<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
--------------------------------------------------------
VERDANT BRANDS, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer 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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (612) 703-3300
RINGER CORPORATION
- --------------------------------------------------------------------------------
(Former name, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
- --------------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Revenues for the fiscal year ended December 31, 1998 totaled $48,151,988.
As of March 23, 1999, the Company had 25,889,214 shares of Common Stock
outstanding. The aggregate market value of the 22,980,950 shares of Common Stock
held by non-affiliates of the Company was $22,262,795, based on the closing
share price on March 23, 1999 on the Nasdaq National Market.
Documents incorporated by reference: Certain responses to Part III are
incorporated herein by reference to information contained in the Company's
definitive proxy statement for its 1999 annual meeting of stockholders to be
filed with the Securities and Exchange Commission on or before April 30, 1999.
Transitional small business disclosure format: [ ] Yes [X] No
<PAGE>
PART I
Item 1. BUSINESS.
General. At its April 15, 1998 Annual Meeting of Shareholders, shareholders
of Verdant Brands, Inc. ("the Company" or "Verdant") approved a proposal to
change the Company's name from Ringer Corporation to Verdant Brands, Inc. The
name change occurred in July 1998, when an official announcement of the change
in name was made. In connection with the name change, Verdant adopted a new
trading symbol of "VERD" for its shares, which are traded on the NASDAQ National
Market System. The Company also changed its fiscal year end from September 30 to
December 31. The change in fiscal years became effective beginning January 1,
1998.
The Company was founded and incorporated in the State of Minnesota in 1961.
It is a developer, manufacturer and marketer of "environmentally sensitive" and
"traditional" lawn and garden products for the consumer and commercial markets.
It also operates full service dealerships that market pest control products to
the specialty agricultural and turf and ornamental sectors of the commercial
market. Verdant's product lines consist of proprietary and non-proprietary pest
control products and, to a much lesser extent, fertilizers and grass seed
products, for both the consumer and commercial markets.
Environmentally Sensitive Product Lines. Verdant markets a complete line of
environmentally sensitive pest control and fertilizer products. The Company's
environmentally sensitive pest control products are sold under the Safer(R),
SureFire(R), ChemFree(R), Insectigone(R) and Blocker(R) brands to the consumer
market. Its CheckMate(R) and BioLure(R) brands of environmentally sensitive pest
control products are sold to the commercial market. Its environmentally
sensitive fertilizer line, marketed under the Ringer(R) brand, is sold to both
the consumer and commercial markets.
The Company's environmentally sensitive pest control products utilize a
variety of patented and proprietary technologies. To effectively control
insects, weeds and fungal diseases, some of Verdant's products use botanical
technologies based on fatty acid compounds and naturally occurring plant
extracts. Other products use biochemical technologies, such as pheromones, which
mimic the natural sexual attractant of insects thereby disrupting mating of
nonbeneficial insects, primarily undesirable moths, and thus prevents production
of unwanted larvae or worms which could otherwise infest and damage edible
fruit, nut and vegetable crops. Still other environmentally sensitive products
marketed by Verdant include mechanical technologies such as traps. Verdant's
traps are designed to catch nonbeneficial insects such as Japanese beetles,
wasps, hornets and moths. Virtually all of Verdant's environmentally sensitive
products are designed to control unwanted pests without harming beneficial
insect populations or leaving harmful residues on turf and garden plants. They
have also been developed to provide premium performance using available
technologies with the lowest environmental impact.
Verdant holds patents on its botanical fatty acid based pest control
products. It also holds numerous patents on products that use fatty acids as
synergists in combination with both natural and synthetic pesticides. The fatty
acids which the Company uses are natural in origin and are generally extracted
from various species of plants.
Verdant's environmentally sensitive granular fertilizer products are
proprietary and organically based. They utilize microbially based delivery
systems that control the release of nutrients for extended and uniform plant
feeding.
Verdant's line of environmentally sensitive products was developed
internally, in part, and obtained as a result of acquisitions of other
companies. The Ringer(R) line of fertilizers was developed entirely by the
Company. Verdant's botanical based line of pest control products was acquired in
1991 through the Company's acquisition of Safer, Inc., which currently operates
as a wholly owned subsidiary of Verdant. Since the 1991 acquisition of Safer,
Inc., the Company has continued to develop additional botanical technologies
internally. The SureFire(R), ChemFree(R), Blocker(R), CheckMate(R),
Insectigone(R) and BioLure(R) brands of pest control products were acquired in
December 1998 in connection with the Company's acquisition of Consep, Inc.,
which currently operates as a wholly owned subsidiary of Verdant.
Traditional Pest Control Product Lines. The Company sells traditional pest
control products to the consumer market under the Dexol(R), Black Leaf(R) and
various private label brands. Its AllPro(R) brand of traditional pest control
products is sold to the commercial market. Verdant's traditional pest control
technologies are based on non-proprietary, synthetic chemical pesticidal
formulations which are common to the consumer lawn and garden and commercial
industries. These traditional pest control products include various forms of
chemical insecticides, herbicides, fungicides and rodenticides. The active
ingredients are obtained primarily from large national and international
chemical companies who supply formulators of products for the agricultural,
horticultural and lawn and garden markets. Verdant's line of Dexol(R) pest
control products
-2-
<PAGE>
was acquired in March 1997 with the acquisition of the assets of Dexol
Industries, Inc. Its Black Leaf(R) and AllPro(R) lines of pest control products
were acquired in December 1997 when the Company acquired Southern Resources,
Inc., which currently operates as a wholly owned subsidiary of Verdant.
While the Company was initially founded based on environmentally sensitive
only technologies, Verdant acquired its traditional pest control lines for
several important financial and strategic reasons. The acquisitions helped give
Verdant its much needed critical mass. They also provided Verdant with the
opportunity to better leverage supplier and customer relationships and allowed
the Company to participate in larger geographic and functional markets. Also,
Verdant owns patents on organically based technologies which, when combined with
traditional pesticides, become "hybrid" pest control products that can result in
reduced overall environmental toxicity and faster acting pest control
performance. Significantly, the Company believes there is opportunity to market
these less toxic "hybrid" pest control technologies utilizing the well
established traditional pest control brand names obtained as a result of the
recent acquisitions.
Acquisitions. A description of the acquisitions Verdant completed in 1997
and 1998 follows:
Dexol Industries, Inc. In March 1997, Verdant acquired substantially all of
the assets of Dexol Industries, Inc. (the "Dexol"), a California based
manufacturer and marketer of pesticides to the consumer market with annual sales
of approximately $10 million. The pesticide products acquired from Dexol 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.
Southern Resources, Inc. In December 1997, Verdant completed a merger with
Southern Resources, Inc. ("SRI"), previously a privately held, Georgia based
company with annual 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 consumer and commercial
markets throughout North America. The merger was accounted for using the
purchase method of accounting.
Consep, Inc. In December 1998, Verdant completed a merger with Consep, Inc.
("Consep"), a publicly held company based in Bend, Oregon with annual sales of
approximately $38 million. Consep develops, manufactures and markets biorational
pest control products and, through its subsidiaries, distributes its biorational
pest control products as well as traditional agrichemical pest control products
to growers of fruits, nuts and vegetables. The merger was accounted for using
the purchase method of accounting.
Business Segments. Verdant conducts business in three major market
segments. The segments consist of a consumer products segment, a commercial
products segment and a commercial dealer segment. Each business segment is more
fully described below:
Consumer Products Segment. As mentioned above, the brands of products sold
to the consumer market consist of environmentally sensitive pest control
products and fertilizers sold under the Safer(R), SureFire(R), ChemFree(R),
Blocker(R), Insectigone(R) and Ringer(R) brands and traditional pest control
products sold under the Dexol(R), Black Leaf(R) and various private label
brands. Sales of consumer products were approximately $37.7 million in 1998,
$4.0 million during the three month period ended December 31, 1997 and $18.3
million in the fiscal year ended September 30, 1997.
Markets. Consumer product sales in the United States are conducted through
a variety of retail distribution channels in all fifty states. These
distribution channels consist of retail mass merchandisers, hardware
co-operatives, catalog operators and lawn and garden wholesale distributors who
resell Verdant's products to retail garden centers, nurseries, hardware stores
and home centers. Some significant retailers selling Verdant's products include
The Home Depot, Wal-Mart, Lowes, Target, Tru-Serve, Menards and Frank's Nursery
& Crafts.
Sales and Marketing. Verdant's retail sales function in the United States
is managed by a vice president of sales and marketing located in Verdant's main
office in Bloomington, Minnesota. The vice president of sales and marketing
oversees six regional sales managers located in Maryland, Georgia, Indiana,
Washington, Minnesota and California, and one national accounts sales manager
located in Minnesota. Verdant uses a combination of direct sales personnel and
independent manufacturers' representatives to market its products. The direct
sales personnel and independent manufacturers' representatives, who report to
the regional managers, are assigned territories that cover all fifty 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.
-3-
<PAGE>
Most of Verdant's marketing and distribution 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 formulators and distributors. It has
sold products to customers in Germany, Switzerland and other European markets
for over ten years.
International consumer market sales are 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 consumer market opportunities, it expects to
concentrate marketing efforts in the United States and Canada for the
foreseeable future while the Company focuses on establishing profitable
operations in these primary market areas.
Competition. Verdant faces significant competition in the consumer pest
control and fertilizer markets from numerous competitors, several of whom
significantly dominate their respective markets and many of whom have
substantially greater financial, technical, marketing and other resources than
Verdant. The Company believes it has three categories of competitors in the
consumer pest control market. Those categories of competitors are traditional
pesticide companies, companies with existing biorational pest control products
and companies developing new biorational pest control products.
Verdant's principal competitors in the consumer pest control market are
Scotts Miracle Gro (Ortho(R) brand), United Industries (Spectracide(R) brand)
and various regional and niche product competitors. The competitors compete
against both the Company's environmentally sensitive pest control product line
as well as its traditional pest control product line. In addition, large
traditional pesticide companies are currently conducting research on biorational
pest control technologies. Furthermore, there are small biotechnology companies
that are conducting research in the biorational pest control area. These
companies could represent significant competition in the future.
Verdant's principal competitor in the consumer fertilizer market is Scotts
Miracle Gro. Other significant competitors include Lebanon (Greenview(R) brand)
and Milwaukee Sewer Improvement District (Milorganite(R) brand). In addition to
national competitors, many regional and local companies, who incur lower freight
costs and are therefore more price competitive in regional and local markets,
compete with the Company. Verdant estimates that approximately 35% of the market
share is held by smaller regional and local fertilizer manufacturers and
marketers.
Products developed by Verdant may also be subject to competition from
products developed by companies using other technologies. One source of
competition is plant science technology. Plant science technology includes the
development of pest resistant plants by genetic engineering and other methods
which has the potential to significantly reduce the need for certain pest
control products currently on the market.
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 environmentally sensitive products generally cost
more than those of their competitors' traditional chemical pesticide
counterparts. Therefore, Verdant is generally not able to compete on price
alone.
To increase brand identity and sell through, Verdant uses various forms of
advertising and promotion to market its products. They primarily consist of
cooperative advertising programs, point-of-purchase marketing materials and
radio and print advertising. The Company spent on consumer sales and marketing
expenses approximately $5.8 million in 1998, $0.9 million during the three
months ended December 31, 1997 and $3.8 million in the fiscal year ended
September 30, 1997.
Commercial Products Segment. The Company's brands of products marketed to
the commercial market consist of environmentally sensitive pest control products
sold under the CheckMate(R) and BioLure(R) brands and traditional pest control
products sold under the AllPro(R) brand. Sales of products to the commercial
market were approximately $9.3 million in 1998, $0.8 million during the three
month period ended December 31, 1997 and $0.5 million in fiscal 1997.
Markets. Verdant's commercial products segment is directed toward markets
which exceed $1 billion in annual sales. 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.
Sales and Marketing. Verdant's commercial products are marketed principally
in the United States through commercial distributor distribution channels.
Commercial products segment sales are made to the specialty agricultural market,
the turf
-4-
<PAGE>
and ornamental market and the professional pest control applicators market.
Verdant's commercial sales activities are supervised by a vice president of
sales located in Bend, Oregon who oversees a 13-person sales organization.
Sales to the specialty agricultural market are made principally through
full service agrichemical dealers and through agricultural products
distributors. Agrichemical dealers employ crop protection professionals who
consult for growers and recommend appropriate insect control programs. Verdant
believes that integrated pest management ("IPM") and crop protection
professionals, such as pest control advisers ("PCAs"), have become key factors
in promoting the introduction and distribution of its insect control products to
the specialty agricultural 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 on how the Company's proprietary products can be integrated into various
insect control programs. Verdant markets its insect control products to the
speciality agricultural market through its 11-person technical sales
organization.
Sales to the turf and ornamental market are made primarily to distributors
and dealers who provide pest control and fertilizer products to providers of
lawn care services (such as Tru-Green Chemlawn), landscapers, park services,
municipalities and golf courses.
Sales to the professional pest control applicators market are made to
distributors of pest control products, who in turn resell the products to
structural pest control applicators. Examples of professional pest control
applicator customers are Orkin and Terminex.
Verdant markets to the professional pest control applicator and turf and
ornamental markets through its four-person sales organization.
The Company spent on commercial sales and marketing expenses approximately
$1.0 million in 1998, $0.2 million during the three months ended December 31,
1997 and $0.1 million in the fiscal year ended September 30, 1997.
Competition. The commercial 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 Verdant. Verdant
generally competes with other providers of traditional pest control products on
the basis of price, service and customer relationships.
Verdant's biorational products account for only a small fraction of
industry wide sales of pest control products. Biorational products generally
require specialized insect control practices, such as timing and method of
application which are different from those typically associated with chemical
products. As a result, in order for biorational products to successfully compete
with chemicals, they must not only be cost competitive but must also provide
other advantages over conventional pesticides. Verdant believes that its
biorational pest control products are generally cost competitive with
traditional insecticides and, because they are non-toxic and leave no harmful
residue in food, soil or groundwater, they provide sufficient advantages over
traditional insecticides to compete effectively against such products.
Verdant believes large chemical pesticide companies are developing chemical
pesticides that are less toxic to humans and the environment, as well as new
products based upon biorational agents. While Verdant believes that the emphasis
of these companies has been on genetic engineering of micro-organisms and on
insect resistant plants and has been primarily directed toward 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 compete directly with those of Verdant.
In addition to the large chemical pesticide companies, Verdant is aware of
several smaller companies using biorational control agents, including
pheromones, to produce alternative insect control products. Verdant also
believes other companies are currently developing biorational insect control
products. The Company believes, however, that none of these competing companies
has delivery systems that perform as effectively and efficiently as the
proprietary controlled release systems used in Verdant's CheckMate(R) products
and that Verdant is, therefore, in a strong competitive position with respect to
these companies.
Verdant expects competition in the biorational pest control segment to
intensify as regulatory pressures on traditional pesticides increase and as
advances in the field are made and become more widely known.
-5-
<PAGE>
Commercial Dealer Segment. Through subsidiaries of Verdant, the Company
owns and operates full-line commercial products and services dealerships in
major agricultural regions of California and in the Connecticut River Valley of
Massachusetts. In addition to selling the Company's biorational speciality
agricultural products, these dealerships sell products produced by other
manufacturers, including traditional pesticides, fertilizers, seeds and farm
supplies. Revenues from Verdant's commercial dealership operations were
approximately $1.1 million in 1998. There were no commercial dealer revenues
during the three month period ended December 31, 1997 and the year ended
September 30, 1997.
Through its commercial dealers, Verdant employs crop protection
professionals, including PCAs, and thereby obtains direct access to growers in
order to facilitate the exchange of information and more effectively introduce
IPM practices in general and Verdant's products in particular. Verdant currently
operates commercial dealer outlets in five locations in the Central Valley of
California and in one location in Massachusetts. Verdant believes these dealer
operations, and the twenty-three PCAs it employs, provide a continuous source of
valuable information regarding new product needs, performance of products in the
field and the competitive position of those products.
Verdant supports the sales efforts of its commercial dealers 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. Verdant
promotes its CheckMate(R) and BioLure(R) product lines through both its own
commercial dealers and other dealers and distributors using brochures, corporate
communications and an on-line Web page.
Verdant's commercial dealer operations face competition from other dealers
and distributors of pest control products operating in the same geographic
markets as the Company. Competitors include large distributors such as
Wilbur-Ellis Company, Terra, United AgriProducts and Britz Chemical Company, all
of which have greater financial strength than Verdant. In addition, Verdant's
dealer operations compete with independent dealers and distributors, some of
which have lower fixed overhead costs and operating expenses than the Company.
In 1998, Verdant sales and marketing expenses for the commercial dealer
segment were not material. There were no sales and marketing expenditures for
the commercial dealer segment during the three months ended December 31, 1997
and the year ended September 30, 1997.
Products. Verdant's major product categories are environmentally sensitive
pest control products, traditional pesticides and microbial fertilizers.
Environmentally Sensitive Pest Control Products. Verdant's environmentally
sensitive pest control products are sold under the Safer(R), SureFire(R),
ChemFree(R), Blocker(R), Insectigone(R), CheckMate(R) and BioLure(R) brands.
The Safer(R) branded line of pest control products 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 developed to control specific insects, weeds and
fungal diseases. The active ingredients include fatty acids, pyrethrin (a
derivative of a certain chrysanthemum flower), pyrethroids (synthetic variations
of pyrethrin), neem (a derivative of the tropical neem tree), bacterium strains
with toxicity specific to certain insects and elemental sulfur. The Safer(R)
branded environmentally sensitive pest control products biodegrade more rapidly
and have a lower mammalian toxicity rating than most traditional pesticides.
The SureFire(R),ChemFree(R) and Insectigone(R) brands of pest control
products consist of a broad line of consumer products used to trap or otherwise
control pests in homes, lawns and gardens. In addition, under its SureFire(R)
label, the Company markets hummingbird and butterfly feeders. The
SureFire(R),ChemFree(R) and Insectigone(R) branded products generally
incorporate the Company'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.
The Blocker(R) brand of pest control products consists of a line of insect
repellants. The repellants are DEET-free and repel mosquitos and other insects
using natural oils. They are manufactured by and are the proprietary products of
a third party, but are being marketed by the Company on an exclusive basis in
the United States under the Blocker(R) label. The Company holds exclusive
distribution rights to these insect repellent products in the United States,
Canada and Mexico, subject to certain performance requirements.
-6-
<PAGE>
The CheckMate(R) brand of pest control products are used to suppress
population levels of undesirable insects by disrupting their mating cycles.
CheckMate(R) 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.
The BioLure(R) brand of products consists of insect monitoring and trapping
products for the commercial agriculture market. 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 of fruits, nuts and vegetables use
monitoring products to identify the emergence of target insect species, to
pinpoint infestation levels and to estimate 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 the
Company's monitoring and trapping products is a pheromone-based lure which
incorporates Verdant'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. The Company
currently offers trapping and monitoring systems for over twenty-five species of
insects.
Traditional Pest Control Products. Verdant acquired its line of traditional
pesticide products in March 1997 with the purchase of substantially all of the
assets of Dexol Industries, Inc. and in December 1997 with its merger with
Southern Resources, Inc. See "--Dexol Industries, Inc." and "--Southern
Resources, Inc." above.
