10-Q 1 e10-q.txt FORM 10-Q 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 ------------------------------------------------- [ ] 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. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Minnesota 41-0848688 -------------------------------------------------------------------------------- (State of incorporation or organization) (I.R.S. Employer Identification No.) 9555 James Avenue South, Suite 200, Bloomington, Minnesota 55431-2543 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (612) 703-3300 -------------------------------------------------------------------------------- (Issuer's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of shares outstanding of each of the registrant's classes of capital stock, as of July 31, 2000, was: Common Stock, $.01 par value 5,112,850 shares 2 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS. VERDANT BRANDS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See notes to unaudited consolidated financial statements. 2 3 VERDANT BRANDS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to unaudited consolidated financial statements. 3 4 VERDANT BRANDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to unaudited consolidated financial statements. 4 5 VERDANT BRANDS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 Note 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Verdant Brands, Inc. and Subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information. They should be read in conjunction with the annual financial statements included in the Company's Annual Report on Form 10-KSB for the prior year ended December 31, 1999. In the opinion of management, the interim condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals and adjustments of certain assets to reflect management's best estimate of their net recoverable value) necessary for a fair presentation of the results for the interim periods presented. Operating results for the three months and six months ended June 30, 2000 are not necessarily indicative of the operating results to be expected for the fiscal year ending December 31, 2000. In recent years, the Company has pursued a strategy of growth through merger and acquisition, joining four businesses together since 1996. While the Company has had some success in combining product lines and increasing revenues, continued operating problems and decreasing demand for some product lines has led to ongoing losses, cash flow problems and defaults on a credit agreement secured by substantially all of the assets of the Company. In response to these issues, the board of directors hired Platinum Management, LLC ("Platinum") to advise the board and appointed representatives of Platinum to the Company officer positions of Chairman/CEO, President/COO, CFO, and Vice President - Finance. Further the board of directors has initiated efforts to sell Company assets and businesses. See Managements Discussion And Analysis on Financial Condition and Results of Operations in this Form 10-Q for further disclosures. The following table reflects the calculation of basic and diluted earnings (loss) per share.

[*] The impact of options and warrants are excluded because their exercise price was higher than the average share price for each period and because the Company reported a loss for the quarter and six months ended June 30,2000. 5 6 Note 2. Sales of the Company's products are greater during the period of January 1 through June 30 of each year due to seasonal factors. Note 3. Inventory consists of the following:

Note 4. LONG-TERM DEBT

Since December 31, 1999, Sureco, Inc., a wholly owned subsidiary, has been in default on a note payable to B&I Lending, totaling $1,021,479 at June 30, 2000, due to noncompliance with covenants restricting change in the use of the facility and equipment in Fort Valley, Georgia, reducing inventory and equipment at the facility, and requiring a minimum tangible net worth ratio. The full value of the note has been classified as a current liability. Due to the Company's default on its line of credit agreement and the prevalence of cross-default provisions in various long-term debt agreement, all long-term debt has been classified in short-term liabilities. Note 5. LINE OF CREDIT The Company relies on financing in the form of lines of credit to fund seasonal increases in receivables and inventory and to provide general working capital and long-term financing. In July 1999, the Company entered into a $37,000,000 secured credit facility with GE Capital Services ("GE"), to replace the Company's previous $25,000,000 facility with the same lender. The credit facility consists of a $35,000,000 revolving line of credit and a $2,000,000 term note and is secured by substantially all of the assets of the Company and its subsidiaries. The Company is in default on the GE credit facility agreement. The credit agreement contains provisions which require the Company to maintain a minimum level of net worth and a minimum interest coverage ratio and limit the Company's expenditures on capital assets. The Company was not in compliance with the interest coverage and minimum net worth covenants for the quarter ended June 30, 2000. GE has been unwilling to waive noncompliance. GE issued a default notice to the Company on June 5, 2000. Due to the Company's default, GE has the right to withdraw funding, demand immediate payment of all outstanding loan balances and foreclose against the loan collateral in satisfaction of its secured debt. The Company is working with GE to address the default and the Company's financial problems. GE has thus far refrained from