<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, 1997
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, 1997:
9,460,151 shares, $.01 par value per share
------------------------------------------
<PAGE> 2
CONSEP, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations for the
three months ended September 30, 1997 and 1996 4
Consolidated Statements of Operations for the
nine months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 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 16
Signatures 17
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,077,646 $ 2,443,508
Short-term investments 102,667 103,167
Accounts receivable, net 7,821,802 3,601,912
Other receivables 852,939 296,358
Inventories, net (note 2) 8,549,731 7,993,706
Prepaid expenses 262,167 966,102
------------- ------------
Total current assets 18,666,952 15,404,753
Property, plant and equipment, net 5,589,080 4,020,456
Intangible assets, net 1,495,564 1,545,246
Goodwill, net 2,080,807 2,181,901
Notes receivable and other assets 23,497 258,865
------------- ------------
Total assets $ 27,855,900 $ 23,411,221
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines 3,747,000 1,170,000
Accounts payable 2,888,714 2,526,325
Current portion of notes and leases payable 485,786 347,190
Accrued liabilities 898,862 646,135
Customer deposits 47,829 282,581
------------- ------------
Total current liabilities 8,068,191 4,972,231
Notes and leases payable, excluding current maturities 2,288,067 1,171,069
Mandatory stock warrant obligation 19,500 19,500
Deferred gain on sale of property 0 238,075
------------- ------------
Total liabilities 10,375,758 6,400,875
Shareholders' equity:
Common stock 94,602 94,312
Additional paid-in capital 44,314,826 44,256,367
Foreign currency translation adjustment 7,945 15,267
Accumulated deficit (26,937,231) (27,355,600)
------------- ------------
Total shareholders' equity 17,480,142 17,010,346
------------- ------------
Total liabilities and shareholders' equity $ 27,855,900 $ 23,411,221
============= ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 2,769,892 $ 2,225,949
Distribution products 6,877,718 6,142,008
------------- -----------
Total revenues 9,647,610 8,367,957
------------- -----------
COST OF REVENUES
Proprietary products 1,865,285 1,404,390
Distribution products 5,739,866 5,110,633
------------- -----------
Total cost of revenues 7,605,151 6,515,023
------------- -----------
Gross margin 2,042,459 1,852,934
------------- -----------
OPERATING EXPENSES (note 3)
Research and development 285,591 319,982
Selling, general and administrative 1,585,031 1,399,443
Distribution 848,759 858,509
------------- -----------
Total operating expenses 2,719,381 2,577,934
------------- -----------
Operating loss (676,922) (725,000)
------------- -----------
OTHER INCOME (EXPENSE)
Interest income 40,730 44,025
Interest expense (156,365) (102,840)
Other, net 101,923 (13,724)
------------- -----------
Net other expense (13,712) (72,539)
------------- -----------
Net loss $ (690,634) $ (797,539)
============= ===========
Net loss per common and common
equivalent share (note 4) $ (0.07) $ (0.10)
============= ===========
Weighted average number of common
and common equivalent shares
outstanding (note 4) 9,455,881 7,659,153
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 12,157,681 $ 9,523,740
Distribution products 22,095,804 19,737,527
------------- ------------
Total revenues 34,253,485 29,261,267
------------- ------------
COST OF REVENUES
Proprietary products 7,252,970 5,692,329
Distribution products 18,092,117 16,018,581
------------- ------------
Total cost of revenues 25,345,087 21,710,910
------------- ------------
Gross margin 8,908,398 7,550,357
------------- ------------
OPERATING EXPENSES (note 3)
Research and development 899,706 958,364
Selling, general and administrative 5,180,301 4,242,817
Distribution 2,680,788 2,517,058
------------- ------------
Total operating expenses 8,760,795 7,718,239
------------- ------------
Operating income (loss) 147,603 (167,882)
------------- ------------
OTHER INCOME (EXPENSE)
Interest income 92,727 119,915
Interest expense (327,068) (257,709)
Other, net 505,107 (31,374)
------------- ------------
Net other income (expense) 270,766 (169,168)
------------- ------------
Net income (loss) $ 418,369 $ (337,050)
============= ============
Net income (loss) per common and common
equivalent share (note 4) $ 0.04 $ (0.04)
============= ============
Weighted average number of common
