<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 number)
213 S.W. COLUMBIA STREET
BEND, OREGON 97702
(Address of principal executive offices, including zip code)
(541) 388-3688
(Registrant's telephone number, including area code)
-----------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 2, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant based upon the last reported sales price was
$11,488,520. There were 9,645,664 shares of Common Stock of the Registrant
outstanding at March 2, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used in connection with the Annual Meeting
of Shareholders to be held on May 21, 1998, are incorporated by reference into
Part III of this report.
<PAGE> 2
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This business discussion and other sections of this Report on Form 10-K
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that are based on current expectations, estimates
and projections about the markets in which Consep operates, management's beliefs
and assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements due to numerous
factors including, but not limited to, those discussed in the following business
section, as well as those discussed elsewhere herein and in the Company's other
filings that are made from time to time with the Securities and Exchange
Commission.
GENERAL
Consep, Inc. ("Consep" or the "Company") develops, manufactures and
markets environmentally safe pest control products for the commercial
agriculture and consumer home, lawn and garden markets. The Company also owns
and operates full-line agrichemical distributors located principally in
California. Products manufactured by the Company employ proprietary controlled
release technologies to enhance the effectiveness and duration of biorational
pest control agents by protecting them from natural degradation and controlling
their release over planned periods of time. Biorational pest control products
use naturally occurring agents and biochemicals, such as pheromones, to control
pest populations. The Company's principal commercial agriculture products,
marketed under the CheckMate label, release synthetic pheromones to suppress
population levels of insects by disrupting their mating. Unlike most
conventional insecticides, the Company's products are non-toxic to humans and
animals, leave no harmful residues, do not contaminate soil or groundwater and
do not disrupt beneficial insect populations. The majority of the Company's
commercial agriculture products are sold through independent distributors. In
addition, the Company owns and operates full-line agrichemical distributors in
major agricultural regions of California and in the Connecticut River Valley. In
addition to selling the Company's commercial agriculture products, the Company's
agrichemical distributors also sell products produced by other manufacturers,
including biorational insect control products, conventional toxic pesticides,
fertilizers and other farm supplies. Consep also sells a broad line of non-toxic
consumer pest control products under its SureFire and Insectigone labels through
a network of cooperative buying groups and distributors who in turn resell to
lawn and garden centers, hardware stores and retail chains. The Company also
sells 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 Blocker label. References herein to the
"Company" or "Consep" shall include Consep, Inc. and each of its subsidiaries.
MARKETS
Worldwide sales of insecticides for commercial agriculture were
estimated by Chemical Marketing Reporter to be $7.8 billion annually in 1991,
with biorational pest control products accounting for approximately $350 million
of such worldwide sales. Management estimates the current market for insect
control products to be $1.5 billion in the United States alone. Conventional
toxic insecticides continue to dominate this market. However, regulatory
limitations on the use, growing concern over the safety and effectiveness of,
and increasing insect resistance to toxic insecticides have created an
increasing demand for alternative insect control products. Biorational insect
control products have significant advantages over conventional toxic
insecticides in several important areas. The principal problems associated with
the use of toxic insecticides and the comparative advantages of biorational
insect control products include:
Regulatory. Under federal law, all insecticide products
registered prior to November 1984 were required to be re-registered with
the U.S. Environmental Protection Agency (the "EPA") by 1997. The cost
of re-registration is high and entails the risk that new testing will
lead to adverse results and mandatory withdrawal of toxic insecticides
from the market. As a result, the Company believes many insecticides
were not re-registered for application in specialty crops such as fruits
and vegetables. In contrast to toxic chemicals, biorational products can
be registered with the EPA in less time and at substantially lower costs
due to the reduced level of toxicity testing required. In addition, in
1994 the EPA established its Biopesticides and Pollution Prevention
Division, whereby companies developing safer and less-toxic alternatives
to conventional pesticides are able to have new products reviewed and
registered by a staff dedicated to this new division. The Food Quality
Protection Act ("FQPA"), passed in 1996, may
2
<PAGE> 3
further restrict the use of toxic pesticides in that FQPA requires the
EPA to consider establishing new risk standards on U.S. registered
pesticides.
Residues. Public concern over the adverse environmental and
health consequences of toxic insecticides continues to grow. These
chemicals can leave unacceptable levels of residues in food and can
contaminate soil and groundwater. Biorational insect control products
use naturally produced or occurring compounds and do not leave toxic
residues in treated crops, soil or groundwater.
Resistance. One of the limitations of toxic insecticides is the
tendency of insects to develop resistance to the active compound. Over
500 insect species have developed resistance to one or more classes of
toxic chemical insecticides. When resistance occurs, growers are forced
to increase the amount of toxic insecticide necessary to control the
target insects, which increases environmental and health risks and
reduces the economic viability of the toxic chemical. Insects are less
likely to develop resistance to biorational products, particularly
behavior-modifying pheromone-based products such as those produced by
Consep.
Resurgence. Toxic insecticides often destroy beneficial insects
which help to naturally control primary and secondary insect
populations. As beneficial insect populations are suppressed, there are
fewer natural enemies against primary and secondary pests and growers
must use escalating dosages and more frequent applications of toxic
insecticides. This increased application exacerbates environmental and
health risks and decreases the cost-effectiveness of the toxic
insecticides. Biorational products target specific insects and do not
adversely affect beneficial insect populations. As a result, beneficial
insects remain in the field and continue to help control detrimental
insect populations.
In response to these concerns regarding conventional toxic insecticides,
commercial growers are increasingly adopting more sophisticated and
environmentally safer methods of pest control which focus on ecosystem
management, collectively identified as Integrated Pest Management ("IPM"), to
control insects in their fields. IPM involves the use of a combination of crop
selection, cultivation practices and biorational pest control measures to reduce
or eliminate toxic chemical applications. The Company's primary focus is on
fruits, nuts, vegetables and selected row crops where growers are generally more
concerned with residues in harvested products or resistance of insects to
chemical insecticides and are thus more likely to adopt biorational insect
control as an alternative to conventional toxic chemicals. The Company's
products are ideally suited to IPM practices because, unlike most conventional
insecticides, the Company's products are non-toxic to humans and animals, leave
no harmful residues, do not contaminate soil or groundwater and do not disrupt
beneficial insect populations. The Company believes that IPM and crop protection
professionals, such as pest control advisers ("PCAs"), have become key factors
in promoting the introduction and distribution of insect control products to the
commercial agriculture market. This trend is most developed in California where
state licensed PCAs are the only individuals who are authorized to recommend the
application of any pesticide, including insect control products.
Management estimates the market in which its consumer pest control
products compete in the United States and Canada to be approximately $1 billion.
The Company believes that, although biorational products currently represent
less than 30% of this market, consumers are becoming increasingly aware of the
health risks associated with many of the conventional toxic products used to
control pests in and around the home and that non-toxic products will represent
an increasing portion of the consumer pest control market. In general, non-toxic
products for the consumer market do not require a time-consuming registration
process, which permits faster and less expensive introduction of new products.
STRATEGY
Management believes that regulatory limitations on the use of, and
increasing insect resistance to, conventional toxic pesticides, together with
growing concern over the safety of those products have created substantial
opportunities to expand the use of Consep's alternative biorational pest control
products. The key components of the Company's strategy are set forth below.
Continue to Develop and Acquire Proprietary Biorational Pest Control
Products, Technologies or Businesses. The Company's strategy includes continuing
to develop new products and technologies through both its own research and
development efforts and its ongoing research and development relationships with
other outside organizations and governmental agencies. Consep also intends to
meet this objective by continuing to acquire complementary product lines,
technologies or businesses to further expand the Company's product lines both in
the commercial agriculture and consumer markets. During the past eight years,
Consep has completed eight acquisitions of complementary businesses and product
lines. Management believes such acquisition opportunities will continue.
Focus Commercial Agriculture Products on High-Value Crops. The Company's
primary focus is on selected high-value fruit, nut and vegetable crops where
growers are generally more concerned with residues in harvested products and
where resistance to conventional
3
<PAGE> 4
pesticides is developing and are thus more likely to adopt biorational insect
control as an alternative to conventional toxic chemicals. Additionally, given
the high cost of re-registering conventional toxic chemicals with the EPA, the
Company believes market opportunities will expand for biorational products as
agrichemical companies have found it uneconomical to re-register their products
for these selected crop markets.
Utilize Company Owned Distributors to Introduce and Promote the
Company's Products. The Company believes that owning and operating agrichemical
distributors accelerates the market acceptance and penetration of its
proprietary agricultural products, provides direct access to growers and field
research personnel and facilitates rapid evaluation and introduction of new
products. The Company may acquire additional agrichemical distributors in
strategic locations to facilitate grower adoption of IPM practices and
biorational pest control products.
Expand Presence and Distribution in Selected International Markets. The
Company believes it has the opportunity to significantly expand its
international presence. Management's strategy is to control the registration,
introduction and distribution of its products in selected international markets
and, as a result, has retained control over worldwide manufacturing and
marketing rights to its products. To effectively market its products abroad, the
Company is staffing an international sales and registration organization to
support the introduction of its products through established distributors in key
international markets.
Expand Presence and Distribution Channels in Consumer Markets. The
Company is focused on expanding its consumer product distribution channels by
increasing its retail account base and penetrating additional locations in
existing accounts. Through a combination of trade show attendance, promoting
relationships with independent manufacturers' representatives and direct selling
efforts, Consep's strategy is to expand into additional co-operative buying
groups, distributors and retail chains, including grocery and drug store chains.
The Company is also focusing on increasing the range of products sold within the
existing retail base through a combination of special display advertising and
co-operative promotional programs. The Company will continue its efforts to
expand its product line through product development, acquisitions and
distribution of biorational products manufactured by other manufacturers.
TECHNOLOGY
The Company believes it is well positioned to take advantage of
opportunities for biorational pest control products as a result of its
proprietary controlled release technologies. The Company's principal commercial
agricultural products combine proprietary controlled release delivery systems
with synthesized pheromones to provide effective biorational pest control.
Consep has devoted considerable resources to investigating the chemical makeup
of pheromones, their reaction with the Company's delivery systems, and their
behavior in a variety of environmental conditions.
Pheromones are natural compounds produced by insects, which, when
released and detected by other insects of the same species, will elicit a
specific response. Over 1,600 insect pheromones have been identified in the
scientific literature and identification of additional insect pheromones
continues to occur. Consep has focused its efforts on one class of pheromones,
sex pheromones, most of which are produced by female insects in order to attract
males of the same species. Males are able to locate the females by using sensors
on their antennae to follow the pheromone trail to its source. These compounds
can be used to control specific insect populations if released in sufficient
quantities to overwhelm the males so that they are unable to locate females.
This system of control, called "mating disruption," produces a substantial
population drop of the target insect. The crop is thereby protected from feeding
larvae, which are the primary source of crop damage.
The key to an efficacious and economically feasible trapping or mating
disruption product is to determine the optimum release rate and to successfully
store, protect, and control the release of pheromones. Most pheromones are
highly unstable compounds which break down quickly when exposed to normal
environmental conditions. The proprietary controlled release systems used in the
Company's products protect the pheromones from the environment and delay their
degradation. The Company designs these devices to release pheromones at a
planned rate over periods ranging from a few weeks to a few months, depending on
the targeted pest and crop. The Company believes that by providing a steady rate
of release over time, the Company's controlled release technologies allow the
Company to use lower quantities of pheromones in its products, as compared to
competitive pheromone products, to achieve the same degree of pest control. The
controlled release technologies used in the Company's products include
membrane-based reservoirs, microporous beads and dispersed (flowable)
microcapsules.
Membrane-Based Reservoir System. The patented, membrane-based reservoir
system used in certain of the Company's products consists of a reservoir
containing the active ingredient, a rate-controlling membrane through which the
active ingredient diffuses and a protective impermeable backing. By varying the
surface area, membrane thickness and type of membrane materials, the Company is
able
4
<PAGE> 5
to adapt this technology to a variety of applications. Membrane-based reservoir
systems are used in the CheckMate and BioLure product lines, and in certain
products within the SureFire product line.
Microporous Bead System. A microporous bead is a polymeric bead with an
internal pore structure encased in a rate-controlling outer surface. The
microporous nature of the beads permits a high loading of active ingredient,
with up to 80% of the bead weight consisting of biorational agents. By
comparison, only 5% to 30% of the weight of conventional micro-encapsulated
systems is represented by biorational agents. The microporous beads are
compatible with a wide range of active ingredients and can be readily mixed with
water and applied by ground or aerial spray equipment. By controlling the size
of the beads and their microporous structure, optimum rates of release can be
achieved. Microporous bead systems are used in current and development-stage
CheckMate products.
Dispersed (Flowable) Microcapsule System. A dispersed (flowable)
microcapsule system is a method of encapsulating biorational agents by
polymerizing a protective wall around the colloidal size particles of the active
agent. The release rate of the active biorational product is adjusted by
controlling the size of the microcapsule as well as the degree of polymer
crosslinking in the capsule wall. Dispersed (flowable) microcapsule systems are
used in certain current and development-stage CheckMate products.
PRODUCTS
The Company develops, manufactures and markets three lines of non-toxic
pest control products: (i) pheromone-based mating disruption products used to
control insect populations in commercial agriculture; (ii) pheromone-based traps
used to monitor and trap insects in commercial agriculture; and (iii) consumer
products used to trap or otherwise control pests in homes, lawns and gardens.
The Company also owns and operates full-line agrichemical distributors located
principally in California which, in addition to selling the Company's commercial
agriculture products, also sell products produced by other manufacturers,
including biorational insect control products, conventional toxic pesticides,
fertilizers and other farm supplies. The Company's proprietary product line also
includes specialty chemicals produced by its specialty chemicals division.
Commercial Mating Disruption Products. The Company's commercial mating
disruption products, marketed under the CheckMate label, are used to suppress
population levels of insects by disrupting their mating cycles. CheckMate
products employ either microporous or microcapsule beads, which are applied by
aerial or ground spray equipment, or membrane-based reservoir dispensers, which
are attached by hand to the branches or stems of plants in crops which they
protect. As of December 31, 1997, Consep offers mating disruption products for
six species of insects. Revenues from the sale of the Company's commercial
mating disruption products for the years ended December 31, 1997, 1996 and 1995
were $4.1 million, $3.0 million and $2.9 million, or 10.4%, 9.1% and 9.5% of the
Company's total revenues for such periods, respectively.
Commercial Monitoring and Trapping Products. The Company's monitoring
and trapping products for the commercial agriculture market are sold under the
BioLure label. A monitoring product typically consists of a trap and a lure
loaded with either pheromones or food bait to attract the target insect species.
Growers use monitoring products to identify the emergence of target species,
pinpoint infestation levels, and project insect population size and crop damage,
thereby facilitating more efficient control measures. The monitoring systems are
used in conjunction with pest control products to correctly time the application
of these control products and to monitor the effectiveness of insect control
programs. The system used in most of the Company's monitoring and trapping
products is a pheromone-based lure which incorporates the Company's controlled
release membrane-based technology to provide for uniform release of the active
ingredient over a longer period of time than competitors' products. Monitoring
and trapping systems which do not incorporate a lure use food bait or a color
spectrum as the attractant. Consep currently offers trapping and monitoring
systems for over 25 species of insects. Revenues from the sale of the Company's
monitoring and trapping products for the years ended December 31, 1997, 1996 and
1995 were $983,000, $833,000 and $621,000, or 2.5%, 2.5% and 2.0% of the
Company's total revenues for such periods, respectively.
Consumer Products. The Company's consumer product line, marketed under
the SureFire and Insectigone labels, is comprised of a broad group of non-toxic
products which trap or otherwise control pests found in and around the home. In
addition, the Company markets, under its SureFire label, hummingbird and
butterfly feeders. Products in the Company's consumer product line generally
incorporate Consep's proprietary technologies, which include the controlled
release of attractants that lure insects into traps, and insecticide powders
composed of patented baits and diatomaceous earth, which kill crawling insects
coming into contact with products incorporating this technology. Consep
currently offers pest control products for over 20 species of household and
garden pests. The Company has begun distributing 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 and Canada under
the Company's Blocker label. The Company holds exclusive distribution rights to
these insect repellent products in the United States, Canada and Mexico, subject
to certain performance requirements. Revenues from the sale of the
5
<PAGE> 6
Company's consumer products for the years ended December 31, 1997, 1996 and 1995
were $6.9 million, $5.3 million and $4.6 million, or 17.6%, 15.8% and 15.0% of
the Company's total revenues for such periods, respectively.
Specialty Chemicals. In February 1995, the Company acquired Farchan
Laboratories, Inc. ("Farchan"), a Florida-based specialty chemicals
manufacturer. Prior to its primary manufacturing facility being destroyed by
fire in October 1996, Farchan supplied certain pheromones to the Company for use
in certain of its mating disruption products. In addition, Farchan supplied high
quality specialty chemicals, including organic acetylenes, to research
organizations, pharmaceutical companies and the agricultural industry. Revenues
from Farchan's operations (excluding pheromone sales to the Company) for the
years ended December 31, 1997, 1996 and 1995 were $1.0 million, $1.3 million and
$1.2 million, or 2.6%, 3.9% and 3.9% of the Company's total revenues for such
periods, respectively. As mentioned above, in October 1996, Farchan's primary
manufacturing facility was destroyed by fire. The Company discontinued separate
business operations at Farchan in the fourth quarter of 1997 and has formed its
own specialty chemicals division in Bend, Oregon, which is currently
manufacturing limited amounts of specialty chemicals for sale to third parties
and is expected to commence production of some pheromones by the fourth quarter
of 1998 for use in the Company's proprietary products to be sold in the 1999
season. See "-Manufacturing," "Properties" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Distribution Operations. The Company owns and operates full-line
agrichemical distributors which, in addition to selling the Company's commercial
agriculture products, also sell products produced by other manufacturers,
including biorational insect control products, conventional toxic pesticides,
fertilizers and other farm supplies. Revenues from the Company's distribution
operations (which exclude sales of the Company's proprietary commercial
agriculture products through these distribution operations) for the years ended
December 31, 1997, 1996 and 1995 were $26.2 million, $22.8 million and $21.5
million, or 66.9%, 68.6% and 69.6% of the Company's total revenues for such
periods, respectively.
