<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended April 30, 1995
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Commission File number 1-9579
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Ecogen Inc.
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(Exact name of registrant as specified in its charter)
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Delaware 22-2487948
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2005 Cabot Boulevard West, Langhorne, Pennsylvania 19047
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (215) 757-1590
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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 .
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at June 1, 1995
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Common Stock, $.01 par value 28,336,278
<PAGE> 2
ECOGEN INC.
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Consolidated Balance Sheets as of
April 30, 1995 and October 31, 1994 . . . . . . . . . . . . . . . . . . . 1
Unaudited Consolidated Statements of Operations
for the three months and six months
ended April 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statement of Stockholders'
Equity for the six months ended April 30, 1995 . . . . . . . . . . . . . . 4
Unaudited Consolidated Statements of Cash Flows
for the six months ended April 30, 1995 and 1994 . . . . . . . . . . . . . 5
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . 7
Item 2 - Management's Discussion and
Analysis of Results of Operations
and Financial Condition . . . . . . . . . . . . . . . . . . . . . 12
PART II - OTHER INFORMATION
Item 6(a) - Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6(b) - Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . N/A
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<PAGE> 3
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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<CAPTION>
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April 30, October 31,
ASSETS 1995 1994
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Current assets:
Cash and cash equivalents................................... $6,408,420 $8,094,075
Temporary investments....................................... - 734,285
Inventory................................................... 7,321,056 6,595,953
Contract and trade receivables, net......................... 3,721,447 1,111,490
Prepaid expenses and other current assets................... 878,611 642,881
- - -------------------------------------------------------------------------------------------------------------
Total current assets 18,329,534 17,178,684
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Plant and equipment:
Office furniture and equipment.............................. 892,477 972,747
Laboratory furniture and equipment.......................... 3,760,896 3,612,386
Leasehold improvements...................................... 2,126,541 2,128,637
- - -------------------------------------------------------------------------------------------------------------
6,779,914 6,713,770
Less accumulated depreciation and amortization.............. (4,997,889) (4,781,984)
- - -------------------------------------------------------------------------------------------------------------
Net plant and equipment 1,782,025 1,931,786
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Intangible and other assets, net............................... 913,553 360,598
- - -------------------------------------------------------------------------------------------------------------
$21,025,112 $19,471,068
=============================================================================================================
</TABLE>
(Continued)
(1)
<PAGE> 4
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
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APRIL 30, OCTOBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
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<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses..................... $4,054,521 $4,041,215
Deferred contract revenue................................. 3,847,811 5,779,059
- - -------------------------------------------------------------------------------------------------------------
Total current liabilities 7,902,332 9,820,274
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Other long-term obligations.................................. 1,810,848 -
Stockholders' equity:
Preferred stock, par value $.01 per share;
authorized 7,500,000 shares (540,000 shares
designated Series A convertible preferred stock):
Series A convertible preferred stock; issued
and outstanding 260,000 shares in 1995 and
1994............................................... 2,600 2,600
Common stock, par value $.01 per share;
authorized 42,000,000 shares; issued
28,335,990 shares in 1995 and 21,283,836
shares in 1994........................................ 283,358 212,838
Additional paid-in capital............................... 102,683,023 86,033,915
Accumulated deficit...................................... (90,530,803) (75,554,683)
Foreign currency translation adjustment.................. 162,534 244,904
Treasury stock, at cost (180,778 shares in
1995 and 1994)........................................ (1,288,780) (1,288,780)
- - -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,311,932 9,650,794
- - -------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------
$21,025,112 $19,471,068
=============================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Financial Statements.
(2)
<PAGE> 5
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Product sales, net................ $2,759,102 $3,477,761 $4,612,512 $4,399,310
Cost of product sold.............. 1,552,544 2,006,902 2,759,414 2,700,252
- - ----------------------------------------------------------------------------------------------------------
Gross profit 1,206,558 1,470,859 1,853,098 1,699,058
- - ----------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development.......... 2,272,674 3,268,460 4,559,767 6,652,260
Selling, general and administration 2,558,358 2,404,768 4,885,115 4,803,108
Special charges................... 395,945 - 9,543,194 350,000
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Total operating expenses 5,226,977 5,673,228 18,988,076 11,805,368
- - ----------------------------------------------------------------------------------------------------------
Other income...................... 441,509 3,548,394 2,158,858 6,821,741
- - ----------------------------------------------------------------------------------------------------------
Net loss ($3,578,910) ($653,975) ($14,976,120) ($3,284,569)
==========================================================================================================
Net loss per common share ($0.14) ($0.04) ($0.61) ($0.18)
==========================================================================================================
Weighted average common
shares outstanding 26,220,601 17,807,375 24,440,218 17,809,883
==========================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Financial Statements.
(3)
<PAGE> 6
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended April 30, 1995
(Unaudited)
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Foreign Treasury
Convertible Additional Currency Stock
Preferred Common Paid-in Accumulated Translation at
Stock Stock Capital Deficit Adjustment Cost Total
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<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE OCTOBER 31, 1994 $2,600 $212,838 $86,033,915 ($75,554,683) $244,904 ($1,288,780) $9,650,794
Issuance of 4,111,200 shares of common
stock in connection with ETech
exchange offer.................... - 41,112 11,264,687 - - - 11,305,799
Issuance of 644,618 shares of common
stock upon exercise of stock
options and warrants.............. - 6,446 1,242,166 - - - 1,248,612
Issuance of 2,268,750 shares of
common stock in connection with
private placements, net........... - 22,687 4,045,976 - - - 4,068,663
Issuance of 27,586 shares of common
stock in connection with a
research agreement................ - 275 96,279 - - - 96,554
Foreign currency translation........... - - - (82,370) - (82,370)
Net loss............................... - - - (14,976,120) - (14,976,120)
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE APRIL 30, 1995 $2,600 $283,358 $102,683,023 ($90,530,803) $162,534 ($1,288,780) $11,311,932
===================================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Financial Statements.
