<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, 1997
Commission File Number 1-9579
Ecogen Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2487948
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2005 Cabot Boulevard West, Langhorne, Pennsylvania 19047
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (2l5) 757-l590
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 June 1, l997
----- ---------------------------
Common Stock, $.01 par value 7,992,072
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ECOGEN INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Consolidated Condensed Balance Sheets as of
April 30, l997 and October 3l, l996......................................1
Unaudited Consolidated Condensed Statements of Operations
for the three months and six months ended April 30, 1997
and 1996 ................................................................2
Unaudited Consolidated Condensed Statement of Stockholders'
Equity for the six months ended April 30, l997...........................3
Unaudited Consolidated Condensed Statements of Cash Flows
for the six months ended April 30, l997 and l996.........................4
Notes to Unaudited Consolidated Condensed Financial
Statements...............................................................6
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition...................................10
PART II - OTHER INFORMATION
Item 2 - Changes in Securities.............................................15
Item 4 - Submission of Matters to Vote of Securities Holders...............15
Item 6(a) - Exhibits.......................................................15
<PAGE> 3
PART I - FINANCIAL INFORMATION
ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets APRIL 30, OCTOBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash, cash equivalents and temporary investments .......................... $ 1,793,620 $ 9,611,111
Contract and trade receivables, net ........................................ 2,470,732 1,783,605
Inventory .................................................................. 8,053,662 6,854,472
Prepaid expenses and other current assets .................................. 582,419 493,519
------------- -------------
Total current assets .................................................. $ 12,900,433 18,742,707
------------- -------------
Plant and equipment, net ...................................................... 4,650,034 4,569,327
Intangible and other assets, net .............................................. 770,339 549,210
------------- -------------
$ 18,320,806 $ 23,861,244
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses .................................. $ 4,191,121 $ 5,172,090
Deferred contract revenue ................................................ 711,250 1,101,367
------------- -------------
Total current liabilities ........................................... $ 4,902,371 6,273,457
------------- -------------
Long-term debt ................................................................ 1,100,835 1,297,469
Other long-term obligations ................................................... 1,788,392 1,887,078
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized 7,500,000 shares
Series B convertible preferred stock - 350,000 shares authorized;
none and 5,834 shares issued and outstanding in 1997 and 1996,
respectively (liquidation value $20 per share) ..................... -- 58
Common stock, par value $.01 per share; authorized 42,000,000 shares;
issued 8,115,335 and 7,928,171 shares in 1997 and 1996,
respectively.......................................................... 81,153 79,282
Additional paid-in capital ............................................... 117,927,266 117,548,065
Accumulated deficit ....................................................... (106,015,612) (101,741,946)
Other ...................................................................... (1,463,599) (1,482,219)
------------- -------------
Total stockholders' equity .......................................... 10,529,208 14,403,240
------------- -------------
$ 18,320,806 $ 23,861,244
============= =============
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
1
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ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net .............. $ 2,661,913 $ 3,213,031 $ 3,574,015 $ 3,920,064
Contract revenue .................. 713,762 618,104 1,424,063 691,971
License and other income .......... -- 200,000 -- 5,013,049
Interest income, net .............. 56,215 246,923 117,665 278,810
----------- ----------- ----------- -----------
Total revenues ................. 3,431,890 4,278,058 5,115,743 9,903,894
----------- ----------- ----------- -----------
Costs and expenses:
Cost of products sold ............. 1,778,014 1,858,863 2,463,524 2,315,622
Research and development:
Funded by third parties ......... 346,722 305,859 587,529 379,726
Self funded ..................... 1,042,686 955,781 2,237,130 1,903,339
Selling, general and administrative 2,313,537 1,976,423 4,101,226 3,681,582
----------- ----------- ----------- -----------
Total costs and expenses ...... 5,480,959 5,096,926 9,389,409 8,280,269
----------- ----------- ----------- -----------
