<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 March 31, 1998
Commission file number: 0-23156
CONSEP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0874480
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
213 S.W. Columbia Street, Bend, OR 97702
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 388-3688
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Number of shares of common stock outstanding as of
May 1, 1998:
9,645,664 shares, $.01 par value per share
<PAGE> 2
<TABLE>
<CAPTION>
CONSEP, INC.
INDEX
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,012,235 $ 1,615,773
Short-term investments 68,334 69,334
Accounts receivable, net 8,719,607 4,733,525
Other receivables 419,040 458,283
Inventories, net (note 2) 10,719,486 9,316,144
Prepaid expenses 400,759 372,023
------------ ------------
Total current assets 21,339,461 16,565,082
Property, plant and equipment, net 5,705,704 5,520,640
Intangible assets, net 1,467,378 1,519,344
Goodwill, net 1,990,855 2,014,874
Notes receivable and other assets 63,015 57,620
------------ ------------
Total assets $ 30,566,413 $ 25,677,560
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines (note 3) 4,279,000 1,492,973
Accounts payable 7,095,958 4,581,462
Current portion of notes and leases payable 556,252 559,272
Accrued liabilities 1,143,702 925,568
Customer deposits 407,152 734,148
------------ ------------
Total current liabilities 13,482,064 8,293,423
Notes and leases payable, excluding current maturities 2,012,410 2,148,119
Mandatory stock warrant obligation 19,500 19,500
------------ ------------
Total liabilities 15,513,974 10,461,042
Shareholders' equity:
Common stock 96,457 94,602
Additional paid-in capital 44,331,862 44,313,127
Foreign currency translation adjustment (8,491) (13,590)
Accumulated deficit (29,367,389) (29,177,621)
------------ ------------
Total shareholders' equity 15,052,439 15,216,518
------------ ------------
Total liabilities and shareholders' equity $ 30,566,413 $ 25,677,560
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 3,642,176 $ 4,787,837
Distribution products 5,980,437 6,037,804
------------ ------------
Total revenues 9,622,613 10,825,641
------------ ------------
COST OF REVENUES
Proprietary products 2,321,851 2,901,431
Distribution products 4,655,151 4,793,089
------------ ------------
Total cost of revenues 6,977,002 7,694,520
------------ ------------
Gross margin 2,645,611 3,131,121
------------ ------------
OPERATING EXPENSES (note 4)
Research and development 539,631 309,557
Selling, general and administrative 1,209,148 1,341,263
Distribution 1,026,961 916,594
------------ ------------
Total operating expenses 2,775,740 2,567,414
------------ ------------
Operating income (loss) (130,129) 563,707
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 43,312 24,594
Interest expense (131,394) (43,671)
Other, net 28,443 58,160
------------ ------------
Net other income (expense) (59,639) 39,083
------------ ------------
Net income (loss) $ (189,768) $ 602,790
============ ============
Basic and diluted net income (loss) per share (note 5) $ (0.02) $ 0.06
============ ============
Weighted average number of shares used in the computation of (note 5):
Basic earnings (loss) per share 9,560,783 9,440,068
Diluted earnings (loss) per share 9,560,783 9,552,196
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
<TABLE>
<CAPTION>
CONSEP, INC. AND SUBSIDIARIES
CONSOLDIATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (189,768) $ 602,790
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 305,347 279,682
Provision for bad debts 79,350 56,518
Inventory reserve 38,539 27,001
Loss (gain) on disposal of equipment 4,582 (911)
Other non-cash items 2,942 8,749
Changes in assets and liabilities, net of amounts acquired:
Short-term investments 1,000 500
Accounts receivable (4,061,696) (4,898,428)
Other receivables 39,245 (250,307)
Inventories (1,435,281) (1,786,542)
Prepaid expenses (24,282) 260,842
Accounts payable 2,505,061 2,844,611
Accrued liabilities 218,055 267,661
Other assets 263 2,000
Customer deposits (326,997) (98,180)
----------- -----------
Net cash used in operating activities (2,843,640) (2,684,014)
----------- -----------
INVESTING ACTIVITIES
Acquisition of intangible assets (16,427) (11,805)
Acquisition of property, plant and equipment (386,188) (237,937)
Issuance of notes receivable, net of payments received (7,346) 20,233
----------- -----------
Net cash used in investing activities (409,961) (229,509)
----------- -----------
FINANCING ACTIVITIES
Increase in bank lines 2,786,017 2,455,340
Principal payments on notes payable (156,251) (76,383)
Net proceeds from issuance of common stock 20,590 31,819
----------- -----------
Net cash provided by financing activities 2,650,356 2,410,776
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (293) 213
----------- -----------
Net decrease in cash and cash equivalents (603,538) (502,534)
Cash and cash equivalents at beginning of period 1,615,773 2,443,508
----------- -----------
Cash and cash equivalents at end of period $ 1,012,235 $ 1,940,974
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
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>
March 31, December 31,
1998 1997
----------- ---------
<S> <C> <C>
Raw materials $ 1,956,261 $ 1,998,509
Finished goods - proprietary 4,963,835 4,640,578
Finished goods - distribution 4,368,622 3,227,485
----------- ---------
11,288,718 9,866,572
Less reserve for obsolescence 569,232 550,428
------------ ----------
$ 10,719,486 $ 9,316,144
=========== ==========
</TABLE>
NOTE 3 - BANK LINES
The Company operates 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 March 31, 1998, $4,279,000 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, the quick ratio and the
profitability covenants. The Company has obtained a waiver of compliance,
with respect to such covenants, for the quarter ended March 31, 1998.
6
<PAGE> 7
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 (LOSS) PER COMMON SHARE
For the three months ended March 31, 1998 and 1997, net income (loss) per
common share is based upon the weighted average number of common shares
outstanding during each period, with diluted net income (loss) 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 the diluted net loss
per share in the accompanying financial statements for the three months March
31, 1998.
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 (loss) to comprehensive income (loss):
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Net Income (loss) $(189,768) $ 602,790
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments 5,099 (8,645)
--------- ---------
Other comprehensive income (loss) 5,099 (8,645)
--------- ---------
Comprehensive income (loss) $(184,669) $ 594,145
========= =========
</TABLE>
NOTE 7 - SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURES
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
Three Months Ended Income
March 31, Interest Taxes
--------- ------- -----
<S> <C> <C>
1998 $ 129,802 $ 4,750
1997 $ 47,024 $ 5,700
</TABLE>
7
<PAGE> 8
Following is a summary of non-cash investing and financing activities of the
Company for the three months ended March 31, 1998 and 1997:
During the three months ended March 31, 1998, the Company acquired a
vehicle for $17,873 through the issuance of a note payable.
During the three months ended March 31, 1997, the Company acquired
equipment and vehicles for $96,555 through the issuance of notes and
leases payable.
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.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Consep derives its revenues from the sale of its proprietary products to the
commercial agriculture and consumer home, lawn and garden markets and from sales
by its distribution subsidiaries of products produced by other manufacturers,
including both biorational insect control products and conventional toxic
pesticides as well as fertilizers and farm supplies. The Company's primary focus
is the development of proprietary products and expansion of the markets for
those products. A significant element of the Company's strategy for the
commercialization of its proprietary commercial agriculture products has been to
acquire distribution operations in key agricultural regions and to introduce its
proprietary products through those operations. In addition, the Company
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 March 31, 1998, the Company recorded a net loss of
approximately $190,000 compared to net income of approximately $603,000 in the
corresponding period of 1997. The net loss for the quarter ended March 31, 1998
includes an expense of approximately $305,000 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. This expense offsets what
would have otherwise been a profitable quarter despite adverse weather
conditions in many of the Company's markets. In addition, the results from the
corresponding period of 1997 included an accrual of $230,000 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 third and fourth quarters as compared to the first two quarters
and the Company may experience a loss in the third and fourth quarters of an
otherwise profitable year.
9
<PAGE> 10
RESULTS OF OPERATIONS
REVENUES. Total revenues for the three months ended March 31, 1998 decreased
11.1% to approximately $9.6 million from approximately $10.8 million in the
corresponding period of 1997. Revenues from the sale of proprietary products
decreased 23.9% during the three months ended March 31, 1998 to approximately
$3.6 million from approximately $4.8 million in the corresponding period of
1997. Revenues from the Company's distribution operations decreased 1.0% during
the three months ended March 31, 1998 to approximately $5,980,000 from
approximately $6,038,000 in the corresponding period of 1997.
The decrease in proprietary product revenues for the three months ended March
31, 1998 was attributable to decreases in revenues for the Company's consumer
products, specialty chemicals and, to a lesser extent, commercial agriculture
products.
Revenues from the sale of commercial agriculture products decreased
approximately $71,000, or 4.3%, for the three months ended March 31, 1998 as
compared to the corresponding period of 1997. The decrease was primarily
attributable to cooler and wetter weather conditions in California, Florida and
Mexico that resulted in lower insect populations in those regions. In addition
to the cooler weather, sales of the Company's product to control peach twig
borer ("CheckMate PTB") and the combination CheckMate product to control both
peach twig borer and oriental fruit moth ("CheckMate SF") were lower in the
three months ended March 31, 1998 as compared to the corresponding period in
1997, as a result of shortages in the supply of pheromone for these products.
The Company does not expect to make up for the revenues lost on CheckMate PTB
and CheckMate SF sales as a result of the pheromone supply shortage. 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. The Company believes that
future production of this pheromone will not result in a supply shortage.
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 $789,000, or 27.8% for the three months ended March
31, 1998 as compared to the corresponding period of 1997. The decrease in
consumer product revenues in the three months ended March 31, 1998 was primarily
attributable to a $720,000, or 56.6%, decrease in revenues for the Company's
Blocker line of products as compared to the corresponding period 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.
Specialty chemical sales decreased to approximately $17,000 in the three months
ended March 31, 1998 from approximately $303,000 in the corresponding period 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 decrease of 1.0% from the Company's distribution operations during
the three months ended March 31, 1998 as compared to the corresponding periods
of 1997 was primarily the result of the cooler and wetter weather conditions in
California discussed above.
10
<PAGE> 11
GROSS MARGIN. The consolidated gross margin for the Company decreased to 27.5%
in the three months ended March 31, 1998 from 28.9% in the corresponding period
of 1997. The gross margin on the sale of proprietary products during the three
months ended March 31, 1998 decreased to 36.3% from the 39.4% gross margin
achieved on proprietary product revenues in the corresponding period of 1997.
Distribution gross margin increased in the three months ended March 31, 1998 to
22.2% from 20.6% in the corresponding period of 1997.
The gross margin on commercial agriculture proprietary product sales for the
three months ended March 31, 1998 decreased to 31.1% from 32.7% in the
corresponding period of 1997. The decrease was primarily attributable to the
$230,000 accrual for estimated insurance recoveries for the additional pheromone
expenses incurred in the three months ended March 31, 1997 due to the October
1996 fire that destroyed the Company's specialty chemicals manufacturing
facility. This one-time accrual reduced cost of revenues by approximately
$230,000 and positively impacted the gross margin percentage on agriculture
proprietary product sales by 13.9% in the three months ended March 31, 1997.
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.
The gross margin on proprietary consumer product sales for the three months
ended March 31, 1998 decreased to 44.1% from 45.7% in the corresponding period
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 44.7% for the three months ended March 31, 1998 as compared
to 55.1% in the corresponding period of 1997. In order to make the Blocker
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 22.2% from 20.6% for
the three months ended March 31, 1998 as compared to the corresponding period of
1997. The increase was primarily attributable to differences in the product
sales mix for distribution operations and a $53,000 increase in unanticipated
prior year manufacturers' rebates which had not been accrued for in 1997. These
rebates improved the distribution gross margin percentage by approximately 0.8%.
OPERATING EXPENSES. Operating expenses during the three months ended March 31,
1998 increased 7.5% to approximately $2.8 million from approximately $2.6
million in the corresponding period of 1997. The increased operating expenses
were primarily attributable to approximately $305,000 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. The Company believes that future
production of the pheromone will not require additional scale-up costs and the
total cost will be lower than the cost of the pheromone purchased from other
outside parties.
OTHER INCOME AND EXPENSE. During the three months ended March 31, 1998, the
Company recorded net other expense of approximately $60,000 compared to net
other income of approximately $39,000 in the corresponding period of 1997. This
decrease is primarily attributable to i) the recognition of approximately
$70,000 in business interruption insurance proceeds in the first three months of
1997 that did not occur in 1998 and ii) an increase of approximately $88,000 in
interest expense as a result of increased average borrowings outstanding as
compared to the corresponding period of 1997. Offsetting this decrease in net
other income were slight increases in i) interest income and ii) foreign
currency exchange gains relating to the Company's Canadian subsidiary in three
months ended March 31, 1998 as compared to foreign currency exchange losses in
the corresponding period of 1997.
11
<PAGE> 12
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 $44.4 million of equity. In addition to equity
financings, the Company operates 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 March 31,
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,
quick ratio and profitability covenants, but has subsequently obtained the
Bank's waiver with respect to such non-compliance for the quarter ended March
31, 1998.
At March 31, 1998, the Company had cash, cash equivalents and short-term
investments of approximately $1.1 million and working capital of approximately
$7.9 million. Borrowings under the Bank line of credit discussed above were
approximately $4.3 million. The Company believes that cash and cash equivalents
at March 31, 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 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.
12
<PAGE> 13
At the present time, 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 addition,
which includes a large scale distillation unit that has been installed and is
operational, will require approximately $100,000 to $150,000 of additional
capital expenditures to complete the first phase of construction. The Company is
currently re-evaluating whether to pursue construction beyond the first phase of
the addition for chemical production as well as its plans to completely produce
pheromones and other specialty chemicals at the Bend, Oregon facility. In order
to reduce the cost of certain pheromones otherwise purchased from third parties,
the Company is considering the purchase of pheromone intermediate materials from
third party sources and completing the final steps of the production processes
in the distillation unit recently completed. The Company has already
successfully completed the final steps for the production of one pheromone in
the new distillation unit using intermediate materials purchased from third
parties. Although completing the production of certain pheromones using
intermediate materials purchased from third parties is expected to lower the
total cost of such pheromones to the Company, the cost-savings will not be as
significant as the cost-savings that were planned to be achieved by the Company
completely producing its own pheromones for use in certain products in the 1999
season.
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 plans for completing the specialty chemicals manufacturing
addition to reduce the cost of certain pheromones used in certain of the
Company's proprietary products; and iii) the Company's belief that future
production of the pheromone used in its CheckMate PTB and CheckMate SF products,
with or without the assistance of contract manufacturers, will meet its supply
needs at a lower cost than would otherwise be paid to outside suppliers, 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 Company's ability to obtain adequate financing,
if needed; the Company's ability to complete, in whole or in part, its
contemplated specialty chemicals manufacturing addition; the Company's ability
to consistently reduce the cost of certain pheromones by purchasing intermediate
materials from third parties and completing the production process using its own
equipment; the Company's ability to use its proprietary synthesis route to
produce adequate supplies of the pheromone used in its CheckMate PTB and
CheckMate SF products at lower costs than would otherwise be incurred in
purchasing the pheromone from outside suppliers; and other 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.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the three months ended March 31, 1998, the Company issued securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act"), as set forth below. Pursuant to the Agreement and Plan of
Merger relating to the acquisition of Farchan Laboratories, Inc. ("Farchan"),
the Company issued an aggregate of 171,671 shares of its common stock on
February 12, 1998 to the four former shareholders of Farchan as additional
consideration to conclude the acquisition transaction. These issuances were
effected in reliance on Section 4(2) of the Securities Act as not involving
any public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.30 Loan Modification Agreement with
Silicon Valley Bank
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)
14
<PAGE> 15
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: May 14, 1998 By: /s/ VOLKER G. OAKEY
------------ --------------------
VOLKER G. OAKEY
Chairman of the Board,
President and Chief
Executive Officer
DATE: May 14, 1998 By: /s/ LARRY KATZ
------------ ----------------
LARRY KATZ
Vice President, Finance and
Chief Financial Officer
15
<PAGE> 1
EXHIBIT 10.30
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of March 4, 1998, by
and among Consep, Inc. and Pacoast, Inc. whose address is 213 SW Columbia
Street, Bend, OR 97702 and Richard Hunt, Inc. whose address is 2749 East Malaga
Avenue, Fresno, CA 93725 (collectively the "Borrower") and Silicon Valley Bank,
a California chartered bank ("Silicon") whose address is 3003 Tasman Drive,
Santa Clara, CA 95054 and with a Loan Production Office located at 1100 SW
Stratus, Beaverton, OR 97008.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Silicon, Borrower is jointly and severally indebted to
Silicon pursuant to, among other documents, an Amended and Restated Loan and
Security Agreement (and Schedules thereto), dated June 23, 1997, as may be
amended from time to time, (the "Loan Agreement"). The Loan Agreement
provided for, among other things, a line of credit in the original principal
amount of Seven Million Five Hundred Thousand and 00/100 Dollars
($7,500,000.00), (the "Credit Limit"). Defined terms used but not otherwise
defined herein shall have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Silicon shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness
is secured by the Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Waiver of Default.
1. Silicon hereby waives Borrower's existing default under
the Loan Agreement by virtue of Borrower's failure to
comply with the Tangible Net Worth and Profitability
covenants as of the quarter ended December 31, 1997.
Silicon's waiver of Borrower's compliance of these
covenants shall apply only to the foregoing period.
Accordingly, for the quarter ended March 31, 1998,
Borrower shall be in compliance with these covenants, as
amended herein.
<PAGE> 2
Silicon's agreement to waive the above-described default
(1) in no way shall be deemed an agreement by Silicon to
waive Borrower's compliance with the above-described
covenants as of all other dates and (2) shall not limit or
impair Silicon's right to demand strict performance of
these covenants as of all other dates and (3) shall not
limit or impair Silicon's right to demand strict
performance of all other covenants as of any date.
Modification(s) to Loan Agreement and Schedule.
1. The Section entitled "Financial Covenants" is hereby
amended in part to read as follows:
TANGIBLE NET WORTH: Borrower shall maintain a Tangible Net
Worth of not less than $12,000,000.00, plus 50% of the net
proceeds of any equity financing of Borrower that closes
after the date hereof, beginning with the quarter ending
March 31, 1998 and thereafter.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Silicon a fee in the amount
of Two Thousand and 00/100 Dollars ($2,000.00) (the "Loan Fee") plus all
out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that it has no defenses against the obligations to
pay any amounts under the indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing
Indebtedness, Silicon is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents.
Except as expressly modified pursuant to this Loan Modification
Agreement, the terms of the Existing Loan Documents remain unchanged and
in full force and effect. Silicon's agreement to modifications to the
existing Indebtedness pursuant to this Loan Modification Agreement in no
way shall obligate Silicon to make any future modifications to the
Indebtedness. Nothing in this Loan Modification Agreement shall
constitute a satisfaction of the Indebtedness. It is the intention of
Silicon and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly
released by Silicon in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of
this paragraph apply not only to this Loan Modification Agreement, but
also to all subsequent loan modifications agreements.
<PAGE> 3
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: SILICON:
CONSEP, INC. SILICON VALLEY BANK
By: /s/ Larry Katz By: /s/ Ron Sherman
-------------------------- -----------------------
Name: Larry Katz Name: Ron Sherman
------------------------- ----------------------
Title: Chief Financial Officer Title: Vice President
---------------------- --------------
PACOAST, INC.
By: /s/ Volker Oakey
------------------------
Name: Volker Oakey
------------------------
Title: Vice President
-----------------------
RICHARD HUNT, INC.
By: /s/ Volker Oakey
------------------------
Name: Volker Oakey
------------------------
Title: Vice President
-----------------------
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,012,235
<SECURITIES> 68,334
<RECEIVABLES> 9,718,765
<ALLOWANCES> 999,158
<INVENTORY> 10,719,486
<CURRENT-ASSETS> 21,339,461
<PP&E> 9,584,667
<DEPRECIATION> 3,878,963
<TOTAL-ASSETS> 30,566,413
<CURRENT-LIABILITIES> 13,482,064
<BONDS> 0
0
0
<COMMON> 96,457
<OTHER-SE> 14,955,982
<TOTAL-LIABILITY-AND-EQUITY> 30,566,413
<SALES> 9,622,613
<TOTAL-REVENUES> 9,622,613
<CGS> 6,977,002
<TOTAL-COSTS> 6,977,002
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 79,350
<INTEREST-EXPENSE> 131,394
<INCOME-PRETAX> (189,768)
<INCOME-TAX> 0
<INCOME-CONTINUING> (189,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (189,768)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
