================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: MARCH 31, 1996 Commission File Number: 0-19746
ECOSCIENCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction incorporation or organization)
04-2912632
(I.R.S. Employer Identification No.)
10 ALVIN COURT, EAST BRUNSWICK, NEW JERSEY 08816
(Address of principal executive offices,
including zip code)
908-432-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
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 May 10, 1996
----- ---------------------------
Common Stock, par value $.01 per share 9,342,177
Total Number of Sequentially Numbered Pages: 26 Exhibit Index on Page: 25
-1-
ECOSCIENCE CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 1996 and June 30, 1995 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 22
PART II. - OTHER INFORMATION 23
SIGNATURES 24
</TABLE>
-2-
ECOSCIENCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---- ----
(Unaudited) (Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 787 $ 481
Short-term investments.................................. 701 6,150
Restricted cash, cash equivalents and short-term investments 1,205 500
Accounts receivable, less reserves of $137 at
March 31, 1996 and $186 at June 30, 1995........... 1,555 1,961
Interest receivable..................................... 17 84
Inventories............................................. 1,838 1,525
Other current assets.................................... 225 498
---------- -----------
Total current assets............................... 6,328 11,199
---------- -----------
Property and equipment, net................................ 1,005 4,478
Restricted cash equivalents................................ - 700
Intangible assets, net..................................... 2,000 2,152
Other noncurrent assets.................................... 180 240
---------- -----------
Total assets....................................... $ 9,513 $ 18,769
========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of noncurrent liabilities........... $ 1,515 $ 2,597
Accounts payable....................................... 1,590 1,946
Accrued restructuring costs............................ 792 1,754
Accrued expenses and other current liabilities......... 734 1,555
---------- -----------
Total current liabilities.......................... 4,631 7,852
---------- -----------
Noncurrent liabilities:
Long-term debt and capital leases, less current maturities 1,061 5,693
Other long-term liabilities............................ 300 2,732
---------- -----------
Total noncurrent liabilities....................... 1,361 8,425
---------- -----------
Stockholders' investment:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
none issued and outstanding........................ - -
Common stock, $.01 par value, 25,000,000 shares authorized;
9,342,177 and 8,840,511 shares issued and outstanding
at March 31, 1996 and June 30, 1995, respectively.. 93 88
Additional paid-in capital............................. 56,077 55,581
Accumulated deficit.................................... (52,650) (53,110)
Unrealized gain (loss) on short-term investments....... 1 (67)
---------- -----------
Total stockholders' investment..................... 3,521 2,492
---------- -----------
Total liabilities and stockholders' investment..... $ 9,513 $ 18,769
========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
- 3 -
ECOSCIENCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------- ----------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales.................................... $ 3,097 $ 3,749 $ 11,454 $ 9,434
Research, development, licensing
fees and other............................... - 11 - 155
Investment income................................ 42 178 174 475
-------------- -------------- -------------- ---------------
Total revenues............................. 3,139 3,938 11,628 10,064
-------------- -------------- -------------- ---------------
Costs and expenses:
Cost of goods sold............................... 2,097 3,021 8,177 7,776
Research and development......................... 197 1,086 782 3,410
Selling and marketing............................ 659 943 1,922 2,756
General and administrative....................... 541 631 1,659 1,890
Reversal of accrued restructuring charge......... (1,550) - (1,550) -
Gains on sale of property and equipment
and debt settlements......................... (241) - (366) -
Interest and other expenses...................... 85 409 544 884
-------------- -------------- -------------- ---------------
Total costs and expenses................... 1,788 6,090 11,168 16,716
-------------- -------------- -------------- ---------------
Net income (loss).................................... $ 1,351 $ (2,152) $ 460 $ (6,652)
============== ============== ============== ===============
Net income (loss) per common share................... $ 0.15 $ (0.24) $ 0.05 $ (0.75)
============== ============== ============== ===============
Weighted average number of common
and common equivalent
shares outstanding.............................. 9,303 8,839 9,020 8,839
============== ============== ============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
-4-
ECOSCIENCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------------------------------------
1996 1995
------------------ -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ 460 $ (6,652)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Depreciation and amortization.................................... 466 758
Loss on sale of investments..................................... 58 7
Gain on sale of property and equipment........................... (74) (65)
Gain on settlement of accounts payable........................... (51) -
Gain on settlement of debt and other liabilities................. (241) -
Reversal of accrued restructuring charge......................... (1,550) -
Foreign exchange loss (gain)..................................... (12) 80
Changes in current assets and liabilities:
Accounts and interest receivable........................... 473 179
Inventories................................................ (313) (22)
Other current assets....................................... 273 (88)
Accounts payable and accrued expenses...................... (1,120) (1,331)
Accrued restructuring costs................................ (1,112) (1,562)
------------------ -----------------
Net cash used for operating activities.............................. (2,743) (8,696)
------------------ -----------------
Cash flows from investing activities:
Purchases of property and equipment..................................... (71) (630)
