<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 July 31, 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)
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 (2l5) 757-l590
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Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section l3 or l5 (d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No .
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at September 1, 1995
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Common Stock, $.01 par value 29,686,278
<PAGE> 2
ECOGEN INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Consolidated Balance Sheets as of July 31, 1995 and
October 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Unaudited Consolidated Statements of Operations for the three
months and nine months ended July 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statement of Stockholders' Equity for
the nine months ended July 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Consolidated Statements of Cash Flows for the nine
months ended July 31, 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 4 - Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE> 3
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
July 31, October 31,
ASSETS 1995 1994
---------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 5,557,436 $ 8,094,075
Temporary investments............................. - 734,285
Inventory......................................... 6,762,135 6,595,953
Contract and trade receivables, net............... 2,512,360 1,111,490
Prepaid expenses and other current assets......... 966,694 642,881
---------------------------------------------------------------------------------------------
Total current assets 15,798,625 17,178,684
---------------------------------------------------------------------------------------------
Plant and equipment:
Office furniture and equipment.................... 900,965 972,747
Laboratory furniture and equipment................ 3,834,820 3,612,386
Leasehold improvements............................ 2,121,734 2,128,637
Construction in progress.......................... 652,901 -
---------------------------------------------------------------------------------------------
7,510,420 6,713,770
Less accumulated depreciation and amortization.... (5,111,590) (4,781,984)
---------------------------------------------------------------------------------------------
Net plant and equipment 2,398,830 1,931,786
---------------------------------------------------------------------------------------------
Intangible and other assets, net..................... 654,221 360,598
---------------------------------------------------------------------------------------------
$18,851,676 $19,471,068
=============================================================================================
</TABLE>
(Continued)
(1)
<PAGE> 4
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
July 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
---------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses............. $ 3,420,612 $ 4,041,215
Deferred contract revenue......................... 3,663,718 5,779,059
---------------------------------------------------------------------------------------------
Total current liabilities 7,084,330 9,820,274
---------------------------------------------------------------------------------------------
Other long-term obligations.......................... 1,743,738 -
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
260,000 in 1995 and 1994.................... 2,600 2,600
Common stock, par value $.01 per share;
authorized 42,000,000 shares; issued
29,686,278 shares in 1995 and 21,283,836
shares in 1994................................. 296,863 212,838
Additional paid-in capital........................ 104,429,951 86,033,915
Accumulated deficit............................... (93,641,274) (75,554,683)
Foreign currency translation adjustment........... 224,248 244,904
Treasury stock, at cost (180,778 shares in
1995 and 1994)................................. (1,288,780) (1,288,780)
---------------------------------------------------------------------------------------------
Total stockholders' equity 10,023,608 9,650,794
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
$18,851,676 $19,471,068
=============================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Financial Statements.
(2)
<PAGE> 5
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
July 31, July 31,
1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Product sales, net................... $3,374,176 $3,238,847 $7,986,688 $7,638,157
Cost of product sold................. 2,040,612 2,417,300 4,800,026 5,117,552
--------------------------------------------------------------------------------------------------------------------------
Gross profit 1,333,564 821,547 3,186,662 2,520,605
--------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development............. 1,926,868 2,530,303 6,674,635 9,182,563
Selling, general and administrative.. 3,105,740 3,040,568 7,802,855 7,843,676
Special charges...................... - - 9,543,194 350,000
--------------------------------------------------------------------------------------------------------------------------
Total operating expenses 5,032,608 5,570,871 24,020,684 17,376,239
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
Total operating loss (3,699,044) (4,749,324) (20,834,022) (14,855,634)
--------------------------------------------------------------------------------------------------------------------------
Other income......................... 588,573 3,701,123 2,747,431 10,522,864
--------------------------------------------------------------------------------------------------------------------------
Net loss ($3,110,471) ($1,048,201) ($18,086,591) ($4,332,770)
==========================================================================================================================
Net loss per common share ($0.11) ($0.06) ($0.70) ($0.24)
==========================================================================================================================
Weighted average number of
common shares outstanding 28,794,013 17,844,951 25,907,431 17,823,437
==========================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Financial Statements.