and common equivalent shares
outstanding (note 4) 9,531,108 7,619,385
============= ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 418,369 $ (337,050)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 864,384 788,944
Provision for bad debts 95,757 1,223
Inventory reserve 84,884 63,615
Loss on disposal of equipment 3,016 6,426
Other non-cash items (9,316) (12,225)
Changes in assets and liabilities, net of amounts acquired:
Short-term investments 500 33,333
Accounts receivable (4,376,317) (2,904,348)
Other receivables (556,581) (307,592)
Inventories (649,598) 834,004
Prepaid expenses 702,817 67,452
Accounts payable 373,410 (24,686)
Accrued liabilities 292,237 132,089
Other assets 6,461 (62,156)
Customer deposits (234,746) (429,475)
------------- -------------
Net cash used in operating activities (2,984,723) (2,150,446)
------------- -------------
INVESTING ACTIVITIES
Acquisition of intangible assets (144,031) (253,670)
Acquisition of property, plant and equipment (1,085,220) (719,127)
Proceeds from sale of property, plant and equipment 1,000 6,000
Issuance of notes receivable, net of payments received 287,867 231,747
------------- -------------
Net cash used in investing activities (940,384) (735,050)
------------- -------------
FINANCING ACTIVITIES
Increase in bank lines 2,577,340 1,585,348
Proceeds from issuance of notes payable 250,000 0
Principal payments on notes payable (326,127) (480,050)
Net proceeds from issuance of common stock 58,749 199,505
------------- -------------
Net cash provided by financing activities 2,559,962 1,304,803
------------- -------------
Effect of exchange rate changes on cash
and cash equivalents (717) 156
------------- -------------
Net decrease in cash and cash equivalents (1,365,862) (1,580,537)
Cash and cash equivalents at beginning of period 2,443,508 2,069,595
------------- -------------
Cash and cash equivalents at end of period $ 1,077,646 $ 489,058
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
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, 1996, as included in the
Company's 1996 Annual Report to Shareholders.
NOTE 2 - INVENTORIES
Inventories, stated at the lower of cost or market, consist of:
September 30, December 31,
1997 1996
------------ ------------
Raw materials $ 1,588,787 $ 2,196,006
Work in process 15,725 44,963
Finished goods - proprietary 4,455,080 3,528,880
Finished goods - distribution 2,909,480 2,717,836
------------ ------------
8,969,072 8,487,685
Less reserve for obsolescence 419,341 493,979
------------ ------------
$ 8,549,731 $ 7,993,706
============ ============
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, 1997 and 1996, 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 - SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURES
Cash paid for interest and income taxes was as follows:
Nine Months Ended Income
September 30, Interest Taxes
------------- -------- -----
1997 $ 333,202 $ 13,431
1996 $ 243,051 $ 9,996
Following is a summary of non-cash investing and financing activities of the
Company for the nine months ended September 30, 1997 and 1996:
During the nine months ended September 30, 1997, the Company acquired
equipment and vehicles for $208,406 through the issuance of notes and
leases payable. In June 1997, the Company completed the purchase of its
headquarters and manufacturing facility which was partially financed by
a $1,125,000 note payable to a bank.
In addition, as a result of the Company's intention to sell its
unfinished specialty chemicals manufacturing plant in Alachua, Florida,
the Company recorded a $175,000 write down to adjust the facility's
carrying value to the estimated fair market value.
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 6 - NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation and disclosure requirements for earnings
per share (EPS) for entities with publicly held common stock or potential common
stock. It replaces the presentation of primary EPS with a presentation of basic
EPS and fully diluted EPS with diluted EPS. Basic EPS, unlike primary EPS,
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then share in
the earnings of the entity. Diluted EPS is computed similarly to fully diluted
EPS under APB No. 15. SFAS No. 128 is effective for financial statements for
both interim and annual periods ending after December 15, 1997. The Company will
adopt SFAS No. 128 at December 31, 1997 for the year then ended. All prior
period EPS data presented at year end will be restated to conform with SFAS No.