Proceeds from sale of property and equipment............................ 368 75
Purchases of restricted cash equivalents
and short-term investments ........................................... (705) (4,580)
Proceeds from sale of short-term investments ........................... 6,159 5,576
Decrease (increase) in other noncurrent assets.......................... 60 (279)
------------------ -----------------
Net cash provided by investing activities............................ 5,811 162
------------------ -----------------
Cash flows from financing activities:
Proceeds from exercise of stock options................................. 1 1
Proceeds from long-term debt ........................................... 7 2,551
Payments on long-term debt and capital leases........................... (2,776) (2,005)
------------------ -----------------
Net cash provided by (used for) financing activities................. (2,768) 547
Effect of exchange rate changes on cash........................................ 6 (80)
------------------ -----------------
Increase (decrease) in cash and cash equivalents............................... 306 (8,067)
Cash and cash equivalents at beginning of period .............................. 481 9,886
------------------ -----------------
Cash and cash equivalents at end of period .................................... $ 787 $ 1,819
================== =================
Total unrestricted and restricted cash, cash equivalents
and short-term investments at end of period............................... $ 2,693 $ 11,149
================== =================
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
- 5 -
ECOSCIENCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. OPERATIONS
EcoScience Corporation ("EcoScience") and its wholly-owned subsidiaries
(collectively, the "Company"), Agro Dynamics, Inc. and Agro Dynamics Canada
Inc. (collectively, "AGRO") and EcoScience Produce Systems Corp. ("EPSC")
are engaged in the development and commercialization of natural pest
control products, naturally-derived coatings to preserve food quality and
extend the shelf life of fruits and vegetables, and the marketing and
distribution of advanced technologies, products, growing systems and
services for the intensive farming, horticulture and produce packing
industries. The Company derives a major portion of its revenues from the
sale of growing medium products to the North American intensive farming and
horticulture industries, sorting and grading products and equipment to the
produce packing industry, and from the sale of post harvest coating
products to the fresh fruit and vegetable markets throughout the western
hemisphere.
Since inception and until the recent restructuring program, the Company had
devoted substantially all of its efforts toward new product research and
development and the manufacture, marketing and distribution of products
recently developed, acquired or licensed. Substantially all revenues
generated by the Company prior to the acquisition of AGRO were from
collaborative research and development arrangements and investment income.
In June 1993, the Company introduced its first two products, the
Bio-Path(R) Cockroach Control Chamber, a biopesticide, and Nature Seal(R),
a naturally derived vegetable based coating for the post harvest protection
of fruits and vegetables. In March 1995, the Company began marketing its
third product, Bio-Save(TM) PostHarvest BioProtectant, a natural microbial
agent that prevents decay on apples, pears and citrus fruits in storage and
during shipment. In August 1995, the Company introduced its fourth product,
Bio-Blast(TM) termiticide, a biopesticide. The Company is subject to a
number of risks similar to those of other companies in similar stages of
development, dependence on key individuals, competition from other products
and companies, the necessity to develop, register, and manufacture
commercially usable products, the ability to achieve profitable operations
and the need to raise additional funds through public or private debt or
equity financing.
At the close of fiscal year 1995, the Company adopted and began
implementation of a restructuring program to shift the corporate focus from
research and development activities to commercial operations in an effort
to reduce operating losses and conserve cash reserves. Under the
restructuring program, the Company eliminated substantially all of its
Massachusetts based work force; closed its manufacturing facility located
in Northborough, Massachusetts; and relocated its corporate headquarters
and operations to AGRO's East Brunswick, New Jersey facility during the
second quarter of fiscal year 1996. As of June 30, 1995, the Company ceased
development and production of its first generation Bio-Path Cockroach
Control Chamber. In addition, the Company has completed formulation and is
currently seeking contractors for reduced cost toll manufacturing, awaiting
Environmental Protection Agency registration and seeking partners to market
its second generation Bio-Path Cockroach Control Chamber. The Company
believes that the impact of the restructuring program has reduced its
working capital needs such that cash, restricted cash equivalents and
short-term investments as of March 31, 1996, together with the anticipated
proceeds from sales of certain property and equipment and other
non-strategic assets and funds available under its existing revolving line
of credit, will be sufficient to finance the Company's working capital
needs for at least the next six to nine
-6-
months. After such time, the Company believes that it may be necessary to
raise additional funds through public or private debt or equity financing.
Since the implementation of the restructuring program adopted in the
fourth quarter of 1995, all of the 33 employees targeted for termination
were terminated by December 31, 1995. Costs of approximately $1,455,000
have been incurred and charged against the restructuring accruals during
the nine months ended March 31, 1996, of which approximately $684,000 is
related to employee severance benefit payments.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company and reflect all adjustments, consisting
of only normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of financial results for the
three and nine month periods ended March 31, 1996 and 1995, in accordance
with generally accepted accounting principles for interim financial
reporting and pursuant to Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in the Company's
annual audited consolidated financial statements have been condensed or
omitted pursuant to such rules and regulations.