The Company sells traditional pest control products to the consumer market
under the Dexol(R), Black Leaf(R) and various private label brands. Its
AllPro(R) brand of traditional pest control products is sold to the commercial
market. Verdant's traditional pest control technologies are based on
non-proprietary, synthetic chemical pesticidal formulations which are common to
the consumer lawn and garden and commercial industries. These traditional pest
control products include various forms of insecticides, herbicides, fungicides
and rodenticides. The active ingredients are synthetically derived and are
obtained primarily from large national and international chemical companies who
supply active ingredients to formulators of products for the agricultural,
horticultural and lawn and garden markets.
While the Company was initially founded based on environmentally sensitive
only technologies, Verdant acquired its traditional pest control lines for
several important financial and strategic reasons. The acquisitions helped give
Verdant its much needed critical mass. They also provided Verdant with the
opportunity to better leverage supplier and customer relationships and allowed
the Company to participate in larger geographic and functional markets. Also,
Verdant owns patents on organically based technologies which, when combined with
traditional pesticides, become "hybrid" pest control products that can result in
reduced overall environmental toxicity and faster acting pest control
performance. Significantly, the Company believes there is opportunity to market
these less toxic "hybrid" pest control technologies utilizing the well
established traditional pest control brand names obtained as a result of the
recent acquisitions.
Microbial Fertilizers. Verdant's environmentally sensitive granular
fertilizer products are sold under the Ringer(R) brand to the consumer market
under the Lawn Restore(R) sub-brand and to the turf and ornamental sector of the
commercial market under the Ringer(R) master brand. The fertilizers are
proprietary and organically based. They utilize microbially based delivery
systems that control the release of nutrients for extended and uniform plant
feeding.
Distribution and Transportation. Verdant relies primarily on common carrier
transportation, leased warehouse facilities and public warehouse services to
distribute its products. Verdant's distribution and freight costs tend to be
significant as a percentage of sales. This is due to the relatively heavy weight
and/or bulky nature of the Company's products and the substantial shipping
distances from distribution locations to some of Verdant's major market areas.
In 1998, during the three month period ended December 31, 1997 and in
fiscal 1997, Verdant spent approximately $4.9 million, $0.5 million and $2.2
million, respectively, on product transportation and warehousing costs.
Government Regulation. The pest control industry is heavily regulated
worldwide. In the United States, the Environmental Protection Agency ("EPA")
under the Federal Insecticide, Fungicide and Rodenticide Act, as amended
("FIFRA"), requires extensive efficacy, toxicology and environmental testing to
substantiate product performance and safety prior to registration. Also,
proposed regulations in the Food Quality Protection Act ("FQPA") could place
stricter rules on the sale and use of pest control products, especially
traditional chemistries such as organophosphates and carbamates. Pest
-7-
<PAGE>
control products 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 pest control 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.
Traditional 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 $15 million or more. In contrast to traditional pesticides, 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 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 traditional
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 the Company'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.
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.
Patents, Proprietary Rights and Technologies. Verdant uses proprietary and
non-proprietary technologies in its products. Non-proprietary technologies are
used in Verdant's traditional pesticide products sold under the Dexol(R), Black
Leaf(R) and AllPro(R) brands and various private label brands. Proprietary
technologies are used in many of Verdant's environmentally sensitive pest
control products and microbial fertilizers. The Company seeks to protect its
proprietary
-8-
<PAGE>
product technologies through a variety of means including patents, licenses,
trade secrets, proprietary know-how, technological innovation and customer
education. Verdant also obtains confidentiality agreements from current Verdant
employees, scientific consultants and potential strategic corporate partners
prior to disclosing Verdant trade secrets and know-how. A more detailed
description of Verdant's patents, proprietary rights and technologies follows.
Patents. As of December 31, 1998, Verdant owned 54 patents, including 28
U.S. patents, and licensed two additional U.S. patents, which expire at various
times during the years from 2006 through 2012. All of the Company's owned
patents cover Verdant's environmentally sensitive and "hybrid" pest control
products. 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.
Proprietary Rights. Proprietary protection of Verdant's products is
important to its business. In addition to its patents, Verdant relies upon trade
secrets, unpatented know-how and continuing technological innovation to develop
and maintain its competitive position.
Much of the Company'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,
Verdant requires key employees, consultants, advisors and collaborators to enter
into confidentiality agreements which prohibit the disclosure of confidential
information to persons unaffiliated with the Company and require disclosure and
assignment to Verdant of ideas, developments, discoveries and inventions made by
such persons.
Verdant has also obtained manufacturing and marketing rights in agriculture
to certain proprietary rights of Bend Research, Inc. ("BRI"), including patents,
patent applications, trade secrets and unpatented know-how which relate to
existing and development stage technologies and products. In addition, Verdant
has filed patent applications with respect to its own inventions which relate to
existing and development stage technologies and products.
Under its agreement with BRI, the Company has obtained a license to all
agricultural applications of technologies developed by BRI, other than certain
animal health and agricultural applications unrelated to Verdant's current or
contemplated products. The license includes rights to certain patents, patent
applications, trade secrets and unpatented know-how owned by BRI, and covers
aspects of the Company's membrane based reservoir system, microporous bead
system and dispersed (flowable) microcapsule system technologies. The license
agreement provides Verdant 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 the Company's CheckMate(R), BioLure(R) and
SureFire(R) products is the subject of a United States patent owned by BRI
expiring in 2002. The microporous bead system technology used in certain current
and development stage CheckMate(R) products is the subject of a pending United
States patent application owned by BRI. The dispersed (flowable) microcapsule
system technology used in certain current and development stage CheckMate(R)
products is not patented in any country. The license agreement with BRI provides
the Company exclusive worldwide rights to agriculture applications of the
microporous bead system technology dispersed (flowable) microcapsule system
technology, except as noted above.
The foregoing licenses are royalty free as to certain of Verdant's existing
controlled-release products. Certain existing products and certain products
resulting from existing and future development efforts are subject to a royalty
cost at rates ranging from 2.5% to 5.0% of the Company's direct gross margin, as
defined in the license agreement, on such products. The license agreement
continues until the later of 2012 or the expiration of the last patent licensed
under it. However, Verdant may terminate the license agreement on sixty days'
notice. The license agreement provides that if it were to be terminated for any
reason, Verdant would retain rights to all BRI technologies incorporated in its
then current products and any products then under development.
Technologies. Verdant believes it is well positioned to take advantage of
opportunities for biorational pest control products as a result of its
proprietary controlled release pheromone technologies and its fatty acid based
pest control technologies.
Pheromone Technologies. The Company's principal commercial agricultural
products combine proprietary controlled release delivery systems with
synthesized pheromones to provide effective biorational pest control. The
Company 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.
-9-
<PAGE>
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. Verdant 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
Verdant's products protect the pheromones from the environment and delay their
degradation. The Company 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. Verdant believes that by providing a steady rate of
release over time, its controlled release technologies allow the Company 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 its 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, the Company is able to
adapt this technology to a variety of applications. Membrane based reservoir
systems are used in the CheckMate(R) and BioLure(R) product lines and in certain
products within the SureFire(R) 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 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(R) 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(R) products.
Fatty Acid Based Pest Control Technologies. Verdant owns and licenses
patents covering a variety of fatty acid pest control applications, including
fatty acid only technologies and "hybrid" fatty acid/traditional pesticide
combinations.
Fatty acids are a form of natural soap that are derived from various of
species of plants. They degrade rapidly in the environment, especially when
exposed to sunlight and oxygen, and work by opening the pores of insect and
plant tissues thereby causing their dehydration. Verdant's fatty acid only
technologies are used in its Safer(R) branded soft bodied insect killer products
and in its Safer(R) branded nonselective weed killers.
In addition to its fatty acid only pest control products, the Company owns
or licenses patents covering fatty acids in combination with other forms of
pesticides. Verdant markets a patented, environmentally sensitive insecticide
which is a combination of fatty acids and pyrethrin, a natural insecticide
extracted from chrysanthemum flowers.
The Company also owns or licenses patents covering fatty acids in
combination with traditional, synthetic pesticides. These "hybrid" formulations
are generally faster acting and less toxic to the environment. Fundamentally,
the fatty acid component of the applicable formation opens the pores of insects
or plants and allows the traditional, synthetic pesticide component of the
formulation to enter the insects or plants more rapidly. As validation of the
technology, a major chemical company licensed one of the Company's "hybrid"
technologies for use in its Roundup(R) branded nonselective weed and grass
killer for the consumer market in the United States, Australia and Canada.
Roundup(R) is a leading consumer herbicide.
-10-
<PAGE>
Product Registrations and Development. The pest control industry is highly
regulated by various federal and state agencies. Many of the Company's products
must be registered annually with such agencies. The Company's product
registration costs were $1,313,365, $89,218 and $351,410 for the year ended
December 31, 1998, the three months ended December 31, 1997 and the year ended
September 30, 1997, respectively.
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. The Company is also actively conducting research and development on
its pheromone based technologies. Verdant believes that additional investment in
new product development will continue to be necessary to remain competitive in
the biorational pest control market.
Verdant's product development and testing is conducted internally and by
university and government researchers unaffiliated with Verdant. In 1998, during
the three month period ended December 31, 1997 and in fiscal 1997, Verdant spent
approximately $743,711, $89,695 and $620,950, respectively, on product
development activities.
Manufacturing. Verdant has a leased manufacturing facility in Torrance,
California where it formulates traditional pesticide products. The manufacturing
facility became available as a result of the Dexol acquisition in March 1997. In
addition, subsidiaries of one of Verdant's subsidiaries own a manufacturing
facility in Fort Valley, Georgia. Furthermore, Consep manufactures the membrane
based reservoir dispensers, microporous beads and dispersed (flowable)
microcapsules used in its products at its facility in Bend, Oregon. Verdant also
uses outside subcontract manufacturers, principally HPI Products, Inc., based in
St. Joseph, Missouri, to produce the remainder of its products.
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 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.
Employees. As of December 31, 1998, Verdant had 231 employees, all but two
of whom are full-time, located in the U.S. and Canada. Of these employees, 61
were engaged in manufacturing, 21 were employed as PCA's, 9 were engaged in
product registration and development, 32 were engaged in sales and marketing, 55
were engaged in distribution and material control and 53 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.
Seasonality. Verdant's business is highly seasonal, with its highest
revenues being recognized in the first and second second quarter of each year
and its lowest revenues being recognized in the fourth quarter of each year.
This seasonality coincides with the growing season in the Northern Hemisphere
and the consumer home, lawn and garden buying season. Many of the Company's
commercial products, and the products sold by its commercial dealers, 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 operations could be adversely impacted.
Item 2. DESCRIPTION OF PROPERTY.
Verdant leases approximately 11,000 square feet of office facilities
located in Bloomington, Minnesota. In addition, Verdant leases 100,000 square
feet of warehouse space in St. Joseph, Missouri 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 January 2002
and October 2003, 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
-11-
<PAGE>
space in a suburb of Toronto, Canada. The lease for the subsidiary's office and
warehouse space expires in 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. The Company's wholly owned subsidiary, Consep, is
based in Bend, Oregon where it owns a 28,800 square foot facility. In addition
to administrative offices, the headquarters facility contains research and
development, manufacturing, warehouse and sales operations for certain of
Consep's proprietary products. Consep also owns, through its Farchan subsidiary,
one building located in Gainesville, Florida, and one building located in
Alachua, Florida, with a combined space of approximately 8,000 square feet.
Consep, through certain of its commercial dealer subsidiaries, also owns
office and warehousing facilities for its agrichemical dealer operations in
Sacramento, Fresno and Patterson, California. Consep's commercial dealer
operations also lease sales and distribution facilities in Livingston and
Escalon, California. Consep's commercial dealer operations also lease sales and
distribution facilities in Worcester and Chicopee, Massachusetts on a
month-to-month basis. The Company believes that it could replace these
facilities in a timely manner, if required to do so. The Company also believes
its properties are adequately covered by insurance.
The Company believes that its existing facilities will be adequate to serve
its needs at least through 2000. The Company incurred facility lease costs of
approximately $644,000 in 1998, $141,000 during the three months ended December
31, 1997 and $356,000 in fiscal 1997.
Item 3. LEGAL PROCEEDINGS.
Subsidiaries of Verdant's wholly owned subsidiary, SRI, are parties 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
subsidiaries' 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's
subsidiaries 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.
The Company is a party to other legal proceedings, none of which, however,
Verdant believes to be, individually or collectively, potentially materially
adverse to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a special shareholders meeting on December 7, 1998 to vote upon
two items of business: (1) To approve and adopt the Agreement and Plan of merger
dated September 8, 1998 among Verdant Brands, Inc., Consep Acquisition, Inc. and
Consep, Inc.. (See "Acquisitions. - Consep, Inc." in Item 1. Business above.);
and, (2) To approve an amendment to the Company's Articles of Incorporation to
increase the authorized shares of common stock from 25,000,000 to 50,000,000
shares. In connection with the meeting, the Company filed a proxy statement
dated October 26, 1998 to solicit proxy votes for the meeting. At the special
shareholder meeting, 11,970,261 shares, or 71.7%, of the 16,705,261 shares
outstanding were voted in person or by proxy. All matters of business at the
special shareholders' meeting were approved by a majority of the shares voted.
The voting results are as follows:
Proposal 1. A proposal to approve and adopt the Agreement and Plan of Merger
dated September 8, 1998 among Verdant Brands, Inc., Consep
Acquisition, Inc. and Consep, Inc. For: 11,897,201 shares;
Against: 47,100 shares; Abstain: 8,746 shares; Broker Non-vote:
17,525 shares.
Proposal 2. A proposal to approve of an amendment to the Restated Articles of
Incorporation to increase the number of authorized shares of the
Company's common stock from 25,000,000 to 50,000,000 shares .
For: 11,741,669; Against: 159,507; Abstain: 69,396 shares.
- --------
-12-
<PAGE>
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the NASDAQ National Market System of
The NASDAQ Stock Market under the symbol "VERD". The following table sets forth
the high and low sales prices of the Company's common stock for the fiscal year
ended September 30, 1997, the three month period ended December 31, 1997 and the
year ended December 31, 1998 as reported by NASDAQ.
Quarterly Stock Prices - Fiscal Year Ended September 30, 1997, Three Months
Ended December 31, 1997 and Year Ended December 31, 1998
Sale Prices
-------------------
High Low
------ ------
Quarter of Fiscal 1997:
First................................... $2.125 $1.250
Second.................................. $1.438 $1.031
Third .................................. $1.750 $1.000
Fourth.................................. $1.781 $1.063
Quarter Ended December 31, 1997.............. $2.125 $1.125
Quarter of Calendar 1998:
First................................... $2.125 $1.250
Second.................................. $2.938 $1.750
Third .................................. $2.50 $1.063
Fourth.................................. $1.688 $1.000
Holders.
As of March 23, 1999, there were 315 holders of record of the Company's
common stock, and the Company estimates there were approximately 3,600
beneficial holders at such date.
Dividends.
The Company has not paid or declared any cash dividends in the past five
years and has no intention of issuing dividends in the foreseeable future.
- --------
-13-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Acquisition Activities
In March 1997, the Company 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 market with annual sales of
approximately $10 million. The pest control products acquired use
non-proprietary traditional chemical technology commonly availably in the lawn
and garden industry. Since the acquisition, the Company has operated the
business acquired as its Dexol division. The financial results of the Dexol
division have been included in the operations of Verdant Brands, Inc. beginning
on March 1, 1997, the effective date of the acquisition for accounting and
reporting purposes.
In December 1997, the Company 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
pesticides through its subsidiary SureCo, Inc., under a variety of proprietary
and private label brands names to commercial and consumer markets throughout
North America. The merger was accounted for using the purchase method of
accounting.
In December 1998, the Company completed a merger with Consep, Inc. ("Consep"), a
publicly held Oregon-based company with annual consolidated sales of
approximately $38 million. Consep develops, manufactures and markets biorational
pest control products under a variety of proprietary brands names to commercial
and consumer markets and operates several commercial product sales and service
dealerships. The merger was accounted for using the purchase method of
accounting.
Management believes that new product introductions are essential to the future
growth and profitability of the Company. The Company is actively seeking
additional new product opportunities through a number of internal and external
means including the possibility of licensing arrangements with other companies
and further acquisitions. It should be noted, however, that the successful
culmination of these efforts or the profitable introduction of new products
cannot be assured.
Results of Operations
The following table sets forth, as a percentage of sales, selected information
derived from the Company's Consolidated Statements of Operations:
<TABLE>
<CAPTION>
3 Months
Year Ended Ended Year Ended
Dec. 31, Dec. 31, Sept. 30,
1998 1997 1997
---------- ----------- ----------
<S> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0%
Cost of sales.................................... 65.6 65.7 54.5
----- ----- -----
Gross margin..................................... 34.4 34.3 45.5
Operating expenses:
Distribution and warehousing................... 10.1 10.7 11.7
Sales and marketing............................ 14.1 21.6 20.2
General and administrative..................... 6.6 18.8 8.8
Product registration and development........... 4.3 3.8 5.2
Amortization of intangibles.................... 1.6 3.1 2.4
----- ----- -----
Total operating expenses 36.7 58.0 48.3
----- ----- -----
Loss before other (expense) income............... (2.3) (23.7) (2.8)
Other (expense) income ....................... (2.5) (1.4) (0.1)
----- ----- -----
Net loss......................................... (4.8)% (25.1)% (2.9)%
===== ===== =====
</TABLE>
-14-
<PAGE>
Year Ended December 31, 1998 Compared to Fiscal Year Ended September 30, 1997
Net Sales
- ---------
Net sales for the year ended December 31,1998 increased by $29,331,363 or 155.8%
to $48,151,988 from $18,820,625 for the previous fiscal year ended September 30,
1997. The sales increase for 1998 was primarily due to sales additions resulting
from the Southern Resources, Inc. ("SRI") and Consep, Inc. ("Consep")
acquisitions. (See "Acquisition Activities" above.) SRI operations has been
included in the consolidated financial statements of the Company beginning
December 1997 and added a full year of sales in 1998 of $22,464,516 compared to
none in fiscal 1997. Consep operations was included in the Company's
consolidated financial statements beginning December 1998 added one months sales
to 1998 of $1,999,805 compared to none in fiscal 1997. Also contributing to the
sales increase was a full twelve months of Dexol sales in 1998 of $8,691,501
compared to seven months of Dexol sales in fiscal 1997 of $6,170,987.
Gross Margin
- ------------
Gross margin for the year ended December 31, 1998 increased by $8,021,202 or
93.6% to $16,586,474 from $8,565,272 for the previous fiscal year ended
September 30, 1997. Gross margin as a percent of sales decreased to 34.4% in
1998 compared to 45.5% in fiscal 1997. The decline in gross margin as a percent
of sales was caused by the December 1997 addition of Southern Resources, Inc.
products and the December 1998 addition of Consep, Inc. products, both of which
carry lower average gross margins compared to the Company's other products.
Operating Expenses
- ------------------
Distribution and warehousing expenses increased $2,686,887, or 122.2%, to
$4,886,473 in 1998 compared to $2,199,586 in fiscal 1997 and decreased as a
percentage of sales in 1998 to 10.1% compared to 11.7% in fiscal 1997. The
absolute dollar increase was due to the addition of the Southern Resources, Inc.
and Consep, Inc. warehousing functions and additional direct distribution costs
associated with increased sales. Sales and marketing expenses increased
$2,980,076, or 78.1%, to $6,793,871 in 1998 compared to $3,813,795 in fiscal
1997 and decreased as a percentage of sales in 1998 to 14.1% compared to 20.2%
in fiscal 1997. The increase in sales expenses in absolute dollars was due
primarily to the addition of the SRI and Consep sales organizations and
increased direct selling costs associated with SRI and Consep sales. The
decrease as a percent of sales in 1998 compared to fiscal 1997 was due to a
greater relative proportion of commercial sales which require relatively lower
sales and marketing costs compared to retail sales.