SALES, MARKETING AND DISTRIBUTION
The Company's sales, marketing and distribution strategies differ for
each of the major markets in which its products are sold.
The Company's sales in the commercial agriculture market are made
principally through agrichemical distributors. These distributors employ crop
protection professionals who consult for growers and recommend appropriate
insect control programs. The Company believes that IPM and crop protection
professionals, such as pest control advisers ("PCAs"), have become key factors
in promoting the introduction and distribution of insect control products to the
commercial agriculture market. This trend is most developed in California, where
state licensed PCAs are the only individuals who are authorized to recommend the
application of any pesticide, including insect control products. The Company's
strategy focuses on improving the PCAs' and growers' understanding of IPM and
how the Company's proprietary products can be integrated into insect control
programs. Consep markets its insect control products to this group through the
Company's 10-person technical sales organization.
As part of Consep's strategy to use Company-owned distributors to
introduce and promote its products, the Company has acquired agrichemical
distribution subsidiaries in strategic market locations. These acquisitions,
which took place in 1990 and 1994, have allowed Consep to employ crop protection
professionals, including PCAs, and obtain direct access to growers in order to
facilitate the exchange of information and more effectively introduce IPM
practices in general, and the Company's products in particular. The Company
currently operates agrichemical distribution outlets in five locations in the
Central Valley of California and in one location in the Connecticut River
Valley. The Company believes these distribution operations, and the 22 PCAs
which they employ, provide a continuous source of valuable information with
respect to new product needs, performance of products in the field and the
competitive position of those products.
The Company supports the sales efforts of the independent and subsidiary
agrichemical distributors through the organization of grower meetings, direct
grower contact and education of other influential groups such as university pest
management specialists and researchers, government agricultural personnel and
independent PCAs. The Company's CheckMate and BioLure product lines are promoted
through the dissemination of brochures, corporate communications and an on-line
Web page, in addition to direct contact with influential groups including
distributors, retailers, PCAs and growers. Agricultural trade shows and certain
industry conferences, such as the California Agricultural Production Consultants
Conference, are other venues for promotion of the Company's CheckMate and
BioLure product lines.
The Company sells its SureFire, Insectigone and Blocker products through
a network of cooperative buying groups and distributors who in turn resell to
lawn and garden centers, hardware stores and retail chains including drug and
grocery stores. These products are also sold directly to retailers and through
mail-order catalogs. Promotion of the Company's consumer products is achieved
primarily by co-operative advertising, media participation and trade shows. In
addition, the Company intends to use limited television
6
<PAGE> 7
advertising in 1998 to promote its Blocker product line. The Company works
directly with over 70 independent sales representatives who are engaged in
various sales and marketing activities related to the Company's consumer product
lines. These independent sales representatives are overseen by the Company's
7-person consumer sales group. The Company's sales and marketing efforts for its
consumer products are directed towards increasing the number of new retail and
distribution accounts and increasing the range of products carried by certain
existing retail accounts.
The Company's commercial agriculture and consumer products are also sold
through independent distributors in certain international markets. In addition,
the Company has established joint testing and marketing programs with these
distributors to introduce and sell its commercial agriculture products in
certain international markets. The Company also manufactures and sells products
on a private label basis to customers in the industrial pest control market. The
Company's revenue attributable to export sales and sales occurring outside of
the United States of both commercial agriculture and consumer products for the
years ended December 31, 1997, 1996 and 1995 were $3,332,346, $2,522,164 and
$2,217,266, respectively. The Company also sells certain BioLure products to the
United States Department of Agriculture (the "USDA") and various state and
international departments of agriculture.
The Company's business is highly seasonal, with its highest revenues
being recognized in the second quarter of each year and its lowest revenues
being recognized in the fourth quarter 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. In addition, many of
the Company's products, and the products sold by its wholly-owned distributors,
are dependent upon the emergence of certain pests in the crops they are designed
to protect. To the extent adverse weather conditions prevent or otherwise
interfere with the growth of certain crops or the emergence of certain pests,
the results of the Company's operations could be adversely impacted. From time
to time, secondary pest infestations may occur within specific crops or
geographic markets causing affected growers to alter their customary pest
control practices. Such events may cause growers to temporarily increase their
use of conventional toxic insecticides and reduce or suspend the use of
biorational products, such as those sold by the Company, which could have a
material adverse effect on the Company's results of operations.
MANUFACTURING
The Company manufactures the membrane-based reservoir dispensers,
microporous beads and dispersed (flowable) microcapsules used in its products at
its facility in Bend, Oregon. Products containing diatomaceous earth are
manufactured at the Company's wholly-owned subsidiary located in Kirkland,
Quebec, Canada. Prior to its primary manufacturing facility in Gainesville,
Florida being destroyed by fire in October 1996, Farchan produced pheromones
used in certain of the Company's commercial agriculture products. Specialty
chemicals continue to be manufactured on a limited basis at Consep's research
and development laboratory in Bend, Oregon. The Company discontinued separate
business operations at Farchan in the fourth quarter of 1997 and has formed its
own specialty chemicals division in Bend, Oregon which is currently
manufacturing limited amounts of specialty chemicals for sale to third parties
and is expected to commence production of some pheromones by the fourth quarter
of 1998 for use in the Company's proprietary products to be sold in the 1999
season. The Company believes it has alternative sources of supply of pheromones
for the 1998 season which it would otherwise have purchased from Farchan. See
"Properties" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources." As of March 2,
1998, Consep employed 33 people in manufacturing and quality control relating to
the production of its proprietary products.
Active ingredients, including pheromones and food baits, are purchased
from specialty chemical supply companies or are produced by Consep. The Company
has historically relied upon on a limited number of suppliers to provide
pheromones for its products. During February 1995, the Company acquired Farchan,
a Florida-based specialty chemicals manufacturer, in order to reduce the cost of
certain pheromones, provide assurance of consistent quality, and provide a
stable supply of these materials. This facility was destroyed by fire in October
1996 and the Company intends to establish a replacement pheromone operation in
Bend, Oregon as described above. The interruption of certain sources of supply,
including anticipated supplies of pheromones from the Company's specialty
chemicals division, or the failure of suppliers, to adapt their products to the
Company's changing technological requirements could result in delays in product
shipments, adversely affecting the Company's financial condition and results of
operations.
During 1998, the Company anticipates spending an additional $250,000 to
$500,000 for new manufacturing equipment for its existing manufacturing facility
in Bend, Oregon. In addition, the Company anticipates spending $300,000 to
$600,000 to construct and equip its new specialty chemicals manufacturing
operation to meet anticipated pheromone supply requirements for the 1999 season.
The Company expects to finance at least fifty percent of such expenses through
bank loans and/or equipment leasing arrangements. See "Properties" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Other than these planned
expenditures, the Company has no current plans to expand its manufacturing
facilities or
7
<PAGE> 8
equipment. Subject to construction of the new specialty chemicals manufacturing
facility described above, the Company believes that it has adequate production
capacity to meet its foreseeable needs.
RESEARCH AND DEVELOPMENT
Consep believes that considerable investment in new product development
will continue to be necessary to remain competitive in the biorational pest
control market. The Company's product development projects generally begin with
the identification of major insect infestation problems which the Company
believes can be addressed with biorational agents and which provide sufficient
market opportunity. Once a potential product is identified, the Company's
research and development personnel study the intended biorational agent and make
a determination as to whether the Company's existing controlled release
technologies are likely to work with the biorational agent. If it appears that
the controlled release technologies may need to be modified to work effectively
with the intended biorational agent, the Company's research and development
personnel work to adapt the existing controlled release technologies to suit the
requirements of the particular biorational agent. Once the controlled release
technology has been selected and the active ingredient has been tentatively
formulated, the development effort continues with laboratory studies and
eventual field testing of prototypes in order to arrive at the final form of the
product. Field testing of products is generally conducted on a collaborative
basis with academic, governmental and corporate entities in the United States,
including the USDA and numerous universities. In international markets, field
testing is generally conducted in collaboration with the Company's international
distributors and government researchers. Through these collaborative efforts,
the Company gains access to individuals within the collaborating organization
who have particular expertise in dealing with the targeted pest and crop and
whose opinions are generally widely accepted. Collaborative field testing also
provides independent verification of product efficacy which is critical to
convincing commercial growers to adopt new biorational products.
Pursuant to a license agreement with Bend Research, the Company is able
to participate in joint funding with various government agencies to develop
improvements to existing technologies. The license agreement also provides the
Company with license rights to agricultural applications of Bend Research
technologies, including technologies which are developed by Bend Research
pursuant to third party funded research and development efforts. See "--
Proprietary Rights." The license agreement also obligates the Company to request
Bend Research to perform research and development services budgeted at not less
than $600,000 a year, at least $400,000 of which must be directed towards
development of biorational products. For 1996 and 1997, the annual commitment
under the license agreement was reduced from $600,000 to $191,500 and $125,000,
respectively. For 1998, the annual commitment under the license agreement has
been waived with no minimum requirement. For years subsequent to 1998, the
$600,000 annual commitment will be reinstated. The license agreement continues
until the later of 2012 or the expiration of the last patent licensed under it.
The Company may terminate the license agreement on sixty days' notice. The
license agreement provides that if it were to be terminated for any reason, the
Company would retain rights to all Bend Research technologies incorporated in
then current products and in products then under development. If the Company
were to lose the services of Bend Research for any reason, the Company may
experience delays in the development and introduction of new products and would
be required to make alternative arrangements for the services performed by Bend
Research. Any such alternative arrangements could delay development efforts,
could substantially increase the cost of the Company's research and development
efforts and could adversely affect the Company's results of operations.
The Company is currently developing and expanding its CheckMate line of
insect control products. Field testing for the products under development is in
various stages of completion. The Company also plans to develop and introduce
additional products for its SureFire and Insectigone lines of consumer pest
control products. Additions to the consumer product lines will occur through new
product development and possible acquisitions of compatible product lines,
technologies or businesses.
GOVERNMENT REGULATION AND PRODUCT REGISTRATION
The pesticide industry is heavily regulated worldwide. In the United
States, the EPA regulates pesticide products under the Federal Insecticide,
Fungicide and Rodenticide Act ("FIFRA") and more recently under FQPA. Pesticides
are also subject to state and foreign regulations. Some states, such as
California, have their own extensive registration requirements, as do certain
foreign governments. To develop and commercialize a pesticide product, detailed
and complex procedures must be completed prior to obtaining approvals through
FIFRA, state and foreign regulatory agencies. Small scale field testing usually
can be conducted prior to product registration to evaluate product efficacy.
Unusual weather conditions during field tests may require additional field
testing requirements in subsequent growing seasons, resulting in delays in
product registration submissions and approvals. In addition, failure to receive
regulatory approval prior to the growing season could delay market introduction
of a new product by up to a year. Significant delays in new product development
or commercialization would have a material adverse effect on the Company's
results of operations.
8
<PAGE> 9
Chemical pesticides require extensive toxicology and environmental
testing to substantiate product safety prior to obtaining a product
registration. Commercial sale of a pesticide requires a product registration for
each pest and crop for which the product is used. Initial EPA registration for a
new chemical pesticide can take seven years or longer, and cost $10 million or
more. In contrast to conventional toxic chemicals, biorational products have
fewer regulatory requirements before commercial use is permitted. For example,
substantially fewer toxicity studies are required for biorational insect control
products than for conventional toxic insecticides. Due to differences such as
this, registration costs for biorational insect control products are
significantly less than for toxic insecticides, and registration of biorational
products requires considerably less time to complete. However, there can be no
assurance that additional requirements will not be added by the EPA which could
make registration procedures more time-consuming and costly or require further
testing and review of previously registered products. Furthermore, even without
any such additional regulatory requirements, the process of obtaining regulatory
approvals can be time-consuming and costly, and there can be no assurance that
such approvals can be obtained in a timely manner.
Government regulations have been enacted in recent years to encourage
the development and introduction of non-toxic alternatives to conventional
insecticides, including the streamlined registration of alternative pest control
products under the EPA's "Safer Pesticide Policy." In September 1993, the EPA,
the FDA and the USDA released a joint summary of the principles guiding their
legislative and regulatory agenda including: (i) a firm commitment to reducing
risks to people and the environment that may be associated with toxic pesticides
while ensuring the availability of cost-effective pest management techniques;
(ii) recognition of the need to work with growers to develop and implement
improved means of pest control, reduce use of higher-risk toxic pesticides and
promote greater use of IPM techniques; and, (iii) implementation of regulatory
reforms and incentives for the development of pesticides that will eliminate or
reduce health and environmental risks. Further, in 1994, the EPA established its
Biopesticides and Pollution Prevention Division, whereby companies developing
safer and less-toxic alternatives to conventional pesticides are able to have
new products reviewed and registered by a staff dedicated to this new division.
Such product reviews and registrations are generally completed over a shorter
time period and at less expense than conventional insecticide reviews and
registrations. In addition, in 1996, Congress passed FQPA which requires the EPA
to perform a new type of risk assessment for the total exposure from pesticides.
Based upon the above actions, coupled with cost and timing advantages of
registering biorational products relative to conventional toxic chemicals, the
Company believes biorational products have significant advantages in the
commercial agriculture insect control market. Field testing, manufacture and
sale of the Company's products outside the United States may be subject to
regulatory approval by other jurisdictions which may be more or less rigorous
than in the United States.
COMPETITION
The pest control industry is highly competitive and is dominated by
multinational chemical companies that have financial, technical and marketing
resources substantially greater than those of the Company. Currently,
biorational products account for only a small fraction of aggregate sales of
pest control products, and can require insect control practices, such as timing
and method of application, which are different from those typically associated
with toxic chemical products. As a result, in order for biorational products to
successfully compete with toxic chemicals, they must not only be cost
competitive but must also provide other advantages over conventional pesticides.
The Company believes that its products are cost competitive with conventional
toxic insecticides and, because they are non-toxic and leave no harmful residue
in food, soil or groundwater, provide sufficient advantages over conventional
toxic insecticides to compete effectively against such products.
The Company believes that many of the large chemical pesticide companies
are developing chemical pesticides which are less-toxic to man and the
environment, as well as new products based upon biorational agents. While Consep
believes that the emphasis of these companies has been on genetic engineering of
micro-organisms and insect-resistant plants and has been primarily directed
towards commodity crops such as wheat, corn, cotton, and soybeans, there can be
no assurance that these companies will not direct significant development
resources to either biorational products or less-toxic chemical products that
would compete directly with those of the Company.
In addition to the large chemical pesticide companies, the Company is
aware of at least five other companies using biorational control agents,
including pheromones, to produce alternative insect control products. The
Company believes that other companies are currently developing biorational
insect control products. The Company believes that none of these competing
companies has delivery systems that perform as effectively and efficiently as
the proprietary controlled release membrane-based reservoir, dispersed
(flowable) microcapsule and microporous bead systems used in Consep's CheckMate
products and that the Company is therefore in a strong competitive position with
respect to these companies.
9
<PAGE> 10
The Company expects competition within the biorational pest control
segment to intensify as regulatory pressures on conventional toxic pesticides
increase and as advances in the field are made and become more widely known.
There can be no assurance that the Company will be able to compete successfully
against its current competitors or that these competitors or new market entrants
will not develop products that compete directly with the Company's products and
are more effective, less expensive or more widely accepted than those of the
Company.
PROPRIETARY RIGHTS
Proprietary protection of the Company's products is important to its
business. Consep relies upon patents, trade secrets, unpatented know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company maintains a policy of seeking patents on its inventions,
acquiring licenses under selected patents or patent applications from third
parties and entering into invention and proprietary information agreements with
its key employees and consultants with respect to technology which it considers
important to its business.
As more specifically described below, the Company has obtained
manufacturing and marketing rights in agriculture to certain proprietary rights
of Bend Research, including patents, patent applications, trade secrets and
unpatented know-how which relate to existing and development-stage technologies
and products. In addition, the Company has filed patent applications with
respect to its own inventions which relate to existing and development-stage
technologies and products. There can be no assurance that patents will issue
from any pending or future patent applications or, if patents are issued, that
they will be of sufficient scope or strength to provide meaningful protection of
the Company's technologies. In addition, there can be no assurance that any of
the current patents issued or licensed to the Company or future patents issued
or licensed to the Company will not be challenged or circumvented by
competitors, or be found to be invalid or non-infringed in judicial or
administrative proceedings should a dispute arise. Moreover, notwithstanding the
scope of the patent protection available to the Company, there can be no
assurance that such patent rights will provide commercial advantage to the
Company as competitors could develop controlled release technologies which are
not covered by the Company's issued or licensed patents or future patents issued
or licensed to the Company.