The results of operations for the three and nine month periods ended March
31, 1996 and 1995 are not necessarily indicative of the results of
operations to be expected for a full fiscal year. The Company expects to
incur a net loss for the fiscal year ending June 30, 1996. These interim
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the fiscal year
ended June 30, 1995, which are included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
The accompanying interim condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
AGRO and EPSC. All material intercompany transactions and balances have
been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and disclosures of
contingent assets and liabilities as of the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
3. RESTRICTED CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following restrictions have been imposed on certain amounts of the
Company's cash and cash equivalents as of March 31, 1996:
<TABLE>
<CAPTION>
Restricted
(In thousands) Amount
------
<S> <C>
Certificate of deposit with bank as collateral for outstanding loan
balance due under revolving line of credit...................................... $ 700
Certificate of deposit with bank as security for outstanding standby
letter of credit in the amount of $400.......................................... 425
Money market account with bank as compensating balance for
revolving line of credit ..................................................... 80
---------
$ 1,205
=========
</TABLE>
-7-
As of March 31, 1996, the Company had cash and term deposits with two
banks which exceeded the United States Federal Deposit Insurance limit for
such deposits by approximately $1,048,000. The Company also had $585,000,
as of March 31, 1996, in cash and cash equivalents in a bank in Canada
where there is no deposit insurance.
4. INVENTORIES
Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market and consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---- ----
<S> <C> <C>
(In thousands)
Raw materials .................................. $ 267 $ 43
Work-in-process ................................ - 160
Finished goods ................................. 1,571 1,322
-------- --------
$ 1,838 $ 1,525
======== ========
</TABLE>
Work-in-process and finished goods include material, labor and
manufacturing overhead.
5. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---- ----
<S> <C> <C>
(In thousands)
Laboratory equipment $ 965 $ 951
Furniture, fixtures and equipment .................. 1,525 1,471
Leasehold improvements ............................. 553 564
Assets under capital leases ........................ 585 4,115
--------- ---------
3,628 7,101
Less accumulated depreciation
and amortization ............................ (2,623) (2,623)
--------- ---------
$ 1,005 $ 4,478
========= ==========
</TABLE>
Accumulated amortization for assets under capital leases totaled $251,000
and $760,000 at March 31, 1996 and June 30, 1995, respectively. As of
March 31, 1996, the Company had certain property and equipment with a net
book value of approximately $439,000 which is intended to be disposed of
as part of the restructuring program adopted in the fourth quarter of
fiscal 1995.
6. DEBT AND LEASES
On October 28, 1994, EcoScience and AGRO entered into equipment and
revolving lines of credit agreements with a bank under which EcoScience
borrowed $250,000 to finance
-8-
the purchases of capital equipment, and AGRO may borrow up to the lesser
of $1,500,000 or the sum of 75% of eligible accounts receivable and 25% of
eligible inventory up to a maximum of $250,000 on a revolving basis for
working capital needs. Funds borrowed under the equipment line of credit
had been payable in equal principal installments of $6,944 plus accrued
interest over 36 months commencing February 5, 1995, at an interest rate
of prime (8.25% at March 31, 1996) plus 2% and had been secured by the
first lien on all fixed assets financed under this line of credit. Funds
borrowed under the revolving line of credit had borne interest at a rate
of prime (8.25% at March 31, 1996) plus 1% and are secured by all the
assets of AGRO and all the outstanding common stock of AGRO owned by
EcoScience. Interest on funds borrowed under the revolving line of credit
is payable monthly in arrears and repayment of principal was originally
due on January 5, 1996.
As of June 30, 1995 and through October 5, 1995, the equipment and
revolving lines of credit agreement imposed certain covenants including a
minimum consolidated tangible net worth of $5,000,000 ("Net Worth
Covenant"), a consolidated quick asset to current liabilities ratio of
1.50 to 1 through June 30, 1995, and 1.25 to 1 thereafter ("Quick Ratio
Covenant"), a minimum aggregate cash, cash equivalents and short-term
investments balance of $5,000,000 ("Cash Covenant"), and a restriction on
the declaration and payment of any cash dividends. As of June 30, 1995 and
through October 5, 1995, the Company was in violation of the Net Worth and
Quick Ratio Covenants. On October 5, 1995, the Company and the bank
entered into an amendment to the equipment and revolving line of credit
agreements pursuant to which the bank waived the violations of the Net
Worth and Quick Ratio Covenants at June 30, 1995 and through October 5,
1995; eliminated the Net Worth and Quick Ratio Covenants for compliance
periods after June 30, 1995; and reduced the Cash Covenant from $5,000,000
to $1,000,000 for compliance periods after June 30, 1995. In addition, the
amendment to the credit agreements required payment of all outstanding
obligations under the equipment line of credit (approximately $194,000 at
October 5, 1995); increased the interest rate on borrowings under the
revolving line of credit to prime plus 1.5% effective October 1, 1995; and
expanded the collateral requirements to include a certificate of deposit
in the amount of $700,000 to be held by the bank as partial cash
collateral for the borrowing outstanding under the revolving line of
credit. Any additional borrowings under the revolving line of credit will
require 66.7% cash collateral coverage in the form of a certificate of
deposit to be held by the bank. The amendment also extended the expiration
date of the credit agreement from January 5, 1996 to July 5, 1996 and any
principal amounts outstanding, together with accrued interest thereon, are
due on such date. As of March 31, 1996, AGRO had an outstanding loan
balance of $1,050,000 under the revolving line of credit.
