8) .1 (3.6)
Other income (expense), net (3.4) .4 (2.1) (.3)
----- ----- ----- -----
Net loss (30.7)% (23.4)% (2.0)% (3.9)%
===== ===== ===== =====
10
<PAGE>
The following table sets forth the percentage of net sales represented by each
of the Company's major product categories:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ----------------
1998 1997 1998 1997
----- ----- ----- -----
Pest control 95.5% 78.6% 90.6% 78.9%
Fertilizers and composting 4.5 21.4 9.4 21.1
------ ----- ----- -----
100.0% 100.0% 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 the Company'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 the Company's products to home owner consumers and the level
of unsold retail inventory of the Company'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
nine months ended September 30.
Comparison of the three months ended September 30, 1998 to the three months
ended September 30, 1997
Net Sales. Net sales increased $4,421,739 or 140.7% to $7,564,474 for the
three months ended September 30, 1998 compared to $3,142,735 for the three
months ended September 30, 1997. The increase was due primarily to the addition
of approximately $4.8 million in 1998 net sales generated from business and
product lines added as a result of the acquisition of SRI in December 1997,
offset in part by reduced international and commercial sales.
Gross Margins. Gross margins as a percent of sales decreased to 24.7% for
the three months ended September 30, 1998 compared to 35.2% for the three months
ended September 30, 1997. The decrease was primarily the result of the sales of
SRI products added in 1998 which shifted product mix to an increased proportion
of traditional chemical pesticides sales which carry lower average gross margins
compared to the sales mix in 1997. In addition, unfavorable manufacturing
efficiency and inventory variances at the SRI plant also contributed to the
decline in gross margins.
Operating Expenses. Distribution expenses increased in absolute dollars
by $475,888 or 95.6% to $973,537 for the three months ended September 30, 1998
from $497,649 for the three months ended September 30, 1997, but decreased as a
percentage of sales to 12.9% for the three months ended September 30, 1998 from
15.8% for the three months ended September 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 $1,050,623 or
180.5% to $1,632,675 for the three months ended September 30, 1998 from $582,052
for the three months ended September 30, 1997, and increased as a percentage of
sales to 21.6% for the three months ended September 30, 1998 compared to 18.5%
for the same period in 1997. The increase in sales and marketing expenses was
largely due to increased variable selling expenses
11
<PAGE>
associated with higher sales levels and the inclusion of the SRI sales and
marketing organizations and programs for the three months ended September 30,
1998.
General and administrative costs, including amortization of intangibles,
increased $321,755 or 56.0% to $896,528 for the three months ended September
30, 1998 from $574,773 for the three months ended September 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 registration and development expenses increased $226,971 or
113.4% to $427,163 for the three months ended September 30, 1998 compared to
$200,192 for the three months ended September 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 $270,715 to $257,569
for the three months ended September 30, 1998 compared to net other income of
$13,146 for the three months ended September 30, 1997. The increase in net other
expense was mainly due to additional interest expense on increased borrowings on
the Company's line of credit and interest expense incurred on long-term and
short-term debt assumed in the SRI acquisition.
Comparison of the nine months ended September 30, 1998 to the nine months ended
September 30, 1997
Net Sales. Net sales increased $23,969,868 or 156.3% to $39,309,762 for
the nine months ended September 30, 1998 compared to $15,339,894 for the nine
months ended September 30, 1997. The increase was due primarily to additional
sales generated from the Dexol and SRI acquisitions. Net sales for the nine
months ended September 30, 1998 contained approximately $19.9 million in SRI net
sales compared to no SRI net sales for the nine months ended September 30, 1997.
In addition, the nine month period ended September 30, 1998 included nine months
of Dexol product sales totaling approximately $7.8 million compared to only
seven months of Dexol product sales totaling $4.8 million included in the nine
months ended September 30, 1997. Increased sales of the Company's Safer(R) brand
pesticides contributed to the remaining increase in net sales.
Gross Margins. Gross margins as a percent of sales decreased to 34.5% for
the nine months ended September 30, 1998 compared to 44.3% for the nine months
ended September 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. In addition, unfavorable manufacturing
efficiency and inventory variances incurred at the SRI plant also contributed to
the decline in gross margins.
Operating Expenses. Distribution expenses increased in absolute dollars
by $2,210,669 or 122.0% to $4,023,144 for the nine months ended September 30,
1998 from $1,812,475 for the nine months ended September 30, 1997, but decreased
as a percentage of sales to 10.2% for the nine months ended September 30, 1998
from 11.8% for the nine months ended September 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 $2,163,401 or
72.2% to $5,159,657 for the nine months ended September 30, 1998 from $2,996,256
for the nine months ended September 30, 1997, but decreased as a percentage of
sales to 13.1% for the nine months ended September 30, 1998 compared to 19.6%
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 nine months ended September 30, 1998.