Net income (loss) ................... ($2,049,069) ($ 818,868) ($4,273,666) $ 1,623,625
=========== =========== =========== ===========
Net income (loss) per common share
available to common stockholders . ($ 0.26) ($ 0.12) ($ 0.54) $ 0.23
=========== =========== =========== ===========
Weighted average number of common
shares outstanding ............... 7,929,000 7,148,000 7,886,000 6,594,000
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
2
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ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended April 30, 1997
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance November 1, 1996 ..................................... $ 58 $ 79,282 $ 117,548,065 ($101,741,946)
Conversion of 5,834 shares of Series B convertible
preferred stock to 44,030 shares of common stock ........ (58) 440 (382) --
Dividends on preferred stock ................................. -- 46 12,088 --
Issuance of 5,028 shares of common stock for employee benefits -- 25 (18,745) --
Issuance of 136,000 shares of common stock ................... -- 1,360 386,240 --
Net reduction in unrealized gain on securities ............... -- -- -- --
Net loss .................................................... -- -- -- (4,273,666)
------------- ------------- ------------- -------------
Balance April 30, 1997 ....................................... $ 0 $ 81,153 $ 117,927,266 ($106,015,612)
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
OTHER
STOCKHOLDERS'
EQUITY TOTAL
------------- -------------
<S> <C> <C>
Balance November 1, 1996 ..................................... ($ 1,482,219) $ 14,403,240
Conversion of 5,834 shares of Series B convertible
preferred stock to 44,030 shares of common stock ........ -- --
Dividends on preferred stock ................................. -- 12,134
Issuance of 5,028 shares of common stock for employee benefits 23,569 4,849
Issuance of 136,000 shares of common stock ................... -- 387,600
Net reduction in unrealized gain on securities ............... (4,949) (4,949)
Net loss .................................................... -- (4,273,666)
------------- -------------
Balance April 30, 1997 ....................................... ($ 1,463,599) $ 10,529,208
============= =============
</TABLE>
See Accompanying Notes To Unaudited Consolidated Condensed Financial Statements.
3
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ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................... ($ 4,273,666) $ 1,623,625
Adjustments to reconcile net income (loss) to net
cash provided by ( used in ) operating activities:
Depreciation and amortization expense ............... 186,240 221,967
Unrealized foreign currency transaction gain (loss). (1,627) 2,716
Changes in assets and liabilities, net .................. (3,389,539) (1,781,230)
------------ ------------
Net cash (used in) provided by operating activities ........... (7,478,592) 67,078
------------ ------------
Cash flows from investing activities:
Purchase of plant and equipment ........................... (146,622) (258,613)
------------ ------------
Net cash used in investing activities ........................ (146,622) (258,613)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of Series C preferred stock .. -- 2,793,943
Net proceeds from issuance of common stock .............. -- 9,470,299
Purchase of treasury stock ................................... -- (15,000)
Repayment of capital lease obligation ........................ (192,277) 0
------------ ------------
Net cash (used in) provided by financing activities ......... (192,277) 12,249,242
------------ ------------
Effect of foreign exchange rate changes on cash .......... -- (943)
------------ ------------
Net increase (decrease) in cash and cash equivalents ...... (7,817,491) 12,056,764
------------ ------------
Cash and cash equivalents, beginning of period ............ 9,611,111 1,775,213
------------ ------------
Cash and cash equivalents, end of period .................. $ 1,793,620 $ 13,831,977
============ ============
</TABLE>
(Continued)
4
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ECOGEN INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
Six months ended
April 30,
1997 1996
----------- -----------
<S> <C> <C>
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses and
other current assets ......................... $ 42,114 ($ 239,358)
Increase in inventory ........................... (1,267,110) (186,028)
Increase in receivables .......................... (687,127) (2,122,391)
Decrease in other assets ........................ 1,812 206,333
Decrease in accounts payable
and accrued expenses ......................... (993,764) (1,837,387)
(Decrease) increase in deferred contract revenue (390,117) 2,438,737
Decrease in other long-term liabilities ........... (95,347) (41,136)
----------- -----------
Changes in assets and liabilities, net .... ($3,389,539) ($1,781,230)
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
Noncash investing and financing activities:
- --------------------------------------------------------------------------------
In the first six months of fiscal 1996, debt totalling approximately
$1,178,000 was incurred by the Company for the acquisition of equipment.