(3)
<PAGE> 6
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended July 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Foreign Treasury
Convertible Additional Currency Stock
Preferred Common Paid-in Accumulated Translation at
Stock Stock Capital Deficit Adjustment Cost Total
----------------------------------------------------------------------------------------------------------------------------------
<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 645,073 shares of common
stock upon exercise of stock
options and warrants............. - 6,451 1,240,139 - - - 1,246,590
Issuance of 3,618,750 shares of
common stock in connection with
private placements, net.......... - 36,187 5,794,931 - - - 5,831,118
Issuance of 27,586 shares of common
stock in connection with a
research agreement............... - 275 96,279 - - - 96,554
Foreign currency translation.......... - - - - (20,656) - (20,656)
Net loss.............................. - - - (18,086,591) - - (18,086,591)
----------------------------------------------------------------------------------------------------------------------------------
Balance July 31, 1995 $2,600 $296,863 $104,429,951 ($93,641,274) $224,248 ($1,288,780) $10,023,608
==================================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Financial Statements .
(4)
<PAGE> 7
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
July 31,
1995 1994
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................................... ($18,086,591) ($4,332,870)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization expense......................................... 474,021 464,754
Unrealized foreign currency transaction gain.................................. (32,861) (45,685)
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........................................... (4,864,947) 4,350,414
-------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (13,506,141) 786,613
-------------------------------------------------------------------------------------------------------------------------
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............................................... 42,870 -
Purchase of furniture, equipment and
leasehold improvements.......................................................... (730,337) (536,326)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 46,818 172,989
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Cash flows from financing activities:
Cash received from ETech investors............................................... 3,995,732 -
Net proceeds from issuance of common stock....................................... 7,077,707 84,044
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Net cash provided by financing activities 11,073,439 84,044
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-------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash.................................... (150,755) 1,050,881
-------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents............................... (2,536,639) 2,094,527
Cash and cash equivalents, beginning of period..................................... 8,094,075 5,886,170
-------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $5,557,436 $7,980,697
=========================================================================================================================
</TABLE>
(continued)
(5)
<PAGE> 8
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
Changes in assets and liabilities, net July 31,
1995 1994
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Increase) decrease in prepaid expenses and
other current assets........................................................... ($330,795) $277,149
Increase in inventory............................................................ (166,426) (2,349,501)
Increase in receivables.......................................................... (1,400,379) (2,644)
(Increase) decrease in other assets.............................................. (262,958) 85,589
(Decrease) increase in accounts payable
and accrued expenses........................................................... (845,388) 424,548
Increase in other long term liabilities.......................................... 163,222 -
(Decrease) increase in deferred contract revenue................................. (2,022,223) 5,915,273
-------------------------------------------------------------------------------------------------------------------------
Changes in assets and liabilities, net ($4,864,947) $4,350,414
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes To Unaudited Consolidated Financial Statements.
(6)
<PAGE> 9
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 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 July 31, 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 and
thereafter, the Company expects that revenues from research and
development and licensing 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 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, it
will further curtail operating expenses.
7
<PAGE> 10
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventory:
At July 31, 1995, inventory consisted of raw materials of $2,018,641,
work-in-progress of $2,559,363 and finished products of $2,184,131.
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. The acquisition of 71.2% of
ETech was accounted for under purchase accounting and in fiscal 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. 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 payments under the ETech Investor Notes. As a result of the
acquisition, 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. 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 nine months
ended July 31, 1995 and 1994 give effect to the acquisition of ETech
as though it had occurred on November 1, 1993 instead of December 31,
1994, the effective date of the transaction. The unaudited pro forma
results include adjustments to eliminate contract revenue and
management fees from ETech and to include all operating expense of
ETech as if ETech was a consolidated subsidiary on November 1, 1993.
The unaudited pro forma results of operations do not include the
nonrecurring charge to operations of approximately $9.0 million ($.37
per share) for the purchased technology.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Product sales, net $ 7,986,688 $7,638,157
Net loss (9,166,534) (11,373,795)
Net loss per share (.35) (.64)
===== =====
</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 on November 1, 1993, or the results which may
occur in the future.