128. The Company does not expect this statement to have a significant impact on
its calculations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. The
Statement establishes standards for the reporting and display of comprehensive
income and its components. The Statement requires that all items that are income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The Statement was only recently issued, and the
Company has not yet determined the impact of adoption on its disclosure
requirements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. The Statement was
only recently issued, and the Company has not yet determined the impact of
adoption on its disclosure requirements.
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. In addition, the Company
distributed for the first time in the 1997 season a line of consumer products,
based on natural oils, to repel biting insects. These insect repellent products,
which are manufactured by, and are the proprietary products of, a third party,
are being marketed on an exclusive basis in the United States under the
Company's Bite Blocker label as part of its consumer proprietary product line.
Proprietary product revenues increased 27.7% for the nine months ended September
30, 1997 as compared to the corresponding period of 1996. This increase in
proprietary product revenues for the nine months ended September 30, 1997,
combined with a 11.9% increase in distribution revenues, and offset by a 13.5%
increase in operating expenses for the same period, contributed to an increase
of approximately $755,000 in net income for the nine months ended September 30,
1997 as compared to the corresponding period of 1996. This increase in net
income includes an accrual of approximately $320,000 for estimated insurance
recoveries for additional pheromone expenses incurred in the nine months ended
September 30, 1997. See "Results of Operations - Gross Margin."
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 has incurred annual operating losses since its inception in 1984.
The Company expects to incur an annual operating loss for 1997. 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, 1997 increased
15.3% to approximately $9.6 million from approximately $8.4 million in the
corresponding period of 1996. For the nine months ended September 30, 1997,
total revenues increased 17.1% to approximately $34.3 million from approximately
$29.3 million in the corresponding period of 1996. Revenues from the sale of
proprietary products increased 24.4% during the three months ended September 30,
1997 to approximately $2.8 million from approximately $2.2 million in the
corresponding period of 1996. For the nine months ended September 30, 1997,
revenues from the sale of proprietary products were approximately $12.2 million,
an increase of 27.7% over proprietary product revenues of approximately $9.5
million recorded in the corresponding period of 1996. Revenues from the
Company's distribution operations increased 12.0% during the three months ended
September 30, 1997 to approximately $6.9 million from approximately $6.1 million
in the corresponding period of 1996. For the nine months ended September 30,
1997, distribution revenues were approximately $22.1 million, an increase of
11.9% over distribution revenues of approximately $19.7 million in the
corresponding period of 1996.
The growth in proprietary product revenues for the three months ended September
30, 1997 was primarily attributable to the Company's sale of its Farchan
research chemicals catalog business and inventory, increased sales of the
Company's SureFire consumer products and growth in sales of the Company's
commercial agriculture products.
Specialty chemical sales by Farchan increased 36.0% in the three months ended
September 30, 1997 as compared to the corresponding periods of 1996. This
increase in Farchan revenues was attributable to the sale of the research
chemicals catalog business and inventory to GFS Chemicals, Inc. of Powell, Ohio.
For the nine months ended September 30, 1997, specialty chemical sales by
Farchan decreased by approximately $171,000 or 14.6%. The decrease in sales by
Farchan was primarily the result of the fire in October of 1996 that destroyed
its primary manufacturing facility in Gainesville, Florida.
Revenues from the sale of commercial agriculture products increased
approximately $53,000 and $1.1 million, or 4.6% and 34.5%, respectively, for the
three months and nine months ended September 30, 1997 as compared to the
corresponding periods of 1996. The increase in revenues for the three months
ended September 30, 1997 from sales of commercial agriculture products was
primarily attributable to (i) increased sales of the CheckMate product to
control codling moth ("CheckMate CM") into markets in the southern hemisphere
and (ii) sales of the new CheckMate flowable product to control tomato pinworm
("CheckMate TPW-F"). These increases were substantially offset by a decrease in
the Company's CheckMate products to control pink bollworm in cotton ("CheckMate
PBW" and "CheckMate PBW-F"). The decrease in CheckMate PBW and PBW-F revenues
was primarily attributable to cooler weather conditions that led to
significantly reduced pink bollworm populations. In addition to the cooler
weather, the decrease in cotton product sales was also a result of the increased
use by growers of transgenic Bt cotton seed, a genetically engineered insect
resistant cotton.