General and administrative expenses increased $1,533,884, or 92.6% to $3,190,880
in 1998 compared to $1,656,996 in fiscal 1997 and decreased as a percentage of
sales in 1998 to 6.6% compared to 8.8% in fiscal 1997. The increase in absolute
dollars was due largely to the addition of SRI and Consep offices and
administrative functions. The decrease as a percent of sales reflect the impact
of the additions of SRI and Consep sales. Product registration and development
expenses increased $1,084,716, or 111.6% to $2,057,076 in 1998 from $972,360 in
fiscal 1997, primarily as a result of increased product registration costs
related to products added as a result of the Company's acquisitions.
Amortization of intangible assets increased $329,360 or 73.6% to $776,858 in
1998 compared to $447,498 in fiscal 1997. The increase was due primarily to the
amortization of the additional goodwill associated with the Company's
acquisitions.
Other income and expense
- ------------------------
Interest income decreased $36,889 to $35,358 in 1998 from $72,247 in fiscal 1997
due primarily to a decline in the amount of average excess cash investments.
Interest expense increased to $1,293,243 in 1998 from $152,729 in fiscal 1997.
The increase in interest expense was due primarily to additional interest
expense incurred on long-term notes payable and on increased line of credit
borrowings relating debt added in 1997 and 1998 to finance the acquisitions of
Dexol, Southern Resources, Inc. and Consep, Inc. Net royalty income increased to
$69,001 in 1998 from $50,885 in fiscal 1997 due largely to increased royalty
income on sales to foreign licensees.
-15-
<PAGE>
Three Months Ended December 31, 1997
The three months ended December 31, 1997 is a transition period from the end of
the Company's previous fiscal year ending on September 30, 1997 to the Company's
new calendar year beginning January 1, 1998. The period was impacted by the
acquisition of SRI and the inclusion of one months operations for the month of
December 1997. which was effective December 1, 1997 for accounting purposes.
Accordingly, operations of SRI for the month of December 1997 were included in
the consolidated financial statements of the Company for the transition period
and consist of the following: Net sales of $1,034,195, Gross margin of $36,056,
distribution expenses of $76,844 , sales and marketing expenses of $177,402,
general and administrative expenses of $130,726, other expenses of $61,628
(principally interest expense), and net loss of $410,544.
Income Taxes
- ------------
Income tax benefits of net deferred tax assets have been offset by valuation
allowances for the year ended December 31, 1998, the three months ended December
31, 1997 and the year ended September 30, 1997 because it is more likely than
not that the tax benefits, which cannot be carried back, could not be realized
in future periods.
At December 31, 1998, the Company has approximately $45.6 million in combined
U.S. net operating loss carryforwards for federal income tax purposes. These
loss carryforwards expire between 1999 and 2013. Of the total, approximately
$4.4 million and $22.7 million are U.S. net operating loss carryforwards of
Safer, Inc. and Consep, Inc., respectively, the Company's wholly owned
subsidiaries. The use of the unexpired net operating loss carryforwards of
Verdant Brands, Inc. which were generated prior to September 30, 1990, totaling
approximately $9.3 million as of December 31, 1998, are limited to about $2.0
million 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. The use of the
net operating losses of Consep, Inc. are limited to approximately $550,000 in
any one year under Internal Revenue Code Section 382 because of a significant
ownership change resulting from the Company's merger with Consep, Inc. in
December 1998. At December 31, 1998, the Company has approximately $380,000 net
operating loss carryforwards in Canada which expire between 1999 and 2002.
Quarterly Performance
- ---------------------
The following table sets forth a summary of quarterly results during the year
ended December 31, 1998, the three months ended December 31, 1997 and the fiscal
year ended September 30, 1997. The table is intended to show the highly seasonal
variations in the Company's business and quarterly fluctuations in its sales and
earnings or losses. This information is unaudited but contains all adjustments,
consisting of normal recurring accruals, which the Company believes are
necessary for a fair presentation.
-16-
<PAGE>
<TABLE>
<CAPTION>
Stub
Calendar Year 1998 Period Fiscal Year 1997
------------------------------------ ------ ------------------------------------
(In thousands, except income (loss) per share data)
Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31 Dec 31
------ ------- ------- ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 8,842 $ 7,564 $15,887 $15,859 $ 4,767 $ 3,143 $ 7,358 $ 4,839 $ 3,481
Gross margin 3,022 1,868 6,030 5,666 1,636 1,105 3,443 2,243 1,774
Operating expenses 4,179 3,930 5,005 4,591 2,768 1,854 3,205 2,283 1,748
Income (loss) before
other income
(expense) (1,157) (2,062) 1,025 1,075 (1,132) (749) 238 (40) 26
Other income
(expense) (357) (258) (321) (265) (65) 13 (54) (14) 34
Net income (loss) $(1,514) $(2,320) $ 704 $ 810 $(1,197) $ (736) $ 184 $ (54) $ 60
Income (loss)per share
- basic and diluted $ (.08) $ (.14) $ .04 $ .05 $ (.09) $ (.06) $ .02 $ (.00) $ .01
Shares used to calculate
income (loss) per share-basic 19,008 16,703 16,689 16,688 13,312 12,181 12,118 10,934 10,922
Shares used to calculate income
(loss) per share-diluted 19,008 16,703 16,940 16,801 13,312 12,181 12,175 10,934 10,922
</TABLE>
Seasonal Factors Affecting Operations
- -------------------------------------
The Company's operations and cash needs are highly seasonal. During November and
December of each year, the Company solicits early orders and plans production,
typically building its inventory of products through February 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 result in revenue
recognition and in receivables, occur in January through June of each year.
Accordingly, the Company typically consumes significant cash in operating
activities during the first and second quarters of each year as it finances
increases in inventory, primarily during the first quarter, and increases in
receivables, primarily during the first and second quarters.
Liquidity and Capital Resources
- -------------------------------
Historically the Company's cash and working capital needs have been provided
through public and private equity offerings as well as bank lines of credit. The
Company relies on a bank line of credit to fund its seasonal working capital
requirements resulting from the build up of inventory and receivables during the
first and second quarters of each year. Consistent with the Company's seasonal
operations, the Company's outstanding borrowings under its bank line are the
greatest during January through June of each year. Long term financing needs are
funded by various secured and unsecured notes payable and by a portion of the
Company's bank line of credit.
The Company currently has in place a three-year $25,000,000 credit facility with
GE Capital Services that expires in May 2000. The credit facility funds working
capital needs of the Company and its wholly owned operating subsidiaries. The
Company's wholly owned subsidiary, Southern Resources, Inc., 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 Southern Resources, Inc. line into its GE Capital Services
line. Consep, Inc., which operates as a wholly owned subsidiary of the Company,
previously had in place a $4,000,000 working capital facility with a commercial
finance corporation which matured in December 1998. That facility was
consolidated into the GE Capital Services facility in December 1998.
Borrowings under the GE Capital Services line of credit are limited to an
aggregate borrowing base calculated using 85% of qualified accounts receivable
and 60% to 65% of qualified inventory. At December 31, 1998, availability on the
GE Capital Services line of credit was $15,735,947. Outstanding borrowings at
December 31, 1998 were $13,098,247, of which $12,000,000 is classified as
long-term debt in the Company's financial statements. Under terms of the credit
agreement, the Company is required to maintain certain financial ratios and
other financial
-17-
<PAGE>
conditions. The Company was not in compliance with an interest coverage ratio
covenant for the quarter ended December 31, 1998 but was granted a waiver of
non-compliance with respect to that covenant by the lender.
During 1998, the Company experienced certain cash flow issues caused by
unusually slow collections on certain large customers' accounts receivable,
relatively high inventory levels, cash demands required to fund Southern
Resources, Inc. operations, payment of certain components of Southern Resources,
Inc. debt and payment of acquisition-related transaction costs. As a result, the
Company extended accounts payable beyond normal payment terms in order to
minimize borrowings and better manage short-term cash flow. The Company has
since aggressively pursued collection of delinquent accounts receivable and
renegotiated payment terms with certain key vendors. In order to help ensure
that the Company has adequate financing in place to fund the seasonal and
long-term needs of the business and to prevent recurrence of cash flow issues,
the Company is currently renegotiating its credit facility and is seeking to
obtain a $35 million credit line. In addition, the Company is evaluating various
other forms of long term financing to augment the Company's line of credit.
Management believes the higher line of credit facility level and the other forms
of long term financing currently being negotiated will meet the Company's
seasonal working capital requirements for 1999. There is, however, no assurance
the Company will be successful in its financing efforts. In 1998, the Company's
maximum borrowings from its bank line of credit were $13,577,568 compared to
maximum borrowings of $2,436,527 in fiscal 1997.
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.
Management believes that its working capital of $13,879,321 at December 31,
1998, together with its seasonal bank line of credit and proceeds from its long
term financing efforts will be sufficient to fund its operations through at
least 1999.
Cash and cash equivalents were $1,783,800 on December 31, 1998. This is an
increase of $1,360,528 compared to December 31, 1997. The increase resulted
primarily from cash provided by financing activities of $5,454,665, offset by
cash used in investing activities of $564,427 and by cash used by operating
activities of $3,515,979. Cash provided by financing activities came principally
from borrowings under the Company's line of credit. Cash used in investing
activities was primarily used to purchase property and equipment and to pay
Consep, Inc. acquisition-related costs. Cash used by operating activities was
used principally to fund increases in working capital and to funds the Company's
operating loss.
There are no significant commitments for capital expenditures in fiscal 1999.
The Company's bank line of credit agreement limits the Company to capital asset
purchases to not more than $500,000 in 1999 and 2000.
Effects of Inflation
- --------------------
The Company believes that, during the periods discussed above, inflation has not
had a material impact on the Company's business.
New Accounting Pronouncements
- -----------------------------
Effective January 1, 1998, the Company adopted Statement on Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires that changes in the amounts of certain items, including foreign
currency translation adjustments, be presented in the Company's financial
statements.
Effective January 1, 1998, the Company adopted Statement on Financial Accounting
Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and
Related Reporting Comprehensive Income". SFAS No. 131 established standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim reports in the year after
adoption. SFAS No. 131 requires reporting a measure of segment profit or loss,
certain specific revenue and expense items and segment assets. It also has other
reporting requirements relative to geographic and customer matters.
Year 2000 Readiness
- -------------------
-18-
<PAGE>
General
The Company may be impacted by the inability if its computer software
applications and other business systems (e.g., embedded microchips) to properly
identify the year 2000 due to a commonly used programming convention of only
using two digits to identify a year. Unless modified or replaced, these systems
could fail or create erroneous results when referencing the year 2000.
Management is assessing the extent and impact of this issue and is implementing
a readiness program to mitigate the possibility of business interruption or
other risks. The objective of the program is to have all significant business
systems Year 2000 compliant by the fourth quarter of 1999.
The Company's senior management is overseeing the readiness program. The
Company's information technology personnel regularly update senior management of
the progress being made to achieve Year 2000 readiness. Senior management, in
turn, reports to the Board of Directors regarding the Company's Year 2000
readiness.
Information Technology Systems, State of Readiness and Costs
Currently, the Company's midrange computer operations at the Company's
Bloomington, Minnesota headquarters support the activities of the Company's
administrative headquarters and the Company's operations in Fort Valley,
Georgia; Torrance, California and St. Joseph, Missouri. During 1997, the Company
replaced its midrange computer hardware and upgraded its computer software to
ensure the system was Year 2000 ready. The total project cost was approximately
$350,000.
The Company's wholly owned subsidiary, Consep, Inc., headquartered in Bend,
Oregon, has its own personal computer based system which is used to support a
portion of the Company's commercial products manufacturing and reporting
systems. The Company is planning to implement its Year 2000 ready midrange
computer systems at Consep's headquarters utilizing wide area network
communications during the third quarter of 1999. The estimated cost of
implementing the information systems at Consep is approximately $50,000.
Consep's commercial dealer subsidiaries operate on an information system that is
separate and different than that of either Consep or Verdant Brands. The primary
supplier of the commercial dealers' software has represented that the software
used by the commercial dealer subsidiaries, when upgraded, will be Year 2000
ready. The Company plans to upgrade this software during its second and third
quarters of 1999. Including certain hardware upgrades, the systems upgrade to
Year 2000 readiness is expected to cost approximately $50,000.
The Company's Canadian subsidiary, Safer, Ltd., operates its business on a
personal computer based software system. The Company is currently upgrading that
system and expects to be Year 2000 ready in the second quarter of 1999.
A confirmation process with respect to third party suppliers is also in
progress. Vendor site visits and testing have and will be done, as deemed
necessary, to determine if alternate sources of supply are needed. An on-site
review of the Company's most critical manufacturing vendor indicated the
supplier's systems were Year 2000 ready.
The Company believes the Year 2000 costs will not have a material impact on its
results of operations, financial condition or cash flows.
Risks
The principal business risks to the Company relating to completion of Year 2000
efforts are:
o Reliance on key business partners to not have disruption in ability to
provide goods and services as a result of Year 2000 issues.
o The ability to retain key staff for the Year 2000 effort.
o The ability to continue to focus on Year 2000 issues by internal and
external resources.
-19-
<PAGE>
Because the Company's Year 2000 readiness is dependent upon key business
partners also being Year 2000 ready, there can be no guarantee that the
Company's efforts will prevent a materially adverse impact on its results of
operations, financial condition and cash flows.
Contingency Plan
A formal contingency plan has not yet been developed. The Company will continue
to assess where alternative courses of action are needed as the Company's Year
2000 readiness plans are executed.
Ongoing Process
The Company's readiness program is an ongoing process and the estimates of costs
and completion dates for various components of the program described above are
subject to change.
Forward Looking Information
- ---------------------------
The information contained in this Annual 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 demand from major customers, competition, changes in
product or customer mix or revenues, and changes in product costs and operating
expenses, and other factors disclosed throughout this Annual 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 statements 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.
-20-
<PAGE>
Item 7. FINANCIAL STATEMENTS.
The following consolidated financial statements are included as a separate
section following the signature page to this Form 10-KSB:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ..................................... F-2
Consolidated Balance Sheets as of December 31, 1998,
December 31, 1997 and September 30, 1997........................ F-3
Consolidated Statements of Operations and Consolidated
Statements of Comprehensive Income (Loss) for the years
ended December 31, 1998 and September 30, 1997 and for
the three months ended December 31, 1997....................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998 and September 30, 1997 and
the three months ended December 31, 1997........................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and September 30, 1997 and
the three months ended December 31, 1997........................ F-6
Notes to Consolidated Financial Statements...................F-7 to F-19
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-21-
<PAGE>
PART III
Item 9. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
The information set forth under the heading "ELECTION OF DIRECTORS",
"EXECUTIVE OFFICERS" and "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934" in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1999 (the "Proxy Statement") is hereby
incorporated by reference.
Item 10. EXECUTIVE COMPENSATION.
The information set forth under the heading "EXECUTIVE COMPENSATION" in the
Proxy Statement referred to in Item 9 above is hereby incorporated by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the heading "PRINCIPAL SHAREHOLDERS" in the
Proxy Statement referred to in Item 9 above is hereby incorporated by reference.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the heading "CERTAIN TRANSACTIONS" in the
Proxy Statement referred to in Item 9 above is hereby incorporated by reference.
-22-
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
a. Listing of 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).
3.1 Restated Articles of Incorporation of the Company, as amended to date
(incorporated by reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-18, SEC File No. 33-36205- C).
3.2 Amendment to the Company's Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 of the Company's Current
Report on Form 8-K, dated July 15, 1998, SEC File No. 0- 18921).
3.3 Amendment to the Company's Restated Articles of Incorporation, dated
December 7, 1998.
3.4 Bylaws of the Company, as amended to date (incorporated by reference to
Exhibit 3.3 of the Company's Registration Statement on Form S-18, SEC
File No. 33-36205-C).
4.1 Specimen certificate of Common Stock, $.01 par value
*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).
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 Amendment to Lease Agreement between the Company and 94th Street
Associates, a Minnesota Partnership, dated November 17, 1998.
-23-
<PAGE>
*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 (incorporated by reference to Exhibit 10.13 of the
Company's Quarterly Report on Form 10-QSB for the three months ended
September 30, 1998, SEC File No. 0-18921).
10.14 Consent to Credit Agreement, dated December 11, 1997, between the
Company and General Electric Capital Corporation dated May 2, 1997
(incorporated by reference to Exhibit 10.14 of the Company's Quarterly
Report on Form 10-QSB for the three months ended September 30, 1998,
SEC File No. 0-18921).
10.15 Second Amendment, dated April 22, 1997, to Credit Agreement between the
Company and General Electric Capital Corporation dated May 2, 1997
(incorporated by reference to Exhibit 10.15 of the Company's Quarterly
Report on Form 10-QSB for the three months ended September 30, 1998,
SEC File No. 0-18921).
10.16 Third Amendment, dated August 31,1998, to Credit Agreement between the
Company and General Electric Capital Corporation dated May 2, 1997.
10.17 Fourth Amendment, dated October 14,1998, to Credit Agreement between
the Company and General Electric Capital Corporation dated May 2, 1997
10.18 Fifth Amendment, dated December 8,1998, to Credit Agreement between the
Company and General Electric Capital Corporation dated May 2, 1997
10.19 Cross-Licensing and Joint Licensing/Sale Agreement between the Company
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).
-24-
<PAGE>
10.20 Patent License Agreement between the Company and 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).
*10.21 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.)
10.22 Agreement and Plan of Merger, dated September 8, 1998, by and among
Verdant Brands, Inc., Consep Acquisition, Inc. and Consep, Inc.
(incorporated by reference to Appendix A to the Proxy Statement -
Prospectus included in the Company's Amended Registration Statement on
Form S- 4/A , dated October 26, 1998).
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney
27.1 Financial Data Schedule
- ----------
* Management contract or compensation plan or arrangement.
See Exhibit Index and Exhibits attached as a separate section of this
report.
b. Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended December 31,
1998.
-25-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Verdant Brands, Inc.