exercising certain of its rights and has continued funding the Company on a restricted basis. The ultimate actions of GE and the resolution of the Company's financial problems is uncertain. The current circumstances and funding levels render the Company unable to maintain normal activities. Because the lender has not waived noncompliance, and has the right to accelerate payment of outstanding 6 7 loans or otherwise restrict borrowings under the line, all outstanding borrowings under the line of credit and term loan have been classified as short-term as of June 30, 2000. In connection with the GE Capital Services line of credit, the Company issued a warrant for the purchase of 334,793 shares of common stock at an original exercise price of $5.95 per share. The warrant is exercisable immediately and expires in July 2002. The fair value of the warrant was calculated using the Black-Scholes method and was estimated at $327,032. This deferred debt issuance cost reduces the carrying value of the related debt and is being amortized over the life of the debt on a straight line basis. In August 2000, the warrant was amended to change the exercise price to fifty cents per share. Borrowings under the line of credit facility are limited to a borrowing base of up to 85% of eligible receivables, and up to 65% of eligible inventory, as defined in the credit agreement. Interest on borrowings is at an Index Rate (the higher of the published prime interest rate or the Federal Funds Rate plus 0.5 percentage points) plus a Revolver Index Margin of 0.35 percentage points through May 2, 2000 and of 0.55 percentage points thereafter (borrowing rate of 9.55% as of June 30, 2000). The Company is required to pay a commitment fee of 1/2% on any unused portion of the line. Outstanding borrowings on the GE credit facility, including the GE line of credit, totaled $24,498,865 as of June 30, 2000. Outstanding borrowings on the GE term note totaled $1,569,103 (net of $222,563 in deferred debt issuance costs) as of June 30, 2000. Note 6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash (paid) received for interest during the period for:

Non-cash transaction - The Company transferred $2,674,990 from accounts receivable to inventory in the settlement of an arrangement with a subcontractor. See Note 9. Note 7. FOREIGN OPERATIONS International sales activity, consisting of sales outside the United States, primarily in Canada, accounted for approximately 9.3% and 7.2% of total sales for the three months ended June 30, 2000 and 1999, and approximately 9.3% and 7.4% of total sales for the six months ended June 30, 2000 and 1999, respectively. A reconciliation for these periods of domestic and foreign activity for net sales, net income and identifiable assets is as follows:

7 8

Note 8. 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. 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 three months and six months ended June 30, 2000 and 1999 of segment activity for net sales, net income (loss) and identifiable assets is as follows:

8 9

Note 9. COMMITMENTS AND CONTINGENCIES Subcontract Manufacturing - The Company relies on outside subcontractors for nearly all of its consumer products manufacturing needs, and manufacture a significant portion of its products at a single subcontract manufacturer. During 1999, the Company transferred title of certain inventory to this subcontractor. In March 2000, the Company agreed to reassume title to this inventory, effective April 3, 2000. At December 31, 1999, accounts receivable included $2,674,490 relating to inventory for which title had transferred under this agreement. Note 10. RESTRUCTURING EXPENSES Restructuring expenses includes $1,152,000 in accrued severance costs for terminated officers and employees and $553,000 in accrued product continuation fees to cover the required two-year registration period following product discontinuance. Note 11. IMPAIRMENT OF INTANGIBLE ASSETS Impairment of intangibles of $8,719,036 were recognized in the second quarter of 2000 for impairment of goodwill resulting from cash flow estimates on the sale of the Company's assets and/or businesses. 9 10 Note 12. SEC STAFF ACCOUNTING BULLETIN In December 1999, the SEC issued Staff Accounting Bulleting No. 101, "Revenue Recognition in Financial Statements," which becomes effective in the fourth quarter of 2000. Management has not completed its review of the effect of the adoption of this Bulletin. Note 13. NASDAQ DELISTING On July 31, 2000, the Company was notified by the Nasdaq Stock Market that the Company has failed to maintain the minimum market value of public float and the minimum bid price as required by Nasdaq rules for continued listing on the Nasdaq National Market. The Company has until October 30, 2000 to demonstrate compliance with the Nasdaq rules or the Company's common stock will be delisted at the opening of business on November 1, 2000. The rules require that the Company maintains a minimum market value for publicly traded shares of no less than $5,000,000 and a minimum bid price of at least $1.00. On the date of notification, the Company's market value of public float was less than $2,500,000 and the bid price was less than fifty cents per share. 