<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, 1996
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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 .
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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 September 1, l996
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Common Stock, $.01 par value 7,841,541
<PAGE> 2
ECOGEN INC.
INDEX
<TABLE>
<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Consolidated Condensed Balance Sheets as of
July 31, l996 and October 3l, l995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Unaudited Consolidated Condensed Statements of Operations
for the three months and nine months ended
July 31, l996 and l995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Unaudited Consolidated Condensed Statement of Stockholders'
Equity for the nine months ended July 31, l996 . . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Condensed Statements of Cash Flows
for the nine months ended July 31, l996 and l995 . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Unaudited Consolidated Condensed Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II - OTHER INFORMATION
Item 6(a) - Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
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ASSETS JULY 31, OCTOBER 31,
1996 1995
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<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $11,579,340 $ 1,775,213
Inventory............................................................................ 6,278,343 6,345,452
Contract and trade receivables....................................................... 3,673,195 733,146
Prepaid expenses and other current assets............................................ 173,755 145,770
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Total current assets 21,704,633 8,999,581
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Plant and equipment, net................................................................ 4,131,959 2,768,318
Intangible and other assets, net........................................................ 460,440 603,600
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$26,297,032 $12,371,499
==============================================================================================================================
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Liabilities and Stockholders' Equity
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Current liabilities:
Accounts payable and accrued expenses................................................. $2,528,601 $4,077,095
Deferred contract revenue............................................................. 1,813,695 43,550
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Total current liabilities 4,342,296 4,120,645
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Long-term debt.......................................................................... 1,703,447 619,978
Other long-term obligations............................................................. 2,119,896 2,123,489
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized 7,500,000 shares
Series B convertible preferred stock - 350,000 shares authorized;
5,834 and 35,000 shares issued and outstanding in 1996 and 1995,
respectively (liquidation value $20 per share)................................. 58 350
Series C convertible preferred stock - 122,000 shares authorized;
20,000 shares and none issued and outstanding in 1996 and 1995, respectively
(liquidation value $25 per share).............................................. 200 -
Common stock, par value $.01 per share; authorized 42,000,000 shares;
issued 7,698,675 and 5,978,542 shares in 1996 and 1995, 76,987 59,785
Additional paid-in capital.......................................................... 117,537,864 105,343,444
Accumulated deficit.................................................................. (98,081,682) (98,878,279)
Foreign currency translation adjustment.............................................. 121,184 270,867
Treasury stock, at cost (85,656 and 36,156 shares in 1996 and 1995,
respectively)...................................................................... (1,523,218) (1,288,780)
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Total stockholders' equity 18,131,393 5,507,387
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$26,297,032 $12,371,499
==============================================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial
Statements.
1
<PAGE> 4
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
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THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Revenues:
Product sales, net..................... $4,592,207 $3,374,176 $8,512,271 $ 7,986,688
Research contract revenues............. 772,163 490,020 1,464,134 2,497,283
License fees and other income.......... - - 5,013,049 -
Interest Income........................ 179,684 98,553 458,494 250,148
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Total revenues 5,544,054 3,962,749 15,447,948 10,734,119
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Costs and expenses:
Cost of products sold.................. 2,816,150 2,040,612 5,131,772 4,800,026
Research and development:
Funded by third parties.............. 251,311 150,664 631,037 1,522,952
Self funded.......................... 878,485 1,776,204 2,781,824 5,151,683
Selling, general and administrative.... 2,308,436 3,105,740 5,990,018 7,802,855
Special charges........................ - - - 9,543,194
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Total costs and expenses 6,254,382 7,073,220 14,534,651 28,820,710
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- ---------------------------------------------------------------------------------------------------
Net income (loss) ($710,328) ($3,110,471) $ 913,297 ($18,086,591)
===================================================================================================
Net income (loss) per common share....... ($0.09) ($0.54) $0.11 ($3.49)
===================================================================================================
Weighted average number of
common shares outstanding................ 7,627,000 5,759,000 6,941,000 5,181,000
===================================================================================================
</TABLE>
See Accompanying Notes to Unaudited Consolidated Condensed Financial
Statements.