(4)
<PAGE> 7
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
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SIX MONTHS ENDED
APRIL 30,
1995 1994
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<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. ($14,976,120) ($3,284,569)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization expense............... 326,246 342,855
Unrealized foreign currency transaction loss (gain) 19,913 (47,671)
Non cash portion of special charges................. 8,878,806 350,000
Loss on sale of fixed assets........................ 125,431 -
Changes in assets and liabilities, net................... (5,177,006) 6,127,774
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Net cash (used in) provided by operating activities (10,802,730) 3,488,389
- - -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities
of temporary investments............................... 734,285 1,672,057
Purchase of temporary investments......................... - (962,742)
Proceeds from sale of fixed assets........................ 43,823 -
Purchase of furniture, equipment and
leasehold improvements................................. (134,978) (536,326)
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Net cash provided by investing activities 643,130 172,989
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Cash flows from financing activities:
Cash received from ETech investors........................ 3,555,736 -
Net proceeds from issuance of common stock................ 5,317,274 60,344
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Net cash provided by financing activities 8,873,010 60,344
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- - -------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash.............. (399,065) 853,646
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Net (decrease) increase in cash and cash equivalents......... (1,685,655) 4,575,368
Cash and cash equivalents, beginning of period............... 8,094,075 5,886,170
- - -------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $6,408,420 $10,461,438
=======================================================================================================
</TABLE>
(continued)
(5)
<PAGE> 8
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
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SIX MONTHS ENDED
CHANGES IN ASSETS AND LIABILITIES, NET APRIL 30,
1995 1994
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(Increase) decrease in prepaid expenses and
other current assets................................... ($275,548) $441,798
Increase in inventory..................................... (725,251) (2,083,517)
(Increase) decrease in receivables........................ (2,605,931) 117,062
(Increase) decrease in other assets....................... (572,578) 52,165
Decrease in accounts payable
and accrued expenses................................... (15,286) (75,073)
Increase in other long term liabilities................... 670,328 -
(Decrease) increase in deferred contract revenue.......... (1,652,740) 7,675,339
- - --------------------------------------------------------------------------------------------------------
Changes in assets and liabilities, net ($5,177,006) $6,127,774
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</TABLE>
See Accompanying Notes To Unaudited Consolidated Financial Statements.
(6)
<PAGE> 9
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1995 and 1994
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Basis of Presentation:
The consolidated financial statements include the accounts of Ecogen
Inc. ("Ecogen" or the "Company") and its wholly-owned and
majority-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. In December 1994,
the Company changed its year end from a calendar year to a fiscal year
ending October 31. Comparative information from 1994 has been
recasted to conform to the new fiscal year end.
The accompanying consolidated condensed financial statements include
all adjustments (consisting of normal recurring accruals) which are,
in the opinion of management, necessary for a fair presentation of the
consolidated results of operations and financial position for the
interim periods presented. The consolidated condensed financial
statements have been prepared in accordance with the requirements for
Form 10-Q and, therefore, do not include all disclosures of financial
information required by generally accepted accounting principles.
These consolidated condensed financial statements should be read in
conjunction with the October 31, 1994 consolidated financial
statements and notes thereto.
The results of operations for the interim period ended April 30, 1995
are not necessarily indicative of the operating results for the full
year.
Operations:
Since its inception in 1983, the Company's source of operating funds
has been primarily dependent on equity offerings, various research and
development contracts, licensing agreements and to a lesser extent
product sales. Funds generated from research and development
agreements were necessary to accelerate the development and
commercialization of certain products. Beginning in fiscal 1995, the
Company expects that research and development revenues from these
types of agreements will decline. The Company's present and future
operations are dependent upon the successful commercialization and
market acceptance of the Company's products. The Company continues to
evaluate various programs to raise additional funds over the short
term and continues to seek additional funds from the licensing or sale
of its proprietary technology from
(7)
<PAGE> 10
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
research and development contracts and from the sale of equity
securities. At this time, the Company is unable to determine whether
it will be successful in raising additional funds. If the Company is
not successful, further curtailment in operating expenses will be
required.
Inventory:
At April 30, 1995, inventory consisted of raw materials of $2,095,284,
work-in-progress of $2,804,221 and finished products of $2,421,551.
Reclassifications:
Certain amounts contained in the 1994 consolidated financial
statements have been reclassified to conform to the 1995 presentation.
(2) ECOGEN TECHNOLOGIES I INCORPORATED
During the first quarter of 1995, the Company completed an Exchange
Offer for 71.2% of the outstanding stock of Ecogen Technologies I Inc.
(ETech) pursuant to which the Company issued 4,111,200 shares of its
common stock having a market value of $11.3 million on December 28,
1994, the date the Exchange Offer expired. Accordingly, effective
January 1, 1995, ETech's consolidated financial statements are
consolidated with those of the Company resulting in the Company
recording 100% of the research and development expenses of ETech
programs and reflecting any payments from ETech investors, subsequent
to the Exchange Offer, as a long-term obligation. Effective October
1, 1994, the Company discontinued recording contract revenue and
management fees under the ETech agreements because it was the
Company's intention to initiate an exchange offer for 20% or more of
the ETech shares. Subsequent to October 1, 1994, ETech collected from
investors participating in the Exchange Offer and remitted to the
Company approximately $3.0 million of the payments under the ETech
Investor Notes. The acquisition of 71.2% of ETech was accounted for
under purchase accounting and in the first quarter of 1995 the Company
recorded approximately $9.0 million as a special charge to operations
for the value of in-process research and development acquired from
ETech. Market feasibility and acceptance has not yet been established
with respect to the ETech research programs and there is no assurance
that the Company will be successful in its commercialization efforts.
The Company continues to have a purchase option through July 1996 to
acquire the remaining minority interest in ETech.
(8)
<PAGE> 11
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following pro forma results of operations for the six months ended
April 30, 1995 and 1994 give effect to the acquisition of ETech as
though it had occurred on November 1, 1993. The unaudited pro forma
results of operations do not include the nonrecurring charges to
operations of $9.0 million ($.37 per share) for the purchased
technology.
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1995 1994
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Product Sales, net $ 4,612,512 $ 4,399,310
Net loss (5,986,244) (7,826,702)
Net loss per share (.25) (.44)
===== =====
</TABLE>
The pro forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the
acquisition been made at November 1, 1993, or the results which may
occur in the future.
(3) STOCKHOLDERS' EQUITY
During the first six months of 1995, the Company sold 2,268,750 shares
of its common stock in connection with private placements of common
stock to institutional investors and the Company issued 644,618 shares
pursuant to the exercise of warrants to purchase the Company's common
stock for aggregate proceeds of $5.3 million, net of expenses. In
connection with the exercise of the warrants, the Company cancelled
100,000 warrants and 72,128 unit purchase options at exercise prices
ranging from $10 to $14 per share. In connection with certain of the
private placements, the Company granted certain registration rights.
In June 1995, the Company issued to an institutional investor an
additional 500,000 shares of its common stock for gross proceeds of
$.8 million.
Subsequent to April 30, 1995, 320,892 stock options at exercise prices
ranging from $2.34 to $13.175 were cancelled. In addition, employees
were given the right to exchange 1,489,093 options at exercise prices
from $6.46 to $13.175 for new options at an exercise price of $2.188,
the fair market value at the date of grant of this exchange right.
The new options are not exercisable until the later of November 13,
1995 or the exercisable date of the option exchanged.
(4) LONG-TERM DEBT
During the first quarter, the Company received approval from the
Israeli government to provide financing for 70% of the cost of a
scale-up manufacturing facility in Israel and certain working capital
financing over a three-year period.
(9)
<PAGE> 12
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The cost of such activities are estimated to be $3.8 million. The
Israeli government will guarantee 75% of the amount financed. The
Company is currently negotiating the terms of such financing with an
Israeli bank. Further, during the second quarter the Company obtained
a $2.0 million line of credit to be used for leasing of production
equipment. To date, the Company has not drawn down on either lines of
credit.
(5) SPECIAL CHARGES
The special charges recorded in 1995 include approximately $.5
million, principally severance costs relating to the shutdown of
Ecogen Australia and other cost containment programs.
(6) ECOGEN EUROPE
In January 1991, Ecogen entered into a research and development
assistance contract (the "1991 Agreement") with 3A S.r.l. ("3A"), an
Italian corporation which has developed an agricultural park in the
Umbria region of Italy. Under the terms of this agreement, Ecogen
agreed to assist 3A in establishing an agricultural biotechnology
research and development facility in Umbria and to undertake a
research program for adapting Ecogen Bt bioinsecticides for use
against insect pests in Europe, Africa and the Middle East (the "Sales
Territory"), in exchange for $2.1 million which was funded over a
three-year period. In September 1992, Ecogen, 3A and Ecogen Europe
S.r.l., an Italian corporation ("Ecogen Europe") 75% owned by Ecogen
and 25% owned by 3A, entered into a research, development and
commercialization agreement (the "1992 Agreement"). Under the terms
of the 1992 Agreement, as amended, 3A is to have provided $8.9 million
of funding to Ecogen Europe and Ecogen is to have provided $5.6
million of funding to Ecogen Europe. To date, 3A has provided Ecogen
Europe $6.2 million in funding and Ecogen has provided Ecogen Europe
cash or paid for certain expenses of Ecogen Europe aggregating $1.4
million and has transferred to Ecogen Europe 683,202 shares of common
stock of Ecogen.
Ecogen and 3A have recently signed a Letter of Intent that provides
for the restructuring of the relationship among Ecogen, 3A and Ecogen
Europe. The transaction contemplated by the Letter of Intent
includes, among other things, (i) the termination of the 1991
Agreement and the 1992 Agreement including the parties' funding
obligations under these agreements; (ii) the transfer of Ecogen's
interest in Ecogen Europe to 3A and the subsequent change of name of
Ecogen Europe; (iii) the return to Ecogen of the 683,202 shares of
(10)
<PAGE> 13
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Ecogen common stock held by Ecogen Europe; (iv) the transfer of cash
by Ecogen Europe to Ecogen in an amount to be determined; and (v) the
transfer to 3A by Ecogen of rights to use and develop certain
bioinsecticide technologies and to market in the former Sales Territory
of Ecogen Europe products that may result from 3A's development
efforts.
The Letter of intent is subject to the parties agreement on final
documentation of the transaction and the approval of the parties
respective Boards of Directors, as well as the approval of the Umbria
Regional Government, which was the source of certain funds transferred
to Ecogen Europe by 3A. In connection with the proposed restructuring
of the Ecogen Europe business, at the behest of 3A, an administrator
that is not related to Ecogen or 3A has assumed control over the
assets and operations of Ecogen Europe. The parties have agreed to
continue this arrangement at least until the closing of the
transaction contemplated by the Letter of Intent. There can be no
assurance that the transaction described in the Letter of Intent or
any other transaction restructuring the relationship among Ecogen,
Ecogen Europe and 3A will actually take place.
(11)
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three Months and Six Months Ended April 30, 1995 and 1994
RECENT EVENTS
In January 1991, Ecogen entered into a research and development
assistance contract (the "1991 Agreement") with 3A S.r.l. ("3A"), an Italian
corporation which has developed an agricultural park in the Umbria region of
Italy. Under the terms of this agreement, Ecogen agreed to assist 3A in
establishing an agricultural biotechnology research and development facility in
Umbria and to undertake a research program for adapting Ecogen Bt
bioinsecticides for use against insect pests in Europe, Africa and the Middle
East (the "Sales Territory"), in exchange for $2.1 million which was funded
over a three-year period. In September 1992, Ecogen, 3A and Ecogen Europe
S.r.l., an Italian corporation ("Ecogen Europe") 75% owned by Ecogen and 25%
owned by 3A, entered into a research, development and commercialization
agreement (the "1992 Agreement"). Under the terms of the 1992 Agreement, as
amended, 3A is to have provided $8.9 million of funding to Ecogen Europe and
Ecogen is to have provided $5.6 million of funding to Ecogen Europe. To date,
3A has provided Ecogen Europe $6.2 million in funding and Ecogen has provided
Ecogen Europe cash or paid for certain expenses of Ecogen Europe aggregating
$1.4 million and has transferred to Ecogen Europe 683,202 shares of common
stock of Ecogen.
Ecogen and 3A have recently signed a Letter of Intent that provides
for the restructuring of the relationship among Ecogen, 3A and Ecogen Europe.
The transaction contemplated by the Letter of Intent includes, among other
things, (i) the termination of the 1991 Agreement and the 1992 Agreement
including the parties' funding obligations under these agreements; (ii) the
transfer of Ecogen's interest in Ecogen Europe to 3A and the subsequent change
of name of Ecogen Europe; (iii) the return to Ecogen of the 683,202 shares of
Ecogen common stock held by Ecogen Europe; (iv) the transfer of cash by Ecogen
Europe to Ecogen in an amount to be determined; and (v) the transfer to 3A by
Ecogen of rights to use and develop certain bioinsecticide technologies and to
market in the former Sales Territory of Ecogen Europe products that may result
from 3A's development efforts.
The Letter of intent is subject to the parties agreement on final
documentation of the transaction and the approval of the parties respective
Boards of Directors, as well as the approval of the Umbria Regional Government,
which was the source of certain funds transferred to Ecogen Europe by 3A. In
connection with the proposed restructuring of the Ecogen Europe business, at
the behest of 3A, an administrator that is not related to Ecogen or 3A has
assumed control over the assets and operations of Ecogen Europe. The parties
have agreed to continue this arrangement at least until the closing of the
transaction contemplated by the Letter of Intent. There can be no assurance
that the transaction described in the Letter of Intent or any other transaction
restructuring the relationship among Ecogen, Ecogen Europe and 3A will actually
take place.
(12)
<PAGE> 15
OVERVIEW
The following is a summary of the six month results as a percentage of sales,
as well as the percentage change in dollar amount compared to the prior period:
<TABLE>
<CAPTION>
Six Months Ended April 30
------------------------- Increase
1995 1994 (Decrease)
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<S> <C> <C> <C>
Product Sales, net 100% 100% 5%
Cost of Sales 60% 61% 2%
Gross Profits 40% 39% 9%
Research & Development 99% 151% (31%)
Selling & Marketing 48% 38% 32%
General & Administration 58% 71% (14%)
Other Income 47% 155% (68%)
</TABLE>
Product sales increased 5% from $4.4 million in 1994 to $4.6 million in 1995.
Contract revenue, which is now included in other income, decreased over $4.3
million during the six month period due principally to the fact that as a
result of the Company's acquisition of 70% of ETech, the Company no longer
records contract revenue from ETech. The 1995 results include special charges
of $9.5 million relating to purchased technology from ETech, the shutdown of
Ecogen Australia and other severance costs. Net loss, exclusive of special
charges approximated $5.4 million ($.22 per share) during the first six months
of 1995 compared to $2.9 million ($.16 per share) in 1994.
SIX MONTHS ENDED APRIL 30, 1995 AND 1994
Product Sales
Net product sales increased $.2 million (5%) for the six months ended April 30,
1995 compared to the same period in 1994. The Bt product line achieved a $.9
million increase in sales in spite of adverse weather conditions in California.
Sales of pheromone products decreased $.7 million from the comparable 1994
period. In addition to the impact of the weather, 1995 sales decreased primarily
due to economic uncertainties in the Mexican market and inventory carryover in
the Pacific Northwest. Gross margins on product sales increased to 40% in
1995 from 39% in 1994 in spite of the fact that pheromone product sales
decreased and this product line has the higher gross margins.
Operating Costs
Research and development costs decreased $2.1 million or 31% due principally to
scheduled reductions in spending under ETech programs for which the research
effort had been accelerated in 1993 and 1994 as a result of the ETech
financing. Selling and marketing expenses increased 32% as a result of costs
associated with new product introductions. General and administration expenses
decreased 14% as a result of cost containment measures taken in 1995.
(13)
<PAGE> 16
Total operating expenses were $19.0 million in the six months ended April 30,
1995 compared to $11.8 million in 1994. The increase in operating expenses
is due to special charges in 1995 relating to purchased technology and the
Company's cost containment measures. Operating expenses exclusive of special
charges decreased 18% from $11.5 million in the six month period in 1994 to
$9.4 million in the comparable period in 1995.
Other Income
Other income, net, decreased $4.7 million during the six months ended April 30,
1995 due principally to a decrease in contract revenue primarily from ETech as
a result of the acquisition of a majority interest in ETech.
Net loss for the six months of 1995 was ($14,976,000) or ($.61) per share
compared to ($3,285,000) or ($.18) per share in the same period in 1994. The
net loss exclusive of special charges was ($5,433,000) or ($.22) per share in
1995 compared to ($2,934,000) or ($.16) per share in 1994. The increase in net
loss exclusive of special charges is due to the decrease in research contract
revenue.
THREE MONTHS ENDED APRIL 30, 1995 AND 1994
Product Sales
Net product sales decreased $.7 million (21%) in the current quarter. Bt
product sales decreased $.5 million and pheromone product sales decreased $.2
million. As mentioned previously, product sales also were negatively impacted
by, among other things, weather conditions during the second quarter. Gross
margins increased to 44% in 1995 from 42% in 1994. This increase reflects the
continued effect of improvements in manufacturing costs in 1995. Gross margins
for fiscal 1994 were 31% compared to 35% and 44% in the first and second
quarters of 1995, respectively.
Operating Expenses
Research and development costs decreased $1.0 million or 30% due principally to
scheduled reductions in spending under ETech programs for which the research
effort had been accelerated in 1993 and 1994 as a result of the ETech
financing. Selling and marketing expenses increased 32% and general and
administration expenses decreased 9% for the same reasons as described above.
Total operating expenses in the 1995 quarter were $5.2 million compared to $5.7
million in the prior period. Operating expenses exclusive of special charges
were $4.8 million representing a decrease of 15% from the $5.7 million incurred
in 1994.
Other Income
Other income, net, decreased $3.1 million in the second quarter of 1995 due to
lower research contract revenue. It is expected the research contract revenues
will continue to decline as the Company makes the transition from a research
company to a product driven commercial business.
(14)
<PAGE> 17
Net loss for the second quarter of 1995 was ($3.6 million) compared to ($.7
million) in the same period in 1994. The second quarter of 1995 included
special charges of $.4 million principally related to severance costs. The
net loss exclusive of special charges was ($3.2 million) or ($.12) per share
in 1995 compared to ($.7 million) or ($.04) per share in 1994. The increase
is attributable to the decrease in research contract revenue.
SEASONALITY OF BUSINESS
The bulk of the Company's current products are presently marketed for
agricultural applications in the northern hemisphere, where the growing season
generally runs from spring until fall. Commercial introduction of the
Company's new products is contingent on, among other factors, completion of
field testing and receipt of required regulatory approvals. Unusual weather
conditions during field tests that may require additional field tests in
subsequent growing seasons, or failure to receive regulatory approvals prior to
the growing season may result in delays in product development and
commercialization. In addition, because of the seasonal nature of its
business, the Company's product revenues are likely to be concentrated in the
fiscal quarters prior to and during a particular growing season and may result
in substantial variations in quarter-to-quarter financial results. Product
sales from year-to-year are also affected by unusual weather conditions, such
as droughts or floods, and the level of insect pressure in grower areas.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital needs primarily through private
and public offerings of equity securities, research and development contract
payments and to a lesser extent product sales. Since its inception in 1983,
the Company's liquidity has been dependent on various research and development
agreements which also have served to accelerate the development and
commercialization of certain products. Such contract revenues are expected to
decrease significantly subsequent to fiscal 1994, as a result of, among other
reasons, the Company's Exchange Offer for ETech (which is described in the
Notes to Unaudited Consolidated Financial Statements). The level of future
contract revenues is also dependent on the continued effect of the Company's
1992 research, development and commercialization agreement with 3A and Ecogen
Europe, which the Company is attempting to restructure as discussed above
pursuant to the terms of a Letter of Intent. If the transaction contemplated
by the Letter of Intent is completed, the Company will not record any
additional research and development contract revenue from its contracts with
3A subsequent to the closing of the transaction.
At April 30, 1995, the Company had cash and liquid investments of $6.4 million,
a net decrease of $2.4 million from October 31, 1994. The decrease was
principally due to $10.8 million of cash expenditures during the current
period for operations including cash expended to fund inventory production and
receivable increases offset by $5.3 million of cash received from the sale of
equity securities and $3.6 million received from ETech investors that
participated in the ETech exchange.
(15)
<PAGE> 18
To date, the Company has not generated positive cash flow from
operations. The Company believes that its existing working capital, committed
research and development contracts, estimated product sales, licensing income
and interest income should be sufficient to meet its capital and liquidity
requirements through the end of fiscal 1995 based, if necessary, on reduced
spending levels. During fiscal 1994, the Company initiated certain measures to
conserve cash. The Company has continued to take other steps to streamline
operations and reduce costs during the first and second quarter of fiscal 1995.
These included personnel reductions in the Company's research and development
functions resulting in part from the Company's scheduled reduction of research
and development under the ETech programs. They also included the closing of
the Company's Australian nematode production facility. Nematode products will
now be manufactured for the Company using Ecogen technology at a toll
manufacturer in the U.S. Such arrangement provides increased production
capacity at a lower cost. The Company believes that these cost reduction
measures will not significantly affect either current operations or the
prospects for success of the continuing development of its core technologies.
The Company's working capital and working capital requirements are affected by
numerous factors and there is no assurance that such factors will not have a
negative impact on the Company's liquidity. Principal among these are the
success of its long-term product commercialization and marketing efforts and
the efforts of its strategic partners in commercializing and selling products
based on the Company's technology, the technological advantages and pricing of
the Company's products, economic and environmental considerations which impact
agricultural crop production and the agricultural sector generally, competitive
conditions in the agricultural pest control market, the success of the
Company's efforts to license its technology to third parties and the Company's
access to capital markets that can provide the Company with the resources
necessary to fund its strategic priorities.
To add to its working capital position and to provide funding for improvements
in its production capabilities, the Company is pursuing the raising of
additional funds including working capital and equipment financings. The
nature, scope, terms and timing of any such financing will depend upon various
factors and there can be no assurance that the Company will be successful in
adding to its working capital or be able to do so upon favorable terms. In
addition, the Company is in the process of attempting to restructure its
commitment to provide funding to Ecogen Europe for research, development and
commercialization activities in Europe under its agreement with 3A. The Company
also will continue to pursue additional avenues to supplement its working
capital, including strategic alliances, joint ventures and research and
development and license agreements. Merrill Lynch has been engaged as the
Company's investment banker to assist the Company in developing strategic
alliances. If the Company is not successful in raising additional funding or
restructuring its commitments, the Company would take a number of additional
steps to conserve cash, including reducing operating costs, in order to
continue to fund only the Company's core research and development projects and
product commercialization efforts.
(16)
<PAGE> 19
The Company has commitments for capital expenditures of approximately $2.0
million relating to certain production equipment needs. The Company has
obtained a lease facility to finance such equipment cost subject to a 15%
security deposit.
During the first quarter of 1995, the Company also received approval from the
Israeli government to provide financing for 70% of the cost of a scale-up
manufacturing facility in Israel and certain working capital financing over a
three-year period, although the Company has no firm commitment for any capital
expenditures to date associated with this project. The cost of such activities
are estimated to be $3.8 million. The Israeli government will guarantee 75% of
the amount financed. The Company is currently negotiating the terms of such
financing with an Israeli bank.
ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
The increase of $2.6 million in receivables from October 31, 1994 is due to
increased product sales. The increase of $.7 million in inventory during the
first half of 1995 resulted from production runs for anticipated sales in the
second half of 1995 during the agricultural growing season in North America.
The increase of $.2 million in prepaid expenses relate to marketing and
advertising costs which will be expensed principally in the third quarter. The
decrease in deferred contract revenue of $1.9 million is due to contract
revenue earned on research contracts with 3A and AgrEvo. The Company's
research contract with AgrEvo expired in December 1994. Other long-term
liabilities of $1.8 million represent amounts received from ETech shareholders
which have been recorded as a deferred liability until such time as the
minority interest in ETech is acquired. The Company has no obligation to
acquire such minority interest.
(17)
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 6 (a). EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.120 Employment and Consulting
Agreement between the Company
and Bruce C. Carlton dated
February 22, 1995.
27 Financial Data Schedule
</TABLE>
ITEM 6 (b). REPORTS ON FORM 8-K.
No reports on Form 8-K have been filed during the quarter.
(18)
<PAGE> 21
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.
ECOGEN INC.
Date: June 13, 1995 By: /s/ James P. Reilly, Jr.
----------------------------------
(James P. Reilly, Jr., President
and Chief Executive Officer)
By: /s/ Mary Paetzold
----------------------------------
(Mary Paetzold, Vice President
and Chief Financial Officer)
(19)
<PAGE> 22
EXHIBIT INDEX
Exhibit No. Description
- - ----------- ------------
10.120 Employment and Consulting
Agreement between the
Company and
Bruce C. Carlton dated
February 22, 1995.
27 Financial Data Schedule
(20)
<PAGE> 1
EXHIBIT 10.120
EMPLOYMENT AND CONSULTING AGREEMENT
THIS EMPLOYMENT AND CONSULTING AGREEMENT (the "Agreement") is entered
into as of February 22, 1995 (the "Effective Date"), between Ecogen Inc., a
Delaware corporation with a principal place of business at 2005 Cabot Boulevard
West, Langhorne, Pennsylvania 19047 (the "Company"), and Bruce C. Carlton, an
individual residing at 914 Macclesfield Road, Furlong, Pennsylvania 18925 ("Dr.
Carlton").
PREAMBLE
Dr. Carlton has served as an officer and member of the Board of
Directors of the Company for more than ten years. Dr. Carlton is currently
Executive Vice President, Research and Development of the Company. Dr. Carlton
desires to resign as an officer and employee of the Company as of June 30,
1995. The Company believes that it is in its best interest to enter into this
Agreement in order to assure itself of the continued services of Dr. Carlton
after his resignation as an officer and employee of the Company.
NOW, THEREFORE, in consideration of the mutual convenants contained
herein, and for other good and valuable consideration, the sufficiency and
receipt of which is hereby acknowledged, the parties hereto agree as follows:
Section 1. Employment as Executive Vice President,
Research and Development.
Subject to the terms and conditions hereof, during the Employment Term
(as defined in Section 3), Dr. Carlton is hereby engaged by the Company to
continue to serve as its Executive Vice President, Research and Development.
Dr. Carlton accepts such employment and agrees to discharge all of the duties
normally associated with this position, to faithfully and to the best of his
abilities perform such other services consistent with his position as a senior
executive officer of the Company as
<PAGE> 2
may from time to time be assigned to him by the Chief Executive Officer of the
Company and to devote at least seventy percent of his business time to such
services. In addition to his employment as Executive Vice President, Research
and Development, Carlton will serve as a member of the Board of Directors of
the Company, without additional compensation, until the earlier of (i) the next
annual meeting of stockholders of the Company or (ii) June 30, 1995.
Section 2. Compensation During Employment Term.
2.1 During the Employment Term, the Company will pay Dr. Carlton a
salary at the annual rate of $190,000 (the "Employment Salary"). The
Employment Salary will be payable in substantially equal monthly installments.
Section 3. Employment Term.
The term of Dr. Carlton's employment as Executive Vice President,
Research and Development of the Company under this Agreement as provided in
Section 1 will end on June 30, 1995, unless earlier terminated as provided in
Section 8 hereof (the "Employment Term").
Section 4. Engagement as a Consultant.
4.1 Subject to the terms and conditions hereof, Dr. Carlton is hereby
engaged by the Company to serve as a consultant during the Consulting Term (as
defined in paragraph 6.1). Dr. Carlton accepts such engagement and agrees to
perform the services described in paragraph 4.2.
4.2 (a) During the Consulting Term, Carlton will provide such
consultation services as the Company may reasonably
-2-
<PAGE> 3
request, including, without limitation, being the Chairman of the Ecogen
Scientific Advisory Board. In addition, Dr. Carlton, if requested by the
Chairman of the Board or Chief Executive Officer of the Company, shall: (i)
render advice and assistance in connection with the Company's technology and
products and the development and implementation of the Company's strategic
plans and objectives; and (ii) represent or assist the Company at meetings or
other events concerning the agricultural and related industry or the Company's
technologies or products. Subject to Dr. Carlton's reasonable availability and
upon reasonable prior notice from the Company to Dr. Carlton, Dr. Carlton may
be required to devote to the Company under this Agreement a maximum of (i)
forty-five (45) days during the first twelve months of the Consulting Term and
forty-five (45) days during the second twelve months of the Consulting Term.
Section 5. Compensation During Consulting Term.
During the Consulting Term, the Company will pay Carlton an annual fee
of $60,000 (the "Consulting Fee"). The Consulting Fee will be payable, in
arrears, in equal monthly installments due on the first business day of each
month during the Consulting Term. In addition, during the Consulting Term, the
Board of Directors of the Company may, from time to time in its sole
discretion, issue to Dr. Carlton options to purchase shares of the Company's
stock upon such terms and conditions as may be determined by the Board of
Directors of the Company.
Section 6. Consulting Term.
6.1 The term of Dr. Carlton's engagement as a consultant as provided
in Section 4 (the "Consulting Term") will, unless Dr. Carlton's employment has
been terminated during the Employment Term pursuant to paragraph 8.1, commence
on July 1, 1995 and, unless sooner terminated as provided in Section 8, end on
June 30, 1997. The parties may, however, upon their mutual written agreement,
extend the Consulting Term beyond June 30, 1997. For purposes of this
Agreement the term "Joint Term" shall mean the Employment Term and the
Consulting Term.
-3-
<PAGE> 4
Section 7. Benefits.
7.1 During the Employment Term, Dr. Carlton may participate, on the
same basis and subject to the same qualifications as other vice presidents of
the Company, in any profit sharing, savings, life insurance, health insurance,
hospitalization, dental, drug prescription, disability, accidental death or
dismemberment and other benefit plans and policies in effect with respect to
other vice presidents of the Company (collectively, the "Benefits").
7.2 During the Joint Term, the Company will pay or promptly reimburse
Dr. Carlton, upon submission of proper invoices in accordance with the
Company's normal procedures, for all reasonable out-of-pocket business,
entertainment and travel expenses incurred by Dr. Carlton in the performance of
his duties hereunder.
7.3 The Company will be entitled to withhold from any salary and fee
amounts payable or benefits accorded to Dr. Carlton hereunder and all federal,
state and local income, employment and other taxes, as and in such amounts as
may be required under applicable law.
-4-
<PAGE> 5
Section 8. Termination.
8.1 Termination by the Company; Resignation by Dr. Carlton. The
Company may terminate Dr. Carlton's employment and/or engagement with the
Company either during the Employment Term or the Consulting Term, as may at the
time be applicable, with or without Cause (as defined in paragraph 8.4) upon
thirty (30) days prior written notice to Dr. Carlton. Dr. Carlton may
voluntarily resign his employment and/or engagement with the Company either
during the Employment Term or the Consulting Term, as may at the time be
applicable, upon ninety (90) days' prior written notice to the Company.
8.2 Compensation and Benefits Upon Termination Without Cause. If the
Company terminates Dr. Carlton's employment and/or engagement hereunder for any
reason other than Cause or Dr. Carlton's death or Permanent Disability (as
defined in paragraph 8.4), prior to the expiration of the Joint Term, the
Company will (i) (A) until the expiration of the Employment Term, continue to
pay Dr. Carlton the Employment Salary due Carlton pursuant to paragraph 2.1 in
accordance with the provisions of paragraph 2.1, and/or (as may be applicable)
(B) until the expiration of the Consulting Term, continue to pay Dr. Carlton
the Consulting Fee due Dr. Carlton pursuant to Section 5 in accordance with the
provisions of Section 5; and (ii) continue until June 30, 1995 the Benefits, as
provided in paragraph 7.1, that Dr. Carlton is participating in at the time of
such termination on the same basis of participation, as applied prior to such
termination, to the extent such plans and policies permit him to participate
therein and subject to any other terms and conditions of such plans and
policies; provided, that if such plans and policies restrict Dr. Carlton from
such participation, Dr. Carlton may, with the reasonable consent and at the
expense of the Company, obtain until June 30, 1995 coverage reasonably
comparable to such Benefits.
