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[VERDANTS LOGO]
VERDANT BRANDS(TM)
For a greener, healthier environment.
TO: VERDANT BRANDS SHAREHOLDERS
FROM: DEAN BACHELOR, CHAIRMAN & CEO
DATE: DECEMBER 27, 2000
RE: UPDATE
During the last several months, Verdant Brands has been carrying out and
undergoing a restructuring and informal reorganization that began in June. Since
we are upon the holiday season and the end of 2000, I want to update you on the
Company's activities. A lot has happened at Verdant. And as shareholders, you
should be aware of the changes within the Company. Although we have continued to
provide press releases of the various actions the Company has taken, it is time
to talk about the current status and future prospects of the Company.
First, it has never been the plan of the Company to go out of business,
liquidate its assets, declare bankruptcy or close its doors. Verdant has been in
business for more than 25 years and is fortunate to have been associated with a
loyal and supportive group of shareholders. The past year has been difficult for
all of the shareholders, as well as for the employees, suppliers and customers
of Verdant. However, hard times often provide opportunities for learning,
reassessment and resolve.
I was asked to assume the role of Chairman and CEO of Verdant in early June of
this year, following the resignations of the previous management. At that time,
our firm, Platinum Group, was asked by the Board of Directors to bring its
expertise and experience to bear in addressing the financial crisis and other
difficulties confronting the Company earlier this year. After conducting due
diligence, we agreed to provide the leadership for Verdant. Therefore, we went
to work. And here is what we found:
AN ACQUISITION STRATEGY CREATED A STRAIN. Throughout the last several years,
Verdant acquired a number of companies, which enabled the Company to grow from
$15 million to approximately $75 million in annual revenues. These acquisitions
were funded, for the most part, through the issuance of the Company's public
stock. Although these acquisitions were based on a realistic plan to fuel the
expansion and growth of the Company, this level of growth created a strain on
the organization that made it difficult to operate. Simply put, the Company grew
too fast for the resources that were available.
COSTLY RESOURCES AND BLOATED INVENTORIES CAUSED CASH FLOW PROBLEMS. To
facilitate the increasing growth of the Company, a number of new management team
members and employees were added to the Company in 1999 to provide the necessary
resources. Unfortunately, an aggressive sales and production forecast combined
with a disappointing lawn and garden season contributed to excess inventory.
Therefore, the additional expenditures for growth-oriented resources were not
met by increased levels of revenue. As inventories swelled and reduced orders
failed to convert the inventories to accounts receivable, the Company's cash
dried up. All of this happened very quickly, presenting the Company with a
significant cash flow problem it had not anticipated.
THE COMPANY DEFAULTED. In May, the Company's senior secured lender conducted a
collateral audit that showed a significant shortage of availability on its
revolving line of credit. On June 5, 2000, the Company's
Verdant Brands, Inc. * 9555 James Avenue South, Suite 2000 *
Bloomington, MN 55431-2543
(612) 703-3300 * Fax: (612) 887-1300
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management received a letter from this lender announcing that the Company had
defaulted on its loan covenants. Through a series of discussions with its senior
secured lender, it became apparent that the Company's borrowing base used as
collateral for its credit facility was not sufficient to provide the working
capital needed to meet the Company's financial obligations. Verdant was in
serious trouble. And something needed to be done very quickly to stem the cash
crisis and the possible foreclosure by the senior secured lender.
PLATINUM GROUP ASSUMED MANAGEMENT OF VERDANT. The Company's Board of Directors
asked Platinum Group to assume the management of Verdant. A Twin Cities based
turnaround management firm; Platinum has provided leadership during the last
twenty years for dozens of companies that have found themselves in trouble.
Platinum Group has managed companies in bankruptcy court and has successfully
developed many plans of reorganization. Platinum is not a liquidating group and
does not believe that the bankruptcy court is a good venue for operating
companies. We prefer to manage troubled situations long enough (often for years)
to create significant value. Platinum Group's partners are senior operations
managers with more than 250 collective years of day-to-day operations
experience. Platinum's normal approach is to find the value within each client
it serves, then focus the operation around that value. As that value is
enhanced, profitability and a successful future become possible. The trick is
finding the value in the middle of financial hardship. Sometimes it is not easy.