In the first six months of fiscal 1997 and 1996, the Company issued 44,030
and 704,373 shares of its common stock upon conversion of the Company's
convertible preferred stock.
In the first six months of fiscal 1997 and 1996, the Company issued 1,700
and 18,621 shares of common stock, respectively, as dividends on the
Company's preferred stock.
In the first six months of fiscal 1997, the Company transferred 2,508
shares of treasury stock to outstanding shares pursuant to certain employee
benefit plans.
In the first six months of fiscal 1997, the Company issued 136,000 shares
of common stock in satisfaction of future royalty obligations.
================================================================================
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
5
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ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
APRIL 30, 1997 AND 1996
(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, l996 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 April 30, 1997 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. The Company has not yet achieved
profitable operations and there is no assurance that profitable operations,
if achieved, could be sustained on a continuing basis. Further, 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 $1,815 and none, respectively, in the six months and three months ended
April 30, 1997, and $103,128 and $50,153, respectively, in the six months
and three months ended April 30, 1996, 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 using the modified treasury stock method since the effect would
be anti-dilutive for both primary and fully diluted earnings per share.
(2) INVENTORY
At April 30, l997, inventory consisted of raw materials of $2,533,338,
work-in-progress of $2,002,412 and finished products of $3,517,912.
(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
("R&D") collaboration arrangement with Monsanto for the further development
of the Company's Bt gene library for a minimum of $10.0 million, of which
$2.5 million and $3.0 million was received in the first six months of 1997
and 1996, respectively and recorded as deferred contract revenue. Such
contract revenue will be recorded as earned under the terms of the
agreement. Under this agreement, the Company recognized as contract revenue
approximately $1.4 million and $.7 million in the six months ended April
30, 1997 and 1996, respectively. Subsequent to April 30, 1997, Monsanto
prepaid the remainder of its fiscal 1997 obligation under the R&D contract
representing the funding of expected research costs under the contract
through the first quarter of fiscal 1998.
(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. Further, Monsanto has
the right to terminate the R&D contract upon the occurrence of certain
events involving a change in control of the Company or a sale of
substantially all of the assets of the Company as defined in the agreement.
(4) LONG-TERM DEBT
The Company has a $2.1 million line of credit for leasing of production
equipment. At April 30, 1997, the Company had borrowed approximately $1.9
million, respectively, under the line of credit. The Company is required to
pay interest only until the equipment is delivered and accepted at which
time the notes are converted to capital lease obligations.
In July 1996, the Company established a two year revolving working capital
line of credit with a commercial bank for up to $5,000,000. Borrowings
under this line are required to be fully collateralized by certain of the
Company's investments. As of April 30, 1997 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"). All
of the Series C Preferred Stock has been converted into shares of the
Company's Common stock in accordance with its terms.
(Continued)
8
<PAGE> 11
ECOGEN INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
STOCKHOLDERS' EQUITY (CONTINUED)
During the first six months of fiscal 1997 and 1996, the Company issued
44,030 and 704,373 shares, respectively, of its common stock upon
conversion of the Company's Series B Convertible Preferred Stock and Series
C Convertible Preferred Stock. Further, in the first six months of fiscal
1997 and 1996, the Company issued 1,700 and 18,621 shares, respectively, of
its common stock in payment of dividends on its preferred stock.
COMMON STOCK
In January 1996, the shareholders 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.
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 April 30, 1997, 92,000 shares have been purchased in the open
market pursuant to this program.
In December 1996, the Board of Directors granted the Company's U.S.
employees, excluding officers, the right to exchange 224,360 options at
exercise prices from $2.75 to $15.63 for new options at an exercise price
of $2.56, the fair market value at the new grant date. The new options
generally vest over a three year period.