The increase in revenues for the nine months ended September 30, 1997 from sales
of commercial agriculture products was primarily attributable to (i) the
introduction of a new combination CheckMate product to control both peach twig
borer and oriental fruit moth ("CheckMate SF"), (ii) a 65.9% increase in
revenues from sales of the CheckMate products to control tomato pinworm,
CheckMate TPW and CheckMate TPW-F and (iii) the increase in revenues from sales
of CheckMate CM in the southern hemisphere. The increase in CheckMate TPW
revenues was primarily the result of the Company's strengthening its sales
organization in Mexico in the first six months of 1996.
10
<PAGE> 11
Revenues from the sale of consumer products from the Company's SureFire and Bite
Blocker line of products in the United States and Chemfree products in Canada
increased by approximately $346,000 and $1.7 million, or 51.8% and 32.8%,
respectively, for the three months and nine months ended September 30, 1997 as
compared to the corresponding periods of 1996. This growth in consumer product
revenues in the three months ended September 30, 1997 was primarily attributable
to a 49.0% increase in the Company's SureFire line of products as compared to
the corresponding period in 1996. The growth in consumer product revenues for
the nine months ended September 30, 1997 was primarily attributable to the
introduction of the Company's new Bite Blocker line of insect repellent
products. These Bite Blocker product revenues were partially offset by a 24.9%
decrease in revenues from sales of the Company's SureFire line of products in
the United States as compared to the nine months ended September 30, 1996. The
Company believes the decrease in SureFire revenues was the result of excess
inventory at the retail level carried over from 1996 which reduced the amount of
new orders placed in the early months of 1997. Although weather conditions
improved in the third quarter of 1997, significantly cooler than normal weather
in the late spring, which reduced insect populations, was a major contributor to
the reduction in consumer product sales for nine months ended September 30, 1997
as compared to the corresponding period of 1996.
The revenue increase of 12.0% and 11.9%, respectively, from the Company's
distribution operations during the three months and nine months ended September
30, 1997 as compared to the corresponding periods of 1996 was primarily the
result of favorable weather conditions and a slightly increased and more
experienced sales force at the Company's distribution operations. In addition,
the revenue increase in the three months ended September 30, 1997 was also
attributable to an increase in insect populations in certain regions in
California that resulted in higher sales of traditional pesticides.
GROSS MARGIN. The consolidated gross margin for the Company decreased to 21.2%
in the three months ended September 30, 1997 from 22.1% in the corresponding
period of 1996. For the nine months ended September 30, 1997, the consolidated
gross margin was 26.0% compared to 25.8% in the corresponding period of 1996.
The gross margin on the sale of proprietary products during the three months
ended September 30, 1997 decreased to 32.7% from the 36.9% gross margin achieved
on proprietary product revenues in the corresponding period of 1996. Gross
margin on proprietary products remained approximately the same at 40.3% in the
nine month period ended September 30, 1997, compared to 40.2% in the
corresponding period of 1996. Distribution gross margins decreased in the three
month and nine month periods ended September 30, 1997 to 16.5% and 18.1%, from
16.8% and 18.8%, respectively, in the corresponding periods of 1996.