In September 1992, the Company entered into a 10-year facility lease with
its landlord for expanded space in a new facility in Worcester,
Massachusetts. On November 1, 1994, the Company and Hybridon, Inc. (the
"Subtenant") entered into a sublease agreement under which the Company
sublet certain space at its corporate headquarters and research and
development facility to the Subtenant for a term of 21 months ending July
1996. On October 11, 1995, the Company and the Subtenant entered into an
amendment to the sublease agreement under which the Company sublet a
significant amount of additional space at this facility to the Subtenant
and extended the term of the sublease agreement through December 31, 1996.
The basic rental rate charged to the Subtenant is approximately the same
rate as the Company's rental rate under its lease. In addition, on
September 19, 1995, the Company and its landlord entered into a partial
lease termination agreement with respect to certain space at its corporate
headquarters and research and development facility.
On January 11, 1996, the Company and its landlord entered into a lease
termination agreement, under which the Company paid the landlord $125,000
on January 18, 1996 and issued 500,000 shares of the Company's common
stock on January 22, 1996 in exchange for an immediate termination of the
lease. Additionally, the Company expects
-9-
to incur approximately $25,000 for expenses related to the completion of
the transaction. After accounting for these settlement provisions
($650,000), the Company was able to reverse $1,550,000 of accrued
restructuring costs in the third quarter of fiscal 1996 that relates to
restructuring costs originally recorded in the fourth quarter of 1995
($2,000,000) and the remaining balance of restructuring costs originally
recorded in the fourth quarter of 1994 ($554,000 as of June 30, 1995).
In May 1993, the Company entered into a 15-year lease agreement for a
manufacturing facility in Northborough, Massachusetts. This lease was
accounted for as a capital lease and the present value of the minimum
lease payments under this capital lease obligation was $3,525,000 at
September 29, 1995. On September 29, 1995, the Company and the lessor
entered into a lease termination agreement under which the Company paid
the lessor on October 31, 1995 approximately $195,000; released to the
lessor approximately $305,000 held in an escrow account; and agreed to
make an advance lease payment for the period October 1995 through December
1995 to the lessor in exchange for an early termination and release from
the remaining lease obligations effective December 31,1995. Accordingly,
the Company reclassified $500,000 from "long-term debt and capital leases"
to "current maturities of noncurrent liabilities" in the consolidated
balance sheet and adjusted the present value of the remaining minimum
lease payments under this capital lease obligation to reflect the impact
of the lease termination agreement as of June 30, 1995. The effect of the
settlement on the financial statements as of March 31, 1996 was net
reductions of assets under capital lease of $2,936,000 and capital lease
obligations of $3,500,000, and a net increase in accrued restructuring
costs of $73,000.
On June 30, 1994, the Company sold certain manufacturing equipment and
leasehold improvements with an original cost of approximately $3,800,000
to a financing company. The Company, in turn, leased the equipment and
improvements back from the financing company. The lease has been accounted
for as a capital lease obligation. On October 11, 1995, the Company and
the financing company entered into an agreement which modified the lease
pursuant to which the financing company waived a payment default which
occurred in September 1995, in exchange for the Company's advance payment
of approximately $1,135,000 which was applied to satisfy the total amount
of the obligation outstanding under rental schedule No. 2 to the lease.
Accordingly, the Company reclassified $886,000 from "long-term debt and
capital leases" to "current maturities of noncurrent liabilities" in the
consolidated balance sheet to reflect the impact of this agreement as of
June 30, 1995. The Company will continue to make the remaining monthly
payments of approximately $55,000 under rental schedule No. 1 to the
lease. As of March 31, 1996, the present value of the minimum lease
payments under the remaining capital lease obligation-rental schedule No.
1 was $1,490,000. In addition, the Company issued to the financing company
a warrant to purchase 100,000 shares of common stock for $3.00 per share
pursuant to the terms of this agreement.
In February 1996, the Company settled EPSC acquisition related debt
totaling $501,000 for $251,000, resulting in a gain on settlement of
$241,000 after settlement related expenses of $9,000. Additionally, as
part of the settlement, the Company issued a warrant to purchase 50,000
shares of the Company's common stock at $2.00 per share.
-10-
7. NET INCOME (LOSS) PER COMMON SHARE
The net income per common share for the three and nine months ended March
31, 1996 is computed based on the weighted average number of common and
common equivalent shares outstanding.
The net loss per common share for the three and nine months ended March
31,1995 is computed based on the weighted average number of common shares
outstanding. Common equivalent shares are not included in the per-share
calculations as the effect of their inclusion would be anti-dilutive.