But if we look hard enough, it usually becomes evident. Platinum is not
interested in quick fixes, nor financial arbitrage, but in finding value and
focusing all of the Company's constituents and stakeholders on that value with
solid, proven, day-to-day operating practices. If you would like additional
information on Platinum, please call our office at (952) 829-5700 and ask for an
informational packet, which will give you a good feel for the kinds of
assignments which have tended to keep us pretty busy during the last 20 years.
THE WORK BEGINS. When we first arrived at Verdant, we conducted an exhaustive
review of the Company's business activities. Frankly, because of the amount of
debt on the Company's books, we were uncertain about the Company's ability to
survive. The results of that review convinced us that there is continuing
significant value, but immediate corrective action was needed to dig the Company
out of its hole. And before we could even begin to ask the creditors to consider
a proposal, we had to take decisive action in an attempt to restructure and
reinvent the Company - to assure ourselves that Verdant had, in fact, the real
possibility of staying out of foreclosure and eventually becoming a viable
operation. These actions included:
o NEGOTIATING A STANDSTILL AGREEMENT WITH THE SENIOR SECURED LENDER. In June,
the senior secured lender entered into a Standstill Agreement (rather than
foreclosing) and agreed to provide interim funding to the Company so that a
financial restructuring plan could be formulated and implemented. The
interim funding agreement has funded purchases of products needed by the
Company to fulfill orders for shipments to customers and for the funding of
day-to-day operations. This Standstill Agreement has been contingent upon
our meeting a 13-week rolling projection; a projection that has been met
and exceeded since June.
o ASKING THE UNSECURED TRADE CREDITORS TO BE PATIENT. All unsecured trade
creditors were asked to exercise patience regarding all amounts owed to
them since May 31, 2000 as we put together a plan for paying them what they
are owed. Their patience and willingness to cooperate have been critical to
the Company's ability to continue operating during this crisis.
o SLASHING OPERATING COSTS. As we replaced the former management team and
reduced the workforce to match the reduced revenue stream, we have been
able to reduce the Company's annual operating costs by more than $2 million
(net after Platinum fees).
o COMPLETING THE SALE OF CERTAIN BUSINESS UNITS. In response to the Company's
financial crisis, the previous management had already introduced several
investment banking firms to the Company's Board of Directors in May. The
Board chose to retain Agri-Capital to sell the Company's agricultural
distribution business unit and Goldsmith-Agio-Helms to sell its retail
business. The Company had grown to become a $75 million
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enterprise, so it was not easy to make the decision to sell parts of the
Company. However, to prevent a foreclosure, a plan was put in place to
divest the Company of its under-performing businesses, pay down debt and
reposition the Company to focus on one viable operation, rather than a
collection of six different entities with six separate accounting systems.
During the last several months, the Company has completed the sale of the
following product lines and business units:
1.) VALLEY GREEN CENTER. This small commercial landscape distribution and
supply company has been sold to Chuck Dooley, the General Manager and
former owner of the business. We thank Chuck for his patience and
perseverance during a difficult time. He is ideally positioned to
serve the customers of this business.
2.) PACOAST, INC. The Company has sold Pacoast, the Company's chemical
distribution business in California to Western Farm Services and Mid
Valley. The sale of Pacoast was recently consummated in three separate
transactions for its five locations. We thank Dennis Husman, Pacoast's
President for continuing to focus on his customers' requirements and
needs throughout the entire year.
3.) VERDANT BRANDS/RINGER/SAFER BRANDS. This was a tough one. The products
involved in this sale provided the largest business unit of the
Company and was seen by many as the future of the Company.
Unfortunately, it also represented the Company's largest cash flow
drain and largest losses. In addition, the Company's very large
life-threatening debt simply could not be reduced enough with the
sales of the other divisions. At the urging of the Company's senior
secured lender, we reluctantly determined that the sale of certain of
the Company's retail lawn & garden product lines to Woodstream
Corporation would provide the best "home" for these products. This
transaction actually involved a foreclosure and sale by the senior
secured lender, whereby it foreclosed on its security in the assets of
this business, sold the assets to Woodstream and applied the sales
proceeds to the reduction of the secured debt. Customers we have
talked to are pleased with our choice. Woodstream knows this business,
has an excellent reputation as a customer-focused supplier and brings
a lot of horsepower and experience, which will ensure the
continuation, and expansion of these products. Thanks to Scott
Glatstein, the Company's Sales Manager as well as Fritz Richards and
Stephanie Vitt of Goldsmith-Agio-Helms for their efforts in assisting
us in this transition - we couldn't have done it without them.