Pursuant to an agreement with Bend Research, the Company has obtained a
license to all agricultural applications of technologies developed by Bend
Research, other than certain animal health and agricultural applications
unrelated to the Company's current or contemplated products. The license
includes rights to certain patents, patent applications, trade secrets and
unpatented know-how owned by Bend Research, and covers aspects of the Company's
membrane-based reservoir system, microporous bead system and dispersed
(flowable) microcapsule system technologies. The license agreement provides the
Company exclusive worldwide rights to all agricultural applications (except as
noted above) of the licensed patents, patent applications, trade secrets and
know-how. The membrane-based reservoir system technology used in many of the
Company's CheckMate, BioLure and SureFire products is the subject of a United
States patent owned by Bend Research expiring in 2002. Such technology is not
patented outside the United States, other than in Japan where the patent is held
by a third party. Neither the Company nor Bend Research has rights with respect
to the Japanese patent. The microporous bead system technology used in certain
current and development-stage CheckMate products is the subject of a pending
United States patent application owned by Bend Research. The license agreement
provides the Company exclusive, worldwide rights to agricultural applications
(except as noted above) of the microporous bead system technology. The dispersed
(flowable) microcapsule system technology used in certain current and
development-stage CheckMate products is not patented in any country. The license
agreement provides the Company exclusive, worldwide rights to agriculture
applications (except as noted above) of the dispersed (flowable) microcapsule
system technology.
The foregoing licenses are royalty-free as to certain of the Company's
existing controlled-release products. Certain existing products are, and
products resulting from existing and future development efforts may be, royalty
bearing at rates ranging from 2.5% to 5.0% of the Company's direct gross margin,
as defined in the license agreement, on such products. During January 1995,
royalties related to certain products incorporating technology provided by Bend
Research for the term of the license agreement were prepaid by the Company. Such
prepaid royalties totaled $121,000 and are being amortized as the related
products are sold by the Company. The license agreement continues until the
later of 2012 or the expiration of the last patent licensed under it. The
Company may terminate the license agreement on sixty days' notice. The license
agreement provides that if it were to be terminated for any reason, the Company
would retain rights to all Bend Research technologies incorporated in then
current products and any products then under development.
The Company's technology relating to its diatomaceous earth products
includes a patented bait formulation. These patents provide protection in Canada
and Australia.
10
<PAGE> 11
Much of the Company's technology and many of its processes are dependent
upon the knowledge, experience and skills of certain scientific and technical
personnel. To protect its rights to its proprietary information and technology,
the Company requires key employees, consultants, advisors and collaborators to
enter into confidentiality agreements which prohibit the disclosure of
confidential information to persons unaffiliated with the Company and require
disclosure and assignment to the Company of ideas, developments, discoveries and
inventions made by such persons. There can be no assurance that these agreements
will prevent disclosure of the Company's confidential information or will
provide meaningful protection for the Company's confidential information if
there is an unauthorized use or disclosure. In the absence of patent protection,
the Company's business may be adversely affected by competitors who develop
substantially equivalent technology.
Proprietary rights litigation, which could result in substantial cost to
and diversion of effort by the Company, may be necessary to enforce patents
issued or licensed to the Company, to protect trade secrets or know-how owned by
the Company or to defend the Company against claimed infringement of the rights
of others and to determine the scope and validity of the proprietary rights of
the Company and others. Adverse determinations in litigation could subject the
Company to significant liabilities to third parties, could require the Company
to seek licenses from third parties and could prevent the Company from
manufacturing, selling or using its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company is not currently a party to any patent litigation or
other litigation regarding intellectual property rights and is not aware of any
challenge to its patents or proprietary rights.
EMPLOYEES
As of March 2, 1998, Consep had 136 employees, with 18 involved in sales
of proprietary products, 22 employed as PCAs in its distribution subsidiaries, 9
involved in product development and registration, 33 involved in manufacturing
and quality control of proprietary products, 17 involved in finance and
administration and 37 involved in operations at its distribution subsidiaries.
ITEM 2. PROPERTIES
The Company is headquartered in Bend, Oregon where it owns a 28,800
square foot facility purchased in 1997 for $1.495 million. In addition to
administrative offices, the headquarters facility contains research and
development, manufacturing, warehouse and sales operations for certain of the
Company's proprietary products. In addition, the Company, through its Chemfree
subsidiary, leases an office, manufacturing, sales, and warehousing facility in
Kirkland, Quebec, Canada under a lease expiring in July 1998. The Company
believes it could replace this facility in a timely manner on terms acceptable
to the Company, if the lease is not renewed in 1998. Total lease expenditures
related to all of the Company's proprietary product-related facilities in 1997,
1996 and 1995 were $111,159, $147,407 and $150,461, respectively.
As of September 30, 1996, the Company also owned, through its Farchan
subsidiary, two buildings located in Gainesville, Florida, and one building
located in Alachua, Florida, with a combined capacity of approximately 11,000
square feet used for this subsidiary's manufacturing, sales, research and
development and warehousing functions. In October 1996, one of Farchan's two
buildings located in Gainesville, Florida with a capacity of approximately 3,000
square feet, which was used as a manufacturing facility, was destroyed by fire.
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 Alachua, Florida. The Company has removed all of its equipment from the
Alachua facility and is attempting to sell the land and building. The Company
has also decided not to rebuild the manufacturing facility at its Gainesville
site and is attempting to sell the property. At the present time, the Company
plans to expand its existing manufacturing facility in Bend, Oregon and build
and equip a specialty chemicals manufacturing area to produce pheromones and
other specialty chemicals. Design work is complete and building permit
applications have been submitted to the City of Bend. The Company believes the
new specialty chemicals manufacturing addition can be operational by the end of
September 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources."
The Company, through certain of its distribution subsidiaries, also owns
office and warehousing facilities for its agrichemical distribution operations
in Sacramento, Fresno, and Patterson, California. The Company's distribution
operations also lease sales and distribution facilities in Livingston and
Escalon, California, under leases which expire on December 31, 1999 and 2001,
respectively. The Company's distribution operations also leases a sales and
distribution facility in Chicopee, Massachusetts on a month-to-month basis. The
Company believes that it could replace this facility in a timely manner, if
required to do so. Total lease expenditures related to all of the Company's
distribution facilities in 1997, 1996 and 1995 were $89,940, $93,820 and
$83,340, respectively.
The Company believes that its existing facilities will be adequate to
serve its needs at least through 1998.
11
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than various
claims and lawsuits which the Company believes are not individually or
collectively material to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Shares of the Company's Common Stock commenced trading on the Nasdaq
Stock Market on February 9, 1994, under the symbol CSEP. As of March 2, 1998,
there were approximately 182 shareholders of record and approximately 2,200
beneficial owners of Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for future growth
and, therefore, does not anticipate declaring or paying any cash dividends in
the foreseeable future. The following table sets forth, for the fiscal periods
indicated, the range of high and low closing prices for the Company's Common
Stock on the Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
- --------------------------------------------------------------------------
<S> <C> <C>
1996
First Quarter 3.750 2.625
Second Quarter 5.125 3.375
Third Quarter 4.000 2.625
Fourth Quarter 3.875 3.250
1997
First Quarter 3.625 2.875
Second Quarter 3.250 2.375
Third Quarter 2.938 2.000
Fourth Quarter 2.125 1.313
1998
First Quarter (through March 2, 1998) 1.875 1.375
- --------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR
(In thousands, ----------------------------------------------------------------------------
except per share) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenues $ 39,204 $ 33,229 $ 30,844 $ 25,120 $ 21,274
Net loss (1,822) (2,483) (1,286) (5,850)* (4,126)
Net loss per share (0.19) (0.31) (0.19) (0.97) (1.01)
BALANCE SHEET
Working capital 8,272 10,433 8,784 6,862 1,973
Total assets 25,678 23,411 21,559 19,653 13,840
Long-term debt,
excluding current
maturities 2,168 1,191 951 689 1,273
Shareholders' equity 15,217 17,010 14,681 12,440 6,489
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* The net loss for 1994 includes restructure costs of $866.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Report on Form 10-K contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that are based on current expectations, estimates
and projections about the markets in which Consep operates, management's beliefs
and assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements due to numerous
factors including, but not limited to, those discussed in the following
discussion and analysis of financial condition and results of operations, as
well as those discussed elsewhere herein and in the Company's other filings that
are made from time to time with the Securities and Exchange Commission.
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.
Continued growth in both proprietary and distribution revenues
contributed to a smaller loss in 1997 than incurred by the Company in 1996. The
growth in proprietary product revenues was primarily attributable to higher
revenues from increased sales of the Company's commercial agriculture products
and to the introduction of the Company's new insect repellent line. These
increased revenues were partially offset by higher overall operating expenses.
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.
13
<PAGE> 14
The Company has incurred annual operating losses since its inception in
1984. The Company believes its future annual profitability is dependent upon
continued revenue growth, maintained or strengthened gross margins, and
controlled 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 second quarter of each year and its lowest
revenues being recognized in the fourth quarter 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 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net revenues of certain items in the Company's Consolidated
Financial Statements. The table and the discussion below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Proprietary products 33.1% 31.4% 30.4%
Distribution 66.9 68.6 69.6
----- ----- -----
Total revenues 100.0 100.0 100.0
COST OF REVENUES
Proprietary products 21.1 20.1 17.8
Distribution 54.9 55.9 57.1
----- ----- -----
Total cost of revenues 76.0 76.0 74.9
----- ----- -----
GROSS MARGIN 24.0 24.0 25.1
OPERATING EXPENSES
Research and development(1) 3.1 4.4 3.4
Selling, general and administrative(1) 16.0 17.1 15.0
Distribution(2) 9.7 10.1 10.9
----- ----- -----
Total operating expenses 28.8 31.6 29.3
----- ----- -----
OPERATING LOSS (4.8) (7.6) (4.2)
OTHER INCOME, NET 0.2 0.1 0.0
----- ----- -----
NET LOSS
Proprietary products (7.0) (9.9) (5.6)
Distribution 2.4 2.4 1.4
----- ----- -----
Total net loss (4.6)% (7.5)% (4.2)%
===== ===== =====
- --------------------------------------------------------------------------------------
</TABLE>
(1) Research and development and selling, general and administrative expenses
are allocated to the Company's proprietary product operations.
(2) Distribution expenses consist entirely of selling, general and
administrative expenses of the Company's distribution operations.
Revenues. Total revenues increased to $39.2 million in 1997 from $33.2
million in 1996 and $30.8 million in 1995. Revenues from the Company's
proprietary products increased to $13.0 million in 1997 from $10.4 million in
1996 and $9.4 million in 1995, while revenues from distribution operations
increased to $26.2 million in 1997 from $22.8 million in 1996 and $21.5 million
in 1995.
The growth in proprietary product revenues for the year ended December
31, 1997 was attributable to growth in sales of the Company's consumer products
and commercial agriculture products. These increases were offset by decreased
sales of specialty chemicals to third parties by the Company's Farchan
subsidiary as a result of a fire in October 1996, that destroyed Farchan's
primary manufacturing facility.
14
<PAGE> 15
In 1997, revenues from the sale of commercial agriculture products
increased approximately $1.2 million or 33.8%, as compared to 1996. The increase
in sales of commercial agriculture products was primarily attributable to a
34.5% increase in sales of the Company's CheckMate line of products. The
increase in revenues from the sales of CheckMate products was primarily
attributable to (i) the introduction of a new combination product to control
both peach twig borer and oriental fruit moth ("CheckMate SF"), (ii) increased
sales of the product to control tomato pinworm ("CheckMate TPW") as a result of
the Company's strengthening its sales organization in Mexico, (iii) increased
sales of the product to control codling moth ("CheckMate CM") into markets in
the southern hemisphere and (iv) sales of the new CheckMate flowable product to
control tomato pinworm ("CheckMate TPW-F"). These increases were partially
offset by a decrease in Company's CheckMate products to control pink bollworm in
cotton ("CheckMate PBW" and "CheckMate PBW-F"). The combined 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.
Revenues from the sale of commercial agriculture products increased
approximately $157,000, or 4.8%, in 1996 as compared to 1995. The increase in
sales of commercial agriculture products was primarily attributable to the
introduction of newly registered formulations of products for which registration
approvals were obtained during the year. In 1996, the Company received
registration approval for CheckMate PBW-F, its new flowable micro-encapsulated
product, which contributed to a 118.4% growth in revenues from the sale of
CheckMate PBW products. Also contributing to the increase in commercial
agriculture product revenues were increased sales of other CheckMate PBW
products in Mexico and increased international sales of CheckMate CM and the
product to control oriental fruit moth ("CheckMate OFM"). These revenue
increases were offset by (i) a reduction in revenues in Mexico from the sale of
the Company's CheckMate TPW product, and (ii) a reduction in revenues in
California from the sale of the Company's CheckMate CM product. The Company
believes the decrease in revenues in Mexico from the sale of CheckMate TPW was
due to increased competition in Mexico and responded by strengthening its sales
organization in that market. The Company believes the decrease in revenues in
California from the sale of CheckMate CM was due to a delay in receiving
registration of a new warm weather formulation of CheckMate CM from the State of
California which caused the Company to sell its cool weather formulation that
did not perform adequately in the hotter weather experienced in the spring of
1996. As a result, many growers used alternatives to the Company's cool weather
formulation of CheckMate CM. Applications of the Company's new warm weather
formulation of CheckMate CM were made after registration was received and
performed as expected.
In 1997, revenues from the sale of consumer products from the Company's
SureFire and Blocker line of products in the United States and Chemfree products
in Canada increased by approximately $1.7 million, or 29.3%, as compared to
1996. This growth in consumer product revenue was primarily attributable to the
introduction of the Company's new Blocker line of insect repellent products.
These Blocker product revenues were partially offset by a 17.1% decrease in
revenues from sales of the Company's SureFire line of products in the United
States as compared to 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 1997. 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 1997. Revenues from the sale of consumer products increased 15.5%, or
$765,000, in 1996 compared to 1995 levels. This growth in consumer product
revenues was generated by the Company's continued efforts to increase the number
of retail outlets through which its products are sold while also increasing the
number of products carried by the individual retail operations.
Specialty chemical sales by Farchan decreased 21.4% in 1997 as compared
to 1996. The decrease in sales was primarily the result of the fire in October
of 1996 that destroyed its primary manufacturing facility in Gainesville,
Florida. Partially offsetting the decrease in specialty chemical sales, Farchan
recognized revenues in 1997 from the sale of its research chemicals catalog
business and related inventory to GFS Chemicals, Inc. of Powell, Ohio. In 1996,
Farchan contributed approximately $111,000 to the growth in proprietary product
revenues as compared to 1995. The increase in specialty chemical sales was
primarily attributable to an increase in the number of products offered by
Farchan and the inclusion of only eleven months of results in 1995. Partially
offsetting this increase was a significant reduction in sales in the fourth
quarter of 1996 as a result of the fire.
Distribution revenues increased $3.4 million, or 15.0%, during the year
ended December 31, 1997 as compared to 1996. In 1996, distribution revenues
increased $1.4 million, or 6.3%, as compared to 1995. These increases were
primarily attributable to continued growth of the Company's California-based
subsidiaries as well as to favorable weather conditions in the Central Valley of
California, the Company's principal distribution market.
Gross Margin. The consolidated gross margin for the Company remained at
24.0% in 1997 compared to 24.0% in 1996. In 1996 the consolidated gross margin
decreased to 24.0% from the 25.1% gross margin in 1995. The decrease in gross
margin in 1996 was primarily attributable to lower gross margins on the
Company's commercial agriculture products.
15
<PAGE> 16
Proprietary gross margins increased to 36.0% in 1997 from 35.8% in 1996.
The gross margin percentage for the Company's commercial agriculture products
increased to 28.2% in 1997 from 27.9% in 1996. This increase in margin
percentage was primarily attributable to differences in product sales mix and
increases in the overall sales and production volumes allowing manufacturing
costs to be allocated over a larger base of products. Substantially offsetting
these increases were decreases primarily as a result of (i) lower margins on the
Company's CheckMate product to control codling moth due to flexible pricing to
introduce the product into Europe and to recover lost markets in the United
States as a result of previously reported performance problems encountered in
1996, (ii) higher pheromone costs as a result of the fire that destroyed the
Farchan facility (see "Liquidity and Capital Resources") and (iii) 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. The gross margin on
commercial agriculture proprietary products includes an accrual of approximately
$100,000 for estimated insurance recoveries for additional pheromone expenses
incurred in 1997 due to the October 1996 fire that destroyed the Company's
specialty chemicals manufacturing facility. This accrual reduced cost of
revenues by approximately $100,000 and positively impacted the gross margin
percentage on commercial agriculture product sales by 2.2% in 1997. To date, the
Company has not reached a final settlement with its former 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 former 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 recover its claims in full.
Proprietary gross margins decreased to 35.8% in 1996 from 41.6% in 1995.
The gross margin percentage for the Company's commercial agriculture products
decreased to 27.9% in 1996 from 43.7% in 1995. This decrease in margin
percentage was 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. In addition, the CheckMate CM product was redesigned for the 1997
season. As a result of the new design of the CheckMate CM product, approximately
$260,000 of CheckMate CM product was written off in the fourth quarter of 1996.
This inventory write-off lowered the gross margin percentage on commercial
agriculture products by 7.6%.
The gross margins on proprietary consumer product sales for 1997
increased to 44.6% from 37.5% in 1996. The increase is primarily attributable to
the 53.3% gross margin realized on sales of the new Blocker product line. In
order to make the Blocker products more competitive in the marketplace, the
Company has reduced its selling price for the 1998 season by 25% which will
negatively impact 1998 gross margins. Sales of consumer products during 1996
resulted in a gross margin of 37.5%, the same percentage achieved in 1995.