The gross margin on commercial agriculture proprietary product sales for the
three months ended September 30, 1997 increased to 36.9% from 36.0% in the
corresponding period of 1996. The increase was primarily attributable to (i)
changes in the product sales mix and (ii) increases in the overall sales and
production volumes allowing manufacturing costs to be allocated over a larger
base of products. The gross margin on commercial agriculture product sales for
the nine months ended September 30, 1997 decreased to 35.8% from 39.7% in the
corresponding period of 1996. The decrease was primarily attributable to (i)
lower margins on the Company's CheckMate product to control codling moth
("CheckMate CM") due to flexible pricing to introduce the product into Europe
and to recover lost markets in the United States as a result of the previously
reported performance problems encountered in 1996, along with higher costs of
manufacturing the new improved CheckMate CM product and (ii) additional
manufacturing costs in the first quarter primarily associated with the late
arrival of production equipment, overtime incurred to meet unexpected demand and
the re-work of inventory carried over from prior years. Somewhat offsetting
these decreases to the gross margin were the increases in the three months ended
September 30, 1997 discussed above. The gross margin on commercial agriculture
proprietary products includes an accrual of approximately $320,000 for
11
<PAGE> 12
estimated insurance recoveries for additional pheromone expenses incurred in the
nine months ended September 30, 1997 due to the October 1996 fire that destroyed
the Company's specialty chemicals manufacturing facility. This accrual reduced
cost of revenues by approximately $320,000 and positively impacted the gross
margin percentage on commercial agriculture proprietary product sales by 7.4%
for the nine month period ended September 30, 1997. To date, the Company has not
reached a final settlement with its insurance carrier for the claim. The
investigation by the insurance carrier has been completed, but settlement
discussions have reached an impasse and the Company has filed a lawsuit against
its insurance carrier, MSI Insurance Company, in the Federal District Court in
Portland, Oregon to recover its claims. Although the Company intends to
vigorously pursue full recovery of its claims in the pending legal proceedings,
there can be no assurance that the Company will prevail in the litigation or
that the Company will be recover its claims in full.
The gross margins on proprietary consumer product sales for the three months and
nine months ended September 30, 1997 increased to 37.3% and 47.2%, respectively,
from 36.4% and 38.3% in the corresponding periods of 1996. The increase for the
three months ended September 30, 1997 is primarily attributable changes in the
product sales mix within the SureFire line of products. The increase for the
nine months ended September 30, 1997 is primarily attributable to the 57.7%
gross margin realized on sales of the new Bite Blocker product line in the nine
months ended September 30, 1997. Sales of specialty chemicals produced gross
margins of 14.6% and 12.0%, respectively, in the three months and nine months
ended September 30, 1997, down from the 40.4% and 50.4% gross margins,
respectively, reported in the corresponding periods of 1996. The variance in
gross margin for specialty chemical sales was the direct result of the October
1996 fire that destroyed Farchan's primary manufacturing facility in
Gainesville, Florida, which prevented Farchan from manufacturing higher margin
specialty chemical products during the nine months ended September 30, 1997.
The gross margins from distribution revenues decreased to 16.5% and 18.1%,
respectively, from 16.8% and 18.8% for the three months and nine months ended
September 30, 1997 as compared to the corresponding periods of 1996. The
decreases were primarily attributable to the differences in the product sales
mix for the distribution operations. Included in the results for the nine months
ended September 30, 1997 was approximately $200,000 of unanticipated 1996
manufacturers' rebates which had not been accrued for in 1996. These rebates
improved the distribution gross margin percentage by approximately 0.9%.
OPERATING EXPENSES. Operating expenses during the three months ended September
30, 1997 increased 5.5% to approximately $2.7 million from approximately $2.6
million in the corresponding period of 1996. During the nine months ended
September 30, 1997, operating expenses increased 13.5% to approximately $8.8
million from approximately $7.7 million in the corresponding period of 1996. The
increased operating expenses during the three months ended September 30, 1997,
as compared to the corresponding period of 1996, were primarily attributable to
selling and marketing expenses related to the Company's new Bite Blocker line of
insect repellent products.
The increased operating expenses during the nine months ended September 30,
1997, as compared to the corresponding period of 1996, were primarily
attributable to (i) selling and marketing expenses related to the Company's new
Bite Blocker line of insect repellent products and (ii) a write down of $175,000
to adjust the carrying value of the unfinished specialty chemicals facility in
Alachua, Florida to its estimated fair market value. As a result of the decision
to rebuild, in Bend, Oregon, the specialty chemicals facility destroyed by fire
in October 1996, the Company intends to sell the facility in Alachua and
estimates its fair market value to be less than its carrying value. See
"Liquidity and Capital Resources."