The decrease in sales and marketing expenses as a percentage of sales for the
nine months ended September
12
<PAGE>
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, including amortization of intangibles,
increased $1,138,311 or 67.5% to $2,824,107 for the nine months ended September
30, 1998 from $1,685,796 for the nine months ended September 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 $670,852 or 79.1%
to $1,518,595 for the nine months ended September 30, 1998 compared to $847,743
for the nine months ended September 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 $789,363 to $843,792
for the nine months ended September 30, 1998 compared to net other expense of
$54,429 for the nine months ended September 30, 1997. The increase in net other
expense was mainly due to additional interest expense on increased borrowings on
the Company's lines of credit and interest expense incurred on long-term and
short-term debt assumed in the SRI acquisitions.
Liquidity and Capital Resources
- -------------------------------
The Company's operations and cash needs are highly seasonal. During the
three months ended December 31 of each year, the Company 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, the Company's
shipments consist of initial sales to direct mass merchant customers and reorder
sales to certain distribution customers. Most of the Company'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, the Company 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. The Company has historically relied upon
bank lines of credit to fund seasonal cash needs.
Cash decreased by $291,822 during the nine months ended September 30,
1998. The decrease in cash reflects the following: cash of $3,642,865 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 $236,688 consumed in investing activities to purchase equipment
and intangible assets, and cash provided from financing activities of $3,607,792
consisting of $5,077,396 in borrowings against the Company's bank lines of
credit, $35,700 proceeds from the sale of common stock, offset by principal
payments on long-term debt of $1,505,304.
The Company relies on financing in the form of lines of credit to fund
seasonal increases in receivables and inventory and to provide general working
capital. The Company 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. The credit facility is intended to finance the Company's seasonal
working capital needs and to provide working capital financing for future
acquisitions. The Company'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, the Company
consolidated this line into its GE Capital Services line. 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. Under
terms of the credit agreement, the Company is required to maintain certain
financial ratios and other financial conditions. At September 30, 1998,
availability on the GE Capital Services line of credit totaled approximately
$8.7 million with outstanding borrowings totaling $8,102,306 of which $7,000,000
is classified as long-term debt. Also at that date, the Company was not in
compliance with the interest coverage ratio covenant. The Company is in the
process of obtaining a waiver of compliance for the quarter ended September 30,
1998 and expects, based on conversations with the lender, to receive such waiver
shortly.
13
<PAGE>
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 caused by payment of certain
components of SRI debt, the Company has had to extend accounts payable beyond
normal payment terms in order to minimize borrowings and manage short-term cash
flow. The extension of payments beyond normal accounts payable terms has begun
to have an impact on the Company's ability to obtain materials required for
production of certain products. The Company is aggressively pursuing collection
of past due accounts receivable and is working to reduce inventory levels to
help reduce immediate cash needs. The Company is also currently in the process
of raising approximately $3 million in external financing for working capital
purposes and for funding of Consep, Inc. acquisition-related transaction and
restructuring costs. The Company believes it will be successful in obtaining
such financing; however, there is no assurance that adequate long-term financing
will be secured.
The Company has no material purchase commitments. Although the Company
continues to evaluate companies and product lines for possible acquisition, no
such agreements are currently in place.
The Company believes that inflation has not had a significant impact on
the results of its operations.
YEAR 2000 CONCERNS
- ------------------
The Company has completed an upgrade of its computer systems at its
domestic locations which, management believes, brings the Company's domestic
systems into year 2000 compliance. The Company invested approximately $250,000
over the last two years in these upgrades. Upgrades to the Company's Canadian
computer systems are expected to be completed in 1999. Costs to upgrade the
Canandian Systems are estimated to be less than $100,000. The Company 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 the Company.
The potential impact of the year 2000 issue will depend not only on the
actions taken by the Company, but also on the way in which the year 2000 issues
are addressed by customers, vendors, service providers, utilities, government
agencies and other entities with which the Company does business. The Company
has 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 the Company. The Company expects to have this review
completed by December 31, 1998. The efforts of these third parties are not
within the Company's control and their failure to respond to year 2000 issues
successfully could have a material adverse impact on the Company. Noncompliance
by these parties could cause the Company to be unable to obtain certain
materials needed for production and distribution of some of its products and the
interruption or delay of normal manufacturing operations. The Company's
contingency plans for these potential problems involve surveying vendors and
subcontract manufacturers for potential problems and changing over to vendors
and subcontract manufacturers that are Year 2000 compliant. However, material
costs, manufacturing delays and lost sales are possible if certain problems do
not become apparent until after December 31, 1999. The Company is not able to
estimate such costs, but management believes that, under the worst case
scenario, they would be material to the operations of the Company.
FORWARD LOOKING INFORMATION
- ---------------------------
The information contained in this Quarterly Report includes forward-
looking statements as defined in Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements involve a number of risks and
uncertainties, including: changes in demand from major customers; effects of
competition and competitive responses to the Company; changes in product mix,
product costs, inventory levels and customer mix and its effect on financial
performance; changes in operating expenses; the Company's ability to raise long-
term financing to satisfy its operating needs; the actual achievement of Year
2000 compliance by the Company and its vendors, subcontract manufacturers and
other third parties and the potential impact on the Company; and other factors
disclosed throughout this Quarterly Report and the Company's other filings with
the Securities and Exchange Commission. The actual results that the Company
achieves may differ materially from any forward-looking statements due to such
risks and uncertainties. The Company undertakes no obligation to revise any
forward-looking statement in order to reflect events or circumstances that may
arise after the date of this report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's other reports filed with the Securities and Exchange Commission that
attempt to advise interested parties of the risks and uncertainties that may
affect the Company's financial condition and results of operations.
*********
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
The Company'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
material loss to SRI.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted for a vote of security holders during the
quarter ended September 30, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
- ------ -----------
2.1 Agreement for Purchase and Sale of Assets by and between Ringer
Corporation and Dexol Industries, Inc. (incorporated by reference to
Exhibit 2.1 of the Company's Amended Current Report on Form 8-K/A filed
on June 16, 1997, SEC File No. 0-18921).
2.2 Amended and Restated Agreement and Plan of Merger by and between Ringer
Corporation and Souther Resources, Inc. (incorporated by reference to
Exhibit 2.1 of the Company's Amended Current Report on Form 8-K/A filed
on February 19, 1998, SEC File No. 0-18921).
4.1 Specimen certificate of Common Stock, $.01 par value (incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement on Form
S- 18, SEC File No. 33-36205-C).
*10.1 1986 Employee Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.4 of the Company'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 the Company's 1986
Employee Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.2 of the Company'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 the Company'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 the Company's Stock Option Plan for Non-Employee
Directors dated December 8, 1997 (incorporated by reference to Exhibit
10.4 of the Company's Quarterly Report on Form 10-QSB dated March 31,
1998, SEC File No. 0-18921).
15
<PAGE>
10.5 Lease Agreement between the Company and 94th Street Associates, a
Minnesota Partnership, dated August 15, 1996 (incorporated by reference
to Exhibit 10.3 of the Company'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 the Company and MEPC American Properties, Inc., a
Delaware corporation, dated August 16, 1996 (incorporated by reference to
Exhibit 10.4 of the Company's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1996.)
*10.7 Employment Agreement between the Company and Stanley Goldberg dated
September 13, 1992 (incorporated by reference to Exhibit 10.6 of the
Company'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 the Company and Stanley
Goldberg, dated December 5, 1997 (incorporated by reference to Exhibit
10.6 of the Company'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 the Company and Mark G. Eisenschenk, dated
December 5, 1997 (incorporated by reference to Exhibit 10.7 of the
Company'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 the Company and
Stanley Goldberg, dated April 29, 1997 (incorporated by reference to
Exhibit 10.8 of the Company's Amended Annual Report on Form 10-KSB/A for
the fiscal year ended September 30, 1997, SEC File No. 0- 18921).
*10.11 Stock purchase agreement, and related documents, between the Company and
Mark G. Eisenschenk, dated April 29, 1997 (incorporated by reference to
Exhibit 10.9 of the Company'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 the Company and General Electric Capital
Corporation dated May 2, 1997 (incorporated by reference to Exhibit 10.6
of the Company'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 the Company and General Electric Capital Corporation dated May 2,
1997.
10.14 Consent to Credit Agreement, dated December 11, 1997, between the Company
and General Electric Capital Corporation dated May 2, 1997.
10.15 Second Amendment, dated April 22, 1997, to Credit Agreement between the
Company and General Electric Capital Corporation dated May 2, 1997.
10.16 Stock Subscription Warrant between the Company and Robert W. Fischer Co.,
Inc. dated July 18, 1990 (incorporated by reference to Exhibit 10.16 of
the Company's Registration Statement on Form S-18, SEC File No. 33-
36205-C).
10.17 Cross-Licensing and Joint Licensing/Sale Agreement between Ringer
Corporation and Mycogen Corporation, dated May 31, 1994 (incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended June 30, 1994, SEC File No. 0-18921).
16
<PAGE>
10.18 Patent License Agreement between Ringer Corporation, Mycogen Corporation
and Monsanto Company, dated June 29, 1994 (incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1994, SEC File No. 0-18921).
*10.19 Ringer Corporation 1996 Employee Stock Option Plan (incorporated by
reference to Exhibit 10.15 of the Company's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1996.)
27.1 Financial Data Schedule
* Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the three
months ended September 30, 1998.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
VERDANT BRANDS, INC.
Dated: November 12, 1998 By /S/ Stanley Goldberg
----------------------
Stanley Goldberg
President and Chief Executive Officer
Dated: November 12, 1998 By /S/ Mark G. Eisenschenk
-------------------------
Mark G. Eisenschenk
Executive Vice President and Chief Financial
Officer
(principal financial officer)
18
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 131,450
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<RECEIVABLES> 7,465,866
<ALLOWANCES> (203,335)
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<CURRENT-ASSETS> 18,754,874
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<COMMON> 37,806,263
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<TOTAL-LIABILITY-AND-EQUITY> 34,802,065
<SALES> 39,309,762
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