By /s/ Stanley Goldberg
-----------------------------------
Stanley Goldberg
President & CEO
Dated: March 26, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Stanley Goldberg Chairman, CEO and Director March 26, 1999
- ---------------------------
Stanley Goldberg (principal executive officer)
/s/ Mark G. Eisenschenk Chief Financial Officer March 26, 1999
- --------------------------- (principal financial and
Mark G. Eisenschenk accounting officer)
Gordon F. Stofer * Director
Robert W. Fischer * Director
Donald E. Lovness * Director
Dr. Franklin Pass * Director
John F. Hetterick * President, COO and Director
Frederick F. Yanni, Jr. * Director
Richard Mayo * Director
Volker Oakey* Director
* /s/ Stanley Goldberg Attorney-in-fact March 26, 1999
--------------------------
Stanley Goldberg
</TABLE>
-26-
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report ...........................................F-2
Consolidated Balance Sheets as of December 31, 1998,
December 31, 1997 and September 30, 1997..............................F-3
Consolidated Statements of Operations and Consolidated Statements
of Comprehensive Income (Loss) for the years ended December 31,
1998 and September 30, 1997 and for the three months ended
December 31, 1997....................................................F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998 and September 30, 1997 and
the three months ended December 31, 1997.............................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and September 30, 1997 and the three months
ended December 31, 1997..............................................F-6
Notes to Consolidated Financial Statements.....................F-7 to F-19
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. and subsidiaries as of December 31, 1998, December 31, 1997 and September
30, 1997, and the related consolidated statements of operations, comprehensive
income, stockholders' equity and cash flows for the year ended December 31,
1998, the three months ended December 31, 1997 and the year 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 Verdant
Brands, Inc. and subsidiaries as of December 31, 1998, December 31, 1997 and
September 30, 1997 and the results of their operations and their cash flows for
the year ended December 31, 1998, the three months ended December 31, 1997 and
the year ended September 30, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
March 26, 1999
F-2
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,783,800 $ 423,272 $ 3,264,294
Trade accounts receivable, less allowance
for doubtful accounts of $280,000, $213,000
and $134,000, respectively 10,838,483 4,437,264 1,153,271
Inventories (Note 3) 18,522,875 8,803,909 2,805,661
Prepaid expenses 1,813,184 1,180,250 221,186
------------ ------------ ------------
Total current assets 32,958,342 14,844,695 7,444,412
PROPERTY AND EQUIPMENT, net (Note 4) 6,635,656 2,904,094 430,138
INTANGIBLE ASSETS, at cost, less accumulated
amortization of $4,194,196, $2,855,662 and
$2,713,002, respectively (Note 1) 19,123,838 13,469,697 6,653,501
OTHER ASSETS 210,456 204,893 87,044
------------ ------------ ------------
$ 58,928,292 $ 31,423,379 $ 14,615,095
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Bank line of credit $ 1,098,247 $ 3,024,910 $ --
Accounts payable 13,202,800 7,818,030 1,273,570
Other accrued expenses 4,125,463 1,961,898 1,087,924
Current portion of long-term debt 652,511 1,538,866 23,207
------------ ------------ ------------
Total current liabilities 19,079,021 14,343,704 2,384,701
LONG-TERM DEBT (Note 6) 16,958,227 3,306,821 1,458,799
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 7):
Preferred stock, undesignated, $.01 par value,
authorized 5,000,000 shares, no shares
issued and outstanding
Common stock, par value $.01 per share, authorized
50,000,000 shares, issued and outstanding
25,914,250, 16,688,061 and 12,181,270
shares, respectively 259,143 166,881 121,813
Additional paid-in capital 49,307,732 37,866,182 33,683,587
Notes receivable from sale of
common stock to officers (249,375) (262,500) (262,500)
Accumulated deficit (26,129,734) (23,809,763) (22,613,212)
Cumulative translation adjustments (296,722) (187,946) (158,093)
------------ ------------ ------------
Total shareholders' equity 22,891,044 13,772,854 10,771,595
------------ ------------ ------------
$ 58,928,292 $ 31,423,379 $ 14,615,095
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1998 1997 1997
------------- ------------ -------------
<S> <C> <C> <C>
NET SALES $ 48,151,988 $ 4,767,233 $ 18,820,625
COST OF GOODS SOLD 31,565,514 3,130,958 10,255,353
------------ ----------- ------------
Gross margin 16,586,474 1,636,275 8,565,272
OPERATING EXPENSES:
Distribution and warehousing 4,886,473 511,727 2,199,586
Sales and marketing 6,793,871 1,032,010 3,813,795
General and administrative 3,190,880 897,685 1,656,996
Product registration and development 2,057,076 178,913 972,360
Amortization of intangibles 776,858 147,426 447,498
------------ ----------- ------------
17,705,158 2,767,761 9,090,235
------------ ----------- ------------
Loss before other
(expense) income (1,118,684) (1,131,486) (524,963)
OTHER (EXPENSE) INCOME:
Interest income 35,358 29,785 72,247
Interest expense (1,293,243) (99,255) (152,729)
Royalties, net (Note 6) 69,001 2,276 50,885
Other income (expense), net (12,403) 2,129 8,624
------------ ----------- ------------
(1,201,287) (65,065) (20,973)
------------ ----------- ------------
NET LOSS $ (2,319,971) $(1,196,551) $ (545,936)
============ =========== ============
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (.13) $ (.09) $ (.05)
============ =========== ============
SHARES USED IN CALCULATING NET LOSS
PER SHARE - BASIC AND DILUTED 17,276,950 13,312,840 11,540,885
============ =========== ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
- ------------------------------------------------------
NET LOSS $ (2,319,971) $(1,196,551) $ (545,936)
Other comprehensive income (no tax effect):
Foreign currency translation adjustments (108,776) (29,853) (18,373)
------------- ----------- -------------
COMPREHENSIVE LOSS $ (2,428,747) $(1,226,404) $ (564,309)
============= =========== =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-------------------- Additional Receivables Cumulative
Number of paid-in from sale Accumulated Translation
shares Amount capital of stock deficit Adjustments Total
---------- -------- ----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 10,921,930 $109,219 $32,036,675 $(22,067,276) $(139,720) $9,938,898
Issuance of common stock in
connection with the purchase
of Dexol 1,059,340 10,594 1,386,412 1,397,006
Issuance of common stock upon
sale of stock to officers 200,000 2,000 260,500 $(262,500) --
Foreign currency translation
adjustments (18,373) (18,373)
Net loss (545,936) (545,936)
---------- -------- ----------- --------- ----------- --------- -----------
BALANCE AT SEPTEMBER 30, 1997 12,181,270 121,813 33,683,587 (262,500) (22,613,212) (158,093) 10,771,595
Exercise of stock options 6,791 68 8,845 8,913
Issuance of common stock in
connection with the purchase
of SRI 4,500,000 45,000 4,173,750 4,218,750
Foreign currency translation
adjustments (29,853) (29,853)
Net loss (1,196,551) (1,196,551)
---------- -------- ----------- --------- ----------- --------- -----------
BALANCE AT DECEMBER 31, 1997 16,688,061 166,881 37,866,182 (262,500) (23,809,763) (187,946) 13,772,854
Note receivable payments 13,125 13,125
Exercise of stock options 17,200 172 22,403 22,575
Issuance of common stock in
connection with the purchase
of Consep 9,208,989 92,090 11,419,147 11,511,237
Foreign currency translation
adjustments (108,776) (108,776)
Net loss (2,319,971) (2,319,971)
---------- -------- ----------- --------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 1998 25,914,250 $259,143 $49,307,732 $(249,375) $(26,129,734) $(296,722) $22,891,044
========== ======== =========== ========= ============ ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 10)
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1998 1997 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,319,971) $ (1,196,551) $ (545,936)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,317,335 243,071 616,079
Income from investment in joint venture (6,212) (10,078)
(Gain) loss on disposal of assets 6,996 3,819 76,114
(Increase) decrease in assets:
Trade accounts receivable (850,542) (2,120,013) 1,605,348
Inventories (836,370) (707,341) 873,900
Prepaid expenses (306,712) (423,847) (152,426)
Increase (decrease) in liabilities:
Accounts payable (158,150) 1,613,200 (2,150,758)
Accrued expenses (362,353) 278,605 (195,638)
------------- ------------- -------------
Net cash provided by (used in)
operating activities (3,515,979) (2,309,057) 116,605
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (204,597) (259,852) (140,008)
Purchase of intangible assets (100,798) (13,227) (42,401)
Proceeds from sale of property and equipment 37,428 8,889
Net cash paid relating to acquisition of Dexol (82,343)
Net cash paid relating to acquisition of SRI (164,495)
Net cash paid relating to acquisition of Consep (296,460)
------------- ------------- -------------
Net cash used in investing activities (564,427) (437,574) (255,863)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 6,094,387 12,915
Cash received in Dexol acquisition 124,073
Cash received in Consep acquisition 1,237,631
Proceeds from issuance of common stock 35,700 8,913
Borrowings on long-term debt (305,000)
Principal payments on long-term debt (1,608,053) (101,606) (12,168)
------------- ------------- -------------
Net cash provided by (used in)
financing activities 5,454,665 (79,778) 111,905
Effect of exchange rate changes on cash (13,731) (14,613) 2,866
------------- ------------- -------------
(Decrease) increase in cash and
cash equivalents 1,360,528 (2,841,022) (24,487)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 423,272 3,264,294 3,288,781
------------- ------------- -------------
END OF YEAR $ 1,783,800 $ 423,272 $ 3,264,294
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
VERDANT BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998,
THE THREE MONTHS ENDED DECEMBER 31, 1997 AND THE YEAR ENDED AND SEPTEMBER 30,
1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - The Company develops, manufactures and markets pest control and
fertilizer products for the consumer and commercial markets. Products are
sold under several nationally recognized brand names and a variety private
labels. The Company also operates dealerships that sell pest control
products and provide services to the commercial market.
Change in fiscal year end - Effective January 1, 1998, the Company changed
its fiscal year end to December 31 from its previous year end of September
30. The three month period of October 1, 1997 through December 31, 1997 is
presented as a transition period to the Company's new fiscal year.
Principles of consolidation - The consolidated financial statements include
the accounts of Verdant Brands, Inc. and its wholly owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Revenue recognition - The Company recognizes revenue on the date of
shipment.
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 periods. 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 thirty 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 thirty 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
the fiscal year ended December 31, 1998 to U.S. consumer, commercial and
commercial dealer markets totaled 58.3%, 34.4% and 2.1%, respectively. The
percentage of consolidated net sales in the three month transition period
ended December 31, 1997 to U.S. consumer, commercial and commercial dealer
markets totaled 67.9%, 17.9% and none, respectively. The percentage of
consolidated net sales in the fiscal year ended September 30, 1997 to U.S.
consumer, commercial and commercial dealer markets totaled 87.3%, 2.5% and
none, respectively. The remaining percentage of consolidated net sales in
the fiscal year ended December 31, 1998, the three month transition period
ended December 31, 1997 and the fiscal year ended September 30, 1997 of
5.2%, 14.2% and 10.2%, respectively, represent foreign sales, primarily in
Canada. In the fiscal year ended December 31, 1998, the three month
transition period ended December 31, 1997 and the fiscal year ended
September 30, 1997, sales to one U.S. consumer market retailer accounted
for 14.3%, 9.1% and 12.8%, respectively, of consolidated net sales while
sales during the same periods to one distributor that resells to retailers
accounted for 6.4%, 16.2% and 8.0%, respectively, of consolidated net
sales.
F-7
<PAGE>
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 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.
Loss per share - Loss per common share is computed using the weighted
average number of shares outstanding during each period. The effect of
outstanding options and warrants have been excluded from the computation of
loss per share because they are 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 amounts 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.
Liquidity and capital resources - During 1998, the Company experienced
certain cash flow issues caused by unusually slow collections on certain
large customers' accounts receivable, relatively high inventory levels,
cash demands required to fund Southern Resources, Inc. operations, payment
of certain components of Southern Resources, Inc. debt and payment of
acquisition-related transaction costs. As a result, the Company extended
accounts payable beyond normal payment terms in order to minimize
borrowings and better manage short-term cash flow. The Company is currently
renegotiating its credit facility to increase its amount to $35 million and
is evaluating various other forms of long term financing to augment the
Company's line of credit. If such additional financing is not obtained, the
Company will need to reduce costs and adjust its operating expenses. Such
reductions and adjustments to operations, if necessary, may have a negative
impact on the results of operations for 1999. Management believes, however,
that, either through additional financing or through expense reductions and
other adjustments to operations, the Company will have adequate working
capital to finance operations through 1999.
New Accounting Pronouncements - Effective January 1, 1998, the Company
adopted Statement on Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income". SFAS No. 130 requires that changes in the
amounts of certain items, including foreign currency translation
adjustments, be presented in the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Investments and Hedging Activities". SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities measured
at fair value. Gains or losses resulting from the change in values of those
derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The Company does not invest
in derivatives or engage in hedging activities. Accordingly, Management
believes that the effect of the adoption of this standard will not be
material to the Company's financial statements.
2. ACQUISITIONS
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
F-8
<PAGE>
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%,
estimated transaction costs of $138,785.
The Dexol acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price was 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 $1,840,487 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 Verdant Brands, Inc. and Dexol
Industries, Inc. as if the acquisition had occurred on October 1, 1996. The
pro forma financial information is provided for illustrative purposes only
and is 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. Amounts
are in thousands except loss per share. A balance sheet in not presented
because the acquisition has been reflected in the Company's balance sheet
herein.
Year Ended
September 30,
1997
-------------
Net sales $21,793
Net loss $(1,128)
=======
Net loss per share-basic and diluted $ (.09)
=======
Shares used to calculate net loss
per share - basic and diluted 13,241
=======
Merger with Southern Resources, Inc. - In December 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. SRI owns 100% of the common stock of
SureCo, Inc. ("SureCo"), SRI's operating company, and 100% of the common
stock of Peach County Property, 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 Company acquired all of the outstanding common stock of SRI in exchange
for 4,500,000 shares of the Company's unregistered, restricted common stock
valued at $4,218,750. In addition, the Company recorded approximately
$230,000 in direct acquisition expenses.
The SRI merger was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair market values at the date
of acquisition. At the time of the merger, SRI had a deficit in equity
totaling approximately $4,786,000 caused by an excess of liabilities over
assets. The excess of purchase price over the estimated fair market value
of net assets acquired ("goodwill") totaled approximately $9,185,000 and is
being amortized on a straight-line basis over thirty years. Since the
acquisition, the Company has operated the acquired business as wholly-owned
subsidiary. SRI operations are included in the Company's consolidated
statements of operations from the effective date of the acquisition of
December 1, 1997.
The following table sets forth unaudited combined net sales, net loss and
loss per share as if the business combination had occurred on October 1,
1996. Amounts are in thousands, except loss per share. The 1997 amounts
include the pro forma impact of the Dexol acquisition.
F-9
<PAGE>
Three Months
Ended Year Ended
December 31, September 30,
1997 1997
------------- -------------
Net sales $ 6,111 $ 46,760
Net loss $(3,858) $ (2,020)
======= ========
Net loss per share-basic and diluted $ (.22) $ (.13)
======= ========
Shares used to calculate net loss
per share - basic and diluted 17,813 16,041
======= ========
Merger with Consep, Inc. - In December 1998, the Company completed a merger
with Consep, Inc. ("Consep"), an Oregon-based developer, manufacturer and
marketer of environmentally sensitive pest control products for the
commercial agriculture and consumer home, lawn and garden markets. Consep
also owns and operates commercial products sales and service dealerships
located in California and Massachusetts. Consep was previously publicly
owned with total sales of approximately $38 million per year. The Company
acquired all of the outstanding common stock of Consep in exchange for
9,208,989 shares of the Company's registered common stock valued at
$11,511,237. In addition, the Company recorded approximately $380,000 in
direct acquisition expenses.
The Consep merger was accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair market
values at the date of acquisition. A final allocation of the purchase price
to net assets acquired is pending the final determination of the fair
market values of inventory, property and equipment. The excess of purchase
price over the estimated fair market value of net assets acquired
("goodwill") was approximately $3,155,000 and is being amortized on a
straight-line basis over thirty years. Since the acquisition, the Company
has operated the acquired business as a wholly owned subsidiary. Consep
operations are included in the Company's consolidated statements of
operations from the effective date of the acquisition of December 1, 1998.
The following table sets forth unaudited combined net sales, net loss and
loss per share as if the business combinations occurred on October 1, 1996.
Amounts are in thousands, except loss per share. The 1997 amounts include
the pro forma impact of the SRI and Dexol acquisitions.
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1998 1997 1997
------------ ------------- -------------
Net sales $84,804 $11,062 $85,964
Net loss $(8,793) $(5,903) $(3,842)
======= ======= =======
Net loss per share
- basic and diluted $ (.34) $ (.23) $ (.15)
======= ======= =======
Shares used to calculate
net loss per share
- basic and diluted 25,906 25,897 25,225
======= ======= =======
3. INVENTORIES
Inventories consist of the following:
December 31,
--------------------------- September 30,
1998 1997 1997
----------- ---------- -------------
Raw materials $ 6,547,020 $5,148,988 $1,697,454
Finished goods 11,975,855 3,654,921 1,108,207
----------- ---------- ----------
$18,522,875 $8,803,909 $2,805,661
=========== ========== ==========
F-10
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------- September 30,
1998 1997 1997
----------- ----------- -------------
<S> <C> <C> <C>
Land $ 916,865 $ 43,879 $ --
Buildings and improvements 3,709,112 867,428 --
Office furniture and equipment 1,997,627 1,139,550 680,454
Machinery and equipment 3,952,048 3,596,547 801,974
Leasehold improvements 254,208 45,700 45,798
Transportation equipment 1,126,753 6,400 6,400
----------- ----------- -----------
11,956,612 5,699,504 1,534,626
Less accumulated depreciation (5,320,957) (2,795,410) (1,104,488)
----------- ----------- -----------
$ 6,635,656 $ 2,904,094 $ 430,138
=========== =========== ===========
</TABLE>
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 the Company and its subsidiaries. The
credit facility is secured by substantially all of the assets of the
Company and its subsidiaries. Borrowings under the facility are limited to
a borrowing base of 85% of eligible receivables and 60% to 65% 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 (8.55% at December 31, 1998). The
Company is required to pay a commitment fee of 3/8% on any unused portion
of the line. Outstanding borrowings under the line of credit totaled
$13,098,247 as of December 31, 1998, of which $12,000,000 was classified as
long-term debt.
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. The Company was not
in compliance with an interest coverage ratio covenant for the quarter
ended December 31, 1998 but was granted a waiver of non-compliance with
respect to that covenant by the lender.
6. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------- September 30,
1998 1997 1997
----------- ----------- -------------
<S> <C> <C> <C>
Line of credit, long-term portion
(Note 5) $12,000,000 $ -- $ --
Notes payable 3,638,660 4,830,482 1,465,800
Mortgage loans 1,685,263 -- --
Capital lease obligations 162,934 15,205 16,206
Other 123,881 -- --
Less current portion (652,511) (1,538,866) (23,207)
----------- ----------- ----------
$16,958,227 $ 3,306,821 $1,458,799
=========== =========== ==========
</TABLE>
Notes Payable - Notes payable at December 31, 1998 consists of a note
payable on acquisition financing debt and various other term notes related
to loans for the purchase of equipment and vehicles and for working
capital. The notes payable have average annual interest rates of
approximately 9%. The notes generally require monthly principal and
interest payments during their term and mature during the years 1999
through 2004.
Notes payable have carrying values equal to estimated fair values.
F-11
<PAGE>
Mortgage Loans - Mortgage loans at December 31, 1998 consists of mortgages
on office, production and warehouse buildings in Oregon and California
which are owned by wholly-owned subsidiaries of the Company. The mortgages
have annual interest rates of 8.85% and 1.5 percentage points over prime
(9.25% at December 31, 1998). The mortgages require monthly principal and
interest payments during their term and mature in 2001 and 2007. Mortgage
loans payable have carrying values equal to estimated fair values.
Capital Lease Obligations - Capital lease obligations at December 31, 1998
consist of equipment and vehicle leases with average interest rates of
approximately 12%. Capital leases require monthly principal and interest
payments and mature in 2000, 2001 and 2004.