In April 1997, the Company issued 136,000 unregistered shares of its common
stock in satisfaction of a royalty obligation. In exchange for the common
stock the Company also was assigned certain patents and patent
applications. In connection therewith, the Company recorded a prepaid
royalty of $387,600 during the second quarter of 1997. The holder of the
shares has certain demand and piggyback registration rights with respect to
the shares of common stock.
9
<PAGE> 12
ECOGEN INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS AND SIX MONTHS ENDED APRIL 30, 1997 AND 1996
OVERVIEW
For the first six months of fiscal 1997, total revenues decreased $4.8 million
from $9.9 million in fiscal 1996 to $5.1 million in fiscal 1997, due to a
nonrecurring upfront fee from the Monsanto Company recorded in the first quarter
of fiscal 1996. Product sales decreased 9% from $3.9 million for the six months
ended April 30, 1996 to $3.6 million for the six months ended April 30, 1997.
For the six months ended April 30, 1997, the Company reported a net loss of
($4.3) million or ($.54) per share compared to net income of $1.6 million or
$.23 per share in the comparable period in fiscal 1996 on weighted average
shares of 7.9 million and 6.6 million, respectively, in fiscal 1997 and 1996.
The difference between the net loss of ($4.3) million for the six month period
ended April 30, 1997 and the net income of $1.6 million for the same period in
fiscal 1996 is principally the $4.8 million in other revenue recognized in
January 1996 from the Company's strategic alliance with Monsanto Company
("Monsanto") and increased operating costs.
SIX MONTHS ENDED APRIL 30, 1997 AND 1996
REVENUES
Net product sales decreased $.3 million or 9% to $3.6 million in the first six
months of fiscal 1997 compared with $3.9 million in the comparable period in
fiscal 1996. Sales of the Company's Bt product line, representing 46% of total
sales, decreased 30% due to decreased volume in the first six months of fiscal
1997 from the comparable period in 1996 principally as a result of lower sales
of Condor, a Bt bioinsecticide for the cotton market, caused by a delay in
planting cotton due to unfavorable weather conditions and lower cotton acreage
available for sprayable Bt products due to increased usage of Bt cotton seeds.
Pheromone product sales, representing 34% of total sales, decreased 8%
principally due to decreased sales of NoMate PBW for control of pink bollworm in
the cotton market, partially offset by sales of the Company's new NoMate OLR
product for control of the omnivorous leafroller in vine and tree fruits.
Biofungicide product sales, representing 20% of total sales increased 164% due
to increased volume of Ecogen's two biofungicide products, Aspire and AQ10. The
minor shortfall in product sales during the first six months of fiscal 1997 is
not expected to have a major impact on the Company's ability to grow product
sales in 1997. The Company anticipates stronger sales during the second half of
fiscal 1997 as it launches its new products into the fruits and vegetables
market.
Other revenues decreased $4.4 million in the current period, due primarily to
$4.8 million in nonrecurring upfront fees recognized in the first six months of
fiscal 1996 pursuant to the Company's
10
<PAGE> 13
REVENUES (CONTINUED)
strategic alliance with Monsanto partially offset by higher research contract
revenues from Monsanto in the first six months of fiscal 1997. Research
contract revenues increased from $.7 million to $1.4 million in the first half
of fiscal 1997 when compared to the same period in 1996, reflecting the fact
that fiscal 1997 represents the first full year of the Monsanto Research and
Development Contract.
COSTS AND EXPENSES
Cost of products sold increased 6% due to increased costs for, among other
things, raw materials etc. Gross margins decreased to 31% in 1997 compared to
41% in 1996. This decrease was due primarily to changes in product mix and
higher costs on initial production of new products.
Research and development costs increased $.5 million or 24% principally as a
result of increased process development costs for CRYMAX and Aspire, two of the
Company's new products. After the announcement of manufacturing problems
associated with equipment design failures, the Company began working on
developing alternative processes for the manufacturing of its new water
dispersible granule products. An alternative process is now in full scale
commercial production for both products. Selling, general and administration
expenses increased $.4 million or 11% primarily as a result of planned higher
marketing and promotional expenses including costs associated with significant
expansion to the Company's field sales force at the end of fiscal 1996, as the
Company aggressively launches several new products into the fruits and
vegetables market.