Although the rapidly changing markets coupled with the decline of the Nasdaq and
increasing downturn of the economy, this year didn't help our selling efforts,
we negotiated these asset sales in a way which allowed us to pay down the senior
lender rapidly.
A COLLECTIVE SIGH OF RELIEF. To date, we have been able to prevent the
foreclosure we discussed earlier by reducing the debt we owed to the Company's
senior secured lender from approximately $30 million to $5 million during the
last six months. This was no small task, and all of the employees who hung in
there with us this year while we tightened our belts and buckled down to do the
hard work required to make this happen deserve our thanks. It involved reducing
inventory, collecting accounts receivables, assisting buyers with due diligence
and exhibiting generous amounts of flexibility - over and over again. As
shareholders, you can be proud of these people and their efforts to save your
company. There is an old saying, "when the going gets tough, the tough get
going" that comes to mind. We have sighed that collective sigh of relief, but
only for a few moments (the champagne bottle remains corked).
A PIVOTAL POINT. Here is the tricky part. The unsecured trade creditors, who are
owed approximately $20 million, have been waiting patiently. Fortunately, we
have 650 vendors and suppliers who have been willing to
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work with us during this very challenging time. This has not been easy. And it
hasn't been any fun for them. They are owed a lot of money and deserve to be
paid. That's the deal. They sell products and services to the Company and expect
to be paid. That's the way it works. However, the Company ran out of money to
pay its bills and we were forced to ask for their patience. Those suppliers
whose products and services we continued to use placed us on COD, so we could
continue to operate the Company, keep the doors open and formulate a plan to pay
them.
A PLAN FOR THE FUTURE. For us to continue operating the Company, we needed a
plan for the future. A new vision. What is the future and vision for the
Company? Although it isn't a simple task to think about the future when you are
scrambling day-to-day to stay alive, after considering a number of alternative
plans, we settled on a plan that includes the following:
o SECURE NEW FINANCING. The company's senior secured lender has informed us
that they would prefer to have the Company secure a new credit facility
from another lender. We are seeking a new lender. But this takes time. And
they simply want out.
o FOCUS ON CONSEP, THE ENVIRONMENTALLY FRIENDLY INSECT CONTROL BUSINESS.
Consep is a wholly-owned subsidiary of Verdant Brand's acquired in 1998.
Consep develops, manufactures, markets and sells environmentally friendly
and EPA approved insect control products for the commercial, agricultural,
industrial and retail markets. These products are used in the agricultural
sector for high-end crops such as tomatoes, peaches, pears, apples and
grapes, as well as the industrial/commercial sector for insect control in
warehouses, grocery stores, restaurants and other commercial environments
where food can be damaged by insects. They are also used in homes to
protect against moths in closets and other insects in the home environment.
Consep's products employ proprietary controlled-release technologies to
enhance the performance, effectiveness and duration of biorational insect
control products by protecting them from natural degradation and
controlling their release over planned periods of time. These biorational
pest control products use naturally occurring agents such as pheromones,
are non-toxic to humans and animals, leave no harmful residues, do not
contaminate soil or groundwater and do not harm beneficial insects. The
traditional approach utilizes chemicals, posing health hazards. Consep has
been a leader for many years in this EPA approved, environmentally friendly
process which has garnered significant attention. The federal government is
forcing the reduction, and eventual shutting down of the use of some
traditional chemicals (you may have seen front page news articles about
Diazinon and Durisban. As more of this occurs and the "green" philosophy
has grown, so has Consep's approach to insect and pest control.
Five billion dollars are spent annually on insect and pest control. Consep
has the second largest market share of any company using the
environmentally friendly approach for insect and pest control. Consep is
positioned to capture a significant portion of the worldwide market for its
products. Domestically, the Company's technical salespeople work with
regional and national distributors of agricultural products. Consep is also
represented on numerous USDA, CALEPA and industry pest management
alliances. Internationally, the Company is positioned in Canada, Mexico,
Europe, South Africa, Guatemala, Argentina and Chile through its own
operating subsidiaries or partnerships with multi-national distributors in
the areas.
