<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended September 30, 1996
Commission file number: 0-23156
CONSEP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0874480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
213 S.W. Columbia Street, Bend, OR 97702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 388-3688
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
Number of shares of common stock outstanding as of
November 1, 1996:
9,422,903 shares, $.01 par value per share
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CONSEP, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the
three months ended September 30, 1996 and 1995 4
Consolidated Statements of Operations for the
nine months ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 489,058 $ 2,069,595
Short-term investments 103,167 136,501
Accounts receivable, net 6,306,449 3,797,425
Inventories, net (note 2) 7,115,824 8,012,430
Prepaid expenses and other 656,966 416,717
------------ ------------
Total current assets 14,671,464 14,432,668
Property, plant and equipment, net 3,938,335 3,215,841
Intangible assets, net 1,582,949 1,526,602
Goodwill, net 2,219,760 2,311,673
Notes receivable and other assets 307,001 71,790
------------ ------------
Total assets $ 22,719,509 $ 21,558,574
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines 3,296,541 1,710,997
Accounts payable 2,434,480 2,458,120
Current portion of notes and leases payable 406,522 444,425
Accrued liabilities 715,128 584,179
Customer deposits 21,751 451,226
------------ ------------
Total current liabilities 6,874,422 5,648,947
Notes and leases payable, excluding current maturities 1,032,055 931,005
Mandatory stock warrant obligation 19,500 19,500
Deferred gain on sale of property 247,967 277,642
------------ ------------
Total liabilities 8,173,944 6,877,094
Shareholders' equity:
Common stock (note 5) 76,673 75,695
Additional paid-in capital (note 5) 39,666,228 39,467,701
Foreign currency translation adjustment 12,427 10,797
Accumulated deficit (25,209,763) (24,872,713)
------------ ------------
Total shareholders' equity 14,545,565 14,681,480
------------ ------------
Total liabilities and shareholders' equity $ 22,719,509 $ 21,558,574
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
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CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 2,225,949 $ 1,460,555
Distribution products 6,142,008 6,297,501
----------- -----------
Total revenues 8,367,957 7,758,056
----------- -----------
COST OF REVENUES
Proprietary products 1,404,390 819,794
Distribution products 5,110,633 5,294,916
----------- -----------
Total cost of revenues 6,515,023 6,114,710
----------- -----------
Gross margin 1,852,934 1,643,346
----------- -----------
OPERATING EXPENSES (note 3)
Research and development 319,982 293,170
Selling, general and administrative 1,399,443 1,135,824
Distribution 858,509 842,835
----------- -----------
Total operating expenses 2,577,934 2,271,829
----------- -----------
Operating loss (725,000) (628,483)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 44,025 89,353
Interest expense (102,840) (74,765)
Other, net (13,724) 54,852
----------- -----------
Net other income (expense) (72,539) 69,440
----------- -----------
Net loss $ (797,539) $ (559,043)
=========== ===========
Net loss per common and common
equivalent share (note 4) $ (0.10) $ (0.08)
=========== ===========
Weighted average number of common
and common equivalent shares
outstanding (note 4) 7,659,153 6,652,063
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
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CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 9,523,740 $ 8,112,989
Distribution products 19,737,527 18,728,931
------------ ------------
Total revenues 29,261,267 26,841,920
------------ ------------
COST OF REVENUES
Proprietary products 5,692,329 4,659,484
Distribution products 16,018,581 15,458,672
------------ ------------
Total cost of revenues 21,710,910 20,118,156
------------ ------------
Gross margin 7,550,357 6,723,764
------------ ------------
OPERATING EXPENSES (note 3)
Research and development 958,364 796,888
Selling, general and administrative 4,242,817 3,501,517
Distribution 2,517,058 2,574,437
------------ ------------
Total operating expenses 7,718,239 6,872,842
------------ ------------
Operating loss (167,882) (149,078)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 119,915 199,373
Interest expense (257,709) (241,381)
Other, net (31,374) 67,416
------------ ------------
Net other income (expense) (169,168) 25,408
------------ ------------
Net loss $ (337,050) $ (123,670)
============ ============
Net loss per common and common
equivalent share (note 4) $ (0.04) $ (0.02)