Common share computation is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
(In thousands) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number
of common shares
outstanding .................. 9,260 8,839 8,980 8,839
Net effect of dilutive
stock options and
warrants based on
treasury stock method ........ 43 - 40 -
------ ----- ------ ------
Weighted average number
of common and common
equivalent shares
outstanding .................. 9,303 8,839 9,020 8,839
===== ===== ===== =====
</TABLE>
8. SUPPLEMENTAL CASH FLOW INFORMATION
In May 1993, the Company entered into a 15-year lease agreement for a
manufacturing facility. This lease was accounted for as a capital lease
and the present value of the minimum lease payments under the capital
lease obligation was $3,525,000 at September 29, 1995. On September 29,
1995, the Company and the lessor entered into a lease termination
agreement under which the Company paid the lessor on October 31, 1995
approximately $195,000; released to the lessor approximately $305,000 held
in an escrow account; and agreed to make an advance lease payment for the
period October 1995 through December 1995 to the lessor in exchange for an
early termination and release for the remaining lease obligation effective
December 31, 1995. The non-cash effect of the settlement on the financial
statements as of March 31, 1996 was net reductions of assets under capital
lease of $2,936,000 and capital lease obligations of $3,500,000, and a net
increase in accrued restructuring costs of $73,000.
On January 11, 1996, the Company and its landlord for its Worcester
corporate headquarters and research and development facility entered into
a lease termination agreement, under which the Company paid the landlord
$125,000 on January 18, 1996 and issued 500,000 shares of the Company's
common stock on January 22, 1996 in
-11-
exchange for an immediate termination of the lease. Additionally, the
Company expects to incur approximately $25,000 for expenses related to the
completion of the transaction. After accounting for these settlement
provisions ($650,000), the Company was able to reverse $1,550,000 of
accrued restructuring costs in the third quarter of fiscal 1996 that
relates to restructuring costs originally recorded in the fourth quarter
of 1995 ($2,000,000) and the remaining balance of restructuring costs
originally recorded in the fourth quarter of 1994 ($554,000 as of June 30,
1995).The non-cash effect of the settlement on the financial statements as
of March 31, 1996 was a reduction of accrued restructuring costs of
$2,050,000 and an increase of common stock and additional paid-in capital
of $500,000.
The Company made certain cash payments and consummated certain non-cash
investing and financing transactions as summarized below:
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------
(In thousands) 1996 1995
---- ----
Cash paid for:
<S> <C> <C>
Interest............................................................. $ 548 $ 761
Taxes................................................................ 7 64
Non-cash investing and financing activities:
Disposition of manufacturing facility under
capital lease...................................................... 2,936 -
Termination of capital lease obligation for
manufacturing facility............................................. (3,500) -
Termination of lease obligation for corporate
headquarters and research and development
facility........................................................... (2,050) -
Issuance of common stock in connection with the termination of lease
obligation for corporate headquarters and research and development
facility........................................................... 500 -
</TABLE>
9. MAJOR CUSTOMER AND CONCENTRATION OF RISK
AGRO has a distribution agreement with an unrelated company under which
AGRO has the exclusive right to sell the unrelated company's products in
the United States and Canada. The sale of products under this distribution
agreement accounted for 43% and 47% of total product sales for the nine
months ended March 31, 1996 and 1995, respectively. Although there are a
limited number of sources of the particular growing medium products that
are sold under this distribution agreement, the Company's management
believes that other suppliers could provide similar products on comparable
terms. A change in suppliers, however, could cause a delay in filling
orders as well as a possible loss of sales, which would adversely affect
operating results.
In August 1995, AGRO entered into a distribution agreement with an
unrelated Company under which AGRO has the exclusive right to sell the
unrelated company's sorting and grading products and equipment in most of
the United States, Canada, Mexico and the Caribbean. The sale of products
and equipment under this distribution agreement
-12-
accounted for 24% and 9% of total product sales for the nine months ended
March 31, 1996 and 1995, respectively.
10. STOCK OPTION PLAN
On November 1, 1995, the Company's Compensation Committee of the Board of
Directors granted 435,000 stock options under the 1991 Stock Option Plan
(the "Plan") to certain employees pursuant to which shares of the
Company's Common Stock may be purchased at $0.875 per share subject to
certain vesting requirements and terms of the Plan.
11. SEASONALITY
The timing of the Company's operating revenues may vary as a result of the
seasonal nature of its businesses. In addition, operating revenues may be
affected by the timing of new product launches, acquisitions and other
economic factors. Operating revenues may be concentrated in the Company's
fourth quarter as a result of the North American growing season and
pesticide treatment season. Although the Company believes that the
historical trend in quarterly revenues for the fourth quarter of its
fiscal year are generally higher than the first, second and third
quarters, there can be no assurance that this will occur in future
periods. Accordingly, quarterly or other interim results should not be
considered indicative of results to be expected for any other quarter or
for the full fiscal year.
12. COMMON STOCK LISTING ON NASDAQ
On November 27, 1995, the Company's common stock was transferred from the
Nasdaq National Market to the Nasdaq SmallCap Market. The Company did not
meet the minimum maintenance requirements for continued listing on the
Nasdaq National Market and was listed on the Nasdaq SmallCap Market
pursuant to an exception to the capital and surplus, and minimum bid price
requirements.
The exception required the Company to achieve a certain minimum dollar
amount of capital and surplus. As described in Note 6, above, the effect
of the termination of the Company's corporate headquarters and research
and development facility lease on January 11, 1996, enabled the Company to
achieve Nasdaq's required capital and surplus dollar amount. Accordingly,
the Company's common stock will continue to be traded on the Nasdaq
SmallCap Market.