The market is large and untapped. The margins look good. The trend is
toward bio friendly technologies which pose no health hazards. We like this
business. The technology Consep utilizes provides us with intellectual
assets that are proprietary. There is significant potential. The former
management saw this potential. We agree and would like to exploit this by
continuing to build Consep.
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o GROW THE COMPANY BY BUILDING ON STRATEGIC ALLIANCES WITH SIGNIFICANT
PARTNERS. Consep has several important relationships it is cultivating,
including:
o CALIFORNIA TECHNICAL INSTITUTE (CAL TECH) has granted Consep an
exclusive international license for the use of its technology in
pheromones.
o MATERIA, a Pasadena, California based R&D group which has its roots at
Cal Tech, has proposed to Consep that it apply it's Matesisis
Catalytic Technology to the production of pheromones, which will
reduce our costs of goods, enabling Consep to compete at new levels.
o DOW AGRI SCIENCES, a division of Dow Chemical, is reviewing a proposed
agreement with Consep to provide international distribution of
Consep's pheromones for insect control. Dow currently markets $100
million its own insect control products throughout the world, and sees
the need for additional products to add to its existing distribution
channels world-wide.
o CHEMICA is a leader in the development of novel synthesis roots.
Chemica has recently secured a significant research grant from the FDA
to apply its technology in addressing the Aids virus. We are
discussing ways for Chemica to work with us to produce a new pheromone
production method for the peach twig borer.
o WOODSTREAM has entered into a supply agreement with Consep to purchase
pheromones for certain of the retail products acquired from Verdant.
o REPAY THE CREDITORS. Unfortunately, the total debt load of the Company, at
approximately $25 million (down from $50 million in May) makes it
impossible to pay creditors in full at this time. In fact, the only way for
us to eventually pay them is to encourage them to convert the most of their
debt into equity in the Company, becoming shareholders with the rest of us,
and muster more patience as we attempt to build the Company in the future.
We have proposed to the creditors the following debt restructuring plan
that reflects the "real world" situation at Verdant as a way for them to
eventually receive a return on their investment:
1. Creditors owed less than five hundred dollars as of October 31, 2000
will be paid 100%. If a creditor is owed between $500 and $5,000, they
can choose to discount their receivable down to $500.
2. All creditors owed more than $500 will receive a cash payment of 10%
of their outstanding receivable balance over a three-year period (if
they do not choose to discount their receivable to $500). Providing we
are able to obtain approval from the SEC regarding the registration
and issuance of additional preferred and common shares, it is our
intent to have the remaining 90% of their receivables converted into
equity in Verdant (half-common and half-preferred shares).
3. The preferred stock will have an annual dividend of 8%, which will
accrue and be paid, based on the availability of the Company's cash
flow. The preferred shares are not convertible into common shares and
we do not anticipate any dividend payments being made during 2001, and
possibly for a longer period of time. It is our intent to pay the 8%
interest if and when there is a transaction, such as a sale, at
sometime in the future.
4. The common stock in Verdant will be issued at one (1) common share of
Verdant for every Three Dollars ($3) of unsecured debt. If all
creditors accept the above-proposed plan, the unsecured creditor group
will collectively own approximately twenty-seven percent (27%) of the
common shares of Verdant Brands, Inc. When the creditors convert debt
to equity, our plan is to issue additional common shares, providing
$10 million shares outstanding. If the shares trade at approximately
$.50/share, the Company will reach the threshold of a $5 million
market cap. Having this strengthened balance sheet and market
capitalization of $5 million is crucial to accomplishing this goal and
providing a realistic way for those creditors and all shareholders to
potentially receive a return on their investment.
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The ultimate success of this restructuring effort to place the Company on more
certain footings, and the opportunity to provide a way for the Company to move
forward, will largely depend on the decision of the senior secured lender to
continue working with us and the unsecured creditors regarding this
debt-restructuring plan. It is simply our intent to find a meaningful way to pay
the creditors what they are owed and ultimately provide all shareholders,
including those creditors who are willing to covert to equity, with long-term
value.
EARLY INDICATIONS ARE POSITIVE. As of the writing of this letter, approximately
47% of the creditors have voted "FOR" the plan, with only a handful voting
"AGAINST" the plan, which provides a strong indication that the majority of the
creditors will cooperate with us and allow us to put the plan in place. If the
current trend continues, we will be successful in our attempt to move millions
of dollars into equity. To date, creditors representing $6.9 million have agreed
to cooperate with our plan.
REALIZE THE COMPANY'S CURRENT FINANCIAL CONDITION DOESN'T PROVIDE COMFORT FOR
CREDITORS. The Company's September 30, 2000 balance sheet as reported on the
company's unaudited 10-Q and the Company's unaudited estimated balance sheet as
of November 30, 2000 reflects the following:
(ACTUAL) ESTIMATED
Current Assets: (000) 9/30/00 11/30/00
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Cash $ 249 $ 80
Accounts Receivable $ 7,225 $ 2,800
Inventory $ 11,330 $ 3,800
Prepaid $ 1,292 0
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Total Current Assets $ 20,096 $ 6,680
P&E $ 4,532 $ 1,918
Intangibles 1,174 $ 550
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TOTAL ASSETS $ 25,802 $ 9,148
Current Liabilities:
Senior Secured Lender $ 18,030 $ 5,000
Accounts Payable $ 17,274 $ 17,389
Accrued Expenses $ 3,962 $ 3,970
Other Debt $ 4,059 $ 3,403
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TOTAL LIABILITIES $ 43,325 $ 29,762
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TOTAL STOCKHOLDER'S EQUITY: ($ 17,523) ($ 20,614)
In the event you would like to review Verdant's financials in greater detail, we
encourage you to log onto the Internet at WWW.SEC.gov and search the Edgar
database for Verdant Brands files. The Company's web page address is
www.verdantbrands.com, where you will also find press releases available. And
representatives of Verdant will be available to answer any questions you may
have.
UTILIZE THIS INFORMAL PLAN OF REORGANIZATION, RATHER THAN SEEKING PROTECTION IN
BANKRUPTCY COURT. If the senior secured lender or unsecured creditors won't
cooperate, another alternative is for Verdant to seek protection from the
creditors under the Federal Bankruptcy Code by declaring bankruptcy. However,
this would only cost substantially more time, as well as additional legal and
court fees, which would ultimately cost both the creditors and shareholders. In
fact, if Verdant Brands is forced into Bankruptcy, the liquidation value of the
remaining assets is such that, in our opinion, the senior secured lender and
unsecured creditors would receive
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less than our plan provides. And the shareholders would receive nothing. We
could be in bankruptcy court any day. It is our hope that is not necessary.
REGAIN NASDAQ LISTING. This plan calls for the trade creditors to convert a
large portion of what is owed them into preferred and common stock in the
Company. This will enable the Company to have a strengthened balance sheet.
Although Verdant has been recently delisted on Nasdaq, the Company's shares are
still traded on the bulletin board and there are still market makers for the
shares. However, it is our intent to create a plan, which will ultimately allow
the Company to regain its Nasdaq listing, which requires a market capitalization
of $5 million.
The reason this makes sense for the current shareholders is that the Company's
balance sheet will be strengthened enough to enable the Company to stay in
business and hopefully build value in the future. With a current significant
negative net worth at Verdant Brands, it is necessary to fulfill this plan in
order to pay the creditors and provide a future for all of the shareholders.
These are difficult times for the Company. And there is still a lot of work to
be done. But in order for us to have a future, we need to be about the task at
hand. There are obviously a number of "ifs": If the senior secured lender
continues to work with us until we find new financing. If the creditors work
with us. If we are able to complete our plan without an involuntary bankruptcy
filing. If Dow's distribution alliance happens. If Materia can actually reduce
our production costs. Then we may have a future. The Company can grow and
prosper. And your shares may appreciate in value. If we are successful in
facilitating this informal plan of reorganization with the creditors, we will
announce this in another communication to all shareholders. Having worked on
more than three dozen of these kinds of creditor workouts in the past, I can
tell you that it normally takes several months to complete. Therefore, we expect
to know a lot more at the end of the first quarter, 2001.
I have had a number of shareholders call and ask, "Should I hang onto the
shares, or sell?" I can't answer that question. However, I will tell you what I
have told those who have called: Sometimes it takes a while to restore value in
companies that have been through difficult times. And not always, but sometimes,
it is worth the wait.
I wish you the very best during this holiday season and throughout 2001.
Respectfully yours,
Dean Bachelor
Chairman, CEO
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