Net loss for the six months ended April 30, 1997 was ($4.3) million, compared to
net income of $1.6 million for the same period in 1996. Net loss per share was
($.54), compared to net income per share of $.23 on weighted average shares
outstanding of 7.9 million and 6.6 million, respectively, in the first six
months of fiscal 1997 and 1996. Excluding the Monsanto nonrecurring upfront
payment in fiscal 1996, the net loss for the first half increased from ($3.2)
million in fiscal 1996, compared to ($4.3) million in fiscal 1997 principally
due to increased operating costs.
THREE MONTHS ENDED APRIL 30, 1997 AND 1996
REVENUES
Net product sales decreased 17% to $2.7 million compared with $3.2 million in
the second quarter of 1996, due primarily to a decrease in Bt product sales
resulting from the Company's shift in strategic direction with less dependence
on the cotton market for sprayable Bt products to the Company's focus on the
fruits and vegetables market where the lion share of products are purchased
and applied later in the year. Sales of the Company's Bt product line,
representing 43% of total sales, decreased 40% due primarily to decreased volume
in the second quarter of fiscal
11
<PAGE> 14
REVENUES (CONTINUED)
1997 from the comparable period in 1996. Pheromone product sales, representing
39% of total sales in the second quarter of fiscal 1997, remained substantially
consistent with 1996. Lower sales of NoMate PBW, for control of pink bollworm
in cotton, and a decrease in government contracts for trap and lure products,
were substantially offset by initial sales of NoMate OLR, for control of
omnivorous leafroller on grapes and kiwi. Biofungicide sales, representing 18%
of total sales in the second quarter of fiscal 1997, increased 76% due to
increased volume over the same period in 1996.
Other revenues decreased $.3 million in the current period, due primarily to
certain upfront fees from Decco in 1996 and lower interest income resulting from
lower cash balances in fiscal 1997.
COSTS AND EXPENSES
Cost of products sold decreased 4%. Gross margins decreased to 33% in 1997
compared to 42% in 1996. This decrease was due primarily to changes in product
mix and higher costs on initial production of new products.
Research and development costs increased $.1 million or 10% principally as a
result of start-up costs associated with process development for CRYMAX(TM) and
Aspire, two of the Company's new products. Selling, general and administration
expenses increased $.3 million or 17% primarily as a result of higher marketing
and promotional costs.
Net loss for the three months ended April 30, 1997 was ($2.0) million, compared
to net loss of ($.8) million for the same period in 1996. Net loss per share for
the three months ended April 30, 1997 was ($.26), compared to net loss per share
of ($.12) on weighted average shares outstanding of 7.9 million and 7.1 million,
respectively, in the second quarter of fiscal 1997 and 1996.
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 through 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, 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
12
<PAGE> 15
SEASONALITY OF BUSINESS (CONTINUED)
may result in substantial variations in quarter-to-quarter financial results.
Product sales from year-to-year and quarter-to-quarter 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
At April 30, 1997, the Company had cash and liquid investments of $1.8 million,
representing a net decrease of $7.8 million from October 31, 1996. The decrease
was due to $7.5 million of cash used in operations, $.1 million used for capital
expenditures and $.2 million for repayment of capital lease obligations for the
purchase of equipment. Cash used in operations during the six months ended April
30, 1997 principally funded the net loss of $4.3 million, an increase in
receivables of $.7 million, an increase in inventory of $1.3 million and a
reduction in accounts payable and accrued expenses of $1.0 million.
To date, the Company has not generated positive cash flow from operations. The
Company has financed its working capital needs primarily through private and
public offerings of equity securities, research contract revenues, license and
other fees and product sales. The Company believes that its existing working
capital and cash flows generated from total revenues in 1997 should be
sufficient to meet its capital and liquidity requirements for fiscal 1997 based
on reduced spending levels. The Company will need additional financing to
support current levels of product development and commercialization over the
short-term. There is no assurance that such financing will be available on
terms acceptable to the Company or at all. 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 sector generally, competitive conditions in the
agricultural pest control market, and access to capital markets that can
provide the Company with the resources necessary to fund its strategic
priorities. Over the long term, the Company's liquidity is dependent on market
acceptance of its products and technology.