10 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In recent years, the Company has pursued a strategy of growth through merger and acquisition, joining four businesses together since 1996. While the Company has had some success in combining product lines and increasing revenues, continued operating problems and decreasing demand for some product lines has lead to ongoing losses, cash flow problems and defaults on a credit agreement secured by substantially all of the assets of the Company. To address these difficulties, the Company engaged the services of Platinum Management, LLC ("Platinum"), a Minneapolis-based turnaround management company. In May 2000, Platinum worked closely with management and the Board of Directors to assess the Company's businesses and define a strategy to address financial problems. On June 7, 2000, the Company's Board of Directors accepted the resignation of the Company's Chairman of the Board and its President and CEO, and appointed members of Platinum to the positions of Chairman/CEO, President /COO, Chief Financial Officer, and Vice President - Finance. In addition, directors Goldberg, Hetterick, Oakey, Yanni, Pass and Lovness resigned their positions as directors and, further, Hetterick and Oakey resigned as employees and officers of the Company. The remaining directors constituting the Company's board of directors, consisting of Stofer and Fischer, then reorganized the board at three directors by appointing Dean Bachelor of Platinum as a director and chairman of the board of directors of the Company. The board of directors believes that the current organization of the board and executive management is better able to deal with the Company's operating and financial problems. In response to the Company's continuing financial problems and to raise needed capital, the Company announced on May 22, 2000 the engagement of AgriCapital Corporation to assist the Company in the divestiture of portions of its commercial dealer business segment. The Company further announced on June 26, 2000 the engagement of Goldsmith-Agio-Helms, an investment banking firm, to assist the Company in exploring the sale of part or all of the Company's retail business segment. At the same time, the Company announced that it had received a default notice from GE Capital Services, the Company's secured lender holding a first security interest in substantially all of the assets of the Company. The Company has been working closely with GE Capital to address the Company's financial problems and to correct the defaults. Any cash generated from the sale of business assets will be first used to retire the GE Capital debt. After satisfying the GE debt, remaining cash flows, if any, will be applied toward payment of unsecured creditors. The cash flows to be generated are uncertain and may be inadequate to pay unsecured creditors in full. The Company has been contacted by parties interested in acquiring portions of the Company's retail and commercial dealer business assets. Discussions continue with interested parties toward a divestiture of these business assets, however, when or if an agreement may be reached is uncertain. In addition, the Company has received an unsolicited bid for the Company's commercial pheromone business, which represents approximately one-third of the Company's current revenues. The Company has delayed any response to this bid pending further review of its strategic options and the results of current divestiture discussions. In view of the Company's efforts to sell substantially all of the assets of the Company, the Company is not reporting discontinued operations within its financial statements. In response to cash flow problems, the Company placed a moratorium on the payment of approximately $16 million in trade accounts payable and certain other liabilities existing prior to May 31, 2000. This has caused many vendors, some critical to operations, to withhold credit and otherwise restrict the Company's ability to acquire materials and services. The resolution of past due trade accounts and certain other liabilities is uncertain and depends to a great extent on the Company's ability to generate cash in excess of that required to retire the Company's senior secured creditor. The Company's senior secured creditor is continuing to fund operations on a restricted basis, however, funding is inadequate for normal operations and the continuation of current funding is uncertain. The Company is working with GE Capital on an agreement to allow the Company to continue operating without GE Capital's foreclosure on the 11 12 assets of the Company, however, there is no assurance that the Company will be successful in negotiating such an agreement. On July 31, 2000, the Company was notified by the Nasdaq Stock Market that the Company has failed to maintain the minimum market value of public float and the minimum bid price as required by Nasdaq rules for continued listing on the Nasdaq National Market. The Company has until October 30, 2000 to demonstrate compliance with the Nasdaq rules or the Company's common stock will be delisted at the opening of business on November 1, 2000. The rules require that the Company maintains a minimum market value for publicly traded shares of no less than $5,000,000 and a minimum bid price of at least $1.00. On the date of notification, the Company's market value of public float was less than $2,500,000 and the bid price was less than fifty cents per share. Results of Operations The following table sets forth, for the periods indicated, information derived from the consolidated statements of operations of the Company as a percentage of net sales:

Seasonal factors effecting sales and results of operations Sales during the year are very seasonal. First quarter sales normally consist of sales on initial orders from direct customers and reorders from distributors who made their initial purchases for the season in the final quarter of the preceding year. Second and third quarter sales consist largely of reorders from direct-ship customers and sales of in-season promotion products. Fourth quarter sales consist primarily of shipments on early season orders from distributors who are stocking warehouses for the upcoming spring selling season. Most of the Company's sales occur during the months of December through June of each year. The level of sales for the fiscal year depends largely upon the level of retail sales of the Company's products to home owner consumers and the level of unsold retail inventory of the Company's products remaining in retail and wholesale distribution channels carried over from the previous year. Retail sales to consumers are affected by numerous outside circumstances such as weather, competitors' products and sales and marketing programs, as well as new product introductions. Each of these factors can fluctuate substantially from year to year and from quarter to quarter. Total year sales cannot be accurately projected with any degree of certainty based on results for the three months and six months ended June 30. 12 13 Comparison of the three months ended June 30, 2000 to the three months ended June 30, 1999 Net Sales. Net sales decreased $7,565,188 or 27.4% to $19,995,066 in the three months ended June 30, 2000 compared to $27,560,254 for the three months ended June 30, 1999. The decrease was primarily the result of $5,022,423 in lower retail segment sales and $2,659,410 in lower commercial segment sales. The lower retail segment sales were due in part to reduced purchases by two large private label customers resulting from slow sales and overstock problems. In addition, retail sales were negatively impacted by a $1,600,000 provision recorded in the second quarter of 2000 for anticipated sales returns, discounts and allowances. The lower commercial segment sales was resulted primarily from the loss of the Sevin(R) brand pesticide and other discontinued products. Gross Margins. Gross margins as a percent of sales decreased 22.2 percentage points to 9.2% for the three months ended June 30, 2000 compared to 31.4% for the three months ended June 30, 1999. Approximately 13.0 percentage points of the decrease was due to a second quarter 2000 provision for obsolete and excess inventory totaling $2,576,000 resulting from the discontinuance of certain products and the existence of excess inventory resulting from slower than expect retail product sales. The remaining 9.2 percentage point decrease in gross margins was due primarily to a shift in sales mix to a higher percentage mix of commercial and commercial dealer sales which carry a lower gross margin than retail products. Operating Expenses. Distribution expenses increased slightly in absolute dollars to $1,958,765 for the three months ended June 30, 2000 from $1,948,747 for the three months ended June 30, 1999, and increased as a percentage of sales to 9.8% for the three months ended June 30, 2000 from 7.1% for the three months ended June 30, 1999. The increase in distribution expenses in 2000 compared to 1999 was due to extra expenses incurred in shipments of products through an agency arrangement on the west coast and to costs incurred for outside storage facilities to store excess inventory. Sales and marketing expenses in absolute dollars increased $282,715 or 10.5% to $2,966,865 for the three months ended June 30, 2000 from $2,684,150 for the three months ended June 30, 1999, and increased as a percentage of sales to 14.8% for the three months ended June 30, 2000 compared to 9.7% for the same period in 1999. The increase in sales and marketing expenses in absolute dollars was largely due to higher sales program expenses incurred in 2000 compared to 1999 in an effort to make up for sales shortfalls during the first and second quarters of 2000. General and administrative costs increased $3,753,234 or 245% to $5,285,419 for the three months ended June 30, 2000 from $1,532,185 for the three months ended June 30, 1999. The increase was in part due to a $1,200,000 charge taken in the second quarter of 2000 to write down the carrying value of certain buildings and equipment to recovery value, and a charge taken in the same period of $480,806 to write off abandoned building projects in process. In addition, the Company recorded a provision for doubtful accounts in the second quarter of 2000 totaling approximately $1,700,000 to reserve for accounts of customers filing bankruptcy or having recently demonstrated serious financial trouble. The remaining increase of approximately $370,000 was mainly the result of increased legal and consulting expenses relating to efforts to deal with the Company's financial problems. Product registration and development expenses increased $235,603 or 50.0% to $706,256 for the three months ended June 30, 2000 compared to $470,653 for the three months ended June 30, 1999. The increase was due primarily to increased product registration costs associated with the conversion of Surefire(R) branded products to Safer(R) brand labels and the increase in registered labels resulting from label changes made to certain product lines. Restructuring expenses of $1,705,000 incurred in the second quarter of 2000 consist of $1,152,000 in accrued severance costs for certain terminated officers and employees and of $553,000 in accrued product registration continuation fees associated with certain discontinued pesticide products. Amortization of intangibles increased $39,684 or 30.6% to $169,307 for the three months ended June 30, 2000 compared to $129,623 for the three months ended June 30, 1999. The increase was due to accelerated amortization resulting from reductions in the estimated useful lives of certain intangibles. 