Sales of specialty chemicals produced a gross margin of 9.1% in 1997
down from the 49.0% gross margin reported in 1996. The decrease in gross margin
percentage 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 1997. Proprietary product margins on
specialty chemical sales by Farchan in 1996 decreased to 49.0% from 53.0% in
1995. The decrease was primarily the result of differences in the product sales
mix for specialty chemicals.
The gross margins from distribution revenues for 1997 decreased to 18.1%
from 18.6% as compared to 1996. The decrease was primarily attributable to
differences in the product sales mix for the distribution operations. The
distribution operations' margin was 18.6% for 1996, compared to 17.9% in 1995.
During the second quarter of 1996 the Company changed the timing for recognition
of manufacturers' rebates for purchases of bulk chemicals. Rather than
recognizing these rebates when received, typically in the fourth and first
quarters of each year, the Company determined that recognition should occur at
the time the rebates are earned. This change improved distribution margins by
approximately 0.8% in 1996.
Research and Development. Research and development costs decreased
approximately $251,000, or 17.2%, from 1996 to 1997. This decrease was primarily
attributable to a 84% decrease in development costs incurred by the Company's
Farchan subsidiary as a result of the October 1996 fire. In addition, costs
associated with the development of the CheckMate flowable products was reduced
as the time required to develop new flowable processes were reduced. During
1996, research and development costs increased approximately $395,000, or 37.3%,
from the level incurred during 1995. This increase was primarily attributable to
(i) increased costs associated with the development of new, lower cost synthesis
routes to be used in the production of pheromones by the Company's Farchan
subsidiary; (ii) costs associated with the development of the Company's new
dispersed (flowable) microcapsule products; (iii) increased amortization
relating to technology purchased from Bend Research in 1995; and (iv) additional
costs associated with the development of other new products.
16
<PAGE> 17
Selling, General and Administrative. In 1997, selling, general and
administrative costs associated with the Company's proprietary product
operations increased 10.5% over 1996. The increase was primarily attributable to
selling and marketing expenses related to the Company's new Blocker line of
insect repellent products and a write down of $200,000 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 Company's decision to establish
a replacement specialty chemicals manufacturing operation, in Bend, Oregon, 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." In 1996, selling, general and administrative costs associated with
the Company's proprietary product operations increased 22.8% from 1995. The
principal sources of this increase were (i) sales and marketing costs associated
with both proprietary consumer products and commercial agriculture products
increased due to increased personnel, increased commissions on higher sales of
consumer products and expanded international operations for commercial
agriculture products; (ii) additional marketing costs related to the
introduction of the Company's Blocker line of insect repellent products; (iii)
additional expenses for complimentary product given to growers in California who
encountered difficulties with the CheckMate CM product described above and (iv)
1996 results included a full twelve months of Farchan operations while 1995
included only eleven months of operating expense for that subsidiary acquired in
February 1995.
Distribution. During 1997, total operating costs related to the
Company's distribution operations increased 12.7% as compared to 1996. The
increase is primarily attributable to (i) increased selling and delivery
expenses as a result of greater sales volume and (ii) a reduction in bad debt
reserves in 1996 that did not occur in 1997. Operating costs related to the
Company's distribution operations remained approximately the same in 1996 as in
1995. Although selling and administrative costs increased 5.6% in 1996, the
Company was able to offset these increases with a reduction in bad debt reserves
as a result of improved collections.
Other Income and Expense. During 1997, the Company recorded net other
income of approximately $42,000 compared to approximately $35,000 of net other
income in 1996. The increase is primarily attributable to approximately $338,000
in business interruption coverage reimbursements from the Company's insurance
carrier in 1997 relating to the Farchan fire. Substantially offsetting this
increase in net other income was a decrease relating to greater interest
expense in 1997 as compared to 1996 as a result of higher outstanding
borrowings during the year. For the year ended December 31, 1996, the Company
recorded net other income of approximately $35,000 compared to approximately
$20,000 in 1995. The increase was primarily attributable to (i) a $227,000
gain relating to the insurance proceeds exceeding the book value of the
property destroyed at the Farchan subsidiary and (ii) a $63,000 estimated
reimbursement from the insurance company for the business interruption
coverage in 1996 relating to the Farchan fire. These increases were
substantially offset by (i) increased interest expense; (ii) reduced interest
income; (iii) increased foreign currency exchange losses relating to the
Company's Canadian subsidiary and (iv) the reversal of an accrued contingent
liability and the gain on the sale of property, both of which had a positive
impact on the 1995 results.
17
<PAGE> 18
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated statements of
operations data for each of the Company's last eight quarters. This quarterly
financial data has been prepared on the same basis as the annual financial
information presented elsewhere in this Form 10-K and, in management's opinion,
reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of operations for each such
quarter. The operating results for any quarter are not necessarily indicative of
the results which may be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
DEC. 31, SEP. 30, JUNE 30, MAR. 31, DEC. 31, SEP. 30, JUNE 30, MAR. 31,
1997 1997 1997 1997 1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Proprietary products $ 805 $2,770 $ 4,600 $ 4,788 $ 895 $2,226 $ 3,723 $3,575
Distribution 4,146 6,877 9,180 6,038 3,073 6,142 7,961 5,634
------- ------ ------- ------- ------- ------ ------- ------
Total revenues 4,951 9,647 13,780 10,826 3,968 8,368 11,684 9,209
Cost of revenues 4,442 7,605 10,045 7,695 3,531 6,515 8,744 6,452
------- ------ ------- ------- ------- ------ ------- ------
Gross margin 509 2,042 3,735 3,131 437 1,853 2,940 2,757
Operating expenses 2,521 2,719 3,474 2,567 2,787 2,578 2,749 2,391
------- ------ ------- ------- ------- ------ ------- ------
Operating income (loss) (2,012) (677) 261 564 (2,350) (725) 191 366
Other income (expense), net (33) (14) 50 39 205 (73) (85) (12)
------- ------ ------- ------- ------- ------ ------- ------
Net income (loss) $(2,045) $ (691) $ 311 $ 603 $(2,145) $ (798) $ 106 $ 354
======= ====== ======= ======= ======= ====== ======= ======
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's business is seasonal, with its highest revenues being
recognized in the second quarter of each year and its lowest revenues being
recognized in the fourth quarter 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 to continue with a slight shift to third and
fourth quarter revenues as sales to international markets increase. In contrast
to revenues, operating expenses tend to be 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 of the year, and the Company may experience a loss in the
third and fourth quarters of an otherwise profitable year.
In addition, many of the Company's products, and the products sold by
its wholly-owned distributors, are dependent upon the emergence of certain pests
in the crops they are designed to protect. To the extent adverse weather
conditions prevent or otherwise interfere with the growth of certain crops or
the emergence of certain pests, the results of the Company's operations could be
adversely impacted. From time to time, secondary pest infestations may occur
within specific crops or geographic markets causing affected growers to alter
their customary pest control practices. Such events may cause growers to
temporarily increase their use of conventional toxic insecticides and reduce or
suspend the use of biorational products, such as those sold by the Company,
which could have a material adverse effect on the Company's results of
operations.
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. Through December 31, 1997,
the Company has raised approximately $44.4 million in equity capital, net of
expenses, since its inception. 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 credit line matures in
December 1998 and is secured by substantially all of the Company's current
assets.
At December 31, 1997, the Company had cash, cash equivalents and
short-term investments of approximately $1.7 million and working capital of
approximately $8.3 million. Borrowings under revolving lines of credit were
approximately $1.5 million. The Company believes that cash and cash equivalents
at December 31, 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
18
<PAGE> 19
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 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 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 fire, it has not reached a final settlement with its
former insurance carrier for the claims associated with its additional expenses
for outside pheromone purchases or business interruption losses. 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 the insurance carrier, MSI Insurance
Company, in the United States 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 proceeding, 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 Alachua, Florida. The Company has removed all of its equipment
from the Alachua and Gainesville facilities and plans to sell the land and
buildings. At the present time, the Company plans to build an addition to its
headquarters and manufacturing facility in Bend, Oregon and purchase the
necessary equipment to establish a specialty chemicals manufacturing operation
to produce pheromone and other specialty chemicals. The Company has finished
design work and applied to the City of Bend for the necessary building permits.
The Company believes the cost of the new addition will range from $80,000 to
$150,000. 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 had 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 had been advanced for the purchase of the existing facility. At December
31, 1997, the additional $600,000 under the loan commitment expired unused. 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 is currently
re-negotiating the construction loan commitment with the bank to provide partial
financing to construct the new addition. 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
manufacturing area is estimated to range from $220,000 to $450,000. 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 equipment financing
arrangements and sufficient internal cashflow, the Company believes the new
specialty chemicals manufacturing area can be operational by the end of
September 1998 and should be able to produce some pheromones for the 1999
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) is
proceeding with its plans to build and equip a specialty chemicals manufacturing
area at its headquarters and manufacturing facility in Bend, Oregon, which it
believes can be operational in sufficient time to produce some pheromones for
the 1999 season and (iii) has 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 area, (ii) internally funding the construction of the new
specialty chemicals manufacturing area or (iii)
19
<PAGE> 20
securing financing to fund the purchase of additional specialty chemicals
manufacturing equipment. The forward-looking statements should be considered in
light of these risks and uncertainties.
The Company has reviewed its internal electronic information systems
with respect to any potential adverse impact of the upcoming change in the
century on the operation of such systems ("Year 2000 Issues") and believes that
it will not have any internal Year 2000 Issues. Although the Company intends to
inquire as to whether its key suppliers, customers, creditors, independent
distributors and financial service organizations (the "Company's Business
Constituents") project any Year 2000 Issues with respect to their respective
business operations that may adversely impact the Company, Consep has not yet
commenced such inquiries. As a result, the Company has not determined whether
any of the Company's Business Constituents project any Year 2000 Issues for
their respective business operations that could have a material adverse impact
on the Company's future operating results or financial condition. The Company
intends to commence a program of contacting the Company's Business Constituents
over the remainder of 1998 to inquire as to their respective Year 2000 Issues.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (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 is effective for financial statements for
fiscal years beginning after December 15, 1997. The Company will adopt the
statement for the year ended December 31, 1998.
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 Company will
adopt the statement for the year ended December 31, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report 21
Consolidated Balance Sheets 22
Consolidated Statements of Operations 23
Consolidated Statements of Shareholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Consep, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Consep,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Consep, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations, and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 13, 1998
21
<PAGE> 22
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,615,773 $ 2,443,508
Short-term investments 69,334 103,167
Accounts receivable, net 4,733,525 3,601,912
Other receivables 458,283 296,358
Inventories, net (note 3) 9,316,144 7,993,706
Prepaid expenses 372,023 966,102
------------ ------------
Total current assets 16,565,082 15,404,753
Property, plant and equipment, net (note 4) 5,520,640 4,020,456
Notes receivable and other assets 57,620 258,865
Intangible assets, net (note 5) 1,519,344 1,545,246
Goodwill, net (note 2) 2,014,874 2,181,901
------------ ------------
Total assets $ 25,677,560 $ 23,411,221
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines (note 6) $ 1,492,973 $ 1,170,000
Accounts payable 4,581,462 2,526,325
Current portion of notes payable (note 7) 527,625 312,821
Current portion of obligations under capital
lease (note 11) 31,647 34,369
Accrued liabilities 925,568 646,135
Customer deposits 734,148 282,581
------------ ------------
Total current liabilities 8,293,423 4,972,231
Notes payable, excluding current portion (note 7) 2,133,560 1,153,553
Obligations under capital lease, excluding
current portion (note 11) 14,559 17,516
Deferred gain on sale of property (note 11) -- 238,075
Mandatory stock warrant obligation (note 8) 19,500 19,500
------------ ------------
Total liabilities 10,461,042 6,400,875
------------ -------------
Commitments and contingencies (notes 11,12 and 13)
Shareholders' equity (note 8):
Preferred stock, $.01 par value.
Authorized 3,000,000 shares, no shares
issued or outstanding at 1997 and 1996 -- --
Common stock, non-voting, $.01 par value.
Authorized 657,601 shares, no shares issued or
outstanding at 1997 and 1996 -- --
Common stock, $.01 par value.
Authorized 15,000,000 shares, issued
and outstanding 9,460,151 and 9,431,203
shares at 1997 and 1996, respectively 94,602 94,312
Additional paid-in capital 44,313,127 44,256,367
Accumulated deficit (29,177,621) (27,355,600)
Foreign currency translation adjustment (13,590) 15,267
------------ ------------
Total shareholders' equity 15,216,518 17,010,346
------------ ------------
Total liabilities and shareholders' equity $ 25,677,560 $ 23,411,221
============ ============
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (note 15) $39,204,329 $33,229,229 $30,843,734
Cost of revenues (note 15) 29,786,976 25,241,986 23,094,064
----------- ----------- -----------
Gross margin 9,417,353 7,987,243 7,749,670
----------- ----------- -----------
Operating expenses:
Research and development (note 12) 1,203,502 1,454,180 1,059,048
Selling, general and administrative 10,077,898 9,051,036 7,996,758
----------- ----------- -----------
Total operating expenses 11,281,400 10,505,216 9,055,806
----------- ----------- -----------
Operating loss (1,864,047) (2,517,973) (1,306,136)
----------- ----------- -----------
Other income (expense):
Interest expense (424,739) (324,017) (284,283)
Interest income 157,275 159,024 245,403
Other, net 309,490 200,079 58,537
----------- ----------- -----------
Net other income 42,026 35,086 19,657
----------- ----------- -----------
Net loss $(1,822,021) $(2,482,887) $(1,286,479)
=========== =========== ===========
Basic and diluted net loss per share (note 1) $ (0.19) $ (0.31) $ (0.19)
=========== =========== ===========
Weighted average number of shares outstanding (note 1) 9,450,963 7,963,358 6,761,623
=========== =========== ===========
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Preferred Stock Common Stock Additional Currency Total
--------------- ------------------- Paid-In Accumulated Translation Shareholders'
Shares Amount Shares Amount Capital Deficit Adjustment Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -- $-- 6,263,653 $62,636 $35,978,675 $(23,586,234) $(15,131) $12,439,946
Common stock issued in
secondary public offering -- -- 1,100,000 11,000 3,078,375 -- -- 3,089,375
Exercise of stock options -- -- 34,213 342 58,297 -- -- 58,639
Business acquisitions (note 2) -- -- 171,671 1,717 352,354 -- -- 354,071
Foreign currency translation
adjustment -- -- -- -- -- -- 25,928 25,928
Net loss -- -- -- -- -- (1,286,479) -- (1,286,479)
---- ---- --------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1995 -- -- 7,569,537 75,695 39,467,701 (24,872,713) 10,797 14,681,480
Common stock issued in
secondary public offering -- -- 1,755,563 17,556 4,587,399 -- -- 4,604,955
Exercise of stock options -- -- 85,698 857 152,686 -- -- 153,543
Common stock issued under
Employee Stock Purchase Plan -- -- 20,405 204 48,581 -- -- 48,785
Foreign currency translation
adjustment -- -- -- -- -- -- 4,470 4,470
Net loss -- -- -- -- -- (2,482,887) -- (2,482,887)
---- ---- --------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1996 -- -- 9,431,203 94,312 44,256,367 (27,355,600) 15,267 17,010,346
Exercise of stock options -- -- 4,400 44 1,056 -- -- 1,100
Common stock issued under
Employee Stock Purchase Plan -- -- 24,548 246 55,704 -- -- 55,950
Foreign currency translation
adjustment -- -- -- -- -- -- (28,857) (28,857)
Net loss -- -- -- -- -- (1,822,021) -- (1,822,021)
---- ---- --------- ------- ----------- ------------ -------- -----------
Balance at December 31, 1997 -- $-- 9,460,151 $94,602 $44,313,127 $(29,177,621) $(13,590) $15,216,518
==== ==== ========= ======= =========== ============ ======== ===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
CONSEP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,822,021) $(2,482,887) $(1,286,479)
Adjustments to reconcile net loss to
net cash provided by (used) in operating activities:
Depreciation and amortization 1,171,893 1,071,925 881,784
Provision for bad debts 228,144 40,171 164,544
Inventory reserve 275,428 383,307 148,042
(Gain) loss on disposal of equipment 2,188 16,526 (50,467)
Other non-cash items 240,574 (10,890) (31,507)
Changes in assets and liabilities,
net of amounts acquired:
Short-term investments 33,833 33,332 1,514,864
Accounts receivable (1,421,268) (292,239) (244,658)
Other receivables (161,925) (77,379) 58,210
Inventories (1,627,104) (450,769) (2,097,823)
Prepaid expenses 587,164 (580,053) 46,091
Accounts payable 2,086,009 85,409 (460,477)
Accrued liabilities 319,921 63,070 (324,627)
Other assets (28,873) (3,000) 66,667
Customer deposits 451,573 (168,646) (110,866)
----------- ----------- -----------
Net cash provided by (used) in
operating activities 335,536 (2,372,123) (1,726,702)
----------- ----------- -----------
INVESTING ACTIVITIES:
Acquisition of intangible assets (226,439) (289,818) (396,915)
Acquisition of property, plant and equipment (1,423,012) (1,077,473) (477,404)
Acquisition of subsidiary companies, net of cash acquired -- -- (74,136)
Net proceeds from sale of property, plant and equipment 14,400 8,350 88,050
(Increase) decrease in notes receivable,
net of payments received 286,663 273,265 (34,900)
----------- ----------- -----------
Net cash used in investing activities (1,348,388) (1,085,676) (895,305)
----------- ----------- -----------
FINANCING ACTIVITIES:
Increase (decrease) in bank lines 323,391 (541,533) 233,897
Increase in notes payable 250,000 215,000 141,516
Principal payments on notes payable and capital
lease obligations (445,020) (650,149) (584,997)
Proceeds from sale of common stock, net 57,050 4,807,283 3,148,014
----------- ----------- -----------
Net cash provided by financing activities 185,421 3,830,601 2,938,430
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents (304) 1,111 (613)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (827,735) 373,913 315,810
Cash and cash equivalents at beginning of period 2,443,508 2,069,595 1,753,785
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,615,773 $ 2,443,508 $ 2,069,595
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 432,646 $ 324,818 $ 295,915
=========== =========== ===========
Cash paid during the period for taxes $ 14,661 $ 10,446 $ 12,403
=========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
CONSEP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash Equivalents and Short-term Investments
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. Similar investments with original maturities beyond
three months are considered short-term investments and are carried at cost,
which approximates market value.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Consep,
Inc. and its wholly-owned subsidiaries, Pacoast, Inc. (Pacoast), Valley Green
Center, Inc., Consep de Mexico, S.A. de C.V. (CdM), Chemfree Environment Inc.