-13-
ECOSCIENCE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Since inception and until the recent restructuring program discussed below, the
Company had been engaged in research to develop new biological pest control
products and in raising capital to support its development programs and
commercial operations. Beginning in 1992, the Company accelerated its
commercialization activities, including the establishment of manufacturing
capabilities and pre-marketing for the Bio-Path Cockroach Control Chamber, which
received marketing approval from the United States Environmental Protection
Agency ("EPA") in May 1993. In June 1993, the Company commenced sales of the
Bio-Path Cockroach Control Chambers to the professional pest control market. In
January 1994, the Company entered into a sales and distribution agreement with
Bengal Chemical, Inc. for the non-exclusive retail distribution of the Bio-Path
Cockroach Control Chamber in the United States. As part of the restructuring
program discussed below, as of June 30, 1995, the Company has ceased production
of the first generation Bio-Path Cockroach Control Chamber. In addition, the
Company has completed formulation and is currently seeking contractors for
reduced cost toll manufacturing, awaiting Environmental Protection Agency
registration and seeking partners to market its second generation Bio-Path
Cockroach Control Chamber.
In June 1992, the Company entered into a Product Development and Licensing
Agreement (the "Terminix Agreement") with the Terminix International Company,
L.P. ("Terminix") for the joint development of biopesticides for termite
control. In October 1994, the Company was granted EPA registration for the
Company's Bio-Blast biological termiticide. The Company commenced commercial
trials of its Bio-Blast termiticide in the first quarter of fiscal 1995 in 11
states under the terms of the Terminix Agreement. In July 1995, the Company
initiated sales of Bio-Blast termiticide to Terminix.
In November 1992, the Company acquired AGRO, an East Brunswick, New Jersey based
Company which designs, markets and distributes advanced technologies, products,
growing systems and services for the North American intensive farming and
horticulture industries, and sorting and grading products and equipment to the
produce packing industry.
In June 1993, the Company entered into licensing agreements with two companies
for rights to develop, manufacture and distribute Nature Seal, a patented,
naturally-derived coating product to protect the quality of fruits and
vegetables after harvest. In May 1994, the Company acquired certain net assets
of American Machinery Company ("AMC"), an Orlando, Florida based company which
provided post harvest coating products and services to the fresh fruit and
vegetable markets throughout the United States, the Caribbean, Central America
and South America. Concurrent with the acquisition of AMC, the Company formed
EPSC to combine the AMC product line and operating unit with its existing
coating activities, which include the distribution of its Nature Seal coating
products.
In the fourth quarter of fiscal 1995, the Company recorded asset valuation and
restructuring charges of $6,000,000 or $0.68 per share to write-down the value
of certain assets and to provide for the costs associated with the closure of
the Company's facilities located in Worcester, Northborough, and Shrewsbury,
Massachusetts and for reductions in the Massachusetts based work force. The
write-down of assets in 1995 included a $1,946,000 non-cash charge against the
Company's investment in its manufacturing, laboratory, and office property and
equipment located in Massachusetts and approximately a $354,000 non-cash charge
for certain other assets to bring their respective values to their net
realizable values. The remaining $3,700,000 of the 1995 charge consisted of
accruals to provide for the costs associated with
-14-
the planned facility lease settlements ($2,000,000), manufacturing plant
shut-down ($497,000), employee severance benefits ($1,035,000) and other
contractual obligations ($168,000) related to the restructuring program adopted
in the fourth quarter of 1995.
At the close of fiscal 1995, the Company began the implementation of the
restructuring program which was designed to shift the corporate focus from
research and development to commercial operations in an effort to reduce
operating losses and conserve cash resources. As part of the restructuring
program, the Company eliminated substantially all of its Massachusetts based
work force (approximately 33 positions) in the first quarter of fiscal 1996. In
addition, during fiscal 1995 certain functions were moved to the Company's
manufacturing facility in Northborough, Massachusetts, and the Company's space
at its corporate headquarters and research and development facility located in
Worcester, Massachusetts, was decreased from approximately 41,000 square feet to
approximately 13,000 square feet. In the first quarter of fiscal 1996, the
Company closed the Worcester facility and all functions were moved to the
Northborough facility. During the second quarter of fiscal 1996, the Company
relocated its Massachusetts based operations including corporate headquarters to
AGRO's East Brunswick, New Jersey facility. The Company believes that the
effects of its restructuring program on operating results for periods commencing
in fiscal 1996 will be to reduce (i) deprecation and amortization expenses
relating to property and equipment and other noncurrent assets, (ii) rent and
related occupancy expenses as a result of consolidation of its various
facilities, (iii) employee expenses from termination of research and development
and other personnel and (iv) other expenses for research and development
programs. The restructuring program is expected to reduce operating expenses,
when fully implemented by approximately, $5,000,000 to $6,000,000 annually. The
Company has completed a major portion of its restructuring activities in the
first nine months of fiscal 1996.
On January 11, 1996, the Company and its landlord for its Worcester corporate
headquarters and research and development facility entered into a lease
termination agreement, under which the Company paid the landlord $125,000 on
January 18, 1996 and issued 500,000 shares of the Company's common stock on
January 22, 1996 in exchange for an immediate termination of the lease.