2
<PAGE> 5
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended July 31, 1996
<TABLE>
<CAPTION>
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CONVERTIBLE ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT
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<S> <C> <C> <C> <C>
Balance November 1, 1995 $350 $59,785 $105,343,444 ($98,878,279)
Issuance of 122,000 shares of Series C
convertible preferred stock in connection
with a private placement, net ................ 1,220 - 2,792,723 -
Issuance of 943,397 shares of common stock,
net............................................ - 9,434 9,325,831 -
Conversion of 29,166 shares on Series B
convertible preferred stock to 122,313 shares
of common stock................................ (292) 1,223 (931) -
Conversion of 102,000 shares on Series C
convertible preferred stock to 633,871
shares of common stock......................... (1,020) 6,339 (5,319) -
Dividends on preferred stock..................... - 206 82,116 (116,700)
Purchase of 49,500 shares of common stock for
Treasury....................................... - - - -
Foreign currency translation..................... - - - -
Net income....................................... - - - 913,297
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BALANCE JULY 31, 1996 $258 $76,987 $117,537,864 ($98,081,682)
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
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TREASURY
FOREIGN STOCK
CURRENCY AT
TRANSLATION COST TOTAL
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<S> <C> <C> <C>
Balance November 1, 1995 $270,867 ($1,288,780) $5,507,387
Issuance of 122,000 shares of Series C
convertible preferred stock in connection
with a private placement, net ................ - - $2,793,943
Issuance of 943,397 shares of common stock,
net............................................ - - 9,335,265
Conversion of 29,166 shares on Series B
convertible preferred stock to 122,313 shares
of common stock................................ - - -
Conversion of 102,000 shares on Series C
convertible preferred stock to 633,871
shares of common stock......................... - - -
Dividends on preferred stock..................... - - (34,378)
Purchase of 49,500 shares of common stock for
Treasury....................................... - (234,438) (234,438)
Foreign currency translation..................... (149,683) - (149,683)
Net income....................................... - - 913,297
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BALANCE JULY 31, 1996 $121,184 ($1,523,218) $18,131,393
==================================================================================================
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial
Statements
3
<PAGE> 6
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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NINE MONTHS ENDED
JULY 31,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................................... $ 913,297 ($14,976,120)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization expense............................ 323,736 326,246
Unrealized foreign currency transaction gain (loss).............. (2,635) 19,913
Non cash portion of special charges.............................. - 8,878,806
Loss on sale of plant and equipment.............................. - 125,431
Changes in assets and liabilities, net................................ (2,647,139) (5,177,006)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (1,412,741) (10,802,730)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of temporary investments..................... - 734,285
Proceeds from sale of plant and equipment............................. - 43,823
Purchase of plant and equipment....................................... (510,232) (134,978)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (510,232) 643,130
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash received from Ecogen Technologies I Inc. investors............... - 3,555,736
Net proceeds from issuance of Series C preferred stock................ 2,793,943 -
Net proceeds from issuance of common stock............................ 9,335,266 5,317,274
Purchase of treasury stock............................................ (234,438) -
Repayment of capital lease obligation................................. (166,214) -
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,728,557 8,873,010
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- ---------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash (1,457) (399,065)
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Net increase (decrease) in cash and cash equivalents..................... 9,804,127 (1,685,655)
Cash and cash equivalents, beginning of period........................... 1,775,213 8,094,075
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $11,579,340 $6,408,420
=====================================================================================================================
</TABLE>
(Continued)
4
<PAGE> 7
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
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NINE MONTHS ENDED
JULY 31,
1996 1995
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<S> <C> <C>
Changes in assets and liabilities:
Increase in prepaid expenses and
other current assets................................ ($27,985) ($275,548)
Decrease (increase) in inventory....................... 67,109 (725,251)
Increase in receivables................................ (2,951,704) (2,605,931)
(Increase) decrease in other assets.................... 22,151 (572,578)
Decrease in accounts payable
and accrued expenses................................ (1,469,099) (15,286)
(Decrease) increase in other long-term liabilities..... (57,756) 670,328
Increase (decrease) in deferred contract revenue....... 1,770,145 (1,652,740)
- -----------------------------------------------------------------------------------------------
Changes in assets and liabilities, net ($2,647,139) ($5,177,006)
===============================================================================================
</TABLE>
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Noncash investing and financing activities:
- --------------------------------------------------------------------------------
During the first nine months of 1996, debt totalling approximately $1,075,000
was incurred by the Company for the acquisition of production equipment.