13 14 Impairment of intangibles of $8,719,036 were recognized in the second quarter of 2000 for impairment of goodwill resulting from cash flow estimates on the sale of the Company's assets and/or businesses. Other Expense, Net. Net other expense increased by $363,203 or 61.4% to $955,151 for the three months ended June 30, 2000 compared to net other expense of $591,948 for the three months ended June 30, 1999. The increase in net other expense was mainly due to increased interest expense on higher average borrowings on the Company's line of credit and the effect of higher interest rates. Comparison of the six months ended June 30, 2000 to the six months ended June 30, 1999 Net Sales. Net sales decreased $8,071,347 or 16.3% to $41,519,264 in the six months ended June 30, 2000 compared to $49,590,611 for the six months ended June 30, 1999. The decrease was primarily the result of $5,191,259 in lower retail segment sales and $2,296,253 in lower commercial segment sales. The lower retail segment sales were due in part to reduced purchases by two large private label customers resulting from slow sales and overstock problems. In addition, retail sales were negatively impacted by a $600,000 provision recorded in the second quarter of 2000 for anticipated sales discounts and allowances on discontinued products. The lower commercial segment sales was resulted primarily from the loss of the Sevin(R) brand pesticide and other discontinued products. Gross Margins. Gross margins as a percent of sales decreased 10.9 percentage points to 21.8% for the six months ended June 30, 2000 compared to 32.7% for the six months ended June 30, 1999. Approximately 6.2 percentage points of the decrease was due to a second quarter 2000 provision for obsolete and excess inventory totaling $2,576,000 resulting from the discontinuance of certain products and the existence of excess inventory resulting from slower than expect retail product sales. The remaining 4.7 percentage point decrease in gross margins was due primarily to a shift in sales mix to a higher percentage mix of commercial and commercial dealer sales which carry a lower gross margin than retail products. Operating Expenses. Distribution expenses increased $126,493 or 3.5% in absolute dollars to $3,717,467 for the six months ended June 30, 2000 from $3,590,974 for the six months ended June 30, 1999, and increased as a percentage of sales to 9.0% for the three months ended June 30, 2000 from 7.2% for the three months ended June 30, 1999. The increase in distribution expenses in 2000 compared to 1999 was due to extra expenses incurred in shipments of products through an agency arrangement on the west coast and to costs incurred for outside storage facilities to store excess inventory. Sales and marketing expenses in absolute dollars increased $311,578 or 6.5% to $5,113,708 for the six months ended June 30, 2000 from $4,802,130 for the six months ended June 30, 1999, and increased as a percentage of sales to 12.3% for the six months ended June 30, 2000 compared to 9.7% for the same period in 1999. The increase in sales and marketing expenses in absolute dollars was largely due to higher sales program expenses incurred in 2000 compared to 1999 in an effort to make up for sales shortfalls during the first and second quarters of 2000. General and administrative costs increased $4,115,000 or 146% to $6,931,335 for the six months ended June 30, 2000 from $2,816,335 for the six months ended June 30, 1999. The increase was in part due to a $1,200,000 charge taken in the second quarter of 2000 to write down the carrying value of certain buildings and equipment to recovery value, and a charge taken in the same period of $480,806 to write off abandoned building projects in process. In addition, the Company recorded a provision for doubtful accounts in the second quarter of 2000 totaling approximately $1,700,000 to reserve for accounts of customers filing bankruptcy or having recently demonstrated serious financial trouble. The remaining increase of approximately $730,000 was mainly the result of increased legal, recruiting and consulting expenses relating to efforts to deal with the Company's financial problems and to employee turnover. Product registration and development expenses increased $244,181 or 20.6% to $1,428,721 for the six months ended June 30, 2000 compared to $1,184,540 for the six months ended June 30, 1999. The increase was due 14 15 primarily to increased product registration costs associated with the conversion of Surefire(R) branded products to Safer(R) brand labels and the increase in registered labels resulting from label changes made to certain product lines. Restructuring expenses of $1,705,000 incurred in the second quarter of 2000 consist of $1,152,000 in accrued severance costs for certain terminated officers and employees and of $553,000 in accrued product registration continuation fees associated with certain discontinued pesticide products. Amortization of intangibles decreased $28,090 to $338,614 for the six months ended June 30, 2000 compared to $366,704 for the six months ended June 30, 1999. The decrease was due to the reduction in goodwill resulting of final valuation adjustments recorded in the fourth quarter of 1999. Impairment of intangibles of $8,719,036 were recognized in the second quarter of 2000 for impairment of goodwill resulting from cash flow estimates on the sale of the Company's assets and/or businesses. Other Expense, Net. Net other expense increased by $721,092 or 75.4% to $1,678,052 for the six months ended June 30, 2000 compared to net other expense of $956,960 for the six months ended June 30, 1999. The increase