(3) STOCKHOLDERS' EQUITY
During the first nine months of 1995, the Company sold 3,618,750
shares of its common stock in connection with various private
placements of common stock to institutional investors and issued
645,073 shares pursuant to the exercise of warrants to purchase the
Company's common stock for aggregate net proceeds of $7.1 million. In
connection with the exercise of the warrants, the Company canceled
100,000 warrants and 72,128 unit purchase options at exercise prices
ranging from $10 to $14 per share.
During fiscal 1995, 577,711 stock options at exercise prices ranging
from $1.4688 to $13.175 were canceled. In addition, employees were
given the right to exchange 1,450,393 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 grant date for the 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
scale-up of a manufacturing facility in Israel and certain working
capital and research and development financing over a three-year
period up to a maximum loan balance of $1.6 million. The equipment
loan of .5 million is payable over a 7 year period, the first two
years being interest only at a rate of 5.625% linked to the Israeli
CPI index and the working capital financing of $1.1 million payable
over five years with the first three years being interest only. The
interest rate on the working capital loan is Israeli prime (currently
15%) + 3.275%. The program also includes a grant of $.3 million.
9
<PAGE> 12
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Israeli government will guarantee 85% of the amount financed.
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 the Israeli line of credit and
has borrowed approximately $.1 million under the lease facility which
will be accounted for as a capital lease.
(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 agreed to provide $8.9 million
of funding to Ecogen Europe and Ecogen agreed to provide $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 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.
10
<PAGE> 13
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
PART I - ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three Months and Nine Months Ended July 31, 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 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 nine month results as a percentage of sales,
as well as the percentage change in dollar amounts compared to the prior
period:
<TABLE>
<CAPTION>
Nine Months Ended July 31
------------------------- Increase
1995 1994 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Product Sales, net 100% 100% 5%
Cost of Sales 60% 67% (6%)
Gross Profits 40% 33% 26%
Research & Development 83% 120% (27%)
Selling & Marketing 48% 40% 26%
General Administration 50% 63% (18%)
Other Income 34% 138% (74%)
</TABLE>
Product sales increased 5% from $7.6 million in 1994 to $8.0 million in 1995.
Other income decreased $7.8 million during the nine month period due
principally to lower contract revenue as a result of the fact that the Company
no longer records contract revenue from Etech due to the Company's acquisition
of 71% of 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. Total operating expenses exclusive of special
charges decreased $2.6 million. Net loss, exclusive of special charges
approximated $8.5 million ($.33 per share) during the first nine months of 1995
compared to $4.0 million ($.22 per share) in 1994.
NINE MONTHS ENDED JULY 31, 1995 AND 1994
Product Sales
Net product sales increased $.3 million (5%) for the nine months ended July 31,
1995 compared to the same period in 1994. The Bt product line achieved a $.6
million (or 12%) increase in sales. Bt sales were lower than expected due to
drought-like weather conditions in the Mississippi Delta causing lower insect
pressure. Pheromone products decreased $.2 million (or 6%) from the comparable
1994 period. In addition to the impact of the weather, 1995 pheromone 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 33% in 1994 in spite of the fact that sales of
pheromone product sales, which have the higher gross margin, decreased and that
product line has the higher gross margins. The increase in gross margins in
1995 reflects the continuing impact of improvements made to the Bt
manufacturing process late in 1994.
Operating Costs
Research and development costs decreased $2.5 million or (27%) 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 26% as a result of costs
associated with new product introductions. General and administration expenses
decreased 18% as a result of cost containment measures taken in late 1994 and
in 1995.
Total operating expenses were $24.0 million in the nine months ended July 31,
1995 compared to $17.4 million in 1994. The increase in operating expenses is
due to special charges of $9.5 million in 1995. Operating expenses exclusive
of special charges decreased 15% from $17.0 million in the nine month period in
1994 to $14.5 million in the comparable period in 1995.
13
<PAGE> 16
Other Income
Other income, net decreased $7.8 million during the nine months ended July 31,
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 nine months of 1995 was $18.1 million (or $.70) per share
compared to $4.3 million (or $.24) per share in the same period in 1994. The
net loss exclusive of special charges was $8.5 (or $.33) per share in 1995
compared to $4.0 million (or $.22) per share in 1994. The increase in net loss
exclusive of special charges is due to the decrease in research contract
revenue partially offset by lower operating costs.
THREE MONTHS ENDED JULY 31, 1995 AND 1994
Product Sales
Net product sales increased $.1 million (or 4%) in the current quarter. Bt
product sales decreased 15% and pheromone product sales increased 62%. As
mentioned previously, Bt product sales were negatively impacted by, among other
things, weather conditions during the third quarter in the Mississippi Delta
where extremely dry conditions caused lower insect pressure. Gross margins
increased to 40% in 1995 from 25% in 1994. This increase reflects the
continued effect of improvements in manufacturing costs in 1995.
Operating Expenses
Research and development costs decreased $.6 million or 24% 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 19% and general and
administration expenses decreased 13% for the same reasons as described above.
Total operating expenses in the 1995 quarter were $5.0 million compared to $5.6
million in the prior period.
Other Income
Other income, net, decreased $3.1 million in the third quarter of 1995 due to
lower research contract revenue. It is expected that research contract
revenues will continue to decline as the Company makes the transition from a
research company to a product driven commercial business.
Net loss for the third quarter of 1995 was $3.1 million compared to $1.0
million in the same period in 1994. The increase is attributable to the
decrease in research contract revenue partially offset by lower operating
costs.
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 the
Company's business, 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.
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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 and the expected restructuring
of the Research and Development Agreement with 3A (such transactions are
described in the Notes to Unaudited Consolidated Financial Statements).
At July 31, 1995, the Company had cash and liquid investments of $5.6 million,
a net decrease of $3.3 million from October 31, 1994. The decrease was
principally due to $13.5 million of cash expenditures during the current period
for operations including cash expended to fund inventory production and
receivable increases offset by $7.1 million of cash received from the sale of
equity securities and $4.0 million received from ETech investors.
To date, the Company has not generated positive cash flows from operations.
In order to meet its capital and liquidity requirements for the
next fiscal year, the Company will continue to need to add to its current cash
position and further reduce its operating expenses. During fiscal 1994, the
Company initiated certain measures to conserve cash and is continuing to take
other steps to streamline operations and reduce costs during 1995. To date
these have included personnel reductions in the Company's administrative, and
research and development functions resulting in part from the Company's
scheduled reduction of research and development under the ETech programs and the
closing of the Company's Australian nematode production facility. The Company
believes that these and other contemplated 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 equity 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. 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.
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The Company has commitments for capital expenditures of approximately $2.0
million of which $.6 million has been funded for advance deposits relating to
certain production equipment needs. The Company has obtained a lease facility
to finance such equipment cost subject to a 15% security deposit. Further, the
Company expects to spend approximately $.7 million on manufacturing equipment
in Israel in 1995 and 1996. 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 and
research and development financing over a three-year period up to a maximum
loan balance of $1.6 million. The equipment loan of $.5 million is payable
over a 7 year period, the first two years being interest only at a rate of
5.625% linked to the Israeli CPI index and the working capital financing of
$1.1 million payable over five years with the first three years being interest
only. The interest rate on the working capital loan is Israeli prime
(currently 15%) + 3.275%. The program also includes a grant from the Israeli
Government of $.3 million.
ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
The increase of $1.4 million in receivables from October 31, 1994 is due to
seasonality of product sales. The increase of $.3 million in prepaid expenses
and other current assets relates principally to interest receivable and
prepaid taxes in Italy. The decrease in deferred contract revenue of $2.1
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 $1.7 million principally 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.
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PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1995 Annual Meeting of Stockholders of Ecogen Inc. was held at Langhorne,
Pennsylvania on May 10, 1995.
The following persons were elected to serve as directors of the Company until
the next annual meeting and until their respective successors are elected and
qualify: Patrick Owen Burns, John E. Davies, Jack D. Early, Lowell N. Lewis and
James P. Reilly, Jr.
In addition, the appointment of KPMG Peat Marwick LLP as independent auditors
to audit the Company's books and records for the fiscal year 1995 was ratified.
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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.
Date: September 19, 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)