============ ============
Weighted average number of common
and common equivalent shares
outstanding (note 4) 7,619,385 6,499,257
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
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CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (337,050) $ (123,670)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 788,944 651,767
Provision for bad debts 1,223 57,827
Inventory reserve 63,615 50,970
Loss (gain) on disposal of equipment 6,426 (42,102)
Other non-cash items (12,225) (32,896)
Changes in assets and liabilities, net of amounts acquired:
Short-term investments 33,333 1,514,935
Accounts receivable (2,904,348) (1,655,898)
Inventories 834,004 (773,665)
Prepaid expenses and other (240,140) (42,733)
Accounts payable (24,686) (524,251)
Accrued liabilities 132,089 (150,195)
Other assets (62,156) 33,333
Customer deposits (429,475) (528,411)
----------- -----------
Net cash used in operating activities (2,150,446) (1,564,989)
----------- -----------
INVESTING ACTIVITIES
Acquisition of intangible assets (253,670) (151,670)
Acquisition of property, plant and equipment (719,127) (256,737)
Acquisition of subsidiary companies, net of cash acquired 0 (74,136)
Proceeds from sale of property, plant and equipment 6,000 78,550
Issuance of notes receivable, net of payments received 231,747 (121,131)
----------- -----------
Net cash used in investing activities (735,050) (525,124)
----------- -----------
FINANCING ACTIVITIES
Increase in bank lines 1,585,348 1,130,032
Proceeds from issuance of notes payable 0 141,516
Principal payments on notes payable (480,050) (366,221)
Net proceeds from issuance of common stock 199,505 2,857,389
----------- -----------
Net cash provided by financing activities 1,304,803 3,762,716
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents 156 (663)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,580,537) 1,671,940
Cash and cash equivalents at beginning of period 2,069,595 1,753,785
----------- -----------
Cash and cash equivalents at end of period $ 489,058 $ 3,425,725
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
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CONSEP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the statements include all
adjustments necessary (which are of a normal and recurring nature) for the fair
presentation of the results of the interim periods presented. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 1995, as included in the
Company's 1995 Annual Report to Shareholders.
NOTE 2 - INVENTORIES
Inventories, stated at the lower of cost or market, consist of:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Raw materials $1,250,282 $1,760,833
Work in process 334,081 208,807
Finished goods - proprietary 3,172,611 3,329,485
Finished goods - distribution 2,553,507 2,975,188
---------- ----------
7,310,481 8,274,313
Less reserve for obsolescence 194,657 261,883
---------- ----------
$7,115,824 $8,012,430
========== ==========
</TABLE>
NOTE 3 - OPERATING EXPENSES
Research and development and selling, general and administrative expenses are
allocated to the Company's proprietary product operations. Distribution expenses
consist entirely of selling, general and administrative costs of the Company's
distribution operations.
NOTE 4 - NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
For the three and nine months ended September 30, 1996 and 1995, net income per
common and common equivalent share is based upon the weighted average number of
common shares outstanding during each period plus, to the extent dilutive, the
effect of common shares contingently issuable from the exercise of stock
options.
7
<PAGE> 8
NOTE 5 - CHANGES IN SHAREHOLDERS' EQUITY
In October 1996, the Company completed a secondary public offering of its common
stock. A total of 1,755,563 shares of the Company's common stock was issued in
conjunction with this offering, providing net proceeds to the Company of
approximately $4.6 million.
NOTE 6 - SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURES
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
Nine Months Ended Income
September 30, Interest Taxes
------------- -------- -----
<S> <C> <C>
1996 $ 243,051 $ 9,996
1995 $ 240,691 $ 18,570
</TABLE>
Following is a summary of non-cash investing and financing activities of the
Company for the first nine months of 1996:
During the nine months ended September 30, 1996, the Company purchased
a building for $396,055 and acquired vehicles for $121,401 through the
issuance of notes payable.
Also during the first nine months of 1996, the Company converted
$499,959 of trade accounts receivable to notes receivable. In
addition, notes receivable increased $10,657 as a result of the sale
of a vehicle.
