<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended June 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 August 1, 1997:
9,460,151 shares, $.01 par value per share
<PAGE> 2
CONSEP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations for the
three months ended June 30, 1997 and 1996 4
Consolidated Statements of Operations for the
six months ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the
six months ended June 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 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,832,338 $ 2,443,508
Short-term investments 102,667 103,167
Accounts receivable, net 9,873,530 3,601,912
Other receivables 685,022 296,358
Inventories, net (note 2) 10,110,892 7,993,706
Prepaid expenses 409,182 966,102
------------ ------------
Total current assets 24,013,631 15,404,753
Property, plant and equipment, net 5,433,921 4,020,456
Intangible assets, net 1,439,276 1,545,246
Goodwill, net 2,112,861 2,181,901
Notes receivable and other assets 236,901 258,865
------------ ------------
Total assets $ 33,236,590 $ 23,411,221
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines 5,584,000 1,170,000
Accounts payable 5,646,543 2,526,325
Current portion of notes and leases payable 503,039 347,190
Accrued liabilities 1,064,726 646,135
Customer deposits 97,229 282,581
------------ ------------
Total current liabilities 12,895,537 4,972,231
Notes and leases payable, excluding current maturities 2,375,657 1,171,069
Mandatory stock warrant obligation 19,500 19,500
Deferred gain on sale of property 0 238,075
------------ ------------
Total liabilities 15,290,694 6,400,875
Shareholders' equity:
Common stock 94,475 94,312
Additional paid-in capital 44,288,023 44,256,367
Foreign currency translation adjustment 4,995 15,267
Accumulated deficit (26,441,597) (27,355,600)
------------ ------------
Total shareholders' equity 17,945,896 17,010,346
------------ ------------
Total liabilities and shareholders' equity $ 33,236,590 $ 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
-------------------------------
JUNE 30, JUNE 30,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 4,599,952 $ 3,722,565
Distribution products 9,180,282 7,961,130
------------ ------------
Total revenues 13,780,234 11,683,695
------------ ------------
COST OF REVENUES
Proprietary products 2,486,255 2,216,924
Distribution products 7,559,161 6,527,117
------------ ------------
Total cost of revenues 10,045,416 8,744,041
------------ ------------
Gross margin 3,734,818 2,939,654
------------ ------------
OPERATING EXPENSES (note 3)
Research and development 304,559 359,880
Selling, general and administrative 2,254,007 1,528,808
Distribution 915,435 860,783
------------ ------------
Total operating expenses 3,474,001 2,749,471
------------ ------------
Operating income 260,817 190,183
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 27,403 32,891
Interest expense (127,032) (96,549)
Other, net 150,024 (20,534)
------------ ------------
Net other income (expense) 50,395 (84,192)
------------ ------------
Net income $ 311,212 $ 105,991
============ ============
Net income per common and common
equivalent share (note 4) $ 0.03 $ 0.01
============ ============
Weighted average number of common
and common equivalent shares
outstanding (note 4) 9,537,979 7,832,489
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
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CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 9,387,789 $ 7,297,790
Distribution products 15,218,086 13,595,520
------------ ------------
Total revenues 24,605,875 20,893,310
------------ ------------
COST OF REVENUES
Proprietary products 5,387,687 4,287,939
Distribution products 12,352,250 10,907,948
------------ ------------
Total cost of revenues 17,739,937 15,195,887
------------ ------------
Gross margin 6,865,938 5,697,423
------------ ------------
OPERATING EXPENSES (note 3)
Research and development 614,116 638,383
Selling, general and administrative 3,595,270 2,843,372
Distribution 1,832,027 1,658,550
------------ ------------
Total operating expenses 6,041,413 5,140,305
------------ ------------
Operating income 824,525 557,118
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 51,997 75,890
Interest expense (170,703) (154,869)
Other, net 208,184 (17,650)
------------ ------------
Net other income (expense) 89,478 (96,629)
------------ ------------
Net income $ 914,003 $ 460,489
============ ============
Net income per common and common
equivalent share (note 4) $ 0.10 $ 0.06
============ ============
Weighted average number of common
and common equivalent shares
outstanding (note 4) 9,543,889 7,824,322
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 914,003 $ 460,489
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 574,015 512,971
Provision for bad debts 72,038 (41,039)
Inventory reserve 61,077 44,115
Loss (gain) on disposal of equipment (362) 8,667
Other non-cash items 184,102 (5,098)
Changes in assets and liabilities, net of amounts acquired:
Short-term investments 500 33,183
Accounts receivable (6,379,108) (4,819,569)
Other receivables (388,664) (214,743)