in net other expense was mainly due to increased interest expense on higher average borrowings on the Company's line of credit and the effect of higher interest rates. Liquidity and Capital Resources The Company's operations and cash needs are highly seasonal. During the three months ended December 31 of each year, the Company usually solicits and ships early orders and expands production to build inventory needed for its major selling season. Most of the Company's seasonal shipments and therefore most of the billings that result in revenue recognition and in receivables, occur during the months of December through May of each year. Accordingly, the Company typically consumes significant cash in operating activities during the periods from October through May from year to year as it finances increases in its inventory, primarily during the periods from October through April, and increases in receivables, primarily during the period from late December through the end of May. Cash increased $546,079 during the six months ended June 30, 2000. The increase in cash reflects the following: Cash used in operating activities of $6,167,041 resulting primarily from funding operating losses and increases in accounts receivable, offset in part by increased accounts payable; cash provided by investing activities of $147,805, primarily from the sale of equipment; cash provided by financing activities of $6,567,119, primarily from borrowings on the Company's line of credit, offset in part by payments on long-term debt. The Company relies on financing in the form of lines of credit to fund seasonal increases in receivables and inventory and to provide general working capital and long-term financing. In July 1999, the Company entered into a $37,000,000 secured credit facility with GE Capital Services ("GE"), to replace the Company's previous $25,000,000 facility with the same lender. The credit facility consists of a $35,000,000 revolving line of credit and a $2,000,000 term note and is secured by substantially all of the assets of the Company and its subsidiaries. The Company is in default on the GE credit facility agreement. The credit agreement contains provisions which require the Company to maintain a minimum level of net worth and a minimum interest coverage ratio and limit the Company's expenditures on capital assets. The Company was not in compliance with the interest coverage and minimum net worth covenants for the quarter ended June 30, 2000. GE has been unwilling to waive noncompliance. GE issued a default notice to the Company on June 5, 2000. Due to the Company's default, GE has the right to withdraw funding, demand immediate payment of all outstanding loan balances and foreclose against the loan collateral in satisfaction of its secured debt. The Company is working with GE to address the default and the Company's financial problems. GE has thus far refrained from exercising certain of its rights and has continued funding the Company on a restricted basis. The ultimate actions of GE and the resolution of the Company's financial 15 16 problems is uncertain. The current circumstances and funding levels render the Company unable to maintain normal activities. Because the lender has not waived noncompliance, and has the right to accelerate payment of outstanding loans or otherwise restrict borrowings under the line, all outstanding borrowings under the line of credit and term loan have been classified as short-term as of June 30, 2000. In connection with the GE Capital Services line of credit, the Company issued a warrant for the purchase of 334,793 shares of common stock at an original exercise price of $5.95 per share. The warrant is exercisable immediately and expires in July 2002. The fair value of the warrant was calculated using the Black-Scholes method and was estimated at $327,032. This deferred debt issuance cost reduces the carrying value of the related debt and is being amortized over the life of the debt on a straight line basis. In August 2000, the warrant was amended to change the exercise price to fifty cents per share. Borrowings under the line of credit facility are limited to a borrowing base of up to 85% of eligible receivables, and up to 65% of eligible inventory, as defined in the credit agreement. Interest on borrowings is at an Index Rate (the higher of the published prime interest rate or the Federal Funds Rate plus 0.5 percentage points) plus a Revolver Index Margin of 0.35 percentage points through May 2, 2000 and of 0.55 percentage points thereafter (borrowing rate of 9.55% as of June 30, 2000). The Company is required to pay a commitment fee of 1/2% on any unused portion of the line. Outstanding borrowings on the GE credit facility, including the GE line of credit, totaled $24,498,865 as of June 30, 2000. Outstanding borrowings on the GE term note totaled $1,569,103 (net of $222,563 in deferred debt issuance costs) as of June 30, 2000. As of December 31, 1999, March 31, 2000 and June 30, 2000, Sureco, a wholly owned subsidiary, was in default on a note payable to B&I Lending, totaling $1,021,479 at June 30, 2000, due to noncompliance with covenants restricting change of use of the facility and equipment in Fort Valley, Georgia, reducing inventory and equipment at the facility, and requiring a minimum tangible net worth ratio. The full value of the note has been classified as a current liability. The Company believes that inflation has not had a significant impact on the results of its operations. FORWARD LOOKING INFORMATION The information contained in this Quarterly Report includes forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the Company's