13
<PAGE> 16
ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Inventory increased $1.3 million as a result of building inventories for sales
in the second half of fiscal 1997. Trade receivables increased $.7 million due
to the seasonality of sales. Accounts payable and accrued expenses
decreased $1.0 million due to timing of payments to vendors and refunds paid to
distributors in the first quarter of fiscal 1997 for product returns in the
fourth quarter of fiscal 1996. Deferred contract revenue decreased $.4 million
during the six months ended April 30, 1997 due to amounts earned under the
Monsanto Research and Development Agreement relating to certain Bt technology
for use in plants.
In late February 1997 the Financial Accounting Standards Board issued FASB
Statement No. 128 "Earnings per Share". The Company is beginning to assess the
effect of this statement but does not believe the statement will have
significant impact because the Company's common stock equivalents are presently
anti-dilutive and therefore are excluded from earnings per share calculations.
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 over the next several weeks and
months. These products, some of which utilize new formulations, 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 may not be successfully
incorporated into the manufacturing process in time to meet targeted sales
opportunities. Additional risks and uncertainties include: (i) the market
acceptance of the Company's current and newly introduced products; (ii) the
efficacy, pricing, ease of use and performance of the Company's products; (iii)
the successful development, registration, commercialization and marketing of
technologically advanced new products; (iv) the continued and uninterrupted
supply of the Company's products from third party toll manufacturers and the
continued financial viability of such manufacturers; (v) 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 (vi) the
ability of the Company to fund its strategic priorities through operations or
access to capital markets.
14
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 2(c): Changes in Securities
In April 1997, the Company issued 136,000 unregistered shares of its
common stock to PruTech Research & Development Partnership II ("PruTech") in
satisfaction of a royalty obligation of the Company to PruTech through fiscal
2005. In exchange for the common stock, the Company also was assigned certain
patents and patent applications. In connection with the transaction, the
Company recorded a prepaid royalty of $387,000, calculated based on the
estimated fair value of the unregistered shares, during the second quarter of
1997. PruTech has certain registration rights with respect to the shares of
common stock. The shares were issued to PruTech in reliance upon the exemption
from securities registration afforded by Rule 506 under Regulation D under the
Securities Act of 1933, as amended.
ITEM 4: Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of the Stockholders on March 5, 1997, at
which time matters were submitted to a vote of the stockholders and were
approved:
I. Election of John E. Davies, Jack D. Early, Esteban A. Ferrer, Lowell N.
Lewis, Mary E. Paetzold, James P. Reilly, Jr. and John R. Sutley to serve
on the Board of Directors of the Company until the next annual meeting.
II. Ratification of the appointment of KPMG Peat Marwick LLP as independent
auditors to audit the Company's books and accounts for the fiscal year
1997.
Item 6(a): Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of Ecogen Inc., filed
with the Secretary of State of the State of Delaware on
October 16, 1992. (Form 10-K for fiscal year ended December
31, 1992.)*
3.8 By-Laws of Ecogen Inc., as amended. (Form S-1 Registration
Statement.)*
10.125 Amendment No. 1 to Research and Development Agreement by and
between Monsanto Company and Ecogen Inc. dated May 22, 1997.
27 Financial Data Schedule
15
<PAGE> 18
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: June 16, 1997
ECOGEN INC.
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
16
<PAGE> 1
EXHIBIT 10.1
Amendment No. 1 to Research and Development Agreement by and between Monsanto
Company and Ecogen Inc. dated May 22, 1997.
17
<PAGE> 2
AMENDMENT NO. 1 TO
RESEARCH AND DEVELOPMENT AGREEMENT
This Amendment No. 1 to Research and Development Agreement ("Amendment") is
made as of May 22, 1997 by and between Monsanto Company, a Delaware corporation,
with its general offices at 800 North Lindbergh Boulevard, St. Louis, Missouri
63167 ("Monsanto"), and Ecogen Inc., a Delaware corporation having its principal
office at 2005 Cabot Boulevard West, Langhorne, PA 19047 ("Ecogen").