Additionally, the Company expects to incur approximately $25,000 for expenses
related to the completion of the transaction. After accounting for these
settlement provisions ($650,000), the Company was able to reverse $1,550,000 of
accrued restructuring costs in the third quarter of fiscal 1996 that relates to
restructuring costs originally recorded in the fourth quarter of 1995
($2,000,000) and the remaining balance of restructuring costs originally
recorded in the fourth quarter of 1994 ($554,000 as of June 30, 1995).
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 VS.
THREE MONTHS ENDED MARCH 31, 1995
The Company's total revenues decreased $799,000 or 20% to $3,139,000 for the
three months ended March 31, 1996 from $3,938,000 for the same period in 1995.
The Company's product sales decreased $652,000 or 17% to $3,097,000 in the three
month period ended March 31, 1996 from $3,749,000 in the same period in 1995.
These decreases were due primarily to the decreases in product sales by AGRO of
$454,000 and EcoScience of $238,000.
The following table sets forth the Company's product sales by operating
divisions for the three months ended March 31, 1996 and 1995:
-15-
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------------------
Increase
1996 1995 (Decrease)
---- ---- ----------
(In thousands)
<S> <C> <C> <C>
AGRO ............................... $ 2,055 $ 2,509 $ (454)
EPSC .............................. 1,042 1,002 40
EcoScience.......................... - 238 (238)
------- ------- -------
Consolidated................... $ 3,097 $ 3,749 $ (652)
======= ======= =======
</TABLE>
AGRO is the exclusive distributor in the United States and Canada of the Grodan
brand of stonewool, which is an inert growing medium supplied by Grodania A/S, a
Danish Company. The sale of products under the distribution agreement with
Grodania accounted for 37% and 45% of the Company's total product sales for the
three months ended March 31, 1996 and 1995, respectively. In August 1995, AGRO
entered into a distribution agreement with Aweta B.V., a Netherlands based
company, for the exclusive right to sell Aweta B.V.'s sorting and grading
equipment to the fruit, vegetable and flower markets in the United States,
Canada, Mexico and the Caribbean. The sale of products and equipment under this
distribution agreement accounted for 12% and 19% of total product sales for the
three months ended March 31, 1996 and 1995, respectively. Although there are a
limited number of sources of the particular growing medium products that are
sold under the Grodania distribution agreement, and sorting and grading
equipment under the Aweta distribution agreement, the Company believes that
other suppliers could provide similar products on comparable terms. A change in
suppliers, however could cause a delay in filling orders as well as a possible
loss of sales, which would adversely affect operating results. The Company
believes that revenues under these distribution agreements will each account for
more than 10% of the Company's product sales in fiscal 1996.
The Company also experienced a decrease in research, development and licensing
fee income of $11,000 and a decrease in investment income of $136,000. The
decrease in research, development and licensing fee income for the three months
ended March 31, 1996 primarily resulted from a reduction in license fees and
product support payments received from Terminix, as its contractual payment
obligations were fulfilled. The decrease in investment income for the three
months ended March 31, 1996 resulted from a decline in the average funds
available for investment.
Cost of goods sold decreased $924,000 or 31% to $2,097,000 for the three months
ended March 31, 1996 from $3,021,000 for the same period in 1995 due primarily
to the decreases in AGRO's and EcoScience's cost of goods sold of $355,000 and
$601,000, respectively, offset by a $32,000 increase in EPSC's cost of goods
sold. AGRO's decrease in cost of goods sold resulted from a decrease in sales,
while EcoScience's decrease resulted from the cessation of manufacturing
activities at the Northborough facility. Gross margin on product sales increased
$272,000 to $1,000,000 in the three months ended March 31, 1996 from $728,000 in
the same period in 1995, while gross margin percentage on product sales
increased to 32% for the three months ended March 31, 1996 from 19% for the same
period in 1995 due primarily to EcoScience's cessation of manufacturing activity
resulting in an elimination of its gross loss from the 1995 period, offset by
Agro's decrease in gross profit as a result of reduced sales.
Research and development expenses decreased $889,000 or 82% to $197,000 for the
three months ended March 31, 1996 from $1,086,000 for the same period in 1995
due primarily to the implementation of the Company's restructuring program at
the close of fiscal 1995, which curtailed and deferred research and development
activities for certain product programs, as well as, significantly reduced
personnel and facility costs. The Company has and will
-16-
continue to incur ongoing research and development expenses for its Bio-Save
PostHarvest BioProtectant, Bio-Blast termiticide and to a lesser extent the
second generation Bio-Path Cockroach Control Chamber product technologies in
fiscal 1996.
Selling and marketing expenses decreased $284,000 or 30% to $659,000 for the
three months ended March 31, 1996 from $943,000 for the same period in 1995 due
primarily to the decreases in EcoScience's and EPSC's selling and marketing
expenses of $200,000 and $133,000, respectively and an increase of $49,000 at
AGRO. The decrease in EcoScience's selling and marketing expenses for the three
months ended March 31, 1996 was primarily attributable to the restructuring
program initiatives discussed above. The decrease in EPSC's selling and
marketing expenses for the three months ended March 31, 1996 was primarily
attributable to the reduction of selling and marketing department personnel and
related costs during the latter part of fiscal 1995. The increase in AGRO's
selling and marketing expenses was primarily due to additional personnel and
related costs to support new product line sales and other sales increases.