12
<PAGE> 13
OTHER INCOME AND EXPENSE. During the three months ended September 30, 1997, the
Company recorded net other expense of approximately $14,000 compared to
approximately $73,000 in the corresponding period of 1996. This decrease is
primarily attributable to the recognition of approximately $100,000 in estimated
proceeds from the insurance company for the business interruption coverage
relating to the Farchan fire. Offsetting this decrease in net other expense for
the three months ended September 30, 1997 was an increase of approximately
$54,000 in interest expense as a result of increased average borrowings
outstanding as compared to the corresponding period of 1996. For the nine months
ended September 30, 1997 the Company recorded net other income of approximately
$271,000 compared to net other expense of approximately $169,000 during the
corresponding period of 1996. The increase in net other income for the nine
months ended September 30, 1997 was primarily attributable to (i) the
recognition of a deferred gain of approximately $195,000 relating to the 1994
sale and leaseback of the Company's headquarters and manufacturing facility and
(ii) a $295,000 estimated reimbursement from the insurance company for the
business interruption coverage relating to the Farchan fire, of which
approximately $208,000 has been reimbursed by the insurance company.
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, acquisitions of other business
operations and working capital requirements. In October 1996, the Company
completed a follow-on public offering of its common stock which raised
approximately $4.6 million net of related offering costs. Since its inception,
the Company has raised approximately $44.4 million of equity. In addition to
equity financing, the Company operates under a bank line of credit with a
maximum borrowing capacity of $7.5 million to support the working capital
requirements of both its principal proprietary product and distribution
operations. This line of credit, which was set to mature in September 1997, has
been extended until November 23, 1997 while the Company negotiates with its bank
for a renewal with terms more favorable to the Company. This line of credit is
secured by substantially all of the Company's current assets. At September 30,
1997, the Company was in compliance with all covenants related to the line of
credit.
At September 30, 1997, the Company had cash, cash equivalents and short-term
investments of approximately $1.2 million and working capital of approximately
$10.6 million. Borrowings under revolving lines of credit were approximately
$3.7 million. The Company believes that cash and cash equivalents at September
30, 1997, funds generated from operations and funds available from existing bank
lines of credit will be sufficient to fund the Company's operations through at
least 1998. 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 and the timing
of regulatory approvals for new products. As a result, the Company may need to
raise additional funds. There can be no assurance that additional financing
would be available and, if available, that the terms would be acceptable to the
Company.
On October 16, 1996, one of two buildings, 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. At the
direction of the U.S. Environmental Protection Agency (the "EPA"), the Company
conducted chemical analysis of the soil and groundwater at the Farchan facility
which resulted in findings that any potential contaminants were below
EPA-allowed limits. Based on the results of the testing, the EPA and
13
<PAGE> 14
the state of Florida have both lifted all restrictions on the Farchan site and
the Company is attempting to sell the property.
Although the Company believes it has adequate insurance to cover all losses
related to the Farchan fire, it has not reached a final settlement with its
insurance carrier for claims associated with its additional expenses for outside
pheromone purchases or business interruption losses. The Company has recorded an
estimated $87,000 receivable due from the insurance company relating to the
business interruption coverage for losses from the date of the fire through July
31, 1997, the end of the indemnity period. The largest portion of the Company's
claim relates to additional expenses incurred by the Company in 1996 and 1997
for the purchase of pheromones from third party manufacturers at substantially
higher costs than would have been incurred if the pheromones had been
manufactured by Farchan. The Company's claim for such additional expenses is
$530,000 and the investigation by the insurance carrier has been completed, but
settlement discussions have reached an impasse and the Company has filed a
lawsuit against its insurance carrier, MSI Insurance Company, in the Federal
District Court in Portland, Oregon to recover its claims. In addition to the
business interruption insurance coverage discussed above, the Company has
recorded an estimated $320,000 receivable due from the insurance company
relating to the additional expenses incurred for pheromones purchased from third
party manufacturers. Although the Company intends to vigorously pursue full
recovery of its claims in the pending legal proceedings, there can be no
assurance that the Company will prevail in the litigation or that the Company
will recover its claims in full.