Aggregate maturities of long-term debt by fiscal year are as follows:
Year ending December 31:
1999 $ 652,511
2000 13,889,197
2001 383,713
2002 352,672
2003 336,096
Thereafter 1,996,549
-----------
$17,610,738
===========
Operating Leases - The Company leases various 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. Leases for office space expire during 2000 through 2002.
Leases for the Company's warehouse facilities expire in 2003. The Company
is also required to carry liability insurance on all leased premises and
fire insurance at one warehouse location.
Costs incurred under operating leases are recorded as rent expense and
totaled $697,654 and $344,587 for the fiscal years ended December 31, 1998
and September 30, 1997, respectively, and $148,836 for the three months
ended December 31, 1997.
Future minimum operating lease payments - The future minimum lease
payments due under non-cancelable operating leases are as follows:
Year ending December 31:
1999 $ 542,850
2000 390,005
2001 351,864
2002 321,523
2003 215,316
----------
Total minimum obligation $1,821,558
==========
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 $30,128 and $34,411 for the fiscal years ended December
31, 1998 and September 30, 1997, respectively, and $9,033 for the three
months ended December 31, 1997.
Royalty income of $99,129, $85,296 and $11,309 for the fiscal years ended
December 31, 1998 and September 30, 1997 and for the three months ended
December 31, 1997, respectively, was generated by the Company through
licensing pesticide technologies to certain foreign and commercial
pesticide distributors for a royalty fee.
F-12
<PAGE>
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 December 31, 1998, a total of 5,000 shares of common
stock were reserved for currently exercisable outstanding warrants
described below.
Warrant
Expiration Shares Exercise Price
---------- ------- --------------
March 7, 2007 5,000 $1.44
1996 Incentive and Stock Option Plan - The Company has reserved 500,000
shares of common stock 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 December 31, 1998
is 9.0 years. Activity under the plan is as follows:
<TABLE>
<CAPTION>
Average
Option Exercise Price
Shares Per Share
--------- --------------
<S> <C> <C>
Balance, September 30, 1996 -0-
Granted 61,600 $1.88
Revalued (*) (.57)
Canceled (16,100) 1.31(*)
---------
Balance, September 30, 1997 (at $1.31 per shares) 45,500 1.31(*)
---------
Granted -0-
Expired (3,055) 1.31
---------
Balance, December 31, 1997 (at $1.31 per share) 42,445 1.31
---------
Granted 177,500 1.71
Expired (7,395) 1.65
---------
Balance, December 31, 1998 (at $1.31 to $2.00 per share) 212,500 $1.64
=========
Exercisable, December 31, 1998 65,939 $1.51
=========
</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 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.
No further stock options have been granted under the Plan after that date.
Previously granted options remain outstanding and exercisable under the
terms of each option. At December 31, 1998, the Company had reserved a
total of 645,451 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 December 31, 1998 is 5.3
years. Options become fully vested upon the occurrence of a change in
control, as defined. Activity under the plan is as follows:
F-13
<PAGE>
<TABLE>
<CAPTION>
Average
Option Exercise Price
Shares Per Share
--------- --------------
<S> <C> <C>
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(*)
---------
Granted -0-
Exercised (6,791) 1.31
Canceled (1) 1.31
---------
Balance, December 31, 1997 (at $1.31 per share) 648,051 1.31
---------
Granted -0-
Exercised (2,200) 1.31
Canceled (400) 1.31
---------
Balance, December 31, 1998 (at $1.31 per share) 645,451 $1.31
=========
Exercisable, December 31, 1998 428,729 $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 December 31, 1998
is 2.8 years. Activity under the plan is as follows:
<TABLE>
<CAPTION>
Average
Option Exercise Price
Shares Per Share
--------- --------------
<S> <C> <C>
Balance, September 30, 1996 115,000 $2.07
Granted 40,000 1.88
Revalued (*) (.71)
--------
Balance, September 30, 1997 (at $1.31 to $2.13 per share) 155,000 1.31(*)
Granted 35,000 2.00
Canceled -0-
--------
Balance, December 31, 1997 (at $1.31 to $2.13 per share) 190,000 1.49
Granted 35,000 1.13
Exercised (15,000) 1.31
Canceled (55,000) 1.45
--------
Balance, December 31, 1998 (at $1.31 to $2.13 per share) 155,000 1.43
========
Exercisable, December 31, 1998 155,000 $1.43
========
</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 Plan for the purchase of up to 155,000 shares
of the Company's common stock
F-14
<PAGE>
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 $91,497 and $39,438 for the fiscal years ended December 31,1998
and September 30, 1997, respectively, and $23,663 for the three months
ended December 31, 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:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1998 1997 1997
------------ ------------- -------------
<S> <C> <C> <C>
Net loss:
As reported $(2,319,971) $(1,196,551) $(545,936)
Pro forma $(2,335,371) $(1,225,601) $(571,433)
Pro forma per share $(.14) $(.09) $(.05)
</TABLE>
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:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1998 1997 1997
------------ ------------- -------------
<S> <C> <C> <C>
Dividend yield 0 0 0
Expected volatility 51.26% 52.35% 41.48%
Risk-free interest rate 5.00% 6.55% 6.55%
Expected life of options 3 years 3 years 4 years
Average fair value per share
on date of grant $1.13 $2.00 $1.31
</TABLE>
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 provided they have attained the age of twenty-one and have completed
thirty days of service. Participants may contribute up to 15% of their
earnings, subject to certain federally mandated limitations. 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 for the year
F-15
<PAGE>
ended September 30, 1997. There were no employer discretionary profit
sharing contributions for the year ended December 31, 1998 or for the three
months ended December 31, 1997.
9. INCOME TAXES
Net deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
Dec. 31, Dec. 31, Sept. 30,
1998 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Prepaid expenses $ (42,000) $ (32,000) $ (29,000)
Accrued expenses 192,000 161,000 184,000
Reserves for doubtful accounts 529,000 97,000 48,000
Inventory valuation reserves 665,000 340,000 63,000
Expenses capitalized to inventory for tax purposes 1,049,000 765,000 512,000
Sales returns and allowance reserves 257,000 163,000 26,000
Less valuation allowance (2,650,000) (1,494,000) $ (804,000)
----------- ----------- -----------
$ -0- $ -0- $ -0-
=========== =========== ===========
Noncurrent:
Excess of tax over book depreciation (315,000) $ (338,000) (20,000)
Packaging design costs 130,000 130,000 154,000
U.S. net operating loss carryforwards 17,473,000 9,497,000 8,394,000
Foreign net operating loss carryforwards 154,000 154,000 226,000
U.S. and foreign tax credit carryforwards 621,000 410,000 490,000
Less valuation allowances (18,063,000) (9,853,000) (9,284,000)
----------- ----------- -----------
$ -0- $ -0- $ -0-
=========== =========== ===========
</TABLE>
At December 31, 1998, the Company has approximately $45.6 million in
combined U.S. net operating loss carryforwards for federal income tax
purposes. These loss carryforwards expire between 1999 and 2013. Of the
total, approximately $4.4 million and $22.7 million are U.S. net operating
loss carryforwards of Safer, Inc. and Consep, Inc., respectively, the
Company's wholly owned subsidiaries.
The use of the unexpired net operating loss carryforwards of Verdant
Brands, Inc. which were generated prior to September 30, 1990, totaling
approximately $9.3 million as of December 31, 1998, are limited to about
$2.0 million 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.
The use of the net operating losses of Consep, Inc. are limited to
approximately $550,000 in any one year under Internal Revenue Code Section
382 because of a significant ownership change resulting from the Company's
merger with Consep, Inc. in December 1998.
At December 31, 1998, the Company has approximately $380,000 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:
3 Months
Year Ended Ended Year Ended
Dec. 31, Dec. 31, Sept. 30,
1998 1997 1997
------------ --------- ------------
Interest paid $(1,093,264) $(93,255) $(152,757)
Interest received 8,507 28,570 71,687
F-16
<PAGE>
Investing and financing transactions not affecting cash during the years
ended December 31, 1998 and September 30, 1997 and the three months ended
December 31, 1997 are described below:
o In fiscal 1998, the Company issued 9,208,989 shares of its common stock
as consideration paid for the acquisition of substantially all of the
assets of Consep, Inc. In connection with this issuance of common
stock, the Company recorded $11,511,237 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
$380,000 in direct acquisition expenses.
o In the three month transition period ended December 31, 1997, the
Company issued 4,500,000 shares of its common stock as consideration
paid for the acquisition of substantially all of the assets of Southern
Resources, Inc. In connection with this issuance of common stock, the
Company recorded $4,218,750 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 $230,000 in
direct acquisition expenses.
o In fiscal 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 fiscal 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.
11. FOREIGN OPERATIONS
International sales activity, consisting of sales outside the United
States, primarily in Canada, accounted for approximately 5.2%, 10.2% and
10.2% of total sales for the year ended December 31, 1998, the three months
ended December 31, 1997 and the year ended September 30, 1997,
respectively. A reconciliation for these periods of domestic and foreign
activity for net sales, net income (loss) and identifiable assets for these
periods is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1998: Domestic Foreign Total
------------------------------------ ----------- ---------- ------------
<S> <C> <C> <C>
Net Sales $45,656,427 $2,495,561 $48,151,988
Net Income (Loss) (2,527,286) 37,090 (2,490,196)
Identifiable Assets $54,311,949 $4,446,118 $58,758,067
Three Months Ended December 31, 1997: Domestic Foreign Total
------------------------------------- ----------- ---------- ------------
Net Sales $ 4,283,203 $ 484,030 $ 4,767,233
Net Income (Loss) (1,199,547) 2,996 (1,196,551)
Identifiable Assets $30,249,918 $1,173,461 $31,423,379
Fiscal Year Ended September 30, 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 $13,542,508 $1,072,587 $14,615,095
</TABLE>
12. BUSINESS SEGMENTS
The Company conducts its business in three major market segments - consumer
products, commercial products and commercial dealers.
Consumer Products Segment - The consumer product segment markets pesticides
and fertilizers through lawn and garden retailers and through lawn and
garden distribution channels to home owners and other consumers.
F-17
<PAGE>
Consumer products consist of environmentally sensitive pest control
products and fertilizers sold under the Safer(R), SureFire(R), ChemFree(R),
Blocker(R), Insectigone(R) and Ringer(R) brands and traditional pest
control products sold under the Dexol(R), Black Leaf(R) and various private
label brands.
Commercial Products Segment - The commercial products segment markets pest
control and fertilizer products to commercial growers in the agriculture
industry through direct sales to growers and through agricultural product
distributors, and commercial applicators in the pest control industry
through commercial pesticide distributors. Commercial products consist of
environmentally sensitive pest control products sold to the agriculture
industry under the CheckMate(R) and BioLure(R) brands and traditional pest
control products sold to the commercial pest control industry under the
AllPro(R) brand.
Commercial Dealer Segment - The commercial dealer segment consists of
dealerships owned by a subsidiary of the Company that sells and distributes
a full-line of commercial products and services to growers in major
agricultural regions of California and in the Connecticut River Valley of
Massachusetts. Products distributed include the Company's products as well
as products produced by other manufacturers, including traditional
pesticides, fertilizers, seeds and farm supplies.
A reconciliation for the year ended December 31, 1998, the three months
ended December 31, 1997 and the fiscal year ended September 30, 1997 of
segment activity for net sales, net income (loss) and identifiable assets
is as follows:
<TABLE>
<CAPTION>
Commercial
Fiscal Year Ended December 31, 1998: Consumer Commercial Dealer Total
----------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales................................. $37,727,997 $ 9,285,828 $ 1,138,163 $48,151,988
Net Income (Loss)......................... (1,707,507) (680,237) 67,773 (2,319,971)
Depreciation and Amortization............. 1,192,405 103,369 21,561 1,317,335
Interest Expense.......................... 1,113,759 164,204 15,280 1,293,243
Interest Income........................... 15,849 8,402 11,107 35,358
Capital Expenditures...................... 187,243 16,195 1,159 204,597
Identifiable Assets....................... $31,242,905 $17,182,001 $10,503,386 $58,928,292
<CAPTION>
Commercial
Three Months Ended December 31, 1997: Consumer Commercial Dealer Total
------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales................................. $ 4,041,206 $ 726,027 $ -- $ 4,767,233
Net Income (Loss)......................... (974,158) (222,393) -- (1,196,551)
Depreciation and Amortization............. 232,046 11,025 -- 243,071
Interest Expense.......................... 59,409 39,846 -- 99,255
Interest Income........................... 29,785 -- -- 29,785
Capital Expenditures...................... 259,852 -- -- 259,852
Identifiable Assets....................... $27,469,581 $ 3,953,798 $ -- $31,423,379
<CAPTION>
Commercial
Fiscal Year Ended September 30, 1997: Consumer Commercial Dealer Total
------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales................................. $18,335,625 $ 485,000 $ -- $18,820,625
Net Income (Loss)......................... (558,361) 12,425 -- (545,936)
Depreciation and Amortization............. 616,079 -- -- 616,079
Interest Expense.......................... 144,229 8,500 -- 152,729
Interest Income........................... 72,247 -- -- 72,247
Capital Expenditures...................... 140,008 -- -- 140,008
Identifiable Assets....................... $14,384,295 $ 230,800 $ -- $14,615,095
</TABLE>
F-18
<PAGE>
13. TRANSITION PERIOD
The following table presents summary statement of operations information
for the three month transition period ended December 31, 1997 compared to
the three month period ended December 31, 1996.
Three Months Ended
December 31,
--------------------------
1997 1996
----------- ----------
Net Sales $ 4,767,233 $3,480,731
Cost of goods sold 3,130,958 1,706,499
----------- ----------
Gross margin 1,636,275 1,774,232
Operating expenses 2,767,761 1,747,965
----------- ----------
Income (loss) before other expense (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 share -
basic and diluted $ (.09) $ .01
=========== ==========
Shares used in calculating net
income (loss) per share -
basic and diluted 13,312,840 10,921,930
=========== ==========
F-19
<PAGE>
INDEX OF EXHIBITS
Exhibit Number Description Pages
- -------------- ----------- -----
3.3 Amendment to the Company's Restated Articles of
Incorporation, dated December 7, 1998.
4.1 Specimen certificate of Common Stock, $.01 par value.
10.6 Amendment to Lease Agreement between the Company and 94th
Street Associates, a Minnesota Partnership, dated November
17, 1998.
10.16 Third Amendment, dated August 31,1998, to Credit Agreement
between the Company and General Electric Capital Corporation
dated May 2, 1997.
10.17 Fourth Amendment, dated October 14,1998, to Credit Agreement
between the Company and General Electric Capital Corporation
dated May 2, 1997.
10.18 Fifth Amendment, dated December 8,1998, to Credit Agreement
between the Company and General Electric Capital Corporation
dated May 2, 1997.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney
27.1 Financial Data Schedule
<PAGE>
Exhibit 3.3
ARTICLES OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
VERDANT BRANDS, INC.
1. The name of the corporation is Verdant Brands, Inc., a Minnesota
corporation.
2. The Restated Articles of Incorporation are amended to read as follows:
(i) Article III is amended by deleting "25,000,000" where it
appears therein, and substituting "50,000,000" thereof.
3. The amendment has been adopted pursuant to Chapter 302A of the
Minnesota Business Corporation Act.
IN WITNESS WHEREOF, the undersigned, Mark G. Eisenschenk,
Executive Vice President, Chief Financial Officer, treasurer and
Secretary of Verdant Brands, Inc., being duly authorized on behalf of
Verdant Brands, Inc. has executed this document this 7th day of
December 1998.
/S/ Mark G. Eisenschenk
-----------------------
Mark G. Eisenschenk, Executive Vice
President, Chief Financial Officer, Treasurer
and Secretary
<PAGE>
Verdant Brands, Inc.
1998 Form 10-KSB
EXHIBIT 4.1 Front
4.1 Specimen certificate of Common Stock, $.01 par value
[LOGO]
- ------------------ ------------------
Number Shares
Verdant Brands
- ------------------ -------------------
INCORPORATED UNDER THE LAWS See reverse for
OF THE STATE OF MINNESOTA certain definitions
------------------
CUSIP 923366 108
------------------
THIS CERTIFIES THAT
is the owner of
SHARES OF FULLY PAID AND NONASSESSABLE COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF
================= =================
---------------------------- VERDANT BRANDS, INC. ----------------------------
================= =================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent & Registrar.
WITNESS the facsimile signatures of the Corporation's duly authorized
officers.
Dated:
/s/ Mark Eisenschenk /s/ Stanley Goldberg
SECRETARY PRESIDENT
Countersigned and Registered:
Norwest Bank Minnesota, National Association
(Minneapolis, Minnesota) Transfer Agent and Registrar
By
Authorized Signature
<PAGE>
Back
NOTICE
Verdant Brands will furnish without charge to each shareholder who so
requests a full statement of the designations, preferences, limitations and
relative rights of the shares of each class or series authorized to be issued,
so far as they have been determined, and a statement of the authority of the
Board of Directors of Verdant Brands to determine the relative rights and
preferences of subsequent classes or series of capital stock.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right
of survivorship and not as
tenants in common
UNIF GIFT MIN ACT -- _______________Custodian________________
(Cust) (Minor)
under Uniform Transfers to Minors
Act____________ ____________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received ___________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
____________________________________________________________________________
____________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
____________________________________________________________________________
____________________________________________________________________________
_____________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocablly constitute and appoint _______________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated ____________________________________
____________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED By:
<PAGE>
Exhibit 10.6
Lease Amendment
This Amendment is made the 17th day of November 1998 between Ninety-Fourth
Street Associates (a Minnesota Partnership) hereinafter called Landlord and
Verdant Brands, Inc. herein called Tenant.
WHEREAS, by Lease dated August 15, 1996, landlord leased to tenant the real
property together with the building and improvements then erected thereon
located at Southtech Plaza, 9555 James Avenue South, Suite 200, Bloomington, MN
55431. All is more particularly described in said Lease.
THEREFORE, in consideration of the mutual covenants herein contained in other
good and valuable consideration. It is covenanted and agreed between the parties
that the aftersaid Lease be modified and amended as follows:
Description of Premise
- ----------------------
The square footage shall change as follows: Office/Restroom/Entry/Finished areas
changed from 4,851 sq. ft. To 7,768 sq. ft. Storage and Service areas change
from 1,589 sq. ft. to 3,632 sq. ft. The total square footage shall change from
6, 440 sq. Ft to 11, 400 sq. ft.
Lease Term
- ----------
The lease term shall be four years commencing January 1, 1999 and expiring
December 31, 2002. Tenant will have access to the expansion area upon full
execution of new Lease with landlord.
Base Rent
- ---------
Effective January 1, 1999 to September 30, 1999 $6254.00 Monthly Base Rent
October 1, 1999 through December 31, 2002 $6789.00 Monthly Base Rent
Additional Rent
- ---------------
Tenant's proportionate share for purposes of allocating Real Estate Taxes
Assessments and operating expenses shall be increased from 5.6% to 9.9%.
Lease Space
- -----------
Landlord shall construct the space as detailed on the attached space plan dated
November 11, 1998 by The Design Partnership, space will be taken as built with
the exception of those improvements as indicated on the attached drawing.
Option to Terminate
- -------------------
Tenant shall have the one time option to terminate this Lease at the end of the
36 month of the lease term (December 31, 2001) by providing landlord 120 day
prior written notice by Certified Mail of its intent to terminate the Lease with
payment of $13,500.00 to landlord.
<PAGE>
This Amendment shall supersede any contrary or conflicting information contained
in the original Lease between landlord and tenant dated August 15, 1996. All
other terms and conditions of the original Lease shall remain in full force and
effect.
Ninety-Fourth Street Associates Verdant Brands, Inc.
By: /S/ Chris Johnson By: /S/ Mark Eisenschenk
------------------------------ ----------------------------
Its: Partner Its: Executive Vice President
------------------------------ ----------------------------
Date: 11-18-98 Date: 11/18/99
------------------------------ ----------------------------
<PAGE>
EXHIBIT 10.16
THIRD AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
This THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as
of August 31, 1998, is by and among RINGER CORPORATION ("Ringer"), SAFER, INC.
("Safer") and SURECO, INC. ("SureCo") (Ringer, Safer and SureCo are sometimes
referred to herein individually as a "Borrower and collectively as the
"Borrowers") and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation,
as Lender.
RECITALS
--------
A. Borrowers and Lender are parties to that certain Credit Agreement
dated as of May 2, 1997 (as from time to time amended, restated, supplemented or
otherwise modified and in effect, the "Credit Agreement"), pursuant to which
Lender has made and may hereafter make loans and advances and other extensions
of credit to Borrowers.
B. Borrowers wish, and Lender is willing, to amend certain provisions
of the Credit Agreement, all on the terms and conditions set forth in this
Amendment.
C. This Amendment shall constitute a Loan Document and these Recitals
shall be construed as part of this Amendment. Capitalized terms used herein
without definition are so used as defined in Annex A to the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto agree as follows:
1. Amendment of Credit Agreement. The Credit Agreement is hereby
amended as follows:
(a) The text contained in paragraph (c) of Annex G to the Credit
Agreement is deleted in its entirety and replaced with the text "Intentionally
omitted".
(b) Each reference to "Loan and Security Agreement" contained in that
certain Second Amendment to Credit Agreement dated as of April 22, 1998 by and
among the parties hereto is deleted and replaced with a reference to "Credit
Agreement".
2. Representations and Warranties of Borrower. In order to induce
Lender to enter into this Amendment, Borrowers hereby jointly and severally
represent and warrant to Lender that:
(a) No Default. After giving effect to this Amendment, no Default or
Event of Default has occurred and is continuing.
<PAGE>
(b) Representations and Warranties. After giving effect to this
Amendment, all of the representations and warranties of Borrowers contained in
the Loan Documents are true, accurate and complete in all respects on and as of
the date hereof to the same extent as though made on and as of the date hereof.
(c) Authorization, etc. Each Borrower has the power and authority to execute,
deliver and perform this Amendment. Each Borrower has taken all necessary action
(including, without limitation, obtaining approval of its stockholders, if
necessary) to authorize its execution, delivery and performance of this
Amendment. No consent, approval or authorization of, or declaration or filing
with, any Governmental Authority, and no consent of any other Person, is
required in connection with any Borrower's execution, delivery and performance
of this Amendment, except for those already duly obtained. This Amendment has
been duly executed and delivered by each Borrower and constitutes the legal,
valid and binding obligation of each Borrower, enforceable against it in
accordance with its terms. Each Borrower's execution, delivery and performance
of this Amendment does not conflict with, or constitute a violation or breach
of, or constitute a default under, or result in the creation or imposition of
any Lien upon the property of such Borrower by reason of the terms of (a) any
contract, mortgage, lease, agreement, indenture or instrument to which any
Borrower is a party or which is binding upon it, (b) any law or regulation or
order or decree of any court applicable to any Borrower, or (c) the certificate
or articles of incorporation or by-laws of any Borrower.
3. Conditions to Effectiveness. The effectiveness of this Amendment is
expressly conditioned upon the satisfaction of each condition set forth in this
Section 3 and the delivery of the following documents to Lender on or prior to
the date hereof and consummation of all of the transactions contemplated by each
such document, all in form and substance acceptable to Lender in its sole and
absolute discretion:
(a) Documentation. Borrowers shall have delivered to Lender all of the
following documents:
(i) Amendment. Duly executed originals of this Amendment.
(ii) Other Documents. All other documents, certificates and
agreements as the Lender may reasonably request to accomplish the
purposes of this Amendment.
(b) No Default. As of the date hereof after giving effect to this
Amendment, no Default or Event of Default shall have occurred and be continuing.
(c) Warranties and Representations. After giving effect to this
Amendment, all of the warranties and representations of Borrowers contained in
the Credit Agreement and the other Loan Documents (including, without
limitation, this Amendment) shall be true and correct in all material respects
to the same extent as though made on and as of the date hereof.
2
<PAGE>
(d) Consents and Acknowledgments. Borrowers shall have obtained all
consents, approvals and acknowledgments which may be required with respect to
the execution, delivery and performance of this Amendment.
(e) Fees, Costs and Expenses. Lender shall have received payment of all
fees, costs and expenses, including, without limitation, reasonable attorneys'
fees and expenses invoiced to Borrower Representative and as otherwise due
pursuant to the Loan Documents, incurred by Lender in connection herewith.
4. Reference to and Effect on Loan Documents.
4.1 Ratification. Except as specifically amended above, the Credit
Agreement and the other Loan Documents shall remain in full force and effect and
each Borrower hereby ratifies and confirms each such Loan Document.
4.2 No Waiver. The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of Lender
under the Credit Agreement or any of the other Loan Documents, or, except as
expressly provided herein, constitute a consent, waiver or modification with
respect to any provision of the Credit Agreement or any of the other Loan
Documents. Upon the effectiveness of this Amendment each reference in (a) the
Credit Agreement to "this Agreement," "hereunder," "hereof," or words of similar
import and (b) any other Loan Document to "the Agreement" shall, in each case
and except as otherwise specifically stated therein, mean and be a reference to
the Credit Agreement as amended hereby.
5. Affirmation of Subsidiary Guarantee. Safer Canada (a) consents to
and approves the execution and delivery of this Amendment by Borrowers and
Lender, (b) agrees that this Amendment does not and shall not limit or diminish
in any manner its obligations under the Subsidiary Guarantee or under any of the
other Loan Documents executed and/or delivered by it in connection therewith,
(c) agrees that this Amendment shall not be construed as requiring the consent
of Safer Canada in any other circumstance, (d) reaffirms its obligations under
the Subsidiary Guarantee and all of the other Loan Documents to which it is a
party, and (e) agrees that the Subsidiary Guarantee and such other Loan
Documents remain in full force and effect and are each hereby ratified and
confirmed.
6. Miscellaneous.
6.1 Successors and Assigns. This Amendment shall be binding on and
shall inure to the benefit of Borrowers, Lender and their respective successors
and assigns, except as otherwise provided herein. No Credit Party may assign,
transfer, hypothecate or otherwise convey its rights, benefits, obligations or
duties hereunder without the prior express written consent of Agent and Lenders.
The terms and provisions of this Amendment are for the purpose of defining the
relative rights and obligations of Borrowers and Lender with respect to the
transactions contemplated hereby and there shall be no third party beneficiaries
of any of the terms and provisions of this Amendment.
3
<PAGE>
6.2 Entire Agreement. This Amendment, including all schedules and other
documents attached hereto or incorporated by reference herein or delivered in
connection herewith, constitutes the entire agreement of the parties with
respect to the subject matter hereof and supersedes all other understandings,
oral or written, with respect to the subject matter hereof.
6.3 Fees and Expenses. As provided in Section 11.3 of the Credit
Agreement, Borrowers agree to pay on demand all fees, costs and expenses
incurred by the Lender in connection with the preparation, execution and
delivery of this Amendment.
6.4 Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
6.5 Severability. Wherever possible, each provision of this Amendment
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Amendment shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Amendment.
6.6 Conflict of Terms. Except as otherwise provided in this Amendment,
if any provision contained in this Amendment is in conflict with, or
inconsistent with, any provision in any of the other Loan Documents, the
provision contained in this Amendment shall govern and control.
6.7 Counterparts. This Amendment may be executed in any number of
separate counterparts, each of which shall collectively and separately
constitute one agreement. Delivery of an executed counterpart of a signature
page to this Amendment by telecopy shall be effective as delivery of a manually
executed counterpart of this Amendment.
6.8 Incorporation of Credit Agreement. The provisions contained in
Sections 11.9 and 11.13 of the Credit Agreement are incorporated herein by
reference to the same extent as if reproduced herein in their entirety.
6.9 Acknowledgment. Each Credit Party hereby represents and warrants
that there are no liabilities, claims, suits, debts, liens, losses, causes of
action, demands, rights, damages or costs, or expenses of any kind, character or
nature whatsoever, known or unknown, fixed or contingent (collectively, the
"Claims"), which any Credit Party may have or claim to have against Lender, or
any of their respective affiliates, agents, employees, officers, directors,
representatives, attorneys, successors and assigns (collectively, the "Lender
Released Parties"), which might arise out of or be connected with any act of
commission or omission of the Lender Released Parties existing or occurring on
or prior to the date of this Amendment, including, without limitation, any
Claims arising with respect to the Obligations or any Loan Documents. In
furtherance of the foregoing, each Credit Party hereby releases, acquits and
forever discharges the Lender Released Parties from any and all Claims that any
Credit Party may have or claim to have, relating to or arising out of or in
connection with the Obligations or any Loan Documents or any other agreement
4
<PAGE>
or transaction contemplated thereby or any action taken in connection therewith
from the beginning of time up to and including the date of the execution and
delivery of this Amendment. Each Credit Party further agrees forever to refrain
from commencing, instituting or prosecuting any lawsuit, action or other
proceeding against any Lender Released Parties with respect to any and all
Claims.
[signature pages follow]
5
<PAGE>
IN WITNESS WHEREOF, this Third Amendment to Credit Agreement has been
duly executed as of the date first written above.
RINGER CORPORATION
By:/S/ Mark Eisenschenk
------------------------------
Title: Executive Vice President
--------------------------
SAFER, INC.
By: /S/ Mark Eisenschenk
------------------------------
Title: Executive Vice President
--------------------------
SURECO, INC.
By: /S/ Mark Eisenschenk
------------------------------
Title: Secretary
--------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION, as Lender
By: /S/ Trevor Clark
-----------------------------
Title: Vice President
--------------------------
<PAGE>
Each of the following Persons is a signatory to this Third Amendment to
Credit Agreement in its capacity as a Credit Party and not as a Borrower.
SAFER, INC.
By: /S/ Mark Eisenschenk
-----------------------------
Title: Executive Vice President
--------------------------
SOUTHERN RESOURCES, INC.
By: /S/ Mark Eisenschenk
-----------------------------
Title: Secretary
--------------------------
<PAGE>
Exhibit 10.17
FOURTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------
This FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as
of October 14, 1998, is by and among VERDANT BRANDS, INC. (f/k/a Ringer
Corporation) ("Ringer"), SAFER, INC. ("Safer") and SURECO, INC. ("SureCo")
(Ringer, Safer and SureCo are sometimes referred to herein individually as a
"Borrower and collectively as the "Borrowers") and GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation, as Lender.
RECITALS
--------
A. Borrowers and Lender are parties to that certain Credit Agreement
dated as of May 2, 1997 (as from time to time amended, restated, supplemented or
otherwise modified and in effect, the "Credit Agreement"), pursuant to which
Lender has made and may hereafter make loans and advances and other extensions
of credit to Borrowers.
B. Borrowers wish, and Lender is willing, to amend certain provisions
of the Credit Agreement, all on the terms and conditions set forth in this
Amendment.
C. This Amendment shall constitute a Loan Document and these Recitals
shall be construed as part of this Amendment. Capitalized terms used herein
without definition are so used as defined in Annex A to the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto agree as follows:
1. Consent and Waiver.
Lender hereby consents to the merger of Ringer with Consep, Inc. and
hereby waives any Default or Event of Default that may arise as a result
thereof.
2. Amendment of Credit Agreement.
(a) Section 1.5(a) of the Credit Agreement is hereby amended by
deleting it in its entirety and replacing it with the following:
(a) Borrowers shall pay interest to Lender, in arrears on each
Interest Payment Date, at a rate of interest equal to the Index Rate
plus three and one-quarter percent (3.25%) per annum; provided,
however, that Borrowers shall pay interest to Lender at a rate of
interest equal to the Index Rate plus three and three-quarter percent
(3.75%) per annum on that portion of the outstanding Revolving Loan
attributable to the use of all or any part of the Ringer Borrowing Base
consisting of the Overadvance Amount;
<PAGE>
3. Amendment of Annexes to Credit Agreement.
(a) Annex A to the Credit Agreement is hereby amended by adding the
following definition in its proper alphabetical order:
"Overadvance Amount" shall mean $1,000,000.
(b) Annex A to the Credit Agreement is hereby amended by deleting the
definition of "Ringer Borrowing Base" and replacing such definition with the
following:
"Ringer Borrowing Base" shall mean, as of any date of
determination by Lender, from time to time, an amount equal to the sum
at such time of:
(a) eighty-five percent (85%) of the Eligible Accounts of
Ringer and of Safer Canada, less any Reserves established by Lender at
such time;
(b) (i) for any Revolving Credit Advance occurring during the
months of July through November of any Fiscal year, sixty percent (60%)
of the book value of the Eligible Inventory of Ringer and of Safer
Canada, and (ii) for any Revolving Credit Advance occurring during the
months of January through June or the month of December of any Fiscal
Year, sixty-five percent (65%) of the book value of the Eligible
Inventory of Ringer and Safer Canada; the book value of Eligible
Inventory shall be valued on a first-in, first-out basis (at the lower
of cost or market), less any Reserves established by Lender at such
time; and
(c) for the period from October 14, 1998 through December 13,
1998, the Overadvance Amount;
provided, however, that not more than $1,000,000 of Eligible Inventory
of Safer Canada shall be included in the Borrowing Base at any time.
4. Representations and Warranties of Borrower. In order to induce
Lender to enter into this Amendment, Borrowers hereby jointly and severally
represent and warrant to Lender that:
(a) No Default. After giving effect to this Amendment, no Default or
Event of Default has occurred and is continuing;
(b) Representations and Warranties. After giving effect to this
Amendment, all of the representations and warranties of Borrowers contained in
the Loan Documents are true, accurate and complete in all respects on and as of
the date hereof to the same extent as though made on and as of the date hereof;
and
2
<PAGE>
(c) Authorization, etc. Each Borrower has the power and authority to
execute, deliver and perform this Amendment. Each Borrower has taken all
necessary action (including, without limitation, obtaining approval of its
stockholders, if necessary) to authorize its execution, delivery and performance
of this Amendment. No consent, approval or authorization of, or declaration or
filing with, any Governmental Authority, and no consent of any other Person, is
required in connection with any Borrower's execution, delivery and performance
of this Amendment, except for those already duly obtained. This Amendment has
been duly executed and delivered by each Borrower and constitutes the legal,
valid and binding obligation of each Borrower, enforceable against it in
accordance with its terms. Each Borrower's execution, delivery and performance
of this Amendment does not conflict with, or constitute a violation or breach
of, or constitute a default under, or result in the creation or imposition of
any Lien upon the property of such Borrower by reason of the terms of (a) any
contract, mortgage, lease, agreement, indenture or instrument to which any
Borrower is a party or which is binding upon it, (b) any law or regulation or
order or decree of any court applicable to any Borrower, or (c) the certificate
or articles of incorporation or by-laws of any Borrower.
5. Conditions to Effectiveness. The effectiveness of this Amendment is
expressly conditioned upon the satisfaction of each condition set forth in this
Section 5 and the delivery of the following documents to Lender on or prior to
the date hereof (unless another date shall be specified) and consummation of all
of the transactions contemplated by each such document, all in form and
substance acceptable to Lender in its sole and absolute discretion:
(a) Documentation. Borrowers shall have delivered to Lender all of the
following documents:
(i) Amendment. Duly executed originals of this Amendment.
(ii) Resolutions. For each of Ringer and its Subsidiaries,
resolutions of such Person's Board of Directors (and shareholders, if
necessary), approving and authorizing the execution, delivery and
performance of this Amendment and the transactions to be consummated in
connection therewith, each certified as of the date hereof by such
Person's corporate secretary or an assistant secretary as being in full
force and effect without any modification or amendment.
(iii) Incumbency Certificates. For each of Ringer and its
Subsidiaries, signature and incumbency certificates of the officers of
each such Person executing this Amendment, certified as of the date
hereof by such Person's corporate secretary or an assistant secretary
as being true, accurate, correct and complete.
(iv) Other Documents. All other documents, certificates and
agreements as the Lender may reasonably request to accomplish the
purposes of this Amendment.
3
<PAGE>
(b) No Default. As of the date hereof after giving effect to this
Amendment, no Default or Event of Default shall have occurred and be continuing.
(c) Warranties and Representations. After giving effect to this
Amendment, all of the warranties and representations of Borrowers contained in
the Credit Agreement and the other Loan Documents (including, without
limitation, this Amendment) shall be true and correct in all material respects
to the same extent as though made on and as of the date hereof.
(d) Consents and Acknowledgments. Borrowers shall have obtained all
consents, approvals and acknowledgments which may be required with respect to
the execution, delivery and performance of this Amendment.
(e) Fees, Costs and Expenses. Lender shall have received payment of (a)
an amendment fee of $10,000, and (b) all other fees, costs and expenses,
including, without limitation, reasonable attorneys' fees and expenses invoiced
to Borrower Representative and as otherwise due pursuant to the Loan Documents,
incurred by Lender in connection herewith.
6. Reference to and Effect on Loan Documents.
6.1 Ratification. Except as specifically amended above, the Credit
Agreement and the other Loan Documents shall remain in full force and effect and
each Borrower hereby ratifies and confirms each such Loan Document.
6.2 No Waiver. The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of Lender
under the Credit Agreement or any of the other Loan Documents, or constitute a
consent, waiver or modification with respect to any provision of the Credit
Agreement or any of the other Loan Documents. Upon the effectiveness of this
Amendment each reference in (a) the Credit Agreement to "this Agreement,"
"hereunder," "hereof," or words of similar import and (b) any other Loan
Document to "the Agreement" shall, in each case and except as otherwise
specifically stated therein, mean and be a reference to the Credit Agreement as
amended hereby.
7. Affirmation of Subsidiary Guarantee.
Safer Canada (i) consents to and approves the execution and delivery of
this Amendment by Borrowers and Lender, (ii) agrees that this Amendment does not
and shall not limit or diminish in any manner its obligations under the
Subsidiary Guarantee or under any of the other Loan Documents executed and/or
delivered by it in connection therewith, (iii) agrees that this Amendment shall
not be construed as requiring the consent of Safer Canada in any other
circumstance, (iv) reaffirms its obligations under the Subsidiary Guarantee and
all of the other Loan Documents to which it is a party, and (v) agrees that the
Subsidiary Guarantee and such other Loan Documents remain in full force and
effect and are each hereby ratified and confirmed.
4
<PAGE>
8. Miscellaneous.
8.1 Successors and Assigns. This Amendment shall be binding on and
shall inure to the benefit of Borrowers, Lender and their respective successors
and assigns, except as otherwise provided herein or therein. The terms and
provisions of this Amendment are for the purpose of defining the relative rights
and obligations of Borrowers and Lender with respect to the transactions
contemplated hereby and there shall be no third party beneficiaries of any of
the terms and provisions of this Amendment.
8.2 Entire Agreement. This Amendment, including all schedules and other
documents attached hereto or incorporated by reference herein or delivered in
connection herewith, constitutes the entire agreement of the parties with
respect to the subject matter hereof and supersedes all other understandings,
oral or written, with respect to the subject matter hereof.
8.3 Fees and Expenses. As provided in Section 11.3 of the Credit
Agreement, Borrowers agree to pay on demand all fees, costs and expenses
incurred by the Lender in connection with the preparation, execution and
delivery of this Amendment.
8.4 Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
8.5 Severability. Wherever possible, each provision of this Amendment
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Amendment shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Amendment.
8.6 Conflict of Terms. Except as otherwise provided in this Amendment,
if any provision contained in this Amendment is in conflict with, or
inconsistent with, any provision in any of the other Loan Documents, the
provision contained in this Amendment shall govern and control.
8.7 Counterparts. This Amendment may be executed in any number of
separate counterparts, each of which shall collectively and separately
constitute one agreement. Delivery of an executed counterpart of a signature
page to this Amendment by telecopy shall be effective as delivery of a manually
executed counterpart of this Amendment.
8.8 Incorporation of Loan and Security Agreement. The provisions
contained in Sections 11.9 and 11.13 of the Credit Agreement are incorporated
herein by reference to the same extent as if reproduced herein in their
entirety.
8.9 Acknowledgment. Each Credit Party hereby represents and warrants
that there are no liabilities, claims, suits, debts, liens, losses, causes of
action, demands, rights, damages
5
<PAGE>
or costs, or expenses of any kind, character or nature whatsoever, known or
unknown, fixed or contingent (collectively, the "Claims"), which any Credit
Party may have or claim to have against Lender, or any of their respective
affiliates, agents, employees, officers, directors, representatives, attorneys,
successors and assigns (collectively, the "Lender Released Parties"), which
might arise out of or be connected with any act of commission or omission of the
Lender Released Parties existing or occurring on or prior to the date of this
Amendment, including, without limitation, any Claims arising with respect to the
Obligations or any Loan Documents. In furtherance of the foregoing, each Credit
Party hereby releases, acquits and forever discharges the Lender Released
Parties from any and all Claims that any Credit Party may have or claim to have,
relating to or arising out of or in connection with the Obligations or any Loan
Documents or any other agreement or transaction contemplated thereby or any
action taken in connection therewith from the beginning of time up to and
including the date of the execution and delivery of this Amendment. Each Credit
Party further agrees forever to refrain from commencing, instituting or
prosecuting any lawsuit, action or other proceeding against any Lender Released
Parties with respect to any and all Claims.
IN WITNESS WHEREOF, this Fourth Amendment to Credit Agreement has been
duly executed as of the date first written above.
VERDANT BRANDS, INC.
By: /S/ Mark Eisenschenk
------------------------------
Title: Executive Vice President
---------------------------
SAFER, INC.
By: /S/ Mark Eisenschenk
------------------------------
Title: Executive Vice President
---------------------------
SURECO, INC.
By: /S/ Mark Eisenschenk
------------------------------
Title: Secretary
---------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION, as Lender
By: /S/ Trevor Clark
------------------------------
Title: Vice President
---------------------------
<PAGE>
Each of the following Persons is a signatory to this Amendment in its
capacity as a Credit Party and not as a Borrower.
SAFER, LTD.
By: /S/ Mark Eisenschenk
------------------------------
Title: Vice President
---------------------------
SOUTHERN RESOURCES, INC.
By: /S/ Mark Eisenschenk
------------------------------
Title: Vice President
---------------------------
7
<PAGE>
Exhibit 10.18
FIFTH AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
This FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
December 8, 1998, is by and among VERDANT BRANDS, INC. ("Verdant"), SAFER, INC.
("Safer"), SURECO, INC. ("SureCo"), CONSEP, INC. ("Consep"), RICHARD HUNT INC.,
("Hunt"), PACOAST INC. "(Pacoast") and VALLEY GREEN CENTER, INC. ("Valley")
(Verdant, Safer, SureCo, Consep, Pacoast, Hunt and Valley are sometimes referred
to herein individually as a "Borrower" and collectively as the "Borrowers") and
GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, as Lender.
RECITALS
--------
A. Verdant, Safer and Sureco and Lender are parties to that certain
Credit Agreement dated as of May 2, 1997 (as from time to time amended,
restated, supplemented or otherwise modified and in effect, the "Credit
Agreement"), pursuant to which Lender has made and may hereafter make loans and
advances and other extensions of credit.
B. Verdant, Safer and Sureco wish, and Lender is willing, to amend
certain provisions of the Credit Agreement, all on the terms and conditions set
forth in this Amendment.
C. This Amendment shall constitute a Loan Document and these Recitals
shall be construed as part of this Amendment. Capitalized terms used herein
without definition are so used as defined in Annex A to the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto agree as follows:
1. Consent and Waiver.
(a) Lender hereby consents to the Consep Transaction and hereby waives
any Default or Event of Default that may arise under Section 8.1(l) as a result
of the consummation of the Consep Transaction.
(b) Any Default or Event of Default that may arise from Borrowers'
failure to achieve the Interest Coverage Ratio contained in Section (d) of Annex
G to the Credit Agreement is hereby waived for the Fiscal Quarter ended
September 30, 1998.
2. Amendment of Credit Agreement.
(a) The definition of "Borrowers" contained in the recitals to the
Credit Agreement is hereby amended to include Consep, Pacoast, Hunt and Valley
therein. In addition, each reference to "Borrower" or "Borrowers" contained in
the other Loan Documents shall be deemed to include Consep, Pacoast, Hunt and
Valley therein. By its execution of this Amendment, each of Consep, Pacoast,
Hunt and Valley agree, from and after the date hereof, to be a Borrower
<PAGE>
under the Credit Agreement and to be liable for all of the Obligations of a
Borrower under the terms of the Loan Documents.
(b) Section 3 is hereby amended by adding the following subsections at
the end thereof:
3.28 Consep Merger Agreement. Verdant has delivered to Lender
a complete and correct copy of the Consep Merger Agreement (including
all schedules, exhibits, amendments, supplements, modifications,
assignments and all other documents delivered pursuant thereto or in
connection therewith). No Credit Party and no other Person party
thereto is in default in the performance or compliance with any
provisions thereof. The Consep Merger Agreement complies with all
applicable laws. All requisite approvals by Governmental Authorities
having jurisdiction over Consep, any other Credit Party and other
Persons referenced therein, with respect to the transactions
contemplated by the Consep Merger Agreement, have been obtained, and no
such approvals impose any conditions to the consummation of the
transactions contemplated by the Consep Merger Agreement or to the
conduct by any Credit Party of its business thereafter. To the best of
each Credit Party's knowledge, none of Consep's representations or
warranties in the Consep Merger Agreement contain any untrue statement
of a material fact or omit any fact necessary to make the statements
therein not misleading. Each of the representations and warranties
given by each applicable Credit Party in the Consep Merger Agreement is
true and correct in all material respects.
(c) Section 6.1 is hereby amended by deleting the first paragraph
thereof and replacing it with the following:
6.1 Mergers, Subsidiaries, Etc. On and after the Closing Date
no Credit Party shall directly or indirectly, by operation of law or
otherwise, (a) form or acquire any Subsidiary, or (b) merge with,
consolidate with, acquire all or substantially all of the assets or
capital stock of, or otherwise combine with or acquire, any Person,
except (i) that any Borrower may merge with another Borrower, provided
that Verdant shall be the survivor of any such merger to which it is a
party and (ii) Canada, Inc. 3032809 and Chemfree Environment, Inc. may
be merged into Safer Canada, provided that in each case Safer Canada
shall be the surviving corporation of such merger.
(d) Section 6.2(b) is hereby amended by deleting it in its entirety and
replacing it with the following:
(b) each Credit Party may maintain its existing investments in
its Subsidiaries as of December 8, 1998; provided, however, that the
aggregate value of Inventory transferred or otherwise conveyed from all
Credit Parties to, and held by,
2
<PAGE>
Consep GmbH and Consep De Mexico collectively shall not exceed
$1,000,000 in the aggregate at any time;
(e) Section 6.3(a) is hereby amended by deleting clause (viii) thereof
in its entirety and replacing it with the following:
(viii) Indebtedness consisting of intercompany loans and
advances made by any Borrower to any other Borrower, provided that (A)
each Borrower shall have executed and delivered to each other Borrower,
on the Closing Date or, if later, on the date such Person becomes a
Borrower under this Agreement, as applicable, a demand note
(collectively, the "Intercompany Notes") to evidence any such
intercompany Indebtedness owing at any time by such Borrower to such
other Borrowers, which Intercompany Notes shall be in form and
substance satisfactory to Lender and shall be pledged and delivered to
Lender pursuant to the applicable Pledge Agreement or Security
Agreement as additional collateral security for the Obligations; (B)
each Borrower shall record all intercompany transactions on its books
and records in a manner satisfactory to Lender; (C) the obligations of
each Borrower under any such Intercompany Notes shall be subordinated
to the Obligations of such Borrower hereunder in a manner satisfactory
to Lender; (D) at the time any such intercompany loan or advance is
made by any Borrower to any other Borrower and after giving effect
thereto, each such Borrower shall be Solvent; and (E) no Default or
Event of Default would occur and be continuing after giving effect to
any such proposed intercompany loan.
3. Amendment of Annexes to Credit Agreement.
(a) Annex A to the Credit Agreement is hereby amended by adding the
following definitions in their proper alphabetical order:
"Consep" shall mean Consep, Inc., an Oregon corporation.
"Consep Borrowing Base" shall mean, as of any date of
determination by Lender, from time to time, an amount equal to the sum
at such time of:
(a) up to eighty-five percent (85%) of the Eligible Accounts
of Consep, less any Reserves established by Lender at such time; and
(b) (i) for any Revolving Credit Advance occurring during the
months of July through November of any Fiscal year, sixty percent (60%)
of the book value of the Eligible Inventory of Consep, and (ii) for any
Revolving Credit Advance occurring during the months of January through
June or the month of December of any Fiscal Year, sixty-five percent
(65%) of the book value of the Eligible Inventory of Consep; the book
value of Eligible Inventory shall be valued on a first-in, first-out
3
<PAGE>
basis (at the lower of cost or market), less any Reserves established
by Lender at such time.
"Consep De Mexico" shall mean Consep De Mexico, a Mexican
corporation wholly-owned by Consep.
"Consep GmbH" shall mean Consep GmbH, an Austrian corporation
wholly-owned by Consep.
"Consep Merger Agreement" shall mean that certain Agreement
and Plan of Merger, dated September 8, 1998, by and among Verdant,
Consep Acquisition, Inc. and Consep, together with all schedules and
exhibits related thereto, as the same may have been heretofore or may
hereafter be amended, restated, modified or otherwise supplemented from
time to time.
"Consep Pledge Agreement" shall mean the Pledge Agreement,
dated as of December 8, 1998, executed by Consep in favor of Lender,
pledging the Stock of its Subsidiaries and all Intercompany Notes owing
to or held by it.
"Consep Security Agreement" shall mean the Security Agreement,
dated as of December 8, 1998, entered into between Lender and Consep.
"Consep Transaction" shall mean the acquisition by Verdant
pursuant to the Consep Merger Agreement of all of the capital stock of
Consep.
"Farchan" shall mean Farchan Laboratories, Inc., a Florida
corporation.
"Farchan Guaranty" shall mean the Guaranty, dated as of
December 8, 1998, executed by Farchan in favor of Lender.
"Hunt" shall mean Richard Hunt Inc., a California corporation.
"Hunt Borrowing Base" shall mean, as of any date of
determination by Lender, from time to time, an amount equal to the sum
at such time of:
(a) up to eighty-five (85%) of the Eligible Accounts of Hunt,
less any Reserves established by Lender at such time; and
(b) (i) for any Revolving Credit Advance occurring during the
months of July through November of any Fiscal year, sixty percent (60%)
of the book value of the Eligible Inventory of Hunt, and (ii) for any
Revolving Credit Advance occurring during the months of January through
June or the month of December of any Fiscal Year, sixty-five percent
(65%) of the book value of the Eligible Inventory of Hunt;
4
<PAGE>
the book value of Eligible Inventory shall be valued on a first-in,
first-out basis (at the lower of cost or market), less any Reserves
established by Lender at such time.
"Hunt Security Agreement" shall mean the Security Agreement,
dated as of December 8, 1998, entered into between Lender and Hunt.
"Pacoast" shall mean Pacoast Inc., a California corporation.
"Pacoast Borrowing Base" shall mean, as of any date of
determination by Lender, from time to time, an amount equal to the sum
at such time of:
(a) up to eighty-five percent (85%) of the Eligible Accounts
of Pacoast, less any Reserves established by Lender at such time; and
(b) (i) for any Revolving Credit Advance occurring during the
months of July through November of any Fiscal year, sixty percent (60%)
of the book value of the Eligible Inventory of Pacoast, and (ii) for
any Revolving Credit Advance occurring during the months of January
through June or the month of December of any Fiscal Year, sixty-five
percent (65%) of the book value of the Eligible Inventory of Pacoast;
the book value of Eligible Inventory shall be valued on a first-in,
first-out basis (at the lower of cost or market), less any Reserves
established by Lender at such time.
"Pacoast Security Agreement" shall mean the Security
Agreement, dated as of December 8, 1998, entered into between Lender
and Pacoast.
"Valley" shall mean Valley Green Center, Inc., a Massachusetts
corporation.
"Valley Borrowing Base" shall mean, as of any date of
determination by Lender, from time to time, an amount equal to the sum
at such time of:
(a) up to eighty-five percent (85%) of the Eligible Accounts
of Valley, less any Reserves established by Lender at such time; and
(b) (i) for any Revolving Credit Advance occurring during the
months of July through November of any Fiscal year, sixty percent (60%)
of the book value of the Eligible Inventory of Valley, and (ii) for any
Revolving Credit Advance occurring during the months of January through
June or the month of December of any Fiscal Year, sixty-five percent
(65%) of the book value of the Eligible Inventory of Valley; the book
value of Eligible Inventory shall be valued on a first-in, first-out
basis (at the lower of cost or market), less any Reserves established
by Lender at such time.
5
<PAGE>
"Valley Security Agreement" shall mean the Security Agreement,
dated as of December 8, 1998, entered into between Lender and Valley.
(b) Annex A to the Credit Agreement is hereby amended by deleting the
definitions of "Aggregate Borrowing Base", "Borrowing Base", "Collateral
Documents", "Pledge Agreements" and "Restricted Payment" and replacing such
definitions with the following:
"Aggregate Borrowing Base" shall mean, as of any date of
determination, an amount equal to the sum of the Verdant Borrowing
Base, the Safer Borrowing Base, the SureCo Borrowing Base, the Consep
Borrowing Base, the Hunt Borrowing Base, the Pacoast Borrowing Base and
the Valley Borrowing Base and, following the consummation of any
Permitted Acquisition in which the Target acquired therein (or any
Subsidiary of the Target) becomes a Subsidiary of Verdant and a
Borrower in accordance with the terms of the Agreement, the Target
Borrowing Base of such Person.
"Borrowing Base" shall mean, as the context may require, the
Verdant Borrowing Base, the Safer Borrowing Base, the SureCo Borrowing
Base, the Consep Borrowing Base, the Hunt Borrowing Base, the Pacoast
Borrowing Base and the Valley Borrowing Base and, following the
consummation of any Permitted Acquisition in which the Target acquired
therein (or any Subsidiary of the Target) becomes a Subsidiary of
Verdant and a Borrower in accordance with the terms of the Agreement,
the Target Borrowing Base of such Person, or any such Borrowing Base.
"Collateral Documents" shall mean the Security Agreement, the
Safer Canada Security Agreement, the SureCo Security Agreement, the
Consep Security Agreement, the Hunt Security Agreement, the Pacoast
Security Agreement, the Valley Security Agreement, the Pledge
Agreements, the Guaranties, the Patent Security Agreements, the
Trademark Security Agreements, the Copyright Security Agreements and
all similar agreements entered into guaranteeing payment of, or
granting a Lien upon property as security for payment of, the
Obligations.
"Pledge Agreements" shall mean, collectively, the Verdant
Pledge Agreement, the Safer Pledge Agreement, the SRI Pledge Agreement,
the Consep Pledge Agreement and any pledge agreements entered into
after the Closing Date by any Credit Party (as required by the
Agreement or any other Loan Document).
"Restricted Payment" of any Person shall mean (a) the
declaration or payment of any dividend or the incurrence of any
liability to make any other payment or distribution of cash or other
property or assets in respect of such Person's Stock, (b) any payment
on account of the purchase, redemption, defeasance, sinking fund or
other retirement of such Person's Stock or any other
6
<PAGE>
payment or distribution made in respect thereof, either directly or
indirectly, (c) any payment or prepayment of principal of, premium, if
any, or interest, fees or other charges on or with respect to, and any
redemption, purchase, retirement, defeasance, sinking fund or similar
payment and any claim for rescission with respect to, any Subordinated
Debt; (d) any payment made to redeem, purchase, repurchase or retire,
or to obtain the surrender of, any outstanding warrants, options or
other rights to acquire Stock of such Person now or hereafter
outstanding; (e) any payment of a claim for the rescission of the
purchase or sale of, or for material damages arising from the purchase
or sale of, any shares of such Person's Stock or of a claim for
reimbursement, indemnification or contribution arising out of or
related to any such claim for damages or rescission; (f) any payment,
loan, contribution, or other transfer of funds or other property to any
Stockholder of such Person; (g) any payment of management fees (or
other fees of a similar nature) by such Person to any Stockholder of
such Person or its Affiliates; and (h) in the case of any Credit Party,
any payment of any earn-out, non-compete, consulting or similar
obligation incurred in connection with any Permitted Acquisition.
(c) Annex C to the Credit Agreement is hereby deleted in its entirety
and replaced with the attached Annex C.
4. Representations and Warranties of Borrower. In order to induce
Lender to enter into this Amendment, Borrowers (as amended hereby) hereby
jointly and severally represent and warrant to Lender that:
(a) No Default. After giving effect to this Amendment, no Default or
Event of Default has occurred and is continuing that has not been waived by
Lender in writing;
(b) Representations and Warranties. After giving effect to this
Amendment, all of the representations and warranties of Borrowers contained in
the Loan Documents are true, accurate and complete in all respects on and as of
the date hereof to the same extent as though made on and as of the date hereof;
and
(c) Authorization, etc. Each Borrower has the power and authority to
execute, deliver and perform this Amendment. Each Borrower has taken all
necessary action (including, without limitation, obtaining approval of its
stockholders, if necessary) to authorize its execution, delivery and performance
of this Amendment. No consent, approval or authorization of, or declaration or
filing with, any Governmental Authority, and no consent of any other Person, is
required in connection with any Borrower's execution, delivery and performance
of this Amendment, except for those already duly obtained. This Amendment has
been duly executed and delivered by each Borrower and constitutes the legal,
valid and binding obligation of each Borrower, enforceable against it in
accordance with its terms. Each Borrower's execution, delivery and performance
of this Amendment does not conflict with, or constitute a violation or breach
of, or constitute a default
7
<PAGE>
under, or result in the creation or imposition of any Lien upon the property of
such Borrower by reason of the terms of (a) any contract, mortgage, lease,
agreement, indenture or instrument to which any Borrower is a party or which is
binding upon it, (b) any law or regulation or order or decree of any court
applicable to any Borrower, or (c) the certificate or articles of incorporation
or by-laws of any Borrower.