General and administrative expenses decreased $90,000 or 14% to $541,000 for the
three months ended March 31, 1996 from $631,000 for the same period in 1995 due
primarily to the decrease in EcoScience's and EPSC's general and administrative
expenses of $99,000 and $24,000, respectively, which was partially offset by an
increase in such expenses for AGRO of $33,000. The decrease in EcoScience's
general and administrative expenses in the three months ended March 31, 1996 was
primarily attributable to the restructuring program initiatives discussed above.
On January 11, 1996, the Company and its landlord for its Worcester corporate
headquarters and research and development facility entered into a lease
termination agreement, under which the Company paid the landlord $125,000 on
January 18, 1996 and issued 500,000 shares of the Company's common stock on
January 22, 1996 in exchange for an immediate termination of the lease.
Additionally, the Company expects to incur approximately $25,000 for expenses
related to the completion of the transaction. After accounting for these
settlement provisions ($650,000), the Company was able to reverse $1,550,000 of
accrued restructuring costs in the third quarter of fiscal 1996 that relates to
restructuring costs originally recorded in the fourth quarter of 1995
($2,000,000) and the remaining balance of restructuring costs originally
recorded in the fourth quarter of 1994 ($554,000 as of June 30, 1995).
In February 1996, the Company settled EPSC acquisition related debt totaling
$501,000 for $251,000, resulting in a gain on settlement of $241,000 after
settlement related expenses of $9,000. Additionally, as part of the settlement,
the Company issued a warrant to purchase 50,000 shares of the Company's common
stock at $2.00 per share.
Interest and other expenses decreased $324,000 or 79% to $85,000 for the three
months ended March 31, 1996 from $409,000 for the same period in 1995 due
primarily to the decrease in interest expense resulting from the lower average
level of long-term debt and capital lease obligations outstanding during the
three months ended March 31, 1996 as compared to the same period in 1995.
The Company had net income of $1,351,000 or $0.15 per share for the three months
ended March 31, 1996 compared to a net loss of $2,152,000 or $0.24 per share for
the same period in 1995. As discussed above, due to the termination and
settlement of the facility lease obligation for the Company's corporate
headquarters and research and development facility in Worcester, Massachusetts,
in the third quarter of fiscal 1996, the Company reversed $1,550,000 or $0.17
per share of accrued restructuring costs. Additionally, the EPSC debt settlement
discussed above and resulting gain amounted to $241,000 or $0.03 per share. The
Company believes the net loss for fiscal 1996 will be substantially less than
those reported in recent years notwithstanding the effect of the termination and
settlement of the facility lease obligation, and gains on the sale of property
and equipment and debt settlements.
-17-
NINE MONTHS ENDED MARCH 31, 1996 VS.
NINE MONTHS ENDED MARCH 31, 1995
The Company's total revenues increased $1,564,000 or 16% to $11,628,000 for the
nine months ended March 31, 1996 from $10,064,000 for the same period in 1995
due primarily to the significant increase in AGRO's product sales which resulted
from approximately $2,695,000 in sales of Aweta B.V. sorting and grading
equipment. The Company's product sales increased $2,020,000 or 21% to
$11,454,000 in the nine month period ended March 31, 1996 from $9,434,000 in the
same period in 1995 due primarily to the increase in sales by AGRO of
$2,235,000. The following table sets forth the Company's product sales by
operating division for the nine months ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------------------
Increase
1996 1995 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
(In thousands)
AGRO ............................... $ 8,958 $ 6,723 $ 2,235
EPSC ............................... 2,334 2,311 23
EcoScience.......................... 162 400 (238)
------- ------- -------
Consolidated................... $11,454 $ 9,434 $ 2,020
======= ======= =======
</TABLE>
AGRO is the exclusive distributor in the United States and Canada of the Grodan
brand of stonewool, which is an inert growing medium supplied by Grodania A/S, a
Danish Company. The sale of products under the distribution agreement with
Grodania accounted for 43% and 47% of the Company's total product sales for the
nine months ended March 31, 1996 and 1995, respectively. In August 1995, AGRO
entered into a distribution agreement with Aweta B.V., a Netherlands based
company, for the exclusive right to sell Aweta B.V.'s sorting and grading
equipment to the fruit, vegetable and flower markets in the United States,
Canada, Mexico and the Caribbean. The sale of products and equipment under this
distribution agreement accounted for 24% and 9% of total product sales for the
nine months ended March 31, 1996 and 1995, respectively. Although there are a
limited number of sources of the particular growing medium products that are
sold under the Grodania distribution agreement, and sorting and grading
equipment under the Aweta distribution agreement, the Company believes that
other suppliers could provide similar products on comparable terms. A change in
suppliers, however could cause a delay in filling orders as well as a possible
loss of sales, which would adversely affect operating results. The Company
believes that revenues under these distