<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 30, 1998
Commission file number: 0-23156
CONSEP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Oregon 93-0874480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
213 S.W. Columbia Street, Bend, OR 97702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 388-3688
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Number of shares of common stock outstanding as of
July 30, 1998:
9,657,664 shares, $.01 par value per share
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CONSEP, INC.
INDEX
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<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the
three months ended June 30, 1998 and 1997 4
Consolidated Statements of Operations for the
six months ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSEP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 437,576 $ 1,615,773
Short-term investments 68,334 69,334
Accounts receivable, net 9,926,168 4,733,525
Other receivables 489,470 458,283
Inventories, net (note 2) 9,987,821 9,316,144
Prepaid expenses 484,994 372,023
------------ ------------
Total current assets 21,394,363 16,565,082
Property, plant and equipment, net 5,680,683 5,520,640
Intangible assets, net 1,447,379 1,519,344
Goodwill, net 1,957,811 2,014,874
Notes receivable and other assets 60,571 57,620
------------ ------------
Total assets $ 30,540,807 $ 25,677,560
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines 3,975,000 1,492,973
Accounts payable 7,324,376 4,581,462
Current portion of notes and leases payable 495,897 559,272
Accrued liabilities 1,365,015 925,568
Customer deposits 171,575 734,148
------------ ------------
Total current liabilities 13,331,863 8,293,423
Notes and leases payable, excluding current maturities 2,042,051 2,148,119
Mandatory stock warrant obligation 19,500 19,500
------------ ------------
Total liabilities 15,393,414 10,461,042
Shareholders' equity:
Common stock 96,577 94,602
Additional paid-in capital 44,226,742 44,313,127
Foreign currency translation adjustment (58,806) (13,590)
Accumulated deficit (29,117,120) (29,177,621)
------------ ------------
Total shareholders' equity 15,147,393 15,216,518
------------ ------------
Total liabilities and shareholders' equity $ 30,540,807 $ 25,677,560
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
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CONSEP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 3,777,610 $ 4,599,952
Distribution products 9,377,501 9,180,282
------------ ------------
Total revenues 13,155,111 13,780,234
------------ ------------
COST OF REVENUES
Proprietary products 2,463,137 2,486,255
Distribution products 7,482,403 7,559,161
------------ ------------
Total cost of revenues 9,945,540 10,045,416
------------ ------------
Gross margin 3,209,571 3,734,818
------------ ------------
OPERATING EXPENSES (note 4)
Research and development 285,176 304,559
Selling, general and administrative 1,373,864 2,254,007
Distribution 1,153,378 915,435
------------ ------------
Total operating expenses 2,812,418 3,474,001
------------ ------------
Operating income 397,153 260,817
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 19,895 27,403
Interest expense (160,245) (127,032)
Other, net (6,534) 150,024
------------ ------------
Net other income (expense) (146,884) 50,395
------------ ------------
Net income $ 250,269 $ 311,212
============ ============
Basic and diluted net income per share (note 5) $ 0.03 $ 0.03
============ ============
Weighted average number of shares used in the computation of (note 5):
Basic earnings per share 9,651,862 9,447,478
Diluted earnings per share 9,683,674 9,537,979
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
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CONSEP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
1998 1997
------------- ---------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 7,419,785 $ 9,387,789
Distribution products 15,357,939 15,218,086
------------ ------------
Total revenues 22,777,724 24,605,875
------------ ------------
COST OF REVENUES
Proprietary products 4,784,987 5,387,687
Distribution products 12,137,555 12,352,250
------------ ------------
Total cost of revenues 16,922,542 17,739,937
------------ ------------
Gross margin 5,855,182 6,865,938
------------ ------------
OPERATING EXPENSES (note 4)
Research and development 824,808 614,116
Selling, general and administrative 2,583,011 3,595,270
Distribution 2,180,339 1,832,027
------------ ------------
Total operating expenses 5,588,158 6,041,413
------------ ------------
Operating income 267,024 824,525
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 63,207 51,997
Interest expense (291,639) (170,703)
Other, net 21,909 208,184
------------ ------------
Net other income (expense) (206,523) 89,478
------------ ------------
Net income $ 60,501 $ 914,003
============ ============
Basic and diluted net income per share (note 5) $ 0.01 $ 0.10
============ ============
Weighted average number of shares used in the computation of (note 5):
Basic earnings per share 9,606,574 9,443,793
Diluted earnings per share 9,639,608 9,543,889
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
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CONSEP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30,
1998 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 60,501 $ 914,003
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 635,647 574,015
Provision for bad debts 188,842 72,038
Inventory reserve 75,113 61,077
Loss (gain) on disposal of equipment 6,636 (362)
Other non-cash items 47,651 184,102
Changes in assets and liabilities
Short-term investments 1,000 500
Accounts receivable (5,413,684) (6,379,108)
Other receivables (31,187) (388,664)
Inventories (761,571) (2,186,403)
Prepaid expenses (114,138) 555,944
Accounts payable 2,773,746 3,125,248
Accrued liabilities 440,400 458,091
Other assets 1,263 6,461
Customer deposits (562,574) (185,346)
----------- -----------
Net cash used in operating activities (2,652,355) (3,188,404)
----------- -----------
INVESTING ACTIVITIES
Acquisition of intangible assets (67,152) (39,920)
Acquisition of property, plant and equipment (575,107) (934,047)
Additional costs related to acquisitions of subsidiaries (177,744) 0
Proceeds from sale of property, plant and equipment 5,500 0
Issuance of notes receivable, net of payments received (5,428) 51,216
----------- -----------
Net cash used in investing activities (819,931) (922,751)
----------- -----------
FINANCING ACTIVITIES
Increase in bank lines 2,482,017 4,414,340
Proceeds from issuance of notes payable 75,000 250,000
Principal payments on notes payable (300,918) (196,228)
Net proceeds from issuance of common stock 65,590 31,819
----------- -----------
Net cash provided by financing activities 2,321,689 4,499,931
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (27,600) 54
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,178,197) 388,830
Cash and cash equivalents at beginning of period 1,615,773 2,443,508
----------- -----------
Cash and cash equivalents at end of period $ 437,576 $ 2,832,338
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
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CONSEP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the statements include all
adjustments necessary (which are of a normal and recurring nature) for the fair
presentation of the results of the interim periods presented. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 1997, as included in the
Company's 1997 Annual Report to Shareholders.
NOTE 2 - INVENTORIES
Inventories, stated at the lower of cost or market, consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ---------
<S> <C> <C>
Raw materials $ 2,024,768 $ 1,998,509
Finished goods - proprietary 4,595,788 4,640,578
Finished goods - distribution 3,953,069 3,227,485
----------- ---------
10,573,625 9,866,572
Less reserve for obsolescence 585,804 550,428
------------ ----------
$ 9,987,821 $ 9,316,144
=========== ==========
</TABLE>
NOTE 3 - BANK LINES
The Company has operated under a $7.5 million bank line of credit which matures
in December 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. Under the terms of the credit
agreement, the Company is required to maintain certain financial ratios and
other financial conditions. At June 30, 1998, $3,975,000 was outstanding under
this line of credit and the Company was not in compliance with the tangible net
worth, the debt to tangible net worth ratio and the quick ratio covenants. The
Company has obtained a waiver of compliance for the quarter ended June 30, 1998.
In connection with the Bank's waiver, the line of credit has been reduced to
$5.0 million from the $7.5 million originally available.
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NOTE 4 - OPERATING EXPENSES
Research and development and selling, general and administrative expenses are
allocated to the Company's proprietary product operations. Distribution expenses
consist entirely of selling, general and administrative costs of the Company's
distribution operations.
NOTE 5 - NET INCOME PER COMMON SHARE
For the three and six months ended June 30, 1998 and 1997, net income per common
share is based upon the weighted average number of common shares outstanding
during each period, with diluted net income per share including the effect of
potentially dilutive common shares.
NOTE 6 - COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and display
of comprehensive income and its components. The following is a reconciliation of
net income to comprehensive income:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 250,269 $ 311,212 $ 60,501 $ 914,003
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments (50,314) (1,627) (45,215) (10,272)
-------- ------- -------- --------
Comprehensive income $ 199,955 $ 309,585 $ 15,286 $ 903,731
======= ======= ====== =======
</TABLE>
NOTE 7 - SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURES
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
Six Months Ended Income
June 30, Interest Taxes
---------------- -------- -------
<S> <C> <C>
1998 $ 289,601 $ 5,062
1997 $ 172,392 $ 11,844
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8
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Following is a summary of non-cash investing and financing activities of the
Company for the six months ended June 30, 1998 and 1997:
During the six months ended June 30, 1998, the Company acquired
vehicles for $55,455 through the issuance of notes payable.
During the six months ended June 30, 1997, the Company acquired
equipment and vehicles for $178,393 through the issuance of notes and
leases payable. In June 1997, the Company completed the purchase of
its headquarters and manufacturing facility which was partially
financed by a $1,125,000 note payable to a bank.
In addition, as a result of the Company's intention to sell its
unfinished specialty chemicals manufacturing plant in Alachua,
Florida, the Company recorded a $175,000 write down to adjust the
facility's carrying value to the estimated fair market value.
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board 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 Company
plans to adopt the statement for the year ended December 31, 1998.
NOTE 9 - SUBSEQUENT EVENTS
On July 14, 1998 the Company announced its intent to merge with Verdant Brands,
Inc., (formerly Ringer Corporation) in a one for one stock swap. The proposed
merger is subject to, among other things, the successful negotiation of a
definitive merger agreement, the approval of Consep's Board of Directors and
shareholders, the approval of Ringer's Board of Directors and shareholders and
applicable third-party consents and approvals. The merger is expected to be
completed by the end of 1998.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Consep derives its revenues from the sale of its proprietary products to the
commercial agriculture and consumer home, lawn and garden markets and from sales
by its distribution subsidiaries of products produced by other manufacturers,
including both biorational insect control products and conventional toxic
pesticides as well as fertilizers and farm supplies. The Company's primary focus
is the development of proprietary products and expansion of the markets for
those products. A significant element of the Company's strategy for the
commercialization of its proprietary commercial agriculture products has been to
acquire distribution operations in key agricultural regions and to introduce its
proprietary products through those operations. In addition, the Company
distributes 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 as part of its consumer
proprietary product line.
For the three months ended June 30, 1998, the Company recorded net income of
approximately $250,000 compared to net income of approximately $311,000 in the
corresponding period of 1997. For the six months ended June 30, 1998, the
Company recorded net income of approximately $61,000 compared to net income of
approximately $914,000 in the corresponding period of 1997. The net income for
the six months ended June 30, 1998 includes an expense of approximately $327,000
for scale-up and development costs associated with the production of the
Company's first batch of pheromones produced using a new proprietary synthesis
route. In addition, the results from the six months ended June 30, 1997 included
an accrual of $320,000 that lowered the Company's cost of goods sold in
anticipation of an insurance settlement from the fire that destroyed the
Company's Farchan manufacturing facility. Approximately $220,000 of this accrual
was reversed in the Company's fiscal 1997 year end results after settlement
discussions were terminated and the Company filed a lawsuit against its
insurance carrier.
Since its inception, Consep has funded its growth primarily through equity
financings. Funds from these financings have allowed the Company to build its
organization, develop and register proprietary products for both the commercial
agriculture and consumer home, lawn and garden markets, acquire distribution
operations for the introduction of its commercial agriculture products and
expand its sales efforts through both domestic and international channels of
distribution.
The Company has incurred annual operating losses since its inception in 1984.
The Company expects to incur an annual operating loss for 1998. The Company
believes annual profitability will be dependent on continued growth of revenues,
maintaining or strengthening gross margins and controlling the growth of
operating expenses. There can be no assurance that the Company will become
profitable on an annual basis.
The Company's business is seasonal with its highest revenues historically being
recognized in the first and second quarters of each year and its lowest revenues
being recognized in the third and fourth quarters of each year. This seasonality
coincides with the commercial growing season in the Northern Hemisphere and, to
a lesser extent, the consumer home, lawn and garden buying season. The Company
anticipates this seasonal profile will continue with a slight shift to third and
fourth quarter revenues as sales to international markets and sales of new
non-seasonal products increase. In contrast to revenues, many of the Company's
operating expenses are largely independent of the quarterly selling cycles. As a
result, operating expenses will generally represent a higher percentage of
revenues in the
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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
Revenues. Total revenues for the three months ended June 30, 1998 decreased 4.5%
to approximately $13.2 million from approximately $13.8 million in the
corresponding period of 1997. For the six months ended June 30, 1998, total
revenues decreased 7.4% to approximately $22.8 million from approximately $24.6
million in the corresponding period of 1997. Revenues from the sale of
proprietary products decreased 17.9% during the three months ended June 30, 1998
to approximately $3.8 million from approximately $4.6 million in the
corresponding period of 1997. For the six months ended June 30, 1998, revenues
from the sale of proprietary products were approximately $7.4 million, a
decrease of 21.0% from proprietary product revenues of approximately $9.4
million recorded in the comparable period of 1997. Revenues from the Company's
distribution operations increased 2.1% during the three months ended June 30,
1998 to approximately $9.4 million from approximately $9.2 million in the
corresponding period of 1997. For the six months ended June 30, 1998, revenues
from the Company's distribution operations increased 1.0% to approximately $15.4
million from $15.2 million in the corresponding period of 1997.
The decrease in proprietary product revenues for the three months and six months
ended June 30, 1998 was attributable to decreases in revenues for the Company's
consumer products, commercial agriculture products and specialty chemicals.
Revenues from the sale of commercial agriculture products decreased
approximately $510,000 and $582,000, or 34.2% and 18.5%, respectively, for the
three months and six months ended June 30, 1998 as compared to the corresponding
periods of 1997. The decreases were primarily attributable to the same cooler
and wetter weather conditions in California, Florida and Mexico, as previously
reported in the first quarter of 1998, that resulted in lower insect populations
in those regions. In addition, revenues from the sale of the Company's products
to control pink bollworm in cotton ("CheckMate PBW" and "CheckMate PBW-F")
declined by 75% in the three months and six months ended June 30, 1998 primarily
as a result of the same cooler weather conditions in the southwest United States
and Mexico. In addition to the cooler weather, sales of the Company's product to
control peach twig borer ("CheckMate PTB") were lower in the three months and
six months ended June 30, 1998 as compared to the corresponding periods in 1997,
as a result of a shortage in the supply of pheromone for this product. The
pheromone supply shortage was due to production delays related to the process
scale-up in the Company's initial production of this pheromone by a contract
manufacturer using a new proprietary synthesis route.
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
decreased by approximately $222,000 and $1.0 million, or 7.4% and 17.3%,
respectively, for the three months and six months ended June 30, 1998 as
compared to the corresponding periods of 1997. The decrease in consumer product
revenues in the three months and six months ended June 30, 1998 was primarily
attributable to a 64.1% and 60.2% decrease, respectively, in revenues for the
Company's Blocker line of products as compared to the corresponding periods in
1997. The decrease in Blocker revenues was primarily a result of i) inventory
carried over from 1997, the introductory year, by distributors and retailers;
ii) a change in the sales program which requires that the Company partially
reserve against revenues for potential product returns; and iii) a 25% reduction
in the selling price. Revenues from the sale of the Company's SureFire products
in the United States and Chemfree products in Canada increased 28.0% and 13.1%
in the three month and six month periods ended June 30, 1998, respectively, as
compared to the
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corresponding periods of 1997. The increase in these revenues was primarily the
result of more favorable weather conditions in certain regions of the United
States and Canada as well as lower initial inventories at the retail level as
compared to 1997.
Specialty chemical sales decreased to approximately $29,000 and $46,000 in the
three months and six months ended June 30, 1998, respectively, from
approximately $119,000 and $422,000, respectively, in the corresponding periods
of 1997. The decrease is the result of closing the Farchan operation which had
its primary manufacturing facility destroyed by fire in October of 1996.
The revenue increases of 2.1% and 1.0% from the Company's distribution
operations during the three months and six months ended June 30, 1998,
respectively, as compared to the corresponding periods of 1997 were primarily
the result of the addition of a new sales and warehousing location for the
Company's Massachusetts distribution operation. These increases were partially
offset by lower revenues in the Company's California distribution operations as
a result of the cooler and wetter weather conditions in California discussed
above.
Gross Margin. The consolidated gross margin for the Company decreased to 24.4%
in the three months ended June 30, 1998 from 27.1% in the corresponding period
of 1997. For the six months ended June 30, 1998, the consolidated gross margin
decreased to 25.7% from 27.9% in the corresponding period of 1997. The gross
margin on the sale of proprietary products during the three months ended June
30, 1998 decreased to 34.8% from the 46.0% gross margin achieved on proprietary
product revenues in the corresponding period of 1997. Gross margin on
proprietary products decreased to 35.5% in the six month period ended June 30,
1998 from 42.6% in the corresponding period of 1997. Distribution gross margins
increased in the three month and six month periods ended June 30, 1998 to 20.2%
and 21.0%, from 17.7% and 18.8%, respectively, in the corresponding periods of
1997.
The gross margin on commercial agriculture proprietary product sales for the
three month and six month periods ended June 30, 1998 decreased to 35.2% and
32.7% from 38.4% and 35.4%, respectively, in the corresponding periods of 1997.
The decreases were primarily attributable to i) the $320,000 accrual for
estimated insurance recoveries for the additional pheromone expenses incurred in
the three month and six month periods ended June 30, 1997 due to the October
1996 fire that destroyed the Company's specialty chemicals manufacturing
facility and ii) the change in product mix as a result of decreased sales for
the Company's higher margin CheckMate PBW and CheckMate PBW-F products. The
one-time insurance accrual reduced cost of revenues by approximately $90,000 and
$320,000 for the three month and six month periods ended June 30, 1997 and
positively impacted the gross margin percentage in 1997 on agriculture
proprietary product sales by 6.0% and 10.2%, respectively. Approximately
$220,000 of this accrual was reversed in the fourth quarter of 1997 after
settlement discussions were terminated and the Company filed a lawsuit against
its insurance carrier. As a result of the decreased sales for the CheckMate PBW
and CheckMate PBW-F products, proprietary commercial agriculture gross margin
percentages were decreased by 3.2% and 1.8%, respectively, for the three month
and six month periods ended June 30, 1998 as compared to the corresponding
periods in 1997.
The gross margin on proprietary consumer product sales for the three month and
six month periods ended June 30, 1998 decreased to 39.7% and 41.6%,
respectively, from 52.1% and 49.0% in the corresponding periods of 1997. The
decrease in gross margin was primarily attributable to a 25% price reduction on
the Blocker line of products which decreased the gross margin for this product
line to 49.9% and 46.9% from 62.6% and 58.7%, respectively, for the three month
and six month periods ended June 30, 1998 as compared to the corresponding
periods of 1997. In order to make the Blocker
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<PAGE> 13
products more competitive in the marketplace, the Company reduced its selling
price for the 1998 season which will continue to have a negative impact on gross
margin as compared to 1997.
The gross margin from distribution revenues increased to 20.2% and 21.0% from
17.7% and 18.8%, respectively, for the three month and six month periods ended
June 30, 1998 as compared to the corresponding periods of 1997. The increases
were primarily attributable to differences in the product sales mix for
distribution operations.
Operating Expenses. Operating expenses during the three months ended June 30,
1998 decreased 19.0% to approximately $2.8 million from approximately $3.5
million in the corresponding period of 1997. The decrease in operating expenses
was primarily attributable to i) a $596,000 reduction in advertising costs
associated with the Company's Blocker line of insect repellent products and ii)
a $246,000 reduction in expenses as a result of closing the Company's Farchan
operation. Partially offsetting these decreases was a $238,000, or 26.0%,
increase in operating expenses at the Company's distribution operations
primarily as a result of i) the increased personnel required to meet the needs
of anticipated sales growth and ii) a reduction of bad debt reserves in 1997
that did not occur in 1998.
During the six months ended June 30, 1998, operating expenses decreased 7.5% to
$5.6 million from $6.0 million in the corresponding period of 1997. The decrease
was primarily attributable to i) the $558,000 reduction in Blocker advertising
discussed earlier and ii) a $314,000 reduction in expenses as a result of
closing the Farchan operation. Partially offsetting these decreases was i) a
$348,000, or 19.0%, increase in operating expenses at the Company's distribution
operations as discussed earlier and ii) as previously reported, approximately
$327,000 in scale-up and development costs related to the initial production of
pheromone for the Company's CheckMate PTB and CheckMate SF products by a
contract manufacturer using a new proprietary synthesis route.
Other Income and Expense. During the three month and six month periods ended
June 30, 1998, the Company recorded net other expense of approximately $147,000
and $207,000 compared to net other income of approximately $50,000 and $89,000,
respectively, in the corresponding periods of 1997. These decreases were
primarily attributable to i) the recognition of approximately $125,000 and
$195,000 in business interruption insurance proceeds in the first three months
and six months of 1997, respectively, that did not occur in 1998 and ii) an
increase of approximately $33,000 and $121,000 for the three month and six month
periods ended June 30, 1998, respectively, in interest expense as a result of
increased average borrowings outstanding as compared to the corresponding
periods of 1997.
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. Since its inception, the Company
has raised approximately $44.3 million of equity. In addition to equity
financings, the Company has operated under a line of credit from Silicon Valley
Bank (the "Bank") pursuant to an Amended and Restated Loan and Security
Agreement (the "Loan Agreement") with a maximum borrowing capacity of $7.5
million to support the working capital requirements of both the Company's
principal proprietary product and distribution operations. This line of credit
matures December 10, 1998 and is secured by substantially all of the Company's
current assets. Under the terms of the Loan Agreement, the Company is required
to maintain certain financial ratios and other financial conditions. At June 30,
1998, the Company was not in compliance with certain covenants under the Loan
Agreement including the tangible net worth, debt to tangible net worth ratio and
quick ratio covenants, but has subsequently obtained the Bank's waiver with
respect to such non-compliance for the quarter ended June 30, 1998. In
connection with the Bank's waiver, the borrowing capacity has been reduced to
13
<PAGE> 14
$5.0 million from the $7.5 million originally available. The Company does not
expect the decrease in the maximum borrowing capacity to materially affect its
financial condition since the Company has not historically had sufficient
collateral to qualify for borrowings beyond $6.0 million.
At June 30, 1998, the Company had cash, cash equivalents and short-term
investments of approximately $506,000 and working capital of approximately $8.1
million. Borrowings under the Bank line of credit discussed above were
approximately $4.0 million. The Company believes that cash and cash equivalents
at June 30, 1998, 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 the Company's ability to comply with
covenants under the Loan Agreement for the three months ending September 30,
1998, future acquisitions, changes to planned research and development
activities, expanded manufacturing and commercialization programs, additional
technological, regulatory and competitive developments and the timing of
regulatory approvals for new products. As a result, the Company may need to
raise additional funds. There can be no assurance that additional financing
would be available and, if available, that the terms would be acceptable to the
Company or that the additional financing could be obtained in a timely manner.
As previously reported, the Company has partially completed the first phase of
an addition to its headquarters and manufacturing facility in Bend, Oregon for
the purpose of producing pheromones and other specialty chemicals. The Company
has re-evaluated its plans for the completion of the addition as well as its
plans to produce pheromones and other specialty chemicals at the Bend, Oregon
facility. At the present time, the Company has indefinitely postponed any
additional capital expenditures for the completion of the addition as well as
any significant production of pheromones or other specialty chemicals. In
addition, after completion of the investigation and analysis of the cost
feasibility for producing pheromones using intermediate materials purchased from
third parties, the Company has determined that it will continue to purchase its
pheromones from its current suppliers in the foreseeable future. However, the
Company still believes that, long term, the greatest cost-savings will be
achieved through the production of its own pheromones.
On July 14, 1998 the Company announced its intent to merge with Verdant Brands,
Inc., (formerly Ringer Corporation) in a one for one stock swap. The proposed
merger is subject to, among other things, the successful negotiation of a
definitive merger agreement, the approval of Consep's Board of Directors and
shareholders, the approval of Ringer's Board of Directors and shareholders and
applicable third-party consents and approvals. The merger is expected to be
completed by the end of 1998.
Forward-looking Statements
The statements set forth above regarding i) the Company's belief that it has
sufficient sources of capital to fund its operations through at least 1998;
ii) the Company's expectation that the recent reduction in maximum borrowing
under The Loan Agreement will not materially affect its financial condition and
iii) the Company's expectation that its merger with Verdant Brands, Inc. will
completed by the end of 1998, are forward-looking statements which are made
pursuant to the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are not guarantees of
future performance and involve 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. These factors include, without limitation,
the factors discussed elsewhere herein and in the Company's other filings that
are made from time to time with the Securities and Exchange Commission. The
forward-looking statements should be considered in light of these risks,
uncertainties and assumptions.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the three months ended June 30, 1998, the Company sold securities without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), as set forth below. This transaction involved the exercise of a stock
option pursuant to the Company's 1992 Stock Incentive Plan and was effected in
reliance on Rule 701 promulgated pursuant to authority granted under Section
3(b) of the Securities Act.
(a) On May 15, 1998, George Richard Hunt, an employee of the Company,
exercised a previously issued Incentive Stock Option to purchase
12,000 shares of Common Stock for an aggregate cash consideration
of $45,000.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1998 Annual Meeting of Shareholders was held on Thursday, May 21,
1998, at which the following actions were taken by a vote of the shareholders:
1. Election of Directors
The following directors were elected , two to serve a three-year term
expiring in 2001 and one to serve a one-year term expiring in 1999, by the votes
indicated below:
<TABLE>
<CAPTION>
Term Votes Votes
Director Expiring For Withheld
<S> <C> <C> <C>
Philip E. Barak 2001 8,355,090 75,450
Kenneth D. MacKay 2001 8,356,890 73,650
Gordon D. Barker 1999 8,354,470 76,070
</TABLE>
2. Approval of Amendment to the 1997 Stock Incentive Plan
By a vote of 7,101,775 to 1,279,042 (with 49,723 abstentions), the
adoption, by the Board of Directors, of an amendment to the Consep, Inc. 1997
Stock Incentive Plan (the "Plan") was approved by the Company's shareholders,
whereby an additional 300,000 shares of the Company's Common Stock was reserved
for issuance pursuant to the Plan.
3. Ratification of Appointment of Auditors
By a vote of 8,401,480 to 24,010 (with 5,050 abstentions), the
appointment, by the Board of Directors, of KPMG Peat Marwick LLP to act as
independent auditors for the Company for the year ending December 31, 1998, was
ratified by the Company's shareholders.
15
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
(b) No reports were filed on Form 8-K during the quarter for which
this report is filed.
(The remainder of this page intentionally left blank)
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSEP, INC.
(REGISTRANT)
DATE: August 14, 1998 By: /s/ Volker G. Oakey
---------------------------------
VOLKER G. OAKEY
Chairman of the Board,
President and Chief
Executive Officer
DATE: August 14, 1998 By: /s/ Larry Katz
---------------------------------
LARRY KATZ
Vice President, Finance and
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 437,576
<SECURITIES> 68,334
<RECEIVABLES> 11,019,250
<ALLOWANCES> 1,093,082
<INVENTORY> 9,987,821
<CURRENT-ASSETS> 21,394,363
<PP&E> 9,789,668
<DEPRECIATION> 4,108,985
<TOTAL-ASSETS> 30,540,807
<CURRENT-LIABILITIES> 13,331,863
<BONDS> 0
0
0
<COMMON> 96,577
<OTHER-SE> 15,050,816
<TOTAL-LIABILITY-AND-EQUITY> 30,540,807
<SALES> 22,777,724
<TOTAL-REVENUES> 22,777,724
<CGS> 16,922,542
<TOTAL-COSTS> 16,922,542
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 188,842
<INTEREST-EXPENSE> 291,639
<INCOME-PRETAX> 60,501
<INCOME-TAX> 0
<INCOME-CONTINUING> 60,501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,501
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