During the first nine months of 1996, the Company issued 20,552 shares of
common stock as dividends on the Company's preferred stock.
================================================================================
See Accompanying Notes To Unaudited Consolidated Condensed Financial
Statements.
5
<PAGE> 8
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JULY 31, 1996 AND 1995
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION:
The consolidated condensed 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.
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 l0-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
Company's October 31, l995 consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K.
The results of operations for the interim period ended July 31, 1996 are
not necessarily indicative of the operating results for the full year.
OPERATIONS:
The Company is a biotechnology company specializing in the development
and marketing of environmentally compatible products for the control of
pests in agricultural and related markets. Prior to fiscal 1996, the
Company had not achieved profitable operations. During the first nine
months of fiscal 1996, the Company reported net income of $.9 million,
however, cash of approximately $1.4 million was used in operations
principally as a result of an increase in trade receivables. There is no
assurance that profitable operations can be sustained on a continuing
basis or that operations will generate positive cash flows. The
Company's future operations are dependent, among other things, on the
success of the Company's commercialization efforts and market acceptance
of the Company's products.
(Continued)
6
<PAGE> 9
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS, CONTINUED
NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share adjusted for preferred stock dividends
of $116,700 and $13,572, in the nine months and three months ended July
31, 1996, respectively, is computed using the weighted average number of
shares outstanding during the period. Common stock equivalents are not
included in the computation of weighted average shares outstanding since
the effect would be anti-dilutive for both primary and fully diluted
earnings per share using the modified treasury stock method.
(2) INVENTORY
At July 31, l996, inventory consisted of raw materials of $1,911,189,
work-in-progress of $1,611,488 and finished products of $2,755,666.
(3) MONSANTO TRANSACTION
In January 1996, the Company entered into an agreement with Monsanto
Company ("Monsanto") for an equity investment, purchase of technology and
joint research and development arrangement relating to the Company's
proprietary Bacillus thuringiensis ("Bt") technology for in-plant
applications (collectively, the "Monsanto Transaction"). The transaction
included (i) the acquisition by Monsanto of certain rights in the
Company's Bt technology for an aggregate purchase price of $5.0 million
in cash which was recorded as license and other income in the first
quarter of 1996; (ii) the sale by the Company to Monsanto of 943,397
shares of Common Stock at $10.60 per share for an aggregate purchase
price of $10.0 million in cash during the first quarter; and (iii) a
four-year research and development collaboration arrangement with
Monsanto for the further development of the Company's Bt gene library for
a minimum of $10.0 million, of which $3.0 million was received in the
first quarter of 1996 and was recorded as deferred contract revenue.
Such contract revenue will be recorded as earned under the terms of the
agreement. The Company recognized approximately $1.2 million and $.7
million in contract revenue under this agreement in the nine months and
three months ended July 31, 1996, respectively.