NOTE 7 - SUBSEQUENT EVENTS
In October 1996, a building owned by the Company's Farchan Laboratories, Inc.
subsidiary was destroyed by fire. The building served as a manufacturing
facility for certain pheromones used in certain of the Company's commercial
agriculture products, as well as specialty chemicals sold to third parties. The
Company does not expect the loss of the manufacturing facility to have a
material adverse effect on the Company's business, financial condition or
results of operations.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Consep derives its revenues from the sale of its proprietary products to the
commercial agriculture and consumer home, lawn and garden markets and from sales
by its distribution subsidiaries of products produced by other manufacturers,
including both biorational insect control products and conventional toxic
pesticides as well as fertilizers and farm supplies. The Company's primary focus
is the development of proprietary products and expansion of the markets for
those products. A significant element of the Company's strategy for the
commercialization of its proprietary commercial agriculture products has been to
acquire distribution operations in key agricultural regions and to introduce its
proprietary products through those operations.
Proprietary product revenues increased 52.4% for the three months ended
September 30, 1996 as compared to the corresponding period of 1995. This
increase in proprietary product revenues for the three months ended September
30, 1996 combined with a 7.0% decrease in proprietary product margin
percentage, a 13.5% increase in operating expenses and a 2.5% decrease in
distribution revenues for the same period contributed to a 42.7% increase in
the net loss for the three months ended September 30, 1996 as compared to the
corresponding period of 1995.
Since its inception, Consep has funded its growth primarily through equity
financings. Funds from these financings have allowed the Company to build its
organization, develop and register proprietary products for both the commercial
agriculture and consumer home, lawn and garden markets, acquire distribution
operations for the introduction of its commercial agriculture products and
expand its sales efforts through both domestic and international channels of
distribution. The Company completed a secondary public stock offering in October
1996, which provided approximately $4.6 million in net proceeds after deducting
costs associated with the offering.
The Company has incurred annual operating losses since its inception in 1984.
The Company expects to incur an annual operating loss for 1996. The Company
believes annual profitability will be dependent on continued growth of revenues,
maintaining or strengthening gross margins and controlling the growth of
operating expenses. There can be no assurance that the Company will become
profitable on an annual basis.
The Company's business is seasonal with its highest revenues historically being
recognized in the first and second quarters of each year and its lowest revenues
being recognized in the third and fourth quarters of each year. This seasonality
coincides with the commercial growing season in the Northern Hemisphere and, to
a lesser extent, the consumer home, lawn and garden buying season. The Company
anticipates this seasonal profile will continue with a slight shift to third and
fourth quarter revenues as sales to international markets and sales of new
non-seasonal products increase. In contrast to revenues, many of the Company's
operating expenses are largely independent of the quarterly selling cycles. As a
result, operating expenses will generally represent a higher percentage of
revenues in the third and fourth quarters as compared to the first two quarters
and the Company may experience a loss in the third and fourth quarters of an
otherwise profitable year.
9
<PAGE> 10
RESULTS OF OPERATIONS
REVENUES. Total revenues for the three months ended September 30, 1996 increased
7.9% to approximately $8.4 million from approximately $7.8 million in the
corresponding period of 1995. For the nine months ended September 30, 1996,
total revenues increased 9.0% to approximately $29.3 million from approximately
$26.8 million in the corresponding period of 1995. Revenues from the sale of
proprietary products increased 52.4% during the three months ended September 30,
1996 to approximately $2.2 million from approximately $1.5 million in the
corresponding period of 1995. For the nine months ended September 30, 1996,
revenues from the sale of proprietary products were approximately $9.5 million,
an increase of 17.4% over proprietary product revenues of approximately $8.1
million recorded in the corresponding period of 1995. Revenues from the
Company's distribution operations decreased 2.5% during the three months ended
September 30, 1996 to approximately $6.1 million from approximately $6.3 million
in the corresponding period of 1995. For the nine months ended September 30,
1996, distribution revenues were approximately $19.7 million, an increase of
5.4% over distribution revenues of approximately $18.7 million in the
corresponding period of 1995.
The growth in proprietary product revenues for the three months and nine months
ended September 30, 1996 was attributable to growth in sales of the Company's
consumer products and commercial agriculture products, as well as increased
sales of specialty chemicals to third parties by the Company's Farchan
Laboratories, Inc. subsidiary ("Farchan"). The acquisition of Farchan occurred
during February 1995, and accordingly, results from the nine months ended
September 30, 1995 included only eight months of Farchan's operations.