efforts to deal with its financial problems, the Company's efforts to sell certain assets or businesses, the Company's efforts and intention to pay down the secured GE Capital debt, the Company's ongoing relationship with GE Capital, the uncertainty of continued funding by GE Capital, the potential for foreclosure by GE Capital against the assets on the Company, and the Company's inability to operate normally. These forward-looking statements involve a number of risks and uncertainties, including: The Company's relationship with GE Capital; the Company's ability pay down GE Capital's secured debt; the Company's ability to successfully negotiate with GE Capital for continued funding, waiver of defaults and forbearance on foreclosure against the Company's assets; the Company's ability to conclude planned sales of assets or businesses and willingness of the Company's shareholders' to approve any such sales; the Company's ability to retain customers, vendors or personnel necessary to continue operations; and other factors disclosed throughout this Quarterly Report and the Company's other filings with the Securities and Exchange Commission. The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. The Company undertakes no obligation to revise any forward-looking statement in order to reflect events or circumstances that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and uncertainties that may affect the Company's financial condition and results of operations. 16 17 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. Subsidiaries of Southern Resources, Inc., our wholly-owned subsidiary, and other parties have been issued governmental orders requiring them to investigate and cleanup the subsidiaries' Fort Valley, Georgia former manufacturing site, currently maintained by the subsidiaries as a warehouse, and adjacent property not owned by the subsidiaries, which properties are collectively known as the Woolfolk Chemical Works site. This site is listed by the United States Environmental Protection Agency ("EPA") on its National Priorities List (NPL). These actions relate to environmental contamination discovered on and near the Woolfolk site. The former owner of the entire Woolfolk site and its predecessors, which are unaffiliated with SRI or its subsidiaries, conducted operations at the property owned by one of the subsidiaries of SRI, between some time prior to 1920 and 1984. Management believes that these historical operations prior to 1984 were the primary source of the contamination of the Woolfolk site. The subsidiaries have conducted certain limited remedial activities at the property at the request of governmental authorities. The former owner of the Woolfolk site has conducted certain investigation and cleanup activities at the site at the request of the EPA. The former owner, however, has declined to undertake additional remedial activities requested by EPA. EPA presently is directing additional cleanup of the Woolfolk site. We are unable at this time to determine whether the legal actions relating to the subsidiaries' Fort Valley property will result in a material loss to SRI or Verdant. We are party to other legal proceedings, which we believe to be individually and collectively immaterial to our business. Item 3. DEFAULT UPON SENIOR SECURITIES The Amended and Restated Credit Agreement, dated as of July 14, 1999, as amended (the "Credit Agreement") among the Company, its subsidiaries and GE contains covenants that the Company will maintain certain levels of interest coverage and net worth with which the Company was not in compliance at June 30, 2000. The failure to comply with these covenants, as well as the default by Sureco under its credit agreement, constitute "events of default" under the Credit Agreement that would, unless waived, allow GE to both refuse additional borrowings under the Credit Agreement, to consider all outstanding borrowings immediately due and payable and to exercise its rights against loan collateral. GE has been unwilling to waive this event of noncompliance and has notified the Company of its default under the credit agreement. GE has yet to exercise its full rights under the credit agreement. The Company's debt to GE in default, consisting of its line of credit and term note, totaled $22,815,017 as of August 14, 2000 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. An annual meeting of shareholders was held on May 25, 2000. There were 5,202,800 shares of common stock entitled to vote and a total of 4,086,865 shares (78.6%) were represented at the meeting. The following four items of business were presented. Items 1, 2 and 3 were approved by a majority vote of the outstanding shares of the Company's common stock present and entitled to vote on that matter. Item 4 was not approved. The items of business and the votes cast are as follows: 1. Election of eight directors as slated in the proxy statement, all of which are incumbents standing for reelection. ALL NOMINEES WERE ELECTED by a majority vote as follows:

17 18 Subsequent to the annual shareholders meeting, directors Goldberg, Lovness, Pass, Yanni, Hetterick and Oakey resigned their positions as directors. The remaining directors, Stofer and Fischer, appointed Dean Bachelor from Platnum Management, LLC as a director and chairman of the board of directors of the Company. See Managements Discussion and Analysis of Financial Condition and Results of Operations herein for further information about management and board changes. 2. Ratification of the appointment of Deloitte and Touche LLP as the Company's independent accountants to audit the Company's consolidated financial statements for 2000. APPOINTMENT WAS RATIFIED by a majority vote as follows:

3. Approval of an amendment to the Company's 1996 Employee Incentive Stock Option Plan to increase the number of shares of the Company's common stock reserved for issuance upon the exercise of options granted under the Plan by 500,000, (from 250,000 shares to 750,000 shares) and to increase the limit on the number of options that may be granted to an employee in a twelve month period from 100,000 shares to 250,000 shares. APPROVAL WAS OBTAINED by a majority vote of shares qualified to vote on this matter. The vote was as follows:

4. Approval of an amendment to the Company's Stock Option Plan for Non-employee Directors to increase the number of shares of the Company's common stock reserved for issuance upon the exercise of options granted under the Plan by 150,000 (from 80,000 shares to 230,000 shares) and to change the manner in which options are granted to non-employee directors. APPROVAL WAS NOT OBTAINED due to less than a majority vote of shares necessary to constitute a quorum. The vote was as follows:

Item 6. 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 the Company 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 the Company 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). 2.3 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). 18 19 3.1 Restated Articles of Incorporation of the Company (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 (incorporated by reference to Exhibit 3.3 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998, SEC File No. 0-18921). 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 (incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998, SEC File No. 0-18921). * 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 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.) * 10.4 Amendment No. 1, adopted at the 1999 annual shareholder's meeting, and Amendment No. 2, adopted at the 2000 annual shareholder's meeting, to the Company's 1996 Employee Stock Option Plan ** * 10.5 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). * 10.6 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). * 10.7 Consep, Inc. 1992 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, SEC File No. 0-18921). * 10.8 Consep, Inc. 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, SEC File No. 0-18921). * 10.9 Consep, Inc. 1997 Stock Incentive Plan (incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, SEC File No. 0-18921). 10.10 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.) 19 20 10.11 Amendment to Lease Agreement between the Company and 94th Street Associates, a Minnesota Partnership, dated November 17, 1998 (incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-KSB for the year ended December 31,1998, SEC File No. 0-18921). 10.12 Lease Agreement between Verdant Brands, Inc. and L&A Development, LLC, dated December 1, 1999 (incorporated by reference to Exhibit 10.11 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, SEC File No. 0-18921). *10.13 Employment Agreement between the Company and John F. Hetterick, dated December 1, 1999 (incorporated by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, SEC File No. 0-18921). *10.14 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). *10.15 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). *10.16 Termination and Consulting Agreement between the Company and Stanley Goldberg, dated December 6, 1999 (incorporated by reference to Exhibit 10.15 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, SEC File No. 0-18921). *10.17 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). *10.18 Separation Agreement and General Release between the Company and Mark G. Eisenschenk, dated December 6, 1999 (incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, SEC File No. 0-18921). *10.19 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). *10.20 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). 10.21 Amended and Restated Credit Agreement between the Company and General Electric Capital Corporation dated July 14, 1999 (incorporated by reference to Exhibit 10.12 of the Company's Quarterly Report on Form 10-QSB for the three months ended June 30, 1999, SEC File No. 0- 18921). 10.22 First Amendment and Waiver to Credit Agreement dated July 14, 1999 between the Company and General Electric Capital Corporation dated March 29, 2000 (incorporated by reference to Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2000, SEC File No. 0-18921). 20 21 10.23 Warrant to Purchase Common Stock in connection with the Amended and Restated Credit Agreement between the Company and General Electric Capital Corporation dated July 14, 1999 (incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-QSB for the three months ended September 30, 1999, SEC File No. 0-18921). 10.24 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). 10.25 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). *10.26 Agreement between the Company and Platinum Management LLC dated June 5, 2000. ** 27.1 Financial Data Schedule ** * Management contract or compensation plan or arrangement. ** Filed with this report. (b) Reports on Form 8-K The Company filed no Current Reports on Form 8-K during the three months ended June 30, 2000. 21 22 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. VERDANT BRANDS, INC. Dated: August 14, 2000 By /S/ Dean Bachelor ------------------------------------------- Dean Bachelor Chief Executive Officer Dated: August 14, 2000 By /S/ Mike Blair ------------------------------------------- Mike Blair Chief Financial Officer (principal financial officer) 22

VERDANT BRANDS INC 10-Q