(Continued)
7
<PAGE> 10
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS, (CONTINUED)
(3) MONSANTO TRANSACTION, (CONTINUED)
As part of the agreement, Monsanto has agreed to maintain its ownership
position during the term of the research and development agreement and
Monsanto is prohibited, during the first three years following the
closing, from acquiring more than 25% of the Company's voting stock
without the Company's consent, except in certain circumstances primarily
related to a change of control of the Company. Monsanto was granted
certain demand and piggyback registration rights with respect to its
shares. In addition, Monsanto has a right of first refusal to purchase
securities of the Company so as to maintain its ownership percentage in
the Company except in certain circumstances defined in the applicable
agreement.
(4) LONG-TERM DEBT
The Company has obtained a $2.0 million line of credit to be used for the
leasing of production equipment. At July 31, 1996, the Company had
borrowed approximately $1,695,000 under the line of credit. The Company
is required to pay interest only until the equipment is delivered at
which time the notes are converted to a capital lease obligation. The
lease facility requires a 15% security deposit which has been made.
In July 1996, the Company established a two-year revolving-secured working
capital line of credit with a commercial bank for up to $5,000,000. As
of July 31, 1996, there have been no borrowings under this agreement.
(5) STOCKHOLDERS' EQUITY
PREFERRED STOCK
In November 1995, the Company raised $2.8 million, net of expenses, from
institutional investors from the private placement of 122,000 shares of
8% Series C Convertible Preferred Stock (the "Series C Preferred Stock").
Dividends are payable annually or at the time of redemption or conversion
in cash, shares of the Company's common stock or shares of Series C
Preferred Stock at the discretion of the Company. Holders of the Series
C Preferred Stock have certain limited voting rights. At the election of
the holders, the Series C Preferred Stock may be converted to
(Continued)
8
<PAGE> 11
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS, CONTINUED
STOCKHOLDERS' EQUITY, (CONTINUED)
shares of the Company's common stock, subject to adjustments for stock
splits and other adjustments, at predetermined discounts from the average
market price per share on the date of conversion. At any time after June
1, 1997, the Company may elect to convert the shares to common stock. At
any time after June 1, 1997, the Company may redeem the Series C
Preferred Stock at a predetermined premium to the original issuance
price. In the event of liquidation, the holders of the Series C
Preferred Stock have the right to $25.00 per share plus all accrued and
unpaid dividends.
During the first nine months of 1996 the Company issued 756,184 shares of
its common stock in exchange for 29,166 and 102,000 shares of the
Company's Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock respectively. Also 20,552 shares of the Company's common
stock were issued in payment of cumulative dividends at the time of
conversion.
COMMON STOCK
In January 1996, the shareholders of the Company approved an amendment to
the Company's Restated Certificate of Incorporation (the "Amendment")
which effected a one-for-five reverse stock split (the "Reverse Split")
of the Company's outstanding shares of common stock. All references to
numbers of shares, weighted average shares and loss per share amounts
except shares authorized, have been retroactively restated to give effect
to the Reverse Split.
In April 1996, the Company's Board of Directors authorized a program to
purchase up to 350,000 shares of the Company's common stock over a two
year period. As of July 31, 1996, 49,500 shares have been purchased in
the open market pursuant to this program.
(6) SPECIAL CHARGES
During 1995, the Company acquired approximately 70% of the outstanding
stock of Ecogen Technologies I Incorporated ("ETech") pursuant to which
the Company issued 822,240 shares of its common stock having a market
value of approximately $11.3 million. The acquisition of approximately
70% of ETech was accounted for under the purchase method of accounting
and
(Continued)
9
<PAGE> 12
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS, CONTINUED
(6) SPECIAL CHARGES, (CONTINUED)
in fiscal 1995 the Company recorded approximately $9.2 million as a
special charge to operations for the value of in-process research and
development acquired from ETech. Market feasibility and acceptance had
not yet been established with respect to the ETech research programs and
there was no assurance that the Company would be successful in its
commercialization efforts.
As a result of the acquisition, effective January 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 special charges recorded in 1995 also included approximately $.3
million relating to the shutdown of Ecogen Australia, the Company's
former wholly-owned research and development subsidiary in Australia,
representing principally severance costs, loss on disposal of equipment
and facilities costs after shutdown of operations, and other cost
containment programs.
The following unaudited pro forma results of operations for the nine
months ended July 31, 1995 give effect to the acquisition of ETech and the
disposition of the Company's interest in Ecogen Europe S.R.L., the
Company's former European majority-owned research subsidiary, as though
those transactions had occurred on November 1, 1994. The unaudited pro
forma results include adjustments to eliminate Ecogen Europe's operations
as a result of the Company's divestiture in October 1995. The pro forma
adjustments represent principally a reduction to contract revenues
interest income and research and development expense as if Ecogen Europe
was not a consolidated subsidiary on November 1, 1994. Further, the
unaudited pro forma results of operations exclude the 1995 nonrecurring
charge of $9.1 million for purchased technology for ETech.
Fiscal 1995
-----------
Total Revenues $ 9,326,956
Net Loss (9,416,269)
Net Loss per Share (1.82)
-----------
The unaudited 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, 1994, or the results which
may occur in the future.
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS AND NINE MONTHS ENDED JULY 31, 1996 AND 1995
OVERVIEW
For the first nine months of fiscal 1996, total revenues increased 44% from
$10.7 million in 1995 to $15.4 million in 1996. For the nine months ended July
31, 1996, the Company reported net income of $0.9 million or $.11 per share
compared to a net loss of ($18.1) million or ($3.49) per share in 1995 on
weighted average shares of 6.9 million and 5.2 million in 1996 and 1995,
respectively. The 1995 period included a special charge of $9.5 million (or
$1.84 per share) principally due to the write-off of in-process research and
development acquired from Ecogen Technologies I Incorporated ("ETech") and the
shutdown of Ecogen Australia. The dramatic improvement in net income exclusive
of special charges was due to a decrease of $5.1 million in operating expenses
exclusive of special charges as well as an increase in other income of
$4.2 million, principally as a result of the Company's research and development
strategic alliance with Monsanto Company ("Monsanto") announced earlier this
year.
NINE MONTHS ENDED JULY 31, 1996 AND 1995
REVENUES
Total revenues increased 44% in the nine months ended July 31, 1996 from $10.7
million to $15.4 million, principally as a result of the Company's research and
development strategic alliance with Monsanto. Net product sales increased 7%
or $.5 million for the nine month period ended July 31, 1996 compared to the
same period in 1995. Sales of the Company's Bt product line, representing 54%
of Company product sales, decreased 13% on lower sales volume due to lower
cotton acreage available for sprayable Bt insecticides. Sales of the pheromone
product line, representing 42% of total sales, increased 37% principally due to
increased volume, including initial international sales of NoMate(R) CM for the
control of codling moth on apples, and increased sales of insect trap and lure
products, pursuant to contracts with federal governmental entities. Sales of
biofungicide products, representing 5% of total sales for the nine month period,
increased as a result of initial sales of the Company's first two biofungicide
products, AQ10(R) and Aspire(TM), in fiscal 1996. The Company expects
increased product sales in the fourth quarter of fiscal 1996 compared to the
comparable quarter of 1995 due to initial sales of the Company's new CRYMAX
bioinsecticide, the first Bt using recombinant DNA for the vegetable market, and
sales of Aspire(TM) biofungicide, a new product introduced in 1996, should
impact our fiscal fourth quarter in the fruit and vegetable preharvest and
postharvest markets, for which the primary selling season begins in the fall.
11
<PAGE> 14
REVENUES, CONTINUED
Research contract revenues decreased $1.0 million in the current nine month
period, due primarily to the divestiture of Ecogen Europe S.R.L., the Company's
former majority-owned European research subsidiary. License fees and other
income increased $5.0 million principally as a result of the Company's research
and development strategic alliance with Monsanto. Interest increased
approximately $.2 million in fiscal 1996 as a result of the increase in funds
available for investment.
COSTS AND EXPENSES
Cost of products sold increased 7% due principally to the increase in product
sales. Gross margins remained constant at 40% for 1996 and 1995 primarily as a
result of a change in product mix caused by higher pheromone sales pursuant to
lower margin government contracts, and higher international sales which carry
lower margins. Overall gross margins of domestic Bt and pheromone sales and
biofungicide product sales continue to increase.
Research and development costs decreased $3.3 million or 49% and selling,
general and administration expenses decreased $1.8 million or 23%, principally
as a result of cost savings from restructuring decisions made by the Company in
1995, including the divestiture of Ecogen Europe, a reduction of research and
development personnel, and a reduction in outside consulting.
Net income for the first nine months of 1996 was $.9 million, or $.11 per
share, compared with a net loss of ($18.1 million) or ($3.49) per share in the
same period in 1995. The nine months of 1995 included special charges of $9.5
million principally due to the write-off of in-process research and
development, as a result of the Company's acquisition of a controlling interest
in ETech. Net income of $.9 million or $.11 per share in 1996 compares
favorably to the net loss exclusive of special charges of ($8.5 million) or
($1.65) per share in 1995 on weighted average shares of 6.9 million and 5.2
million in 1996 and 1995, respectively.
THREE MONTHS ENDED JULY 31, 1996 AND 1995
REVENUES
Total revenues increased 40% in the three months ended July 31, 1996 to $5.5
million, up from $4.0 million in the three months ended July 31, 1995. Net
product sales increased $1.2 million or 36% compared with $3.4 million in
the third quarter of 1995. Sales of the Company's Bt product line, representing
49% of total sales, increased 13% due to volume in the third quarter from the
same period in 1995 due to the introduction of Condor(R) XL for cotton and
other row crops in the Mississippi Delta and Texas, despite the drought in
Texas and low insect pressure in the Mississippi Delta. Pheromone product
sales, representing 49% of
12
<PAGE> 15
REVENUES, CONTINUED
total sales, increased 64% principally due to increased volume including
increased sales of NoMate PBW, for control of pink bollworm on cotton plants,
an increase in government contracts for trap and lure products and initial
international sales of NoMate CM, for the control of codling moth on apples.
In 1996, the Company recognized its first biofungicide sales, representing 2%
of total sales in the third quarter of fiscal 1996, as a result of the
introduction of both AQ10 and Aspire.
Other revenues increased $.4 million in the current period, due primarily to
increased research contract revenue of $.3 million recognized under the
Monsanto Research and Development Agreement and $.1 million higher interest
income.
COSTS AND EXPENSES
Cost of products sold increased 38% due principally to the increase in product
sales. Overall gross margins remained relatively constant at 39% in 1996
compared to 40% in 1995. This was due primarily to the changes in product mix
caused by higher pheromone sales of lower margin government contracts and
higher international sales which carry lower margins. Overall gross margins on
domestic Bt and pheromone sales and biofungicide product sales continue to
increase. The Company expects margins to be stronger in the fourth quarter due
to changes in product mix.
Research and development costs decreased $.8 million or 41% and selling,
general and administration expenses decreased $.8 million or 26% as a result of
costs savings realized from the restructuring decisions made by the Company in
1995, including the divestiture of Ecogen Europe and personnel reductions at
other locations.
Net loss for the three months ended July 31, 1996 was ($.7 million), a
reduction of 77% from a loss of ($3.1 million) in the same period in 1995. Net
loss per share for the three months ended July 31, 1996 was ($.09), a reduction
of 83% from a loss of ($.54) in the same period in 1995 on weighted average
shares outstanding of 7.6 million and 5.8 million in the third quarter of 1996
and 1995, respectively.
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 or failure to receive regulatory approvals prior to the
growing season may require additional field tests in subsequent growing
seasons, with resulting delays in product development and commercialization.
In addition,
13
<PAGE> 16
SEASONALITY OF BUSINESS, CONTINUED
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 which 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 contracts, product sales,
license fees and other income.
In January 1996, the Company completed a $25 million transaction with Monsanto,
which included $10 million from the sale of 943,397 shares of the Company's
common stock at $10.60 per share. Further, the Company sold 122,000 shares of
Series C Preferred Stock at $25 per share in a private placement to
institutional investors for aggregate net proceeds of $2.8 million. In
connection with the private placement, the Company issued warrants to purchase
77,877 shares of the Company's common stock at $7.30 per share exercisable for
five years.
To date, the Company has not generated positive cash flows from operations.
The Company believes that its existing working capital should be sufficient to
meet its capital and liquidity requirements for the immediate future. However,
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 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 pest control market, and access to capital
markets that can provide the Company with the resources necessary to fund its
strategic priorities.
At July 31, 1996, the Company had cash and liquid investments of $11.6 million,
a net increase of $9.8 million from October 31, 1995. The increase was due to
$11.7 million from financing activities principally due to net cash of $9.3
million received from the sale of equity securities to Monsanto and $2.8
million from the Series C Preferred Stock offering offset by the $1.4 million
cash used in operations and $.5 million cash used for investing activities for
the purchase of production equipment. Negative cash flows from operations
during the nine months ended July 31, 1996 of $1.4 million principally funded
an increase in accounts receivable, a reduction in accounts payable and accrued
expenses offset by an increase of $1.8 million in deferred
14
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
contract revenue, which represents advances received from Monsanto under a
Research and Development Agreement.
The Company had a $2.1 million line of credit to be used for the leasing of
production equipment. To date, approximately $1.9 million has been borrowed
under the line of credit. The Company has commitments for $.9 million of
capital expenditures as of September 1, 1996.
ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
The increase in contract and trade receivables of $2.9 million is the result of
the seasonality of product sales during the third quarter. The decrease of
$1.5 million in accounts payable and accrued expenses is due to timing of
payments to vendors. The increase in deferred contract revenue of $1.8 million
is due to advance payments received from Monsanto for research and development
to be performed during fiscal 1996 and 1997.
The discussion set forth in this document contains forward looking statements
that involve a number of risks and uncertainties that could cause actual results
to differ materially from expected results. The Company intends to market and
sell a number of newly introduced products. Some of these products utilize new
formulations which have not to date been produced on a commercial scale or
produced on a commercial scale that has been replicated. Certain of the
manufacturing processes for such products include newly developed equipment and
techniques which are being incorporated into commercial scale manufacturing
processes. Risks and uncertainties associated with the successful
commercialization of the products include: (i) the successful scale up of the
Company's manufacturing process in time to meet targeted sales opportunities;
(ii) the market acceptance of the Company's current and newly introduced
products; (iii) the efficacy, pricing, ease of use and performance of the
Company's products; (iv) the successful development, registration,
commercialization and marketing of technologically advanced new products; (v)
the continued and uninterrupted supply of the Company's products from third
party toll manufacturers and the continued financial viability of such
manufacturers; (vi) economic and environmental considerations which impact
agricultural crop production and agricultural crop protection including the
amount of acres of target crops planted, the cost and efficacy of competitive
products, weather conditions and the level of insect and disease infestation on
target crops, and (vii) the ability of the Company to fund its strategic
priorities through operations or access to capital markets.
15
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6(a): Exhibits
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
16
<PAGE> 19
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: September 13, 1996 By: /s/ James P. Reilly, Jr.
------------------------
James P. Reilly, Jr.
Chairman and
Chief Executive Officer
By: /s/ Mary E. Paetzold
------------------------
Mary E. Paetzold
Vice President and
Chief Financial Officer
17
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