Revenues from the sale of commercial agriculture products increased
approximately $591,000 and $257,000, or 104.9% and 8.6%, respectively, for the
three months and nine months ended September 30, 1996 as compared to the
corresponding periods of 1995. The increase in sales of commercial agriculture
products for the three months ended September 30, 1996 was primarily
attributable to the introduction of newly registered formulations of products
for which registration approvals were obtained during the quarter. In the three
months ended September 30, 1996 the Company received registration approval for
its new flowable micro-encapsulated product for the control of the Pink Bollworm
in cotton ("CheckMate PBW-F"), which contributed to a 327.2% growth in revenues
from the sale of CheckMate PBW products. The revenue increase for the nine
months ended September 30, 1996 was primarily attributable to 1) an increase in
CheckMate PBW product revenues as a result of the introduction of CheckMate
PBW-F and increased sales of other CheckMate PBW products in Mexico and 2)
increased international sales of CheckMate products to control Codling Moth and
Oriental Fruit Moth. These revenue increases were offset by previously reported
reductions in revenue in the six months ended June 30, 1996 from the sale in
Mexico of the Company's product to control Tomato Pinworm and from the sale in
California of the Company's product to control Codling Moth.
Revenues from the sale of consumer products from the Company's SureFire line of
products in the United States and Chemfree products in Canada increased by 19.0%
in the three months ended September 30, 1996 compared to the corresponding
period of 1995. For the nine months ended September 30, 1996, consumer product
revenues increased 21.7% from the corresponding period of 1995. This growth in
consumer product revenues was primarily attributable to increases in the number
of retail outlets through which the Company's consumer products are sold and in
the number of such products carried by the individual retail operations.
10
<PAGE> 11
Farchan, which was acquired in February 1995, contributed approximately $68,000
and $236,000, respectively, to the growth in proprietary product revenues for
the three months and nine months ended September 30, 1996 as compared to the
corresponding periods in 1995.
The revenue decrease of 2.5% from the Company's distribution operations during
the three months ended September 30, 1996 as compared to the corresponding
period of 1995 was primarily the result of milder weather in the spring and
early summer, which contributed to less insect infestation in targeted crops
during the late summer. For the nine months ended September 30, 1996
distribution revenues increased 5.4% over the corresponding period of 1995. This
increase was primarily attributable to continued growth in revenues from the
Company's Pacoast subsidiary as well as to favorable weather conditions during
the six months ended June 30, 1996 in the Central Valley of California, the
Company's principal distribution market.
GROSS MARGIN. The consolidated gross margin for the Company increased to 22.1%
in the three months ended September 30, 1996 from 21.2% in the corresponding
period of 1995. For the nine months ended September 30, 1996, the consolidated
gross margin was 25.8% compared to 25.0% in the corresponding period of 1995.
The margin improvement for the three months and nine months ended September 30,
1996, as compared to the corresponding periods of 1995, is primarily
attributable to an increase in the gross margins generated on distribution
revenues. During the second quarter the Company changed the timing for
recognition of manufacturers' rebates for purchases of bulk chemicals. Rather
than recognizing these rebates when received, typically at year-end, the Company
determined that recognition should occur at the time the rebates are earned.
This change improved distribution margins by approximately 1.4% and 1.3%,
respectively, in the three months and nine months ended September 30, 1996. The
gross margin on the sale of proprietary products during the three months ended
September 30, 1996 decreased to 36.9% from the 43.9% gross margin achieved on
proprietary product revenues in the corresponding period of 1995. Gross margin
on proprietary products also decreased in the nine months ended September 30,
1996 to 40.2% from 42.6% in the corresponding period of 1995.
The gross margins on agricultural proprietary product sales for the three and
nine months ended September 30, 1996 decreased to 36.0% and 39.7%, respectively,
from 48.3% and 45.8% in the corresponding periods of 1995. The decreases were
primarily attributable to differences in product sales mix and higher than
expected production and raw material costs incurred in connection with the
introduction of the Company's new warm weather CheckMate CM formulation. The
gross margins on proprietary consumer product sales increased to 36.4% from
33.3%, respectively, in the three months ended September 30, 1996 and 1995 and
decreased slightly to 38.3% from 38.5%, respectively, in the nine months ended
September 30, 1996 and 1995. Sales of specialty chemicals produced a gross
margin of 40.4% in the three months ended September 30, 1996, down from the
54.2% gross margin reported in the corresponding period of 1995. For the nine
months ended September 30, 1996, gross margins on specialty chemical sales
decreased to 50.4% from 51.3% in the corresponding period of 1995. The variances
in gross margins for consumer products and specialty chemical sales were the
result of differences in the product sales mix within those product categories
for both the three months and nine months ended September 30, 1996 as compared
to the corresponding periods in 1995. The gross margins from distribution
revenues increased to 16.8% from 15.9% and to 18.8% from 17.5%, respectively,
for the three months and nine months ended September 30, 1996 and 1995.
11
<PAGE> 12
OPERATING EXPENSES. Operating expenses during the three months ended September
30, 1996 increased 13.5% to approximately $2.6 million from approximately $2.3
million in the corresponding period of 1995. During the nine months ended
September 30, 1996, operating expenses increased 12.3% to approximately $7.7
million from approximately $6.9 million in the corresponding period of 1995. The
increased operating expenses during the three months ended September 30, 1996,
as compared to the corresponding period of 1995, were primarily attributable to
increased personnel, expanded international operations and additional marketing
costs related to the introduction of the Company's new Bite Blocker line of
insect repellent products which accounted for approximately 30% of the increase
in operating expenses over the three months ended September 30, 1995. Since the
Company does not expect to commence significant sales of the Bite Blocker
product line until the first quarter of 1997, marketing costs related to the
introduction of this new consumer product line will continue to be incurred
during the fourth quarter of 1996 without any significant revenue generation in
that period. In addition to the effects of the increased personnel, expanded
international operations and additional marketing costs discussed above, the
increase in operating expenses for the nine months ended September 30, 1996 was
also attributable to 1) higher product development costs in general, (2)
additional expenses for complementary product given to growers in California who
encountered previously reported difficulties with the CheckMate product to
control Codling Moth and (3) 1996 results include nine months of Farchan
operations while the nine months ended September 30, 1995 included only eight
months of operating expenses for that subsidiary acquired in February 1995.
OTHER INCOME AND EXPENSE. During the three months ended September 30, 1996, the
Company recorded net other expense of approximately $73,000 compared to
approximately net other income of $69,000 during the corresponding period of
1995. For the nine months ended September 30, 1996 net other expense increased
to approximately $169,000 from net other income of $25,000 in the same period in
1995. The third quarter increase in net other expense was primarily due to 1) an
increase in interest expense of approximately $28,000, 2) approximately $45,000
less in interest income and 3) a one-time gain in September 1995 of
approximately $44,000 on the sale of property which had a positive impact on
the third quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has used funds generated from operations,
equity financings and bank borrowings to fund its research and development,
marketing, acquisition of capital equipment, acquisition of distribution
operations and working capital requirements. In October 1996, the Company
completed a secondary public stock offering which raised approximately $4.6
million net of related offering costs. Since its inception, the Company has
raised approximately $44.3 million of equity. During August 1995, the Company
secured a new $5 million line of credit which consolidated the collateral bases
of the Company's two previous lines of credit, providing the Company greater
flexibility in funding the working capital requirements of its overall
operations. This line of credit, which is secured by substantially all of the
Company's current assets, was renewed in September 1996 for a one-year term. As
a result of the closing of the Company's secondary public stock offering in
October 1996, the line of credit now provides the Company with a $7.5 million
credit facility. At September 30, 1996 the Company was in compliance with all
covenants related to the line of credit.
In January of 1996, the Company, through its Farchan subsidiary, acquired land
and a building to facilitate expansion of its specialty chemicals manufacturing
capacity. The facility, which is located in Alachua, Florida, was acquired to
provide increased manufacturing capacity to produce additional pheromones for
use in the Company's proprietary agriculture products, as well as to expand
Farchan's capacity to supply specialty
12
<PAGE> 13
chemicals to third party customers. This facility, which was acquired for
approximately $396,000, was financed primarily by a term loan secured by
Farchan's land and buildings.
On October 16, 1996, one of two buildings, with a capacity of approximately
3,000 square feet located in Gainesville, Florida, owned by Consep's Farchan
subsidiary was destroyed by fire. The building served as a manufacturing
facility for certain pheromones used in certain of the Company's commercial
agriculture products, as well as specialty chemicals sold to research
organizations, pharmaceutical companies and the agricultural industry. Farchan
is currently working with an environmental clean-up contractor to analyze,
remove and dispose of the fire debris. This clean-up process is being supervised
by the U.S. Environmental Protection Agency (the "EPA") and should be completed
in approximately two weeks. Although chemical analysis of the fire debris
resulted in findings that substantially all of the debris contains contaminants
below EPA-allowed limits and can be disposed of in traditional landfills and
recycling facilities, a limited amount of ash contains elevated levels of
cyanide which will require special treatment and disposal procedures. As a
result of the chemical analysis of the fire debris, and at the EPA's direction,
Farchan is working with an EPA-approved consultant to prepare a sampling plan to
test the Farchan site for potential soil and groundwater contamination resulting
from the fire. The Company does not expect the fire and resulting loss of the
manufacturing facility to have a material adverse effect on the Company's
business, financial condition or results of operations, since the Company (i)
has property damage, environmental remediation and business interruption
insurance which covers the destroyed facility, its contents, the underlying
property and the associated manufacturing operations, and (ii) had acquired a
new building in Alachua, Florida in January 1996, as discussed above, to
facilitate expansion of its specialty chemicals manufacturing capacity.
Immediately following the fire, the Company planned to accelerate expansion of
manufacturing capacity at the new facility, which had been scheduled to commence
production of specialty chemicals by mid-November 1996. However, on October 21,
1996, the City of Alachua, Florida denied Farchan's application for a site
permit which is required to operate the new manufacturing facility. The Company
intends to appeal this decision and believes that the new facility should be
able to commence production by late February 1997 if the requisite site permit
is issued at the next scheduled meeting of the Alachua City Council.
Alternatively, if the site permit for the new manufacturing facility is not
issued prior to completion of cleanup efforts and environmental testing at the
site of the destroyed manufacturing facility, the Company intends to dispose of
the new manufacturing facility and build a manufacturing building on the site of
the destroyed manufacturing facility. The Company believes that construction of
a new Farchan manufacturing facility in Gainesville, Florida, could be completed
by late March 1997 and that the resulting delays in recommencing manufacturing
operations at Farchan will not have a material adverse effect on the business,
financial condition or results of operations of the Company due to its business
interruption insurance coverage with respect to Farchan's business operations.
In addition, the Company believes it has alternative sources of supply of
pheromones which it would otherwise purchase from Farchan.
Due to the limited time available to fully analyze issues surrounding the fire
and resulting loss of the Farchan manufacturing facility and the lack of a
complete analysis of potential soil and groundwater contamination, no assurance
can be given that the Company will not encounter unexpected developments,
including, without limitation, delays or difficulties in receiving insurance
proceeds, restrictions on the use of such proceeds which could be imposed by the
insurance company, discovery of unanticipated soil or groundwater contamination
at the Farchan site, environmental remediation expenses in excess of the
Company's insurance coverage limits, or difficulties in transitioning
manufacturing operations to the new Farchan
13
<PAGE> 14
facility on an accelerated basis. Any such developments could adversely affect
the Company's business, financial condition or results of operations.
At September 30, 1996, the Company had cash, cash equivalents and short-term
investments of approximately $592,000, with excess credit line borrowing
capacity of approximately $311,000, and working capital of approximately $7.8
million. Borrowings under revolving lines of credit were approximately $3.3
million. The Company believes that cash and cash equivalents at September 30,
1996, funds generated from operations, funds available from existing bank lines
of credit and funds received from the secondary public stock offering completed
in October 1996, will be sufficient to fund the Company's operations through at
least 1997. The Company's capital needs may increase depending upon several
factors, including future acquisitions, changes to planned research and
development activities, expanded manufacturing and commercialization programs,
additional technological, regulatory and competitive developments, the timing of
regulatory approvals for new products and unanticipated expenses arising out of
the fire at the Company's Farchan facility. As a result, the Company may need to
raise additional funds through the issuance of equity securities or other
financing instruments. There can be no assurance that additional financing will
be available and, if available, that the terms would be acceptable to the
Company.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) No reports were filed on Form 8-K during the quarter for which
this report is filed.
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSEP, INC.
(REGISTRANT)
DATE: November 12, 1996 By: \s\ VOLKER G. OAKEY
----------------- ---------------------------
VOLKER G. OAKEY
Chairman of the Board,
President and Chief
Executive Officer
DATE: November 12, 1996 By: \s\ LARRY KATZ
----------------- ---------------------------
LARRY KATZ
Vice President, Finance and
Chief Financial Officer
16
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