-5-
<PAGE> 6
8.3 Compensation and Benefits Upon Resignation, Termination for
Cause, Death or Permanent Disability. If prior to the expiration of the Joint
Term, Dr. Carlton dies, suffers a Permanent Disability or voluntarily resigns
his employment and/or engagement hereunder or is terminated by the Company for
Cause, then after the date of his termination or the effective date of his
resignation, or upon Dr. Carlton's death or Permanent Disability, as the case
may be, Dr. Carlton will (a) receive no further Employment Salary or Consulting
Fee, as may at the time be applicable, (b) cease to be covered under or be
permitted to participate in the Benefits (except payments due Dr. Carlton or
his beneficiaries or representatives under any applicable life or disability
insurance plans or policies).
8.4 Definitions. "Cause" means (i) any gross misconduct, fraud,
embezzlement or willful, intentional or deliberate breach or nonobservance by
Dr. Carlton of any of the material covenants contained herein, or (ii) any
willful, intentional or deliberate disobedience or neglect by Dr. Carlton of
the reasonable orders or directions of the Company, in either case not
including Permanent Disability.
"Permanent Disability" means the permanent inability of Dr. Carlton to
perform his duties hereunder as a result of any physical, mental or
psychological injury, illness or incapacity, as reasonably determined by the
Company.
Section 9. Confidential Information and Non-Competition.
Dr. Carlton agrees to continue to be bound by the provisions of that
certain agreement between the Company and himself, dated October 10, 1984,
concerning confidentiality, non-competition and non-solicitation; provided,
that solely for the purpose of such agreement, it is understood that Dr.
Carlton's employment with the Company will not be deemed to terminate prior to
the later of (i) the expiration or termination of the Joint Term or (ii) the
date payments cease being made to Dr. Carlton by the Company pursuant to
Section 8.
-6-
<PAGE> 7
Section 10. Miscellaneous.
10.1 This Agreement will be construed, interpreted and governed by
the laws of the Commonwealth of Pennsylvania, without regard to the conflicts
of law rules thereof.
10.2 This Agreement will extend to and be binding upon Dr. Carlton,
his legal representatives, heirs and distributees, and upon the Company, its
successors and assigns regardless of any change in the business structure of
the Company, be it through spin-off, merger, sale of stock, sale of assets or
any other transaction. However, this Agreement is a personal services contract
and as such, Dr. Carlton may not assign any of his duties or obligations
hereunder.
10.3 Except for any stock option or stock award agreements between
the parties, this Agreement, and the agreement referenced to in Section 10,
this Agreement constitutes the entire agreement of the parties with respect to
the subject matter hereof. No waiver, modification or change of any of its
provisions will be valid unless in writing and signed by both parties. Any and
all prior agreements (other than the agreements referred to in the first
sentence of this paragraph) between the parties, written or oral, relating to
Dr. Carlton's employment and engagement by the Company, including, but not
limited to, that certain Employment Agreement dated as of January 1,
-7-
<PAGE> 8
1994, between the parties, are hereby cancelled and are of no further force or
effect. The parties agree that no rights or obligations contained in said
Employment Agreement survive.
10.4 The waiver of any breach of any duty, term or condition of this
Agreement will not be deemed to constitute a waiver of any preceding or
succeeding breach of the same or any other duty, term or condition of this
Agreement. If any provision of this Agreement will be unenforceable in any
jurisdiction in accordance with its terms, the provision will be enforceable to
the fullest extent permitted in that jurisdiction and will continue to be
enforceable in accordance with its terms in any other jurisdiction.
10.5 All notices pursuant to this Agreement will be in writing and
will be sent by certified mail, return receipt requested, addressed to the
parties hereto at the addresses set forth above, or to such other addresses as
may hereafter be specified by notice in writing by either of the parties and
will be deemed given three days after mailing in accordance with the foregoing.
10.6 This Agreement may be executed in counterparts, each of which
will be deemed an original but all of which will together constitute one and
the same agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
/s/ BRUCE C. CARLTON
---------------------------
Bruce C. Carlton
ECOGEN INC.
By: /s/ JAMES P. REILLY, JR.
---------------------------
James P. Reilly, Jr.
President and Chief
Executive Officer
-8-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> APR-30-1995
<CASH> 6,408,420
<SECURITIES> 0
<RECEIVABLES> 3,811,447
<ALLOWANCES> (90,000)
<INVENTORY> 7,321,056
<CURRENT-ASSETS> 18,329,534
<PP&E> 6,779,914
<DEPRECIATION> 4,997,889
<TOTAL-ASSETS> 21,025,112
<CURRENT-LIABILITIES> 7,902,332
<BONDS> 0
<COMMON> 283,358
0
2,600
<OTHER-SE> 11,025,974
<TOTAL-LIABILITY-AND-EQUITY> 21,025,112
<SALES> 4,612,512
<TOTAL-REVENUES> 4,612,512
<CGS> 2,759,414
<TOTAL-COSTS> 18,988,078
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (14,976,120)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,976,120)
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<EPS-PRIMARY> (.61)
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</TABLE>