(Chemfree), Richard Hunt, Inc., d.b.a. Sierra Ag Chemical (Sierra Ag), Consep
GmbH, and Farchan Laboratories, Inc. (Farchan). All significant intercompany
transactions and balances have been eliminated in consolidation.
(c) Accounts Receivable
Accounts receivable are shown net of allowance for doubtful accounts of
$920,785 and $857,775 at December 31, 1997 and 1996, respectively. The Company
sells its products through agribusiness distributors, consumer products
distributors and retailers and to agricultural growers, primarily in the Central
Valley of California. The Company performs continuing credit evaluations of its
customers and generally does not require collateral.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(e) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using
the straight-line method over the estimated useful lives of the assets ranging
from three to twenty years. Leasehold improvements are amortized over the
shorter of the estimated life of the asset or the term of the related lease.
(f) Patents, Trademarks, Technology and Registrations
Patents are amortized over seventeen years, technology over five to ten
years, catalog rights over five years, and trademarks and product registrations
over their useful lives, all using the straight-line method.
(g) Goodwill
Goodwill, which represents the excess of the purchase price over the
fair value of net assets acquired, is amortized over periods ranging from twenty
to twenty-five years using the straight-line method. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
discounted projected future cash flows of the operations or assets from which
the goodwill arose. Amortization charged to operations was $114,290, $123,641
and $125,571 for the years ended December 31, 1997, 1996 and 1995, respectively.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
26
<PAGE> 27
respective tax bases and operating loss and has credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(i) Net Loss Per Common Share
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128. Accordingly, "basic net loss per share" and "dilutive net loss per
share" for the year ended December 31, 1997 and for all prior periods presented
were computed using the weighted average number of common shares outstanding
during each year, with diluted net income per share including the effect of
potentially dilutive common shares.
Potentially dilutive common shares related to stock options are
anti-dilutive in a net loss situation and, therefore, were not included in
diluted net loss per share in the accompanying financial statements.
(j) Foreign Currency Translation
The Canadian dollar is the functional currency of Chemfree, the
Company's Canadian subsidiary. Assets and liabilities of Chemfree are translated
to U.S. dollars at current exchange rates, and revenues and expenses are
translated using weighted average rates of exchange. Adjustments arising from
foreign currency translation are included as a separate component of
shareholders' equity. Foreign currency transaction gains and losses are included
as a component of other income and expense and arise primarily from
U.S.-dollar-based amounts held by Chemfree and Mexican-peso-based amounts held
by CdM, the Company's Mexican subsidiary. There are no foreign currency
translation effects arising from CdM as the U.S. dollar is the functional
currency of this subsidiary.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(l) Reclassifications
Certain reclassifications have been made in the accompanying
consolidated financial statements for 1995 and 1996 to conform with the 1997
presentation.
(m) Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996 the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. As allowed under SFAS No. 123, the Company has continued to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1994 and
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied.
(n) Financial Instruments
The carrying amounts of cash equivalents, short-term investments, trade
receivables, accounts payable, customer deposits and short-term borrowings
approximate fair value because of the short-term nature of these instruments.
The fair market value of the Company's long-term debt approximates its carrying
value as the interest rates on borrowings are based on floating rate or the
interest rates approximate the current market interest rate.
27
<PAGE> 28
(2) ACQUISITION
In February 1995, the Company acquired all of the outstanding capital
stock of Farchan, a Florida-based specialty chemicals manufacturer which is
currently supplying pheromones, a major raw material used in the Company's
proprietary products, to the Company. The purchase price of the acquisition was
approximately $589,000, consisting of 171,671 shares of the Company's common
stock valued at $354,000, a non-competition agreement with the former majority
shareholder of Farchan valued at approximately $161,000, and direct costs of the
acquisition of approximately $74,000.
Pursuant to the Agreement and Plan of Merger, the Company covenants that
the 171,671 shares issued to effect the merger (the "Original Shares") will have
an aggregate market value of at least $1 million (the "Guaranteed Value") for at
least three consecutive trading days during the period from February 1, 1997 to
January 31, 1998. If the Original Shares do not reach the Guaranteed Value
during the period specified, then the following shall apply: (i) if as of
January 31, 1998, the Original Shares have an aggregate market value of less
than the Guaranteed Value but more than $950,000, then the Company shall issue
additional shares of its common stock to the extent necessary to make the
aggregate value of the Original Shares, plus the additional shares, equal to $1
million; (ii) if as of January 31, 1998, the Original Shares have an aggregate
market value of less than $950,000 but more than $500,000, then the Company
shall, at the Company's option, either (a) issue additional shares of its common
stock, up to a maximum of 171,670 additional shares, to the extent necessary to
make the aggregate value of the Original Shares, plus the additional shares,
equal to $1 million, or (b) deliver the acquired Farchan shares to the previous
Farchan shareholders in exchange for the Original Shares; (iii) if as of January
31, 1998, the Original Shares have an aggregate market value of less than
$500,000, then either (a) the Company shall issue an additional 171,670 shares
of its common stock to the previous Farchan shareholders, or (b) if the Company
does not elect to deliver such additional shares by February 15, 1998, then the
previous Farchan shareholders shall have the option to elect between the
remedies provided in (ii)(a) and (ii)(b) above. Such election by the previous
Farchan shareholders must occur before March 1, 1998. Pursuant to this agreement
the Company issued an additional 171,671 shares on February 12, 1998 to conclude
this transaction and preclude any future obligations.
The aggregate purchase price, less the fair market value of net assets
acquired of approximately $482,000, has been recognized as goodwill and is being
amortized over 20 years on a straight-line basis. The operating results of
Farchan are included in the Company's consolidated results from February 1,
1995.
The above acquisition was accounted for as a purchase.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $1,998,509 $2,196,006
Work in process -- 44,963
Finished goods--proprietary 4,640,578 3,528,880
Finished goods--distribution 3,227,485 2,717,836
---------- ----------
9,866,572 8,487,685
Less reserve for obsolescence 550,428 493,979
---------- ----------
$9,316,144 $7,993,706
========== ==========
</TABLE>
28
<PAGE> 29
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---------- ----------
<S> <C> <C>
Land $ 872,986 $ 502,481
Buildings 2,397,184 1,308,625
Machinery and equipment 3,538,533 2,860,568
Furniture and fixtures 1,203,284 1,088,977
Vehicles 1,082,250 927,892
Leasehold improvements 124,615 314,876
---------- ----------
9,218,852 7,003,419
Less accumulated depreciation and amortization 3,698,212 2,982,963
---------- ----------
$5,520,640 $4,020,456
========== ==========
</TABLE>
(5) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
USEFUL LIVES 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Patents, technology and trademarks 5 - 20 years $1,011,483 $ 928,939
Product registrations 10 - 20 years 891,564 798,466
Other 3 - 10 years 462,886 436,946
---------- ----------
2,365,933 2,164,351
Less accumulated amortization 846,589 619,105
---------- ----------
$1,519,344 $1,545,246
========== ==========
</TABLE>
(6) BANK LINES
In December 1997, the Company renewed its $7.5 million bank line of
credit which matures December 10, 1998 and is secured by substantially all of
the Company's current assets. Maximum borrowings under the credit line cannot
exceed 70% of eligible accounts receivable and between 40% and 50% of eligible
inventory from certain of the Company's distribution operations. Interest is
payable monthly at the bank's prime rate (8.50% at December 31, 1997) plus 1.5%.
At December 31, 1997, the Company had approximately $1.5 million outstanding
under this line.
In addition to the $7.5 million bank line of credit, the Company's
Chemfree subsidiary has a working capital bank line of credit of approximately
$37,000. Interest is payable monthly at the bank's prime rate (6.00% at December
31, 1997) plus 2.0%. At December 31, 1997, there was approximately $14,000
outstanding under this line.
Under the terms of the $7.5 million credit agreement, the Company is
required to maintain certain financial ratios and other financial conditions. At
December 31, 1997, $1,479,000 was outstanding under this line of credit and the
Company was not in complete compliance with the financial covenants. The Company
has obtained a waiver of compliance for the quarter ended December 31, 1997.
29
<PAGE> 30
(7) NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---------- ----------
<S> <C> <C>
Mortgages payable at interest rates ranging from prime plus 1.5% to
8.85%, secured, payable in monthly installments through June, 2007 $1,682,530 $ 595,160
Various notes payable at interest rates ranging from 6.9% to
12.9%, secured by equipment and vehicles, payable in monthly
installments with various maturity dates through July, 2002 463,236 411,122
Notes payable at interest rates of prime plus 1.5%, secured by
substantially all of the Company's current assets with the
outstanding balances at December 31, 1997 reducing the amount
available under the $7.5 million bank line of credit, payable
in monthly installments through July, 2000 357,709 206,042
Notes payable at an interest rate of 10%, unsecured, payable
upon demand 21,917 39,917
Notes payable to former shareholders of Sierra Ag and Farchan, interest
ranging from 8% to 9%, payable semi-monthly or in annual install-
ments with maturity dates through 2000 (The former shareholders of
Sierra Ag and Farchan are currently employed by those subsidiaries.) 135,793 214,133
---------- ----------
2,661,185 1,466,374
Less current maturities 527,625 312,821
---------- ----------
Notes payable, excluding current maturities $2,133,560 $1,153,553
========== ==========
</TABLE>
The aggregate maturities of notes payable for the five years ending
after December 31, 1997 are as follows: 1998-$527,625; 1999-$455,478;
2000-$347,397; 2001-$195,609; and 2002-$180,922.
(8) SHAREHOLDERS' EQUITY
(a) Common Stock
In October 1995, the Company completed a secondary public offering of
its common stock. This offering resulted in net proceeds to the Company of
approximately $3.1 million upon the sale of 1,100,000 shares of common stock.
In October 1996, the Company completed a follow-on public offering of
its common stock. This offering resulted in net proceeds to the Company of
approximately $4.6 million upon the sale of 1,755,563 shares of common stock.
(b) Stock Option Plans
Under the Company's 1992 Stock Incentive Plan (the "1992 Plan"), options
may be granted to employees and certain other individuals to purchase a maximum
of 339,267 shares of common stock. Both incentive and nonqualified stock options
may be granted under the 1992 Plan. Options granted pursuant to the 1992 Plan
become exercisable in various increments determined at the time of grant and
generally expire ten years from the date of grant.
Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"), options
may be granted to employees and certain other individuals to purchase a maximum
of 370,000 shares of common stock. Both incentive and nonqualified stock options
may be granted under the 1993 Plan. Options granted pursuant to the 1993 Plan
become exercisable in various increments determined at the time of grant and
generally expire ten years from the date of grant.
Under the Company's 1993 Stock Option Plan for Nonemployee Directors
(the "1993 Director Plan"), options are automatically granted to certain
nonemployee directors immediately following the Company's annual
shareholders' meetings. Annually, each eligible nonemployee director receives an
option to purchase 2,000 shares of the Company's common stock under the 1993
Director Plan. Options granted under the 1993 Director Plan are exercisable upon
grant and expire ten years from date of grant. The annual number of shares of
common stock for which options may be granted under the 1993 Director Plan is
limited to 24,000.
30
<PAGE> 31
Under the Company's 1997 Stock Incentive Plan (the "1997 Plan"), options
may be granted to employees and certain other individuals to purchase a maximum
of 300,000 shares of common stock. Both incentive and nonqualified stock options
may be granted under the 1997 Plan. Options granted pursuant to the 1997 Plan
become exercisable in various increments determined at the time of grant and
generally expire ten years from the date of grant. In February 1998, the
Company's Board of Directors authorized an amendment to the 1997 Plan, subject
to shareholder approval, whereby the number of shares reserved for future
issuance under the 1997 Plan was increased by 300,000.
At December 31, 1997, the Company has reserved an aggregate of 980,756
of its common stock for future issuance upon exercise of stock options pursuant
to the 1992 Plan, the 1993 Plan, the 1993 Director Plan and the 1997 Plan.
Options under the Company's four plans specified above are generally granted at
no less than the market value of the Company's common stock at the date of
grant.
Stock options outstanding and transactions involving the Company's stock
option plans are summarized as follows:
<TABLE>
<CAPTION>
AGGREGATE EXERCISE
EXERCISE PRICE PER
NUMBER PRICE SHARE
----------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1994 429,729 $ 891,591 $0.25-5.25
Options granted 140,749 406,591 2.63-3.00
Options canceled (7,900) (22,550) 2.25-3.25
Options exercised (34,213) (58,639) 0.25-2.25
----------- ----------- -----------
Balance at December 31, 1995 528,365 $ 1,216,993 $0.25-5.25
Options granted 181,566 589,599 2.25-4.25
Options canceled (92,200) (288,702) 1.75-5.25
Options exercised (85,698) (153,543) 0.25-3.25
----------- ----------- -----------
Balance at December 31, 1996 532,033 $ 1,364,347 $0.25-4.63
Options granted 235,626 367,439 1.50-3.25
Options canceled (16,000) (46,850) 2.25-3.25
Options exercised (4,400) (1,100) 0.25-0.25
----------- ----------- -----------
Balance at December 31, 1997 747,259 $ 1,683,836 $0.50-4.63
=========== =========== ==========
</TABLE>
At December 31, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $0.50 - $4.63 and 7.84
years, respectively. At December 31, 1997 and 1996, the number of options
exercisable was 384,312 and 280,712, respectively, and the weighted average
exercise price of those options was $2.35 and $2.06, respectively.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date as prescribed
by SFAS No. 123, net loss and loss per share would have been increased to the
pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $ (1,822,021) $ (2,482,887) $ (1,286,479)
Net loss - pro forma (1,857,419) (2,577,593) (1,324,853)
Net loss per share - as reported $ (0.19) $ (0.31) $ (0.19)
Net loss per share - pro forma (0.20) (0.32) (0.20)
</TABLE>
31
<PAGE> 32
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected dividend yield 0.00% 0.00%
Expected stock price volatility 94.63% 92.15%
Risk-free interest rate 5.56% 5.57%
Expected life of options 7 years 7 years
</TABLE>
The weighted average fair value of options granted during 1997 and 1996
is $1.56 and $3.25 per share, respectively.
(c) Stock Warrants
In 1988, the Company issued warrants for $250,000 to purchase 28,571
shares of its preferred stock. The warrants carry a mandatory repurchase element
which converts to term debt if the Company is unable to meet the repurchase
schedule. The repurchase price of the warrants exceeded the initial issuance
price, therefore, the difference has been accreted to additional paid-in capital
over the term of the warrants. As of December 31, 1997, the Company has
repurchased 25,571 of these warrants. The remaining 3,000 warrants, which were
converted into warrants to purchase common stock in conjunction with the
Company's IPO in February 1994, carry an exercise price of $6.50 per share and
are required to be repurchased by the Company in April 1999 for $19,500.
The Company has also issued warrants to purchase 48,000 shares of its
preferred stock, which were converted into warrants to purchase 48,000 shares of
the Company's common stock upon the closing of the Company's February 1994 IPO.
The exercise price of these warrants is $6.25 per share. Warrants to purchase
19,200 shares of the Company's common stock expired unexercised on February 1,
1995. Of the remaining warrants to purchase 28,800 shares of the Company's
common stock, 16,000 expire October 20, 1999 and 12,800 expire February 1, 2000.
All such remaining warrants were exercisable as of December 31, 1997.
In December 1993, the Company issued warrants to purchase 50,001 shares
of its common stock at an exercise price of $6.00 per share. These warrants were
issued in conjunction with a $3 million loan commitment provided by certain of
the Company's shareholders. The loan commitment expired unused upon the closing
of the Company's IPO in February 1994. The warrants, all of which were
outstanding and none of which had been exercised as of December 31, 1997, expire
December 20, 1998.
In October 1996, the Company issued warrants to purchase 175,556 shares
of common stock to an investment banking firm in connection with underwriting
services rendered to the Company with respect to its follow-on public offering
in October 1996. These warrants carry an exercise price of $3.60 per share and
expire October 23, 2001. These warrants became exercisable on October 23, 1997
and all were outstanding and none had been exercised as of December 31, 1997.
(d) Employee Stock Purchase Plan
During 1995, the Company established an employee stock purchase plan
(the "Plan") whereby eligible employees are able to purchase shares of the
Company's common stock at prices no less than 85% of the fair market value of
the Company's common stock determined at certain specified dates. At December
31, 1997, the Company has reserved 150,000 shares of its common stock for
issuance under the Plan. During 1997 and 1996, 24,548 and 20,405 shares,
respectively, were purchased pursuant to the Plan. During 1995, there were no
shares purchased under this plan.
32
<PAGE> 33
(9) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax effects
of significant items comprising the Company's deferred tax assets and
liabilities at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventories $ 1,091,000 $ 707,000
Allowance for doubtful accounts 163,000 206,000
Tax credit carryforwards 291,000 283,000
Net operating loss carryforwards 8,498,000 8,459,000
Valuation allowance (9,820,000) (9,256,000)
Other 186,000 106,000
----------- -----------
Total deferred tax assets 409,000 505,000
----------- -----------
Deferred tax liabilities:
Tax basis depreciation and amortization 409,000 505,000
----------- -----------
Total deferred tax liabilities 409,000 505,000
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996
was $8,209,500. The net change in total valuation allowance for the years ended
December 31, 1997 and 1996 was an increase of $564,000 and $1,046,500,
respectively.
The provision for income taxes differs from the "expected" tax benefit
(computed by applying the federal statutory income tax rate to net loss before
taxes) as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Expected statutory federal tax benefit (34)% (34)%
Change in valuation allowance 35 42
State income tax, net of federal (5) (5)
Expiration of state net operating losses 4 --
Other -- (3)
--- ---
Effective tax rate -- % -- %
=== ===
</TABLE>
33
<PAGE> 34
The Company has available at December 31, 1997 unused investment
credits, research and development tax credits, and operating loss carryforwards,
which may reduce taxable income in future periods and expire as follows:
<TABLE>
<CAPTION>
STATE FEDERAL
---------- -------------------------------------------------
RESEARCH
OPERATING AND OPERATING
YEAR OF LOSS INVESTMENT DEVELOPMENT LOSS
EXPIRATION CARRYFORWARDS CREDITS CREDITS CARRYFORWARDS
- ---------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C>
1998 $ 1,244,000 $ -- $ -- $ --
1999 1,035,000 600 18,000 1,358,000
2000 180,000 14,000 50,000 1,696,000
2001 388,000 3,600 31,000 971,000
2002 -- -- -- 789,000
2003 278,000 -- -- 1,076,000
2004 1,028,000 -- -- 1,240,000
2005 603,000 -- 39,000 484,000
2006 417,000 -- 16,000 1,614,000
2007 784,000 -- 39,000 2,776,000
2008 1,219,000 -- -- 4,074,000
2009 1,133,000 -- 43,000 3,471,000
2010 200,000 -- 10,000 710,000
2011 430,000 -- 37,000 1,435,000
2012 -- -- 8,000 --
----------- ----------- ----------- -----------
$ 8,939,000 $ 18,200 $ 291,000 $21,694,000
=========== =========== =========== ===========
</TABLE>
In addition, the Company has available a combined foreign net operating
loss carryforward of approximately $1,592,000 in Austria, Canada and Mexico
which will expire in various years.
A provision of the Tax Reform Act of 1986 required the utilization of
net operating losses and credits be limited when there is a change of more than
50% in ownership of the Company. Such a change occurred with the sales of stock
in 1988, 1989, 1992 and 1996. Accordingly, the utilization of the net operating
loss carryforwards generated from periods prior to March 25, 1988, the period
March 26, 1988 to November 14, 1989, the period November 15, 1989 to July 15,
1992 and the period July 16, 1992 to October 29, 1996 is limited; the amounts
subject to the limitation are approximately $4,200,000, $1,500,000, $5,000,000
and $10,700,000, respectively.
(10) EMPLOYEE SAVINGS PLAN
The Company sponsors a defined contribution plan (the "Plan") covering
all full-time domestic employees. Employees may contribute up to 15% of their
compensation to the Plan. The Company may also make discretionary contributions
to the Plan for the benefit of all eligible employees. Company matching
contributions vest over six years.
(11) LEASES
The Company leases certain assets under various capital leasing
arrangements. Included in property, plant and equipment in the accompanying
consolidated balance sheets are $146,235 and $128,810 of assets under capital
lease at December 31, 1997 and 1996, respectively, net of related accumulated
amortization of $67,164 and $67,910, respectively.
34
<PAGE> 35
Capital lease obligations are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
------- -------
<S> <C> <C>
Leases of certain manufacturing equipment with lease
periods expiring through February 2000, with interest $46,206 $49,650
ranging from 15.0% to 35.0%
Lease of certain office and computer equipment with lease
period expiring in March 1997, at interest of 13.7% -- 2,235
------- -------
Total obligations under capital lease 46,206 51,885
Less current portion 31,647 34,369
------- -------
Obligations under capital lease, less current portion $14,559 $17,516
======= =======
</TABLE>
During February 1994, the Company sold and leased back the Company's
headquarters building. The selling price was $1,250,000 and the lease term for
the lease-back is ten years. The sale/lease-back transaction resulted in a
deferred gain of approximately $396,000, which was being amortized as an offset
to operating expenses over the term of the lease on a straight-line basis. The
lease included annual payments of approximately $140,000 for the initial three
years of the lease, with three percent increases in years four, seven, and ten
of the lease. In June 1997, the Company re-purchased the facility for
approximately $1,500,000 and the remaining deferred gain of approximately
$195,000 was applied against the purchase price of the facility.
The Company also leases certain office and operating facilities, and
certain other equipment under
operating leases with remaining terms ranging from one to five years. Rental
expense for all operating leases, net of the deferred gain amortization related
to the sale/lease-back transaction discussed above, amounted to $234,699,
$288,685 and $296,369 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Minimum lease payments under leases expiring subsequent to December 31,
1997 with original terms of one year or more are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ------------------------ -------------- ----------------
<S> <C> <C>
1998 $ 36,792 $ 130,574
1999 12,192 97,835
2000 4,141 30,683
2001 -- 22,232
2002 -- 103
---------- --------
Total minimum lease payments 53,125 $ 281,427
=========
Less amount representing interest (6,919)
----------
Present value of net minimum lease payments $ 46,206
==========
</TABLE>
(12) COMMITMENTS
In November 1993, the Company entered into a License Agreement ("the
Agreement") with Bend Research, Inc. (Bend Research) whereby the Company will
fund certain research performed by Bend Research and will obtain exclusive
licenses to sell products utilizing the technology developed through the
research provided under the Agreement. Under the terms of the Agreement, the
Company is to fund a minimum of $600,000 of research annually through the term
of the Agreement, which is twenty years. The Agreement can be terminated upon 60
days prior notice by the Company. Bend Research invoiced the Company $78,011,
$246,804 and $375,565 for research and development work performed during the
years ended December 31, 1997, 1996 and 1995, respectively. Payments by the
Company to Bend Research for research and development services provided to the
Company totaled $77,673 in 1997, which amount has been acknowledged by Bend
Research to satisfy the Company's obligation to Bend Research for research and
development services. For certain products sold by the Company utilizing
technology provided under the Agreement, the Company is required to pay
royalties to Bend Research based upon a percentage of product margins
attributable to the provided technology as defined in the Agreement. During
January 1995, royalties for the term of the Agreement related to certain
products incorporating technology provided by Bend Research were prepaid by the
Company. Such prepaid royalties totaled $121,000 and are being amortized as the
related products are sold by the Company. In addition, Bend Research and the
Company agreed to reduce the annual commitment described above from $600,000 to
$191,500 in 1996 and from $600,000 to $125,000 in 1997. During 1998, the annual
commitment was waived with no minimum requirement. For years subsequent to 1998,
the $600,000 annual commitment will again be in effect.
The Company was incorporated by Bend Research in 1984. Bend Research
owns less than 5% of the Company's common stock as of December 31, 1997. Walter
C. Babcock, the President, Chief Executive Officer, and Chairman of the Board of
Bend Research, is also a director of the Company and serves on the Company's
Scientific Advisory Board. Dr. Babcock is also a shareholder of Bend Research
and the Company. Volker G. Oakey, the President, Chief Executive Officer, and
Chairman of the Board of the Company is also a director of Bend Research and is
a shareholder of the Company.
35
<PAGE> 36
In April 1996, the Company entered into a five-year purchase agreement
with a supplier in exchange for exclusive selling rights to this product in the
United States, Canada and Mexico. The agreement requires the Company to purchase
approximately $200,000 per year of this product for five years. The agreement
automatically renews every three years thereafter for an additional three-year
term.
During October 1994, the Company entered into a license agreement to
make, use, and sell certain consumer products. Pursuant to this license
agreement, the Company is required to pay the licensor guaranteed minimum
royalties of $25,000 per year through September 1999.
During 1993, the Company entered into a non-compete agreement with a
previous shareholder of a business acquired by the Company. Pursuant to this
non-compete agreement, the Company is required to make quarterly payments of
$5,000 through January 2000.
(13) CONTINGENCIES
In October 1996, a building owned by the Company's Farchan subsidiary
was destroyed by fire and the Company has not reached a settlement with its
former insurance carrier for the claims associated with its additional expenses
for outside pheromone purchases. As a result, the Company has filed a lawsuit
against the insurance carrier in the United States District Court to recover its
claims.
(14) NON-CASH INVESTING AND FINANCING ACTIVITIES
The following is a summary of non-cash investing and financing
activities for the three years ended December 31, 1997, 1996 and 1995:
December 31, 1997:
During the year ended December 31, 1997, the Company acquired a building
for $1,495,000, of which $1,125,000 was financed by the issuance of a note
payable. The Company also acquired vehicles and equipment for $259,371 through
the issuance of notes and capital leases payable. In addition, during 1997, the
Company wrote down the carrying value of an unfinished specialty chemicals
facility held for re-sale by $200,000.
December 31, 1996:
During the year ended December 31, 1996, the Company acquired a building
for $396,055 and acquired vehicles for $182,045 through the issuance of notes
payable. Also, during 1996, the Company converted $499,959 of trade accounts
receivable to notes receivable.
December 31, 1995:
Effective February 1, 1995, the Company acquired all of the outstanding
capital stock of Farchan as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $1,135,684
Issuance of 171,671 shares of the Company's common stock 354,071
Issuance of notes payable in conjunction with non-compete agreement 160,816
Cash paid 74,136
----------
Liabilities assumed $ 546,661
==========
</TABLE>
During the year ended December 31, 1995, the Company also acquired
$103,088 of equipment through the issuance of notes payable.
36
<PAGE> 37
(15) BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into three business
segments: domestic proprietary products, foreign proprietary products and
distribution operations. Proprietary products include products manufactured by
the Company, and distribution operations include the distribution and sale of
agrichemicals and other agricultural products by the Company's distribution
subsidiaries. Proprietary products manufactured by the Company which are sold
through the Company's wholly-owned distribution subsidiaries are included in
proprietary products in the following table. Summarized financial information by
business segment for the years ended December 31, 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
PROPRIETARY PRODUCTS DISTRIBUTION
DOMESTIC FOREIGN OPERATIONS (1) TOTAL
-------- ------- -------------- -----
<S> <C> <C> <C> <C>
December 31, 1997:
Revenues $ 10,351,905 $ 2,610,677 $ 26,241,747 $ 39,204,329
Cost of revenues 6,359,843 1,930,883 21,496,250 29,786,976
Operating income (loss) (2,263,589) (613,747) 1,013,289 (1,864,047)
Transfers 1,918,309 1,454,410 174 3,372,893
Total assets 12,370,484 3,067,331 10,239,745 25,677,560
Depreciation and amortization 662,221 109,787 399,885 1,171,893
Capital expenditures 2,180,755 60,118 371,510 2,612,383
December 31, 1996:
Revenues $ 8,431,056 $ 1,987,476 $ 22,810,697 $ 33,229,229
Cost of revenues 5,278,965 1,406,346 18,556,675 25,241,986
Operating income (loss) (2,654,365) (839,605) 975,997 (2,517,973)
Transfers 1,414,402 231,003 3,925 1,649,330
Total assets 11,764,452 3,374,907 8,271,862 23,411,221
Depreciation and amortization 610,226 89,612 372,087 1,071,925
Capital expenditures 1,245,375 91,024 304,616 1,641,015
December 31, 1995:
Revenues $ 7,611,108 $ 1,774,004 $ 21,458,622 $ 30,843,734
Cost of revenues 4,467,421 1,011,406 17,615,237 23,094,064
Operating income (loss) (1,866,238) (29,204) 589,306 (1,306,136)
Transfers 1,093,833 99,644 3,957 1,197,434
Total assets 10,395,536 2,486,026 8,677,012 21,558,574
Depreciation and amortization 414,909 82,282 384,593 881,784
Capital expenditures 398,247 34,864 147,382 580,493
</TABLE>
(1) The distribution operations business segment consists only of domestic
distribution operations.
During the years ended December 31, 1997, 1996 and 1995, export sales of
the Company's proprietary products and sales of proprietary products occurring
outside of the United States totaled $3,332,346, $2,522,164 and $2,217,266,
respectively.
37
<PAGE> 38
(16) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OTHER OF PERIOD
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts $857,775 228,144 165,134(1) -- 920,785
Inventory valuation reserve 493,979 275,428 218,979(2) -- 550,428
Product warranty reserve 7,834 94,469 87,202(3) -- 15,101
Year ended December 31, 1996:
Allowance for doubtful accounts $834,128 40,171 16,524(1) -- 857,775
Inventory valuation reserve 261,883 383,307 151,211(2) -- 493,979
Product warranty reserve 58,292 52,329 102,787(3) -- 7,834
Year ended December 31, 1995:
Allowance for doubtful accounts $681,198 164,544 11,614(1) -- 834,128
Inventory valuation reserve 227,239 148,042 113,398(2) -- 261,883
Product warranty reserve 82,179 83,494 107,381(3) -- 58,292
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Deductions primarily represent accounts written off during the period.
(2) Deductions primarily represent inventory scrapped during the period.
(3) Deductions primarily represent warranty credits given to customers for
products returned under warranty.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding Directors is included in
the section of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 21, 1998 (the "1998 Proxy Statement") captioned
"Election of Directors" and is incorporated herein by reference.
The information required by this item regarding Executive Officers is
included in the section of the Company's 1998 Proxy Statement captioned
"Management" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the section of the
Company's 1998 Proxy Statement captioned "Executive Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the section of the
Company's 1998 Proxy Statement captioned "Stock Owned by Management and
Principal Shareholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the section of the
Company's 1998 Proxy Statement captioned "Certain Transactions and
Relationships" and is incorporated herein by reference.
38
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements of Consep, Inc. as set forth under Item 8 are
filed as part of this report.
Supplemental Schedule II - Valuation and Qualifying Accounts is included
in the Notes to the Consolidated Financial Statements as Note 16 on page 38.
Financial statement schedules other than those listed above have been omitted
since the information called for is not present in amounts sufficient to require
submission of the schedules.
The independent auditors' report with respect to the above-listed
financial statements and financial statement schedule appears on page 21 of this
report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.
(c) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Agreement and Plan of Merger with Farchan Laboratories,
Inc.**
3.1 Third Restated Articles of Incorporation of Consep, Inc.***
3.2 Amended provisions of Article II of Third Restated Articles
of Incorporation of Consep, Inc.****
3.3 Second Restated Bylaws of Consep, Inc.***
4.0 Form of Stock Certificate***
10.1 Form of Indemnity Agreement between Consep, Inc. and each
of its executive officers and directors***
10.2 1992 Stock Incentive Plan***
10.3 1993 Stock Incentive Plan, as amended (Incorporated by
reference to the Company's Registration Statement on Form
S-8 dated August 8, 1996, File No. 333-09759)
10.4 1993 Stock Option Plan for Nonemployee Directors***
10.5 Registration Rights Agreement, as amended***
10.6 License Agreement with Bend Research, Inc.***
10.7 Loan and Security Agreement with Silicon Valley Bank, as
amended***
10.8 Fourth Amendment to Registration Rights Agreement***
10.9 Fifth Amendment to Registration Rights Agreement****
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.10 Master Equipment Lease Agreement with Financing for Science
International, Inc., including Rental Schedule No. 1 and
Schedules A and B thereto (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994, filed on November 14, 1994)
10.11 Amendment No. 2 to License Agreement with Bend Research,
Inc., including Paid-Up License Schedule 1 thereto**
10.12 Loan Modification Agreement with Silicon Valley Bank**
10.13 Schedule to Loan and Security Agreement with Silicon Valley
Bank**
10.14 Loan Modification Agreement with Silicon Valley Bank
(Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995,
filed on August 14, 1995)
10.15 Schedule to Loan Modification Agreement with Silicon Valley
Bank (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995,
filed on August 14, 1995)
10.16 Sixth Amendment to Registration Rights Agreement
(Incorporated by Reference to the Company's Registration
Statement on Form S-1 dated September 12, 1995, File No.
33-96002)
10.17 1995 Employee Stock Purchase Plan (Incorporated by
reference to the Company's Registration Statement on Form
S-8 dated July 28, 1995, File No. 33-95130)
10.18 Seventh Amendment to Registration Rights Agreement*
10.19 Loan Modification Agreement with Silicon Valley Bank*
10.20 Amended and Restated Schedule to Loan Modification
Agreement with Silicon Valley Bank*
10.21 Eighth Amendment to Registration Rights Agreement*
10.22 Loan Modification Agreement with Silicon Valley Bank*****
10.23 Amended and Restated Schedule to Loan Modification
Agreement with Silicon Valley Bank*****
10.24 Sale and Purchase Agreement for Real Estate*****
10.25 Construction Loan Agreement with Western Bank*****
10.26 Loan Modification Agreement with Silicon Valley Bank
10.27 Amended and Restated Schedule to Loan Modification
Agreement with Silicon Valley Bank
10.28 Amendment No. 5 to License Agreement with Bend Research,
Inc.
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.29 Form of Control Change Agreement Between Consep, Inc. and
each of its Executive Officers
21.0 List of Subsidiaries of Consep, Inc. (Incorporated by
reference to the Company's Registration Statement on Form
S-1 dated September 12, 1995, File No. 33-96002)
23.0 Consent of KPMG Peat Marwick LLP
24.0 Power of Attorney (included in signature page)
27.0 Financial Data Schedule
- --------------------------------------------------------------------------------
* Incorporated by reference to the Company's Registration
Statement on Form S-1 dated October 23, 1996, File No.
33-11827
** Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994, filed on
March 30, 1995
*** Incorporated by reference to the Company's Registration
Statement on Form S-1 dated February 3, 1994, File No.
33-71846
**** Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, filed on
March 30, 1994
***** Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, filed on
August 13, 1997
</TABLE>
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 27, 1998 By: /s/ LARRY KATZ
--------------------------------
Larry Katz
Vice President, Finance
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Larry Katz and Volker G. Oakey, jointly and
severally, his attorney-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ VOLKER G. OAKEY President, Chief Executive Officer and Chairman March 27, 1998
- ----------------------------- of the Board of Directors (Principal Executive Officer)
Volker G. Oakey
/s/ LARRY KATZ Vice President, Finance and Chief Financial Officer March 27, 1998
- ----------------------------- (Principal Financial and Accounting Officer)
Larry Katz
/s/ WALTER C. BABCOCK Director March 27, 1998
- -----------------------------
Walter C. Babcock
/s/ PHILIP E. BARAK Director March 27, 1998
- -----------------------------
Philip E. Barak
/s/ KENNETH D. MACKAY Director March 27, 1998
- -----------------------------
Kenneth D. MacKay
/s/ JOHN BEAULIEU Director March 27, 1998
- -----------------------------
John Beaulieu
</TABLE>
42
<PAGE> 1
EXHIBIT 10.26
LOAN MODIFICATION AGREEMENT
BETWEEN: Consep, Inc. ("Consep"), whose address is 213 S.W. Columbia St.,
Bend, OR 97702-1013; Pacoast Inc. ("Pacoast"), whose address is 213
S.W. Columbia St., Bend, OR. 97702-1013; and Richard Hunt Inc.
("Hunt"), whose address is 2749 East Malaga Avenue, Fresno, CA.
93725.
AND: Silicon Valley Bank ("Silicon") whose address is 3003 Tasman Drive,
Santa Clara, California 95054;
DATE: December 11, 1997
This Loan Modification Agreement is entered into on the above date by
Consep, Pacoast and Hunt (collectively, "Borrower") and Silicon.
1. Background. Consep entered into a loan and security agreement with
Silicon dated as of May 25, 1993, which has been modified since that date (as
amended from time to time, the "Loan Agreement"). Capitalized terms used in this
Loan Modification Agreement shall, unless otherwise defined in this Agreement,
have the meaning given to such terms in the Loan Agreement.
Silicon, Consep, Pacoast and Hunt are entering into this Agreement to
state the terms and conditions of certain modifications to the Loan Agreement
and the Schedule, as modified prior to the date of this Agreement.
2. Modifications to Loan Agreement and Schedule.
2.1 The Schedule to the Loan Agreement is hereby deleted and
replaced by the Amended and Restated Schedule to Loan and Security Agreement
attached to this Agreement.
2.2 Borrower acknowledges and agrees that all Obligations,
including without limitation Borrower's obligation to repay amounts advanced by
Silicon to Borrower on the terms of the Loan Agreement and Schedule as modified
by this Loan Modification Agreement, are secured by all liens and security
interests granted by any Borrower to Silicon in the Loan Agreement or by any
other document or agreement.
3. Conditions Precedent. This Loan Modification Agreement shall not take
effect until Borrower delivers to Silicon a Certified Resolution of Borrower and
such other documents as Silicon shall reasonably require to give effect to the
terms of this Loan Modification Agreement.
4. No Other Modifications. Except as expressly modified by this Loan
Modification Agreement, the terms of the Loan Agreement, as amended prior to
this date, shall remain unchanged and in full force and effect. Silicon's
agreement to modify the Loan Agreement pursuant to this Loan Modification
Agreement shall not obligate Silicon to make any future modifications to the
Loan Agreement or any other loan document. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of any indebtedness of any Borrower to
Silicon. It is the intention of Silicon and Borrower to retain as liable parties
all makers and endorsers of the Loan Agreement or any other loan document. No
maker, endorser, or guarantor shall be released by virtue of this Loan
Modification Agreement. The terms of this paragraph shall apply not only to this
Loan Modification Agreement, but also to all subsequent loan modification
Page 1 - LOAN MODIFICATION AGREEMENT
<PAGE> 2
agreements.
5. Representations and Warranties.
5.1 The Borrower represents and warrants to Silicon that the
execution, delivery and performance of this Agreement are within the Borrower's
corporate powers, and have been duly authorized and are not in contravention of
law or the terms of the Borrower's articles of incorporation, bylaws or of any
undertaking to which the Borrower is a party or by which it is bound.
5.2 The Borrower understands and agrees that in entering into
this Agreement, Silicon is relying upon the Borrower's representations,
warranties and agreements as set forth in the Loan Agreement and other loan
documents. Borrower hereby reaffirms all representations and warranties in the
Loan Agreement, all of which are true as of the date of this Agreement.
BORROWER: CONSEP, INC.
By: /s/ Larry Katz
----------------------------
Title: Chief Financial Officer
----------------------------
PACOAST INC.
By: /s/ Volker Oakey
----------------------------
Title: Vice President
----------------------------
RICHARD HUNT INC.
By: /s/ Volker Oakey
----------------------------
Title: President
----------------------------
SILICON: SILICON VALLEY BANK
By: /s/ Ron Sherman
----------------------------
Title: Vice President
----------------------------
Page 2 - LOAN MODIFICATION AGREEMENT
<PAGE> 1
EXHIBIT 10.27
AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
CO-BORROWERS: CONSEP, INC., PACOAST INC. AND RICHARD HUNT INC.
ADDRESS: Consep, Inc.
Pacoast, Inc.
213 SW Columbia Street
Bend, OR 97702
Richard Hunt, Inc.,
dba Sierra Ag Chemical
2749 East Malaga Avenue
Fresno, CA 93725
DATE: December 11, 1997
LINE OF CREDIT
CREDIT LIMIT:
Subject to the reserves stated below, the Credit Limit
shall be an amount not to exceed the lesser of: (i)
$7,500,000 at any one time outstanding; or (ii) the sum of
(a) 70% of the Net Amount of Borrower's accounts, which
Silicon in its discretion deems eligible for borrowing,
plus (b) 40% of book value of Borrower's eligible
inventory, as defined below, as reported to Silicon on a
monthly basis, up to a maximum advance against inventory
of $1,250,000 outstanding at any one time, plus (c) 100%
of the amount of any certificate of deposit owned by
Borrower that is in Silicon's possession and in which
Silicon has a first priority security interest.
Notwithstanding the foregoing, however, (i) the 40%
advance rate as stated in clause (b) above shall be
increased to 50% for the months of December 1997 through
April 1998; and (ii) the $1,250,000 sublimit on inventory
advances as stated in clause (b) above shall be increased
to $1,500,000 for the months of March 1998 through July
1998. The amount otherwise available for borrowing under
this line of credit shall be reduced, dollar for dollar,
by the face amount of all letters of credit issued by
Silicon and by an additional amount of $350,000 with
respect to Silicon's day-light overdraft risk associated
with Borrower's controlled disbursement accounts. In
addition, the outstanding balances of the Secured Term
Loan and Secured Term Loan No. 2 described below shall
reduce, dollar for dollar, the amount otherwise available
for borrowing under the formula stated above at any time
during the term hereof during which Borrower fails to
comply with the Debt Service Coverage Ratio stated below.
There shall be no outstanding advances against inventory
during a period of thirty consecutive days each year. "Net
Amount" of an account means the gross amount of the
account, minus all applicable sales, use, excise and other
similar taxes and minus all discounts, credits and
allowances of any nature granted or claimed.
Page 1 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 2
Without limiting the fact that the determination of which
accounts are eligible for borrowing is a matter of
Silicon's discretion, the following will not be deemed
eligible for borrowing: accounts that are not subject to a
first priority perfected security interest in favor of
Silicon, accounts outstanding for more than 90 days from
the invoice date, (provided, however, that accounts
relating to the following as account debtors are eligible
for up to 30 days past their respective due dates provided
that such accounts are not outstanding for more than 150
days from the invoice date: Cotter & Co., Ace Hardware,
Frank's Nursery, Servistar Corp., Commerce/Darbco, US
Garden Sales, Agway, Inc., Hardware Wholesalers, Inc., LG
Cook Distributors, Central Garden, Caldwell Supply, Arett
Sales Corp., J. Mollema & Son, Wetzel Seed Co., and Rite
Aid), accounts subject to any contingencies, accounts
owing from an account debtor outside the United States
(unless pre-approved by Silicon in its discretion, or
backed by a letter of credit satisfactory to Silicon, or
FCIA insured satisfactory to Silicon), accounts owing from
one account debtor to the extent they exceed 25% of the
total eligible accounts outstanding, accounts owing from
an affiliate of Borrower, and accounts owing from an
account debtor to whom Borrower is or may be liable for
goods purchased from such account debtor or otherwise. In
addition, if more than 50% of the accounts owing from an
account debtor are outstanding more than 90 days from the
invoice date or are otherwise not eligible accounts, then
all accounts owing from that account debtor will be deemed
ineligible for borrowing.
Without limiting the fact that the determination of which
inventory is eligible for borrowing is a matter of
Silicon's discretion, the following shall not be deemed
eligible for borrowing: any inventory other than packaged
chemicals (in boxes, bags, cans or barrels, on which the
seal has not been broken) that are owned by Pacoast or
Hunt and located in Bend, Oregon or another location
identified to Silicon in writing, inventory that is not
subject to a first priority perfected security interest in
favor of Silicon, inventory that is used, obsolete or
returned goods, inventory that is stored at a location
other than the Borrower's Address or any location owned,
leased or rented by Borrower and previously identified to
Silicon, inventory that is subject to a landlord's lien,
and inventory that is not in the possession of Borrower.
INTEREST RATE:
A rate equal to the "Prime Rate" in effect from time to
time, plus 1.50% per annum. Interest shall be calculated
on the basis of a 360-day year for the actual number of
days elapsed. "Prime Rate" means the rate announced from
time to time by Silicon as its "prime rate;" it is a base
rate upon which other rates charged by Silicon are based,
and it is not necessarily the best rate available at
Silicon. The interest rate applicable to the Obligations
shall change on each date there is a change in the Prime
Rate.
LOAN COMMITMENT
FEE: One quarter of one percent per annum of the maximum credit
limit of $7,500,000, which was paid at closing.
Page 2 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 3
MATURITY DATE: December 10, 1998.
LETTERS OF CREDIT: Subject to the other terms of the Loan Agreement and the
Schedule, Silicon is willing to issue letters of credit on
the following terms:
LETTER OF CREDIT
SUBLIMIT: The amount of all letters of credit, whether commercial or
standby letters of credit, outstanding at any one time
(including amounts drawn on letters of credit and not yet
reimbursed by the Borrower) shall not exceed $1,500,000.00
at any one time. The amount of all letters of credit
issued by Silicon at the request of the Borrower shall
reduce, dollar for dollar, the amount otherwise available
to be borrowed under the borrowing base formula described
in the first paragraph of this Schedule.
MATURITIES OF
LETTERS OF CREDIT: Letters of credit issued by Silicon shall have an expiry
date of not later than the Maturity Date for the line of
credit as stated above. Not later than that date, all
letters of credit issued by Silicon shall be satisfied or
terminated, with the result that Silicon shall have no
continuing obligations under such letters of credit,
unless Borrower's obligations to Silicon with respect to
such letters of credit is secured by cash pledged to
Silicon and in Silicon's possession on terms satisfactory
to Silicon, in which case such letters of credit shall
have an expiry date of not later than 90 days after the
Maturity Date for the line of credit as stated above.
REPAYMENT: The Borrower shall repay on demand any amount drawn on a
letter of credit issued by Silicon. Silicon may, but is
not obligated to, add to the principal amount outstanding
under the line of credit described above in this Schedule
any amount drawn on a letter of credit issued by Silicon.
Any such amount shall be subject to the terms applicable
to the line of credit described above. For calculating the
interest due from the Borrower, no interest shall accrue
on the amount of any letters of credit issued by Silicon
at the Borrower's request unless Silicon shall actually
makes a payment as a result of a draw on any such letter
of credit, at which time the amount of the draw shall be
deemed an advance on the line of credit described above
and shall bear interest accordingly.
ISSUANCE: The issuance of any letter of credit under this Schedule
must be in form and content satisfactory to Silicon and in
favor of a beneficiary acceptable to Silicon. The Borrower
shall execute Silicon's then-current application forms,
reimbursement agreement and related documents as a
condition to Silicon's issuance of any letter of credit.
FEES: The Borrower shall pay Silicon the fees and costs
customarily charged by Silicon (at the time of issuance of
the letter of credit) with respect to the issuance of
letters of credit.
SECURED TERM LOAN
Page 3- AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 4
CREDIT LIMIT: An amount not to exceed $215,000 at any one time
outstanding. The Borrower shall not be entitled to more
than one advance with respect to this Secured Term Loan.
The Borrower's indebtedness to Silicon with respect to
this Secured Term Loan shall be evidenced by this Schedule
and the Loan Agreement, not by a separate promissory note
unless required by Silicon. The unpaid principal balance
owing on this Secured Term Loan at any time may be
evidenced by Silicon's internal records, including daily
computer print-outs (which Silicon shall provide to
Borrower periodically).
INTEREST RATE: The interest rate applicable to the Secured Term Loan
shall be a rate equal to the "Prime Rate" (as defined
above) in effect from time to time, plus 1.5% per annum.
Interest calculations shall be made on the basis of a
360-day year and the actual number of days elapsed. The
interest rate applicable to the Obligations shall change
on each date there is a change in the Prime Rate.
AMORTIZATION: Borrower shall pay Silicon monthly payments of interest on
the last day each month commencing with August 1996. In
addition, Borrower shall pay Silicon on the last day of
each month, commencing with August 1996, the amount
necessary to repay fully the amount of the Secured Term
Loan in 72 equal monthly payments.
MATURITY DATE: July 31, 2000, at which time all unpaid principal and
accrued but unpaid interest, fees and other charges shall
be due and payable.
COMMITMENT
FEE: $1,000, which was paid at closing. This fee is fully
earned at closing and is non-refundable.
SECURED TERM LOAN NO. 2
CREDIT LIMIT: An amount not to exceed $250,000 at any one time
outstanding. The Borrower shall not be entitled to more
than one advance with respect to this Secured Term Loan
No. 2. The Borrower's indebtedness to Silicon with respect
to this Secured Term Loan No. 2 shall be evidenced by this
Schedule and the Loan Agreement, not by a separate
promissory note unless required by Silicon. The unpaid
principal balance owing on this Secured Term Loan No. 2 at
any time may be evidenced by Silicon's internal records,
including daily computer print-outs (which Silicon shall
provide to Borrower periodically).
INTEREST RATE: At Borrower's option at the time of disbursement under
this Secured Term Loan No. 2, the interest rate applicable
to the Secured Term Loan No. 2 shall be a rate equal to
the "Prime Rate" (as defined above) in effect from time to
time, plus 1.5% per annum, or a two-year fixed rate quoted
by Silicon. Interest calculations shall be made on the
basis of a 360-day year and the actual number of days
elapsed. The interest rate applicable to the Obligations
shall change on each date there is a change in the Prime
Rate if the variable rate option is chosen by Borrower.
Page 4 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 5
AMORTIZATION: Borrower shall pay Silicon monthly payments of interest on
the last day each month commencing with July 31, 1997. In
addition, Borrower shall pay Silicon on the last day of
each month, commencing with July 31, 1997, the amount
necessary to repay fully the amount of the Secured Term
Loan in 24 equal monthly payments.
MATURITY DATE: July 31, 1999, at which time all unpaid principal and
accrued but unpaid interest, fees and other charges shall
be due and payable.
COMMITMENT
FEE: $2,500, payable at closing. This fee is fully earned at
closing and is non-refundable.
PRIOR NAMES OF
BORROWER: Consep Membranes, Inc.
TRADE NAMES OF
BORROWER:
CheckMate; BioLure; SureFire; Sierra Ag Chemical
OTHER LOCATIONS
AND ADDRESSES:
Escalon Patterson
P.O. Box 335 P.O. Box 186
20001 McHenry Avenue 105 N. 1st Street
Escalon, CA 95320 Patterson, CA 95363
209-838-2809 209-892-2601
Livingston Sacramento
P.O. Box 165 P.O. Box 292337
11019 Eucalyptus 8120 37th Avenue
Livingston, CA 95334 Sacramento, CA 95824
209-394-7981 916-383-3610
MATERIAL ADVERSE
LITIGATION: None
NEGATIVE COVENANTS-
EXCEPTIONS: Without Silicon's prior written consent, Borrower may do
the following, provided that, after giving effect thereto,
no Event of Default has occurred and no event has occurred
which, with notice or passage of time or both, would
constitute an Event of Default, and provided that the
following are done in compliance with all
Page 5 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 6
applicable laws, rules and regulations: (i) repurchase
shares of Borrower's stock pursuant to any employee stock
purchase or benefit plan, provided that the total amount
paid by Borrower for such stock does not exceed $200,000
in any fiscal year, (ii) incur debt, make loans and incur
liability as a guarantor in the ordinary course of
business, (iii) pledge up to $350,000 in cash or cash
equivalents as collateral for the indebtedness of Chemfree
Environment, Inc. (a subsidiary of Borrower) to Royal Bank
of Canada; and (iv) make additional advances to Borrower's
subsidiaries provided that the total amount of such
additional advances shall not exceed $250,000 during the
term hereof.
FINANCIAL
COVENANTS: Borrower shall comply with all of the following covenants
on a consolidated basis, except as set forth below.
Compliance shall be determined as of the end of each
quarter, except as otherwise specifically provided below:
QUICK ASSET RATIO: Borrower shall maintain a ratio of "Quick Assets" to
current liabilities of not less than 0.60:1.00 for the
quarter ending December 31, 1997, not less than 0.80:1.00
for the quarter ending March 31, 1998, and not less than
0.90:1. For the quarter ending June 30, 1998, and
thereafter.
TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of not less
than $12,300,000, plus 50% of the net proceeds of any
equity financing of Borrower that closes after the date
hereof.
DEBT TO TANGIBLE
NET WORTH RATIO: Borrower shall maintain a ratio of total liabilities to
tangible net worth of not more than 1.25 to 1.0.
PROFITABILITY: Borrower shall not incur a loss (after taxes) for any
fiscal quarter in excess of $1,500,000 for the quarter
ending December 31, 1997; a loss in any amount for the
quarters ending March 31, 1998 and June 30, 1998; a loss
in excess of $250,000 for the quarter ending September 30,
1998; a loss in excess of $1,500,000 for the quarter
ending December 31, 1998; or a loss for the 1998 fiscal
year.
DEBT SERVICE
COVERAGE RATIO: Borrower shall maintain a Debt Service Coverage Ratio of
not less than 1.50:1.00 as of the end of each fiscal
quarter of Borrower.
DEFINITIONS: "Current assets," and "current liabilities" shall have the
meanings ascribed to them in accordance with generally
accepted accounting principles.
"Debt Service Coverage Ratio" means Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA),
divided by the Current Maturities of Long-Term Debt
(CMLTD) plus interest. For quarterly calculations,
quarterly EBITDA is matched against 25% of CMLTD plus
interest.
"Tangible net worth" means total shareholders' net worth,
determined in
Page 6 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 7
accordance with generally accepted accounting principles,
plus Subordinated Debt (as referred to below), excluding
however restricted cash, receivables owing from
subsidiaries of Borrower, and all assets which would be
classified as intangible assets under generally accepted
accounting principles, including without limitation
goodwill, licenses, patents, trademarks, trade names,
copyrights, capitalized software costs, deferred
organizational costs and franchises.
"Quick Assets" means cash on hand or on deposit in banks,
readily marketable securities issued by the United States,
readily marketable commercial paper rated "A-1" by
Standard & Poor's Corporation (or a similar rating by a
similar rating organization), certificates of deposit and
banker's acceptances, and accounts receivable (net of
allowance for doubtful accounts).
SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants do
not include indebtedness which is subordinated to the
indebtedness to Silicon under a subordination agreement in
form specified by Silicon or by language in the instrument
evidencing the indebtedness which is acceptable to
Silicon.
OTHER COVENANTS Borrower shall at all times comply with all of the
following additional covenants:
1. BANKING RELATIONSHIP. Borrower shall at all times
maintain its primary banking relationship with Silicon.
Borrower shall establish a daily deposit sweep arrangement
with either US Bank or First Interstate Bank.
2. FINANCIAL STATEMENTS AND REPORTS. The Borrower shall
provide Silicon: (a) within 30 days after the end of
each month, a monthly financial statement (consisting
of a income statement and a balance sheet) prepared by
the Borrower in accordance with generally accepted
accounting principles; (b) within 20 days after the
end of each month, an accounts receivable aging
report, an inventory report and an accounts payable
aging report, in such form as Silicon shall reasonably
specify; (c) within 20 days after the end of each
month, a Borrowing Base Certificate in the form
attached to this Agreement as Exhibit A, as Silicon
may reasonably modify such Certificate from time to
time, signed by the Chief Financial Officer of the
Borrower; (d) within 30 days after the end of each
quarter, a Compliance Certificate in such form as
Silicon shall reasonably specify, signed by the Chief
Financial Officer of the Borrower, setting forth
calculations showing compliance (at the end of each
such calendar quarter) with the financial covenants
set forth on the Schedule, and certifying that
throughout such quarter the Borrower was in full
compliance with all other terms and conditions of this
Agreement and the Schedule, and providing such other
information as Silicon shall reasonably request; (e)
within five days after filing, all 10Q and 10K reports
and other reports filed with the Securities Exchange
Commission; and (f) within 90 days following the end
of the Borrower's fiscal year, complete annual
CPA-audited financial statements, such audit being
conducted by independent certified public accountants
reasonably acceptable to Silicon, together with an
unqualified opinion of such accountants.
Page 7 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 8
3. INDEBTEDNESS. Without limiting any of the foregoing
terms or provisions of this Agreement, Borrower shall not
in the future incur indebtedness for borrowed money,
except for (i) indebtedness to Silicon, and (ii)
indebtedness incurred in the future for the purchase price
of or lease of equipment in an aggregate amount not
exceeding normal course of business at any time
outstanding.
BORROWER:
CONSEP, INC.
BY: /s/ Larry Katz
-------------------------
ITS: Chief Financial Officer
-------------------------
PACOAST INC.
BY: /s/ Volker Oakey
-------------------------
ITS: Vice President
-------------------------
RICHARD HUNT INC.
BY: /s/ Volker Oakey
-------------------------
ITS: President
-------------------------
SILICON:
SILICON VALLEY BANK
BY: /s/ Ron Sherman
-------------------------
ITS: Vice President
-------------------------
Page 8 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 9
EXHIBIT A
[INSERT BORROWING BASE CERTIFICATE]
Page 9 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 1
EXHIBIT 10.28
February 25, 1998
Walter C. Babcock
President
Bend Research, Inc.
64550 Research Road
Bend, OR 97701
Re: Reduced R&D Programs obligation under the License Agreement (the
"Agreement") dated November 1, 1993 between Consep, Inc. ("Consep") and
Bend Research, Inc. ("Bend") for the calendar year 1998.
Dear Chris:
Pursuant to Paragraph 4.2 of the Agreement, this letter is to confirm
our mutual agreement regarding Consep's R&D Program obligation, as set forth in
Paragraph 4.1 of the Agreement. Bend agrees with Consep that a reduction in that
obligation is needed to maximize the value of our investment. The R&D Program
obligation is, therefore, reduced to no minimum requirement for the calendar
year 1998. Also, during 1998 there is no required portion of the R&D Program
obligation that must be spent on biorational products. Except as set forth
above, the rights of the parties under the Agreement shall remain unchanged.
This reduction in Consep's R&D Program obligation does not constitute
any intent to reduce that obligation in any subsequent calendar year or to
reduce any other Consep obligation during 1998 or any subsequent calendar year.
If the above accurately reflects your understanding of our mutual
agreement, please sign and date the enclosed copy of this letter and return it
to me.
Best regards,
/s/ Volker G. Oakey
- -------------------------
Volker G. Oakey
President
Accepted and agreed to:
BEND RESEARCH, INC.
By: /s/ Walter C. Babcock Date: February 26, 1998
-------------------------
Walter C. Babcock
<PAGE> 1
EXHIBIT 10.29
CONTROL CHANGE AGREEMENT
THIS CONTROL CHANGE AGREEMENT ("Agreement"), made as of the ______ day
of _________________, ______, by and between CONSEP, INC., an Oregon
corporation, with its principal office at 213 S.W. Columbia Street, Bend, Oregon
97702 ("Company"), and [name, address] ("Employee").
RECITALS:
Employee has been a valued employee of the Company since _____ and is an
experienced manager of the Company's business. The Company believes that
Employee's continued employment by the Company enhances shareholder value and
will contribute to the Company's future success. Accordingly, the Company wishes
to give the Employee certain assurances concerning change in control of the
Company.
AGREEMENT:
The parties therefore agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms have
the definitions set forth below:
a. "CHANGE IN CONTROL" means the occurrence on or before December 31,
1999 of any one of the following events: (i) any Person becomes the beneficial
owner of twenty percent (20%) or more of the total number of voting shares of
the Company; (ii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting shares of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least fifty percent (50%) of the total voting power represented by
the voting shares of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the shareholders of the
Company approve an agreement for the sale or disposition by the Company of all
or substantially all the Company's assets; or (iii) as the result of, or
- --------------------------------------------------------------------------------
1 - CONTROL CHANGE AGREEMENT
<PAGE> 2
in connection with, any cash tender or exchange offer, merger, or other business
combination, sale of assets or any combination of the foregoing transactions,
the persons who were directors of the Company before such transactions cease to
constitute at least two-thirds (2/3) of the board of directors of the Company or
any successor entity.
b. "MATERIAL ADVERSE CHANGE IN EMPLOYMENT" means:
(1) Without Employee's express written consent, any assignment of
duties inconsistent with Employee's position immediately prior to a Change in
Control, or a change in Employee's reporting responsibilities, titles or offices
as in effect immediately prior to a Change in Control, or any removal of
Employee from or any failure to reelect or reappoint Employee to Employee's
position immediately prior to a Change in Control, except (a) in connection with
Employee's termination for Cause or as a result of Employee's death or
Disability, (b) pursuant to an order of a court of competent jurisdiction, or
(c) upon Employee's retirement under a retirement plan of the Company; or
(2) A reduction of Employee's aggregate base salary from the
Company following a Change in Control; or
(3) The relocation of the office at which Employee regularly
performs Employee's duties for the Company which relocation is not consented to
by Employee and which relocation requires Employee to be based anywhere other
than the principal executive office of the Company or its successors and
assigns.
c. "PERSON" means any individual, corporation, partnership, trust,
association, joint venture, pool, syndicate, unincorporated organization,
joint-stock company or similar organization or group acting in concert, but does
not include any employee stock ownership plan or similar employee benefit plan
of the Company. A "Person" shall be deemed to be a beneficial owner as that term
is used in Rule 13d-3 under the Securities Exchange Act of 1934.
d. "CAUSE" means the occurrence of one or more of the following events:
(1) Employee's wilful failure or refusal to comply with the
reasonable and lawful policies, standards or regulations from time to time
established by the Company, and Employee's failure to correct such failure or
refusal within thirty (30)
- --------------------------------------------------------------------------------
2 - CONTROL CHANGE AGREEMENT
<PAGE> 3
days following notice from the Company specifying the nature of such failure or
refusal; or
(2) Employee engages in criminal conduct or engages in conduct
with respect to the Company that is dishonest, fraudulent or materially
detrimental to the reputation, character or standing of the Company.
e. "DISABILITY" means the inability of Employee to perform his or her
assigned duties to the Company because of physical or mental incapacity for a
continuous period of four (4) months, as reasonably determined by the Board of
Directors of the Company after consultation with a qualified physician selected
by the Board of Directors.
2. Severance Compensation.
a. Upon Employee's termination of employment, whether voluntary
or involuntary, following both a Change in Control and a Material Adverse Change
in Employment; provided the termination of employment occurs within two (2)
years following the Change in Control, the Company shall provide severance
compensation and benefits as follows:
(1) The Company shall pay Employee an amount equal to two
(2) years of Employee's salary calculated with reference to Employee's salary
(excluding bonuses) for the calendar year immediately preceding termination; and
(2) The Company shall, at its sole expense, for a period
of two (2) years following the date of termination provide Employee with
medical, dental, Disability and life insurance benefits equivalent to the
benefits plans and programs available to Employee through the Company as of the
date of termination.
b. Amounts payable pursuant to paragraph a.(1) of this Section
shall not bear interest and shall be paid in twenty-four (24) equal monthly
installments commencing thirty (30) days following the date of termination.
Amounts payable under this Section shall be net of amounts required to be
withheld under applicable law and amounts requested to be withheld by Employee.
c. Upon Employee's termination for Cause or due to death or
disability, or voluntary or involuntary termination under any circumstances
other than
- --------------------------------------------------------------------------------
3 - CONTROL CHANGE AGREEMENT
<PAGE> 4
those described in subsection a. of this Section 2, Employee shall not be
entitled to the compensation and benefits described in this Section 2.
3. NOTICE. Unless otherwise provided herein, any notice, request,
certificate or instrument required or permitted under this Agreement shall be in
writing and shall be deemed "given" upon personal delivery to the party to be
notified or three business days after deposit with the United States Postal
Service, by registered or certified mail, addressed to the party to receive
notice at the address set forth above, postage prepaid. Either party may change
its address by notice to the other party given in the manner set forth in this
Section.
4. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and contains all the agreements between them with respect to
the subject matter hereof. It also supersedes any and all other agreements or
contracts, either oral or written, between the parties with respect to the
subject matter hereof.
5. MODIFICATION. Except as otherwise specifically provided, the terms
and conditions of this Agreement may be amended at any time by mutual agreement
of the parties, provided that before any amendment shall be valid or effective,
it shall have been reduced to writing and signed by an authorized representative
of the Company and Employee.
6. NO WAIVER. The failure of any party hereto exercise any right, power
or remedy provided under this Agreement or otherwise available in respect hereof
at law or in equity, or to insist upon compliance by any other party hereto with
its obligations, shall not be a waiver by such party of its right to exercise
any such or other right, power or remedy or to demand compliance.
7. SEVERABILITY. In the event that any paragraph or provision of this
Agreement shall be held to be illegal or unenforceable, such paragraph or
provision shall be severed from this Agreement and the entire Agreement shall
not fail as a result, but shall otherwise remain in full force and effect.
8. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the Company and its successors and assigns, and shall be binding upon
Employee, his administrators, executors, legatees, and heirs. Employee shall not
assign this Agreement.
- --------------------------------------------------------------------------------
4 - CONTROL CHANGE AGREEMENT
<PAGE> 5
9. DISPUTE RESOLUTION. The Company and Employee agree that any dispute
between Employee and the Company or its officers, directors, employees, or
agents in their individual or Company capacity relating to the interpretation,
enforcement or breach of this Agreement, shall be submitted to a mediator for
non-binding, confidential mediation. If the matter cannot be resolved with the
aid of the mediator, the Company and Employee mutually agree to arbitration of
the dispute. The arbitration shall be in accordance with the then-current
Employment Dispute Resolution Rules of the American Arbitration Association
("AAA") before an arbitrator who is licensed to practice law in the State of
Oregon. The arbitration shall take place in or near Portland, Oregon. The
prevailing party in such arbitration, including any appeals thereon, shall be
awarded reasonable attorneys' fees and costs, including expenses associated with
the taking of depositions and the hiring of expert witnesses.
The Company and Employee agree that the procedures outlined in this
provision are the exclusive method of dispute resolution.
10. APPLICABLE LAW. This Agreement shall be construed and enforced under
and in accordance with the laws of the State of Oregon.
11. COUNTERPARTS. This Agreement may be signed in two counterparts, each
of which shall be deemed an original and both of which shall together constitute
one agreement.
IN WITNESS WHEREOF, Consep, Inc. has caused this Agreement to be signed
by its duly authorized representative, and Employee has hereunder set his name
as of the date of this Agreement.
COMPANY: CONSEP, INC.
By:
-------------------------------------
EMPLOYEE: ----------------------------------------
NAME
- --------------------------------------------------------------------------------
5 - CONTROL CHANGE AGREEMENT
<PAGE> 1
EXHIBIT 23.0
Consent of Independent Accountants
The Board of Directors and Shareholders
Consep, Inc. and Subsidiaries:
We consent to incorporation by reference in the Registration Statements (Nos.
333-32189, 33-86638, 33-95130, 333-09759, 33-86636 and 33-95128) on Form S-8 of
Consep, Inc. and subsidiaries of our report dated February 13, 1998, relating to
the consolidated balance sheets of Consep, Inc. and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, which report appears on Form 10-K of Consep,
Inc. and subsidiaries.
/S/ KPMG PEAT MARWICK LLP
March 27, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,615,773
<SECURITIES> 69,334
<RECEIVABLES> 5,654,310
<ALLOWANCES> 920,785
<INVENTORY> 9,316,144
<CURRENT-ASSETS> 16,565,082
<PP&E> 9,218,852
<DEPRECIATION> 3,698,212
<TOTAL-ASSETS> 25,677,560
<CURRENT-LIABILITIES> 8,293,423
<BONDS> 0
0
0
<COMMON> 94,602
<OTHER-SE> 15,121,916
<TOTAL-LIABILITY-AND-EQUITY> 25,677,560
<SALES> 39,204,329
<TOTAL-REVENUES> 39,204,329
<CGS> 29,786,976
<TOTAL-COSTS> 29,786,976
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 228,144
<INTEREST-EXPENSE> 424,739
<INCOME-PRETAX> (1,822,021)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,822,021)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,822,021)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