As an indirect result of the fire at the Farchan facility, the Company believes
it is not feasible to proceed with plans to finish and occupy its proposed plant
in nearby Alachua, Florida. The Company plans to remove all of its equipment
from the Alachua facility and sell the land and building. The Company has also
decided not to rebuild the manufacturing facility at its Gainesville site. At
the present time, the Company plans to build a specialty chemical facility to
produce pheromones and other specialty chemicals adjacent to its headquarters
and manufacturing facility in Bend, Oregon. The Company has received site permit
approval from the City of Bend and is in the process of finishing design work
for submission to the City of Bend. The Company believes the cost of the new
facility will range from $750,000 to $900,000. In June 1997, the Company
completed the purchase of its headquarters and manufacturing facility in Bend,
Oregon for a purchase price of approximately $1.5 million. The Company has also
received a loan commitment with a bank to provide approximately $1.7 million in
debt financing to help fund the purchase of the Company's headquarters and
manufacturing facility and the construction of the new specialty chemicals
manufacturing facility, of which approximately $1.1 million has been advanced
for the purchase of the existing facility. In addition, the Company received a
term loan of $250,000 from its primary bank to help fund the purchase of the
existing facility. The Company intends to fund the balance of the expected costs
of construction of the new facility out of its internal cashflow. The cost of
the additional equipment needed to complete the new facility is estimated to
range from $300,000 to $500,000. The Company expects to finance at least fifty
percent of the additional equipment through bank loans and/or equipment leasing
arrangements. There can be no assurance that additional financing will be
available and, if available, that the terms will be acceptable to the Company.
Assuming the availability of adequate equipment financing arrangements and
sufficient internal cashflow, the Company believes the new facility can be
operational by the end of the second quarter of 1998 and should be able to
produce some pheromones for the 1998 season.
The Company does not expect the Farchan fire and the 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, business interruption and
additional expense insurance which covers the destroyed facility, its contents,
the underlying property
14
<PAGE> 15
and the associated manufacturing operations, (ii) is proceeding with its plans
to build a specialty chemical manufacturing facility in Bend, Oregon, which it
believes can be operational in sufficient time to produce some pheromones for
the 1998 season and (iii) has secured alternative sources of supply of
pheromones for the 1998 season which it would otherwise have purchased from
Farchan.
The statements set forth above regarding estimated insurance recoveries and the
Company's plans for replacing the destroyed specialty chemicals manufacturing
facility, are forward-looking statements which are made pursuant to the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from the forward-looking statements,
including, without limitation, the Company not recovering its claims in the
pending litigation with its insurance carrier and unanticipated delays or
difficulties in i) obtaining regulatory approvals needed to construct the new
manufacturing facility, ii) internally funding the construction of the new
specialty chemical manufacturing facility or iii) securing the financing to fund
the purchase of additional manufacturing equipment. The forward-looking
statements should be considered in light of these risks and uncertainties.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
27.0 Financial Data Schedule
(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)
16
<PAGE> 17
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 , 1997 By: /s/ VOLKER G. OAKEY
--------------- ------------------------------------
VOLKER G. OAKEY
Chairman of the Board,
President and Chief
Executive Officer
DATE: November , 1997 By: /s/ LARRY KATZ
--------------- ------------------------------------
LARRY KATZ
Vice President, Finance and
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,077,646
<SECURITIES> 102,667
<RECEIVABLES> 8,635,678
<ALLOWANCES> 813,876
<INVENTORY> 8,549,731
<CURRENT-ASSETS> 18,666,952
<PP&E> 9,130,076
<DEPRECIATION> 3,540,996
<TOTAL-ASSETS> 27,855,900
<CURRENT-LIABILITIES> 8,068,191
<BONDS> 0
0
0
<COMMON> 94,602
<OTHER-SE> 17,385,540
<TOTAL-LIABILITY-AND-EQUITY> 27,855,900
<SALES> 34,253,485
<TOTAL-REVENUES> 34,253,485
<CGS> 25,345,087
<TOTAL-COSTS> 25,345,087
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 95,757
<INTEREST-EXPENSE> 327,068
<INCOME-PRETAX> 418,369
<INCOME-TAX> 0
<INCOME-CONTINUING> 418,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 418,369
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