WITNESSETH
WHEREAS, Monsanto and Ecogen are parties to that certain Research and
Development Agreement dated as of January 24, 1996 (the "Original Agreement");
and
WHEREAS, Monsanto and Ecogen wish to amend the Original Agreement as set
forth herein;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
Monsanto and Ecogen agree as follows:
1. Capitalized terms used herein but not defined herein shall have the
respective meanings ascribed thereto in the Original Agreement.
2. On the date hereof, Monsanto is transferring to Ecogen, as an advance
payment, $1,424,000 of the funds scheduled to be disbursed by Monsanto to Ecogen
under the Research Budget during the third and fourth quarters of the Budget
Year currently in effect. Monsanto further agrees that if Monsanto shall elect,
in its sole discretion, but consistent with the Research Plan as determined by
the Supervisory Committee, to increase the aggregate amount of funds scheduled
to be disbursed by Monsanto to Ecogen under the Research Budget during the
Budget Year currently in effect, then Monsanto shall disburse such funds to
Ecogen within ten days following notification by Monsanto to Ecogen of such
election.
18
<PAGE> 3
3. Section 3.5 of the Original Agreement is hereby amended to insert the
phrase "and other than a termination of this Agreement by Monsanto pursuant to
Section 5.7 following a Change of Control (as hereinafter defined) of Ecogen"
immediately after the words "Section 5.3" appearing therein.
4. A new Section 5.7 is added to the Original Agreement to read as follows:
5.7 Termination of Agreement upon Change of Control. Notwithstanding anything
contained in this Agreement to the contrary, Monsanto shall have the right to
terminate this Agreement effective upon written notice of such termination from
Monsanto at any time following the occurrence of a Change of Control of Ecogen.
For purposes of this Agreement, the term "Change of Control" shall mean the
occurrence of any of the following events with respect to Ecogen: (i) there
shall be consummated (A) any merger, consolidation or combination involving
Ecogen in which Ecogen is not the continuing or surviving corporation, or
pursuant to which shares of Ecogen's voting stock would be converted in whole or
in part into cash (excluding any such transaction in which only fractional
shares are so converted to cash), or (B) any sale, lease, exchange or transfer
(in one transaction or a series of related transactions) of all or substantially
all of the assets of Ecogen, or (ii) any person, company, corporation or other
entity shall become the beneficial owner (within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934) of securities of Ecogen representing 50% or
more of the combined voting power of then outstanding securities ordinarily (and
apart from rights accruing in special circumstances) having the right to vote in
the election of directors, as a result of a tender or exchange offer, open
market purchases, privately negotiated purchases or otherwise. The parties
hereto agree that a sale, lease, exchange or transfer of all or substantially
all of the Intellectual Property Rights of Ecogen shall constitute a sale,
lease, exchange or transfer (as the case may be) of all or substantially all of
the assets of Ecogen for purposes hereof. The parties hereto further agree that
a sale, lease, exchange or transfer of Ecogen assets which does not include all
or substantially all of the Intellectual Property Rights of Ecogen shall not
constitute a sale, lease, exchange or transfer (as the case may be) of all or
substantially all of the assets of Ecogen for purposes hereof, unless after
giving effect to such transaction, Ecogen would be unable to pay its debts as
they become due, would become insolvent or would cease operations as a going
concern.
19
<PAGE> 4
IN WITNESS WHEREOF, each party has caused this Amendment to be executed by
its duly authorized representative effective on the date set forth first above.
MONSANTO COMPANY ECOGEN INC.
By:/s/ Derek K. Rapp By:/s/ James P. Reilly, Jr.
--------------------------- -------------------------------
Name: Derek K. Rapp Name: James P. Reilly, Jr.
Title: Director, Mergers Title: Chairman and Chief
and Acquisitions Executive Officer
20
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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