5. Conditions to Effectiveness. The effectiveness of this Amendment is
expressly conditioned upon the satisfaction of each condition set forth in this
Section 5 and the delivery of the following documents to Lender on or prior to
the date hereof (unless another date shall be specified) and consummation of all
of the transactions contemplated by each such document, all in form and
substance acceptable to Lender in its sole and absolute discretion:
(a) Documentation. Borrowers shall have delivered to Lender all of the
following documents:
(i) Amendment. Duly executed originals of this Amendment.
(ii) Disclosure Schedules. Revised Disclosure Schedules to the
extent necessary to comply with Section 5.6 of the Loan Agreement.
(iii) Revolving Notes. Revolving Notes executed by Consep,
Hunt, Pacoast and Valley in the aggregate principal amount of Twenty
Five Million Dollars ($25,000,000) payable to Lender.
(iv) Verdant Pledge Agreement. Duly executed originals of an
amendment to the Verdant Pledge Agreement, accompanied by (a) share
certificates representing all of the outstanding Stock of Consep and
undated stock powers for such share certificates executed in blank.
(v) Farchan Guaranty. Duly executed originals of the Farchan
Guaranty.
(vi) Consep Pledge Agreement. Duly executed originals of the
Consep Pledge Agreement, accompanied by (a) share certificates
representing all of the outstanding Stock being pledged pursuant to
such Pledge Agreement and undated stock powers for such share
certificates executed in blank and (b) the original Intercompany Notes
of each of Consep, Hunt, Pacoast and Valley, duly endorsed in blank.
(vii) Consep Security Agreement. Duly executed originals of
the Consep Security Agreement.
(viii) Hunt Security Agreement. Duly executed originals of the
Hunt Security Agreement.
8
<PAGE>
(ix) Pacoast Security Agreement. Duly executed originals of
the Pacoast Security Agreement.
(x) Valley Security Agreement. Duly executed originals of the
Valley Security Agreement.
(xi) Security Interests and Code Filings. Evidence
satisfactory to Lender that Lender has a valid and perfected first
priority security interest in the Collateral of the Borrowers,
including (i) such documents duly executed by the Borrowers (including
financing statements and amendments thereto under the Code and other
applicable documents under the laws of any jurisdiction with respect to
the perfection of Liens) as Lender may request in order to perfect its
security interests in such Collateral and (ii) copies of Code search
reports listing all effective financing statements that name Consep,
Farchan, Hunt, Pacoast or Valley as debtor, together with copies of
such financing statements, none of which shall cover the Collateral and
Permitted Encumbrances.
(xii) Payoff Letters; Termination Statements; Releases. Payoff
letters from Silicon Valley Bank itemizing amounts of principal,
interest, fees, expenses or other amounts payable to it; UCC-3 or other
appropriate termination statements and mortgage releases, executed by
Silicon Valley Bank, releasing all Liens of such Person upon any of the
personal property of Consep and its Subsidiaries, and termination of
all blocked account agreements, bank agency agreements or other similar
agreements or arrangements in favor of such Person or relating to the
loans.
(xiii) Intellectual Property Security Agreement. Duly executed
originals of a Trademark Security Agreement, dated the date hereof,
executed by Consep in favor of Lender, together with all instruments,
documents and agreements executed pursuant thereto.
(xiv) Powers of Attorney. Originals of the Power of Attorney
executed by Consep, Hunt, Pacoast and Valley.
(xv) Borrowing Base Certificate. Duly executed originals of a
Borrowing Base Certificate from each Borrower, dated the dated hereof,
reflecting information concerning Eligible Accounts and Eligible
Inventory of such Borrower.
(xvi) Letter of Direction. Duly executed originals of a letter
of direction from Borrower Representative addressed to Lender with
respect to the disbursement on the date hereof of the proceeds of any
Revolving Credit Advance.
9
<PAGE>
(xvii) Cash Management System; Blocked Account Agreements.
Evidence satisfactory to Lender that as of the date hereof, Cash
Management Systems with respect to Consep, Hunt, Pacoast and Valley
complying with Annex C to the Credit Agreement have been established
and are currently being maintained in the manner set forth in such
Annex C, together with copies of duly executed tri-party blocked
account and lock box agreements, satisfactory to Lender, with the banks
as required by Annex C.
(xviii) Consep Merger. Evidence satisfactory to Lender that
Verdant and Consep shall have consummated the transactions contemplated
by the Consep Merger Agreement in accordance with the terms set forth
therein (which terms and conditions shall be satisfactory to Lender and
its counsel in all respects), and Verdant shall have furnished to
Lender a certified copy of the Consep Merger Agreement and all exhibits
and schedules thereto, as finally amended, and all consents, approvals
or permits obtained with respect thereto and a certificate signed by
the Chief Executive Officer of Verdant certifying that (i) the
transactions contemplated by the Consep Merger Agreement have been
consummated in accordance with the Consep Merger Agreement and no term
or condition of the Consep Merger Agreement has been amended, modified
or waived except as set forth in the certified copy of the Consep
Merger Agreement provided to Lender, (ii) any documents required to be
filed to effect the Consep Transaction have been filed in accordance
with applicable law, (iii) all consents, approvals or permits necessary
or admissible to be obtained in connection with the Consep Transaction
have been obtained, and (iv) neither Verdant nor any of its
Subsidiaries has failed to perform any material obligation or covenant
required by the Consep Merger Agreement to be performed or complied
with by such Person on or before the merger date unless waived by
Consep, and the substance of such certificate shall be true and
correct.
(xix) Charter, Bylaws and Good Standing. For each of Consep,
Hunt, Pacoast, Valley and Farchan, such Person's (a) charter and all
amendments thereto, (b) bylaws, together with all amendments thereto
(c) good standing certificates in its state of incorporation and (d)
good standing certificates and certificates of qualification to conduct
business in each jurisdiction where its ownership or lease of property
or the conduct of its business requires such qualification, each dated
a recent date prior to the date hereof and certified by the applicable
Secretary of State or other authorized Governmental Authority.
(xx) Verdant Restated Articles and Bylaws. Verdant's Restated
Articles of Incorporation and Bylaws as amended to give effect to the
Consep Transaction, dated a recent date prior to the date hereof and,
with respect to the Articles of Incorporation, certified by the
Secretary of State of Minnesota.
10
<PAGE>
(xxi) Good Standing Certificates. For each of Verdant, Safer,
Sureco, SRI and Safer Canada, good standing certificates in its state
or province of incorporation.
(xxii) Resolutions. For each Credit Party, resolutions of such
Person's Board of Directors (and shareholders, if necessary), approving
and authorizing the execution, delivery and performance of the Loan
Documents to which such Person is a party and the transactions to be
consummated in connection therewith, each certified as of the date
hereof by such Person's corporate secretary or an assistant secretary
as being in full force and effect without any modification or
amendment.
(xxiii) Incumbency Certificates. For each Credit Party,
signature and incumbency certificates of the officers of each such
Person executing any of the Loan Documents, certified as of the date
hereof by such Person's corporate secretary or an assistant secretary
as being true, accurate, correct and complete.
(xxiv) Opinion of Counsel. Duly executed originals of opinions
of Dorsey & Whitney LLP, counsel for the Credit Parties, and Ater Wynne
LLP, Oregon counsel for the Credit Parties, each dated the date hereof,
and accompanied by a letter addressed to such counsel from the
applicable Credit Parties, authorizing and directing such counsel to
address its opinion to Lender and to include in such opinion an express
statement to the effect that Lender is authorized to rely on such
opinion.
(xxv) Appointment of Agent for Service. An appointment of CT
Corporation as agent for service of process for Consep, Hunt, Pacoast,
Valley and Farchan.
(xxvi) Waivers. Duly executed originals of landlord waivers
and consents and bailee letters with respect to Consep, Hunt, Pacoast
and Valley, in each case as required pursuant to Section 5.9.
(xxvii) Other Documents. All other documents, certificates and
agreements as the Lender may reasonably request to accomplish the
purposes of this Amendment.
(b) Insurance. Satisfactory evidence that the insurance policies of
Consep and its Subsidiaries required by Section 5.4 of the Credit Agreement are
in full force and effect and, within five (5) days after the date hereof,
appropriate evidence showing loss payable and/or additional insured clauses or
endorsements, as requested by Lender in favor of Lender.
(c) Permitted Acquisition. Evidence satisfactory to Lender of
compliance with the requirements of Section 6.1 with respect to a Permitted
Acquisition.
11
<PAGE>
(d) No Default. As of the date hereof after giving effect to this
Amendment, no Default or Event of Default shall have occurred and be continuing,
that has not been waived by Lender in writing.
(e) Warranties and Representations. After giving effect to this
Amendment, all of the warranties and representations of Borrowers contained in
the Credit Agreement and the other Loan Documents (including, without
limitation, this Amendment) shall be true and correct in all material respects
to the same extent as though made on and as of the date hereof.
(f) Consents and Acknowledgments. Borrowers shall have obtained all
consents, approvals and acknowledgments which may be required with respect to
the execution, delivery and performance of this Amendment.
(g) Fees, Costs and Expenses. Lender shall have received payment of all
fees, costs and expenses, including, without limitation, reasonable attorneys'
fees and expenses invoiced to Borrower Representative and as otherwise due
pursuant to the Loan Documents, incurred by Lender in connection herewith.
6. Reference to and Effect on Loan Documents.
6.1 Ratification. Except as specifically amended above, the Credit
Agreement and the other Loan Documents shall remain in full force and effect and
each Borrower hereby ratifies and confirms each such Loan Document.
6.2 No Waiver. The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of Lender
under the Credit Agreement or any of the other Loan Documents, or, except as
expressly provided herein, constitute a consent, waiver or modification with
respect to any provision of the Credit Agreement or any of the other Loan
Documents. Upon the effectiveness of this Amendment each reference in (a) the
Credit Agreement to "this Agreement," "hereunder," "hereof," or words of similar
import and (b) any other Loan Document to "the Agreement" shall, in each case
and except as otherwise specifically stated therein, mean and be a reference to
the Credit Agreement as amended hereby.
7. Affirmation of Guaranty.
Each of Safer Canada and SRI (i) consents to and approves the execution
and delivery of this Amendment by Borrowers and Lender, (ii) agrees that this
Amendment does not and shall not limit or diminish in any manner its obligations
under the Guaranty or under any of the other Loan Documents executed and/or
delivered by it in connection therewith, (iii) agrees that this Amendment shall
not be construed as requiring the consent of such Person in any other
circumstance, (iv) reaffirms its obligations under the Guaranty and all of the
other Loan Documents to which it is a party, and (v) agrees that the Guaranty
and such other Loan Documents remain in full force and effect and are each
hereby ratified and confirmed.
12
<PAGE>
8. Miscellaneous.
8.1 Successors and Assigns. This Amendment shall be binding on and
shall inure to the benefit of Borrowers, Lender and their respective successors
and assigns, except as otherwise provided herein or therein. The terms and
provisions of this Amendment are for the purpose of defining the relative rights
and obligations of Borrowers and Lender with respect to the transactions
contemplated hereby and there shall be no third party beneficiaries of any of
the terms and provisions of this Amendment.
8.2 Entire Agreement. This Amendment, including all schedules and other
documents attached hereto or incorporated by reference herein or delivered in
connection herewith, constitutes the entire agreement of the parties with
respect to the subject matter hereof and supersedes all other understandings,
oral or written, with respect to the subject matter hereof.
8.3 Fees and Expenses. As provided in Section 11.3 of the Credit
Agreement, Borrowers agree to pay on demand all fees, costs and expenses
incurred by the Lender in connection with the preparation, execution and
delivery of this Amendment.
8.4 Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
8.5 Severability. Wherever possible, each provision of this Amendment
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Amendment shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Amendment.
8.6 Conflict of Terms. Except as otherwise provided in this Amendment,
if any provision contained in this Amendment is in conflict with, or
inconsistent with, any provision in any of the other Loan Documents, the
provision contained in this Amendment shall govern and control.
8.7 Counterparts. This Amendment may be executed in any number of
separate counterparts, each of which shall collectively and separately
constitute one agreement. Delivery of an executed counterpart of a signature
page to this Amendment by telecopy shall be effective as delivery of a manually
executed counterpart of this Amendment.
8.8 Incorporation of Loan and Security Agreement. The provisions
contained in Sections 11.9 and 11.13 of the Credit Agreement are incorporated
herein by reference to the same extent as if reproduced herein in their
entirety.
8.9 Acknowledgment. Each Credit Party hereby represents and warrants
that there are no liabilities, claims, suits, debts, liens, losses, causes of
action, demands, rights, damages
13
<PAGE>
or costs, or expenses of any kind, character or nature whatsoever, known or
unknown, fixed or contingent (collectively, the "Claims"), which any Credit
Party may have or claim to have against Lender, or any of their respective
affiliates, agents, employees, officers, directors, representatives, attorneys,
successors and assigns (collectively, the "Lender Released Parties"), which
might arise out of or be connected with any act of commission or omission of the
Lender Released Parties existing or occurring on or prior to the date of this
Amendment, including, without limitation, any Claims arising with respect to the
Obligations or any Loan Documents. In furtherance of the foregoing, each Credit
Party hereby releases, acquits and forever discharges the Lender Released
Parties from any and all Claims that any Credit Party may have or claim to have,
relating to or arising out of or in connection with the Obligations or any Loan
Documents or any other agreement or transaction contemplated thereby or any
action taken in connection therewith from the beginning of time up to and
including the date of the execution and delivery of this Amendment. Each Credit
Party further agrees forever to refrain from commencing, instituting or
prosecuting any lawsuit, action or other proceeding against any Lender Released
Parties with respect to any and all Claims.
IN WITNESS WHEREOF, this Fifth Amendment to Credit Agreement has been
duly executed as of the date first written above.
VERDANT BRANDS, INC.
By: /S/ Mark Eisenschenk
---------------------------------
Title: Executive Vice President
------------------------------
SAFER, INC.
By: /S/ Mark Eisenschenk
---------------------------------
Title: Executive Vice President
------------------------------
SURECO, INC.
By: /S/ Mark Eisenschenk
---------------------------------
Title: Secretary
------------------------------
CONSEP, INC.
By: /S/ Mark Eisenschenk
---------------------------------
Title: Vice President
------------------------------
PACOAST INC.
By: /S/ Mark Eisenschenk
---------------------------------
Title: Vice President
------------------------------
14
<PAGE>
RICHARD HUNT INC.
By: /S/ Mark Eisenschenk
---------------------------------
Title: Vice President
------------------------------
VALLEY GREEN CENTER, INC.
By: /S/ Mark Eisenschenk
---------------------------------
Title: Vice President
------------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION, as Lender
By: /S/ Trevor Clark
---------------------------------
Title: Vice President
------------------------------
Each of the following Persons is a signatory to this Amendment in its
capacity as a Guarantor.
SAFER, LTD.
By: /S/ Mark Eisenschenk
---------------------------------
Title: Vice President
------------------------------
SOUTHERN RESOURCES, INC.
By: /S/ Mark Eisenschenk
---------------------------------
Title: Vice President
------------------------------
FARCHAN LABORATORIES, INC.
By: /S/ Mark Eisenschenk
---------------------------------
Title: Vice President
------------------------------
15
<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., incorporated under the
laws of the State of Georgia.
Sureco, Inc.:
A wholly owned subsidiary of Southern Resources, Inc., incorporated under
the laws of the State of Georgia.
Peach County Property, Inc.:
A wholly owned subsidiary of Southern Resources, Inc., incorporated under
the laws of the State of Georgia.
Consep, Inc.:
A wholly owned subsidiary of Verdant Brands, Inc., incorporated under the
laws of the State of Oregon.
Pacoast, Inc. (d/b/a Pacoast Chemical Company; Protech Spray Service; Central
California Ag Service)
A wholly owned subsidiary of Consep, Inc., incorporated under the laws of
the State of California.
Richard Hunt, Inc. (d/b/a Sierra Ag Chemical):
A wholly owned subsidiary of Consep, Inc., incorporated under the laws of
the State of California.
Valley Green Center, Inc.:
A wholly owned subsidiary of Consep, Inc., incorporated under the laws of
the State of Massachusetts.
Farchan Laboratories, Inc.:
A wholly owned subsidiary of Consep, Inc., incorporated under the laws of
the State of Florida.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Verdant Brands, Inc. and Subsidiary
We consent to the incorporation by reference in the Registration Statement
numbers 33-37806 and 33-72666 of Verdant Brands, Inc. and subsidiaries on
Form S-8 of our report dated March 26, 1999 appearing in this Annual Report on
Form 10-KSB of Verdant Brands, Inc. and subsidiaries for the year ended December
31, 1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
March 26, 1999
Minneapolis, Minnesota
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Stanley Goldberg and Mark G. Eisenschenk and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
re-substitution for him and in his name, place and stead, in any and all
capacities, to sign the Verdant Brands, Inc. (the "Company") Annual Report on
Form 10-KSB for the year ended December 31, 1998 (the "1998 Form 10-KSB") under
the Securities Exchange Act of 1934, as amended, and any and all amendments
thereto, and to file such 1998 Form 10-KSB and any and all such amendments, with
all exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, state securities administrations and any and
all other agencies or administrations as may be deemed necessary or advisable by
said attorneys-in-fact and agents, and each of them, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully 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 either of them, or their or his substitutes,
may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on the 18th day
of March 1999, by the following persons:
/s/ Gordon F. Stofer /s/ Robert W. Fischer
- ----------------------------------- -------------------------------------
Gordon F. Stofer Robert W. Fischer
/s/ Stanley Goldberg /s/ Donald E. Lovness
- ----------------------------------- -------------------------------------
Stanley Goldberg Donald E. Lovness
/s/ John R. Hetterick /s/ Franklin Pass
- ----------------------------------- -------------------------------------
John R. Hetterick Franklin Pass
/s/ Frederick F. Yanni, Jr. /s/ Richard Mayo
- ----------------------------------- -------------------------------------
Frederick F. Yanni, Jr. Richard Mayo
/s/ Volker Oakey
- -----------------------------------
Volker Oakey
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 OCT-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,783,800 423,272
<SECURITIES> 0 0
<RECEIVABLES> 11,118,483 9,016,909
<ALLOWANCES> (280,000) (213,000)
<INVENTORY> 18,522,875 8,803,909
<CURRENT-ASSETS> 1,813,184 14,844,695
<PP&E> 11,956,612 5,699,504
<DEPRECIATION> (5,320,957) (2,795,410)
<TOTAL-ASSETS> 58,928,292 31,423,379
<CURRENT-LIABILITIES> 19,079,021 14,343,704
<BONDS> 16,958,227 3,306,821
0 0
0 0
<COMMON> 49,317,500 37,770,563
<OTHER-SE> (26,426,456) (23,997,709)
<TOTAL-LIABILITY-AND-EQUITY> 58,928,292 31,423,379
<SALES> 48,151,988 4,767,233
<TOTAL-REVENUES> 48,151,988 4,767,233
<CGS> 31,565,514 3,130,958
<TOTAL-COSTS> 49,270,672 5,898,719
<OTHER-EXPENSES> (91,956) (34,190)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,293,243 99,255
<INCOME-PRETAX> (2,319,971) (1,196,551)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,319,971) (1,196,551)
<EPS-PRIMARY> (.13) (.09)
<EPS-DILUTED> (.13) (.09)
</TABLE>