Inventories (2,186,403) (428,765)
Prepaid expenses 555,944 (9,035)
Accounts payable 3,125,248 2,444,478
Accrued liabilities 458,091 439,947
Other assets 6,461 (5,000)
Customer deposits (185,346) (402,985)
----------- -----------
Net cash used in operating activities (3,188,404) (1,982,384)
----------- -----------
INVESTING ACTIVITIES
Acquisition of intangible assets (39,920) (226,200)
Acquisition of property, plant and equipment (934,047) (468,560)
Proceeds from sale of property, plant and equipment 0 1,000
Issuance of notes receivable, net of payments received 51,216 198,414
----------- -----------
Net cash used in investing activities (922,751) (495,346)
----------- -----------
FINANCING ACTIVITIES
Increase in bank lines 4,414,340 1,007,589
Proceeds from issuance of notes payable 250,000 0
Principal payments on notes payable (196,228) (192,887)
Net proceeds from issuance of common stock 31,819 167,728
----------- -----------
Net cash provided by financing activities 4,499,931 982,430
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents 54 211
----------- -----------
Net increase (decrease) in cash and cash equivalents 388,830 (1,495,089)
Cash and cash equivalents at beginning of period 2,443,508 2,069,595
----------- -----------
Cash and cash equivalents at end of period $ 2,832,338 $ 574,506
=========== ===========
</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, 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:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 2,049,534 $ 2,196,006
Work in process 52,333 44,963
Finished goods - proprietary 4,758,560 3,528,880
Finished goods - distribution 3,739,926 2,717,836
----------- -----------
10,600,353 8,487,685
Less reserve for obsolescence 489,461 493,979
----------- -----------
$10,110,892 $ 7,993,706
=========== ===========
</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 six months ended June 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:
<TABLE>
<CAPTION>
Six Months Ended Income
June 30, Interest Taxes
-------- -------- -----
<S> <C> <C>
1997 $ 172,392 $ 11,844
1996 $ 139,359 $ 5,399
</TABLE>
Following is a summary of non-cash investing and financing activities of the
Company for the six months ended June 30, 1997 and 1996:
During the six months ended June 30, 1997, the Company acquired
equipment and vehicles for $178,393 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 six months ended June 30, 1996, the Company purchased a
building for $396,055 and acquired vehicles for $77,858 through the
issuance of notes payable. Also during the first six months of 1996,
the Company converted $467,959 of trade accounts receivable to notes
receivable.
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 31, 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.
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 has
begun distributing for 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 28.6% for the six months ended June 30,
1997 as compared to the corresponding period of 1996. This increase in
proprietary product revenues for the six months ended June 30, 1997, combined
with a 1.4% increase in proprietary product margin percentage, a 17.5% increase
in operating expenses and a 11.9% increase in distribution revenues for the same
period, contributed to a 98.5% increase in net income for the six months ended
June 30, 1997 as compared to the corresponding period of 1996.
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 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 June 30, 1997 increased
17.9% to approximately $13.8 million from approximately $11.7 million in the
corresponding period of 1996. For the six months ended June 30, 1997, total
revenues increased 17.8% to approximately $24.6 million from approximately $20.9
million in the corresponding period of 1996. Revenues from the sale of
proprietary products increased 23.6% during the three months ended June 30, 1997
to approximately $4.6 million from approximately $3.7 million in the
corresponding period of 1996. For the six months ended June 30, 1997, revenues
from the sale of proprietary products were approximately $9.4 million, an
increase of 28.6% over proprietary product revenues of approximately $7.3
million recorded in the comparable period of 1996. Revenues from the Company's
distribution operations increased 15.3% during the three months ended June 30,
1997 to approximately $9.2 million from approximately $8.0 million in the
corresponding period of 1996. For the six months ended June 30, 1997, revenues
from the Company's distribution operations increased to approximately $15.2
million from approximately $13.6 million in the corresponding period of 1996.
The growth in proprietary product revenues for the three months ended June 30,
1997 was attributable to growth in sales of the Company's commercial agriculture
products and the introduction of Bite Blocker, the Company's new insect
repellent product line. These increases were partially offset by decreases in
revenues from the Company's SureFire consumer product line as well as decreased
sales of specialty chemicals to third parties by the Company's Farchan
subsidiary.
Revenues from the sale of commercial agriculture products increased
approximately $543,000 and $1.1 million, or 57.2% and 51.1%, respectively, for
the three months and six months ended June 30, 1997 as compared to the
corresponding periods of 1996. The increase in revenues for the three months
ended June 30, 1997 from sales of commercial agriculture products was primarily
attributable to sales of the new CheckMate flowable product to control pink
bollworm ("CheckMate PBW-F"). No sales of CheckMate PBW-F were recorded in the
three months ended June 30, 1996 as the Company did not receive EPA registration
until the third quarter of 1996. Revenues for the three months ended June 30,
1997 from the remaining commercial agriculture products increased a combined
29.0% over the corresponding period of 1996.
The increase in revenues for the six months ended June 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 72.9% increase in
revenues from sales of the CheckMate product to control tomato pinworm
("CheckMate TPW") and (iii) the introduction of the new CheckMate PBW-F product
discussed above. 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.
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 $538,000 and $1.3 million, or 21.9% and 30.0%,
respectively, for the three months and six months ended June 30, 1997 as
compared to the corresponding periods of 1996. This growth in consumer product
revenues 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 34.9% and 34.5% decrease, respectively, in
revenues from sales of the Company's SureFire line of products in the United
States as compared to the three months and six months ended June 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 six months ended June 30,
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<PAGE> 11
1997. The Company believes that this trend of reduced orders will continue in
the short term until the excess inventory at the retail level is depleted. In
addition, 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 three months and six months ended June 30, 1997 as compared to
the corresponding periods of 1996.
Specialty chemical sales by Farchan decreased 62.3% and 42.5%, respectively, in
the three months and six months ended June 30, 1997 as compared to the
corresponding periods of 1996. 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.
The revenue increase of 15.3% and 11.9%, respectively, from the Company's
distribution operations during the three months and six months ended June 30,
1997 as compared to the corresponding period 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.
GROSS MARGIN. The consolidated gross margin for the Company increased to 27.1%
in the three months ended June 30, 1997 from 25.2% in the corresponding period
of 1996. For the six months ended June 30, 1997, the consolidated gross margin
was 27.9% compared to 27.3% in the corresponding period of 1996. The margin
improvement for the three months and six months ended June 30, 1997, as compared
to the corresponding period of 1996, is attributable to both an increase in the
gross margins on proprietary product revenues and a proportional increase in the
higher margin proprietary product revenues. The gross margin on the sale of
proprietary products during the three months ended June 30, 1997 increased to
46.0% from the 40.4% gross margin achieved on proprietary product revenues in
the corresponding period of 1996. Gross margin on proprietary products increased
to 42.6% in the six month period ended June 30, 1997 from 41.2% in the
corresponding period of 1996. Distribution gross margins decreased in the three
month and six month periods ended June 30, 1997 to 17.7% and 18.8%, from 18.0%
and 19.8%, respectively, in the corresponding periods of 1996.
The gross margin on commercial agricultural proprietary product sales for the
three months ended June 30, 1997 increased to 38.4% from 35.9% in the
corresponding period of 1996. The increase was primarily attributable to (i)
changes in the product mix, including the new, higher margin CheckMate PBW-F
discussed earlier 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 agricultural product sales for the six months ended
June 30, 1997 decreased to 35.4% from 41.8% 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 June 30, 1997 discussed above. The
gross margins on agricultural proprietary products includes accruals of
approximately $90,000 and $320,000, respectively, for the estimated insurance
recoveries for the additional pheromone expenses incurred in the three months
and six months ended June 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 $90,000 and $320,000, respectively, and
positively impacted the gross margin percentage on agriculture proprietary
product sales by 6.0% and 10.2%,
11
<PAGE> 12
respectively, for the three month and six month periods ended June 30, 1997. To
date the Company has not reached a settlement with its insurance carrier for the
claim. The investigation by the insurance carrier has been completed, but
settlement discussions have reached an impasse. Although the Company is
continuing to pursue recovery of its claims through settlement discussions, the
Company intends to initiate legal proceedings, if necessary, to recover its
claim in full. However, there can be no assurance that the Company's claim will
be paid in full.
The gross margins on proprietary consumer product sales for the three months and
six months ended June 30, 1997 increased to 52.1% and 49.0%, respectively, from
39.6% and 38.6% in the corresponding periods of 1996. The increase is primarily
attributable to the 62.6% and 58.7% gross margins, respectively, realized on
sales of the new Bite Blocker product line in the three months and six months
ended June 30, 1997. Sales of specialty chemicals produced gross margins of
- -12.7% and 8.6%, respectively, in the three months and six months ended June 30,
1997, down from the 60.1% and 55.9% 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 six months ended June 30, 1997.
The gross margins from distribution revenues decreased to 17.7% and 18.8%,
respectively, from 18.0% and 19.8% for the three months and six months ended
June 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 six months 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 1.3% and accordingly, the Company does not
expect the distribution gross margin to continue at the same level for the
remainder of 1997.
OPERATING EXPENSES. Operating expenses during the three months ended June 30,
1997 increased 26.4% to approximately $3.5 million from approximately $2.7
million in the corresponding period of 1996. During the six months ended June
30, 1997, operating expenses increased 17.5% to approximately $6.0 million from
approximately $5.1 million in the corresponding period of 1996. The increased
operating expenses during the three months ended June 30, 1997, as compared to
the corresponding period of 1996, were primarily attributable to (i) selling and
marketing expenses related to the introduction of 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."
The increased operating expenses during the six months ended June 30, 1997, as
compared to the corresponding period of 1996, were primarily attributable to (i)
selling and marketing expenses related to the introduction of the Company's new
Bite Blocker line of insect repellent products, (ii) the $175,000 facility
carrying value write down discussed above and (iii) a $52,000 reduction in bad
debt reserves that positively impacted the six months ended June 30, 1996 for
the distribution operations which did not occur in the six months ended June 30,
1997.
OTHER INCOME AND EXPENSE. During the three months and six months ended June 30,
1997, the Company recorded net other income of approximately $50,000 and
$89,000, respectively, compared to net other expense of approximately $84,000
and $97,000 during the corresponding periods of 1996.
12
<PAGE> 13
The increase in net other income for the three months ended June 30, 1997 was
primarily attributable to a $125,000 estimated reimbursement from the insurance
company for the business interruption coverage relating to the Farchan fire.
During the six months ended June 30, 1997, the increase in net other income was
primarily attributable to a $195,000 estimated reimbursement from the insurance
company for the business interruption coverage relating to the Farchan fire, of
which $105,000 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 matures in September 1997 and is secured by
substantially all of the Company's current assets. At June 30, 1997, the Company
was in compliance with all covenants related to the line of credit.
At June 30, 1997, the Company had cash, cash equivalents and short-term
investments of approximately $2.9 million and working capital of approximately
$11.1 million. Borrowings under revolving lines of credit were approximately
$5.6 million. The Company believes that cash and cash equivalents at June 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 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 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 tests of the fire debris. Although the chemical
analysis of the fire debris resulted in findings that substantially all of the
debris contained contaminants below EPA-allowed limits, a limited amount of ash
was declared hazardous due to elevated levels of cyanide and was disposed of
accordingly. As a result of the chemical analysis of the fire debris, and at the
EPA's direction, Farchan has tested for potential soil and groundwater
contamination resulting from the fire. Initial results of the soil and
groundwater testing indicate contaminate levels below EPA-allowed limits. Based
on the results of the initial testing, the Company believes that the EPA will
lift all restrictions on the Farchan site in the near term. All expenses related
to the cleanup, sampling and laboratory analysis have been covered by the
Company's insurance and the Company believes that the total cleanup costs will
not exceed the insurance coverage limits of $250,000.
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
13
<PAGE> 14
an estimated $90,000 receivable due from the insurance company relating to the
business interruption coverage for losses from the date of the fire through June
30, 1997. 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
has revised its claim for such additional expenses to $530,000 and the
investigation by the insurance carrier has been completed, but settlement
discussions have reached an impasse. 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
through June 30, 1997. Although the Company is continuing to pursue recovery of
its claims through settlement discussions, the Company intends to initiate legal
proceedings, if necessary, to recover its claim in full. However, there can be
no assurance that the Company's claim will be paid 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 $1.0 to $1.1 million. 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 to the advance against
the purchase of the existing facility, the Company has received a term loan of
$250,000 from its primary bank to help fund the purchase of the existing
facility and the construction of the new facility. The Company is exploring
various alternatives for funding the balance of the expected costs of
construction of the new facility. 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 financing arrangements, the Company believes the new facility can be
operational by the end of the first 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 and the associated manufacturing operations, (ii) the
Company 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) the Company
believes it has alternative sources of supply of pheromones for the 1998 season
which it would otherwise have purchased from Farchan.
14
<PAGE> 15
The statements set forth above regarding expected insurance recoveries and
anticipated results of environmental cleanup efforts related to the fire at the
Company's Farchan subsidiary, as well as the statements regarding the Company's
plans for replacing the destroyed specialty chemicals manufacturing facility,
are forward-looking statements which involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements,
including, without limitation, further delays or difficulties in receiving
insurance recoveries for business interruption losses or additional pheromone
expenses, environmental remediation expenses in excess of the Company's
insurance coverage limits and unanticipated delays or difficulties in (i)
securing the necessary financing to fund the construction of the new specialty
chemical manufacturing facility and the purchase of additional manufacturing
equipment or (ii) obtaining regulatory approvals needed to construct the new
manufacturing facility. The forward-looking statements should be considered in
light of these risks and uncertainties.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 Annual Meeting of Shareholders was held on Thursday, May 22,
1997, at which the following actions were taken by a vote of the shareholders:
1. Election of Directors
The following directors were elected, two to serve a three-year term
expiring in 2000 and two to serve a one-year term expiring in 1998, by the votes
indicated below:
<TABLE>
<CAPTION>
Term Votes Votes
Director Expiring For Withheld
-------- -------- --- --------
<S> <C> <C> <C>
Walter C. Babcock 2000 7,664,789 41,907
John A. Beaulieu 2000 7,664,789 41,907
Philip E. Barak 1998 7,665,374 41,322
Kenneth D. MacKay 1998 7,665,374 41,322
</TABLE>
2. Approval of the 1997 Stock Incentive Plan
By a vote of 7,079,241 to 382,416 (with 36,925 abstentions and 208,114
broker non-votes), the adoption, by the Board of Directors, of the Consep, Inc.
1997 Stock Incentive Plan (the "Plan"), was ratified by the Company's
shareholders, including the reservation of 300,000 shares of the Company's
common stock for issuance to employees and consultants pursuant to the Plan.
3. Ratification of Appointment of Auditors
By a vote of 7,682,579 to 5,367 (with 18,750 abstentions), the
appointment, by the Board of Directors, of KPMG Peat Marwick LLP to act as
independent auditors for the Company for the year ending December 31, 1997, was
ratified by the Company's shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.26 Loan Modification Agreement with Silicon
Valley Bank*
10.27 Amended and Restated Schedule to Loan
and Security Agreement with Silicon
Valley Bank*
10.28 Sale and Purchase Agreement for Real
Estate*
10.29 Construction Loan Agreement with
Western Bank*
27.0 Financial Data Schedule
</TABLE>
* Previously filed.
16
<PAGE> 17
(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)
17
<PAGE> 18
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: March 26, 1998 By: /s/ VOLKER G. OAKEY
-------------- --------------------
VOLKER G. OAKEY
Chairman of the Board,
President and Chief
Executive Officer
DATE: March 26, 1998 By: /s/ LARRY KATZ
-------------- ---------------
LARRY KATZ
Vice President, Finance and
Chief Financial Officer
18
<PAGE> 19
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.26 Loan Modification Agreement with Silicon
Valley Bank*
10.27 Amended and Restated Schedule to Loan
and Security Agreement with Silicon
Valley Bank*
10.28 Sale and Purchase Agreement for Real
Estate*
10.29 Construction Loan Agreement with
Western Bank*
27.0 Financial Data Schedule
</TABLE>
* Previously filed.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,832,338
<SECURITIES> 102,667
<RECEIVABLES> 10,792,622
<ALLOWANCES> 919,092
<INVENTORY> 10,110,892
<CURRENT-ASSETS> 24,013,631
<PP&E> 8,772,233
<DEPRECIATION> 3,338,312
<TOTAL-ASSETS> 33,236,590
<CURRENT-LIABILITIES> 12,895,537
<BONDS> 0
0
0
<COMMON> 94,475
<OTHER-SE> 17,851,421
<TOTAL-LIABILITY-AND-EQUITY> 33,236,590
<SALES> 24,605,875
<TOTAL-REVENUES> 24,605,875
<CGS> 17,739,937
<TOTAL-COSTS> 17,739,937
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 72,038
<INTEREST-EXPENSE> 170,703
<INCOME-PRETAX> 914,003
<INCOME-TAX> 0
<INCOME-CONTINUING> 914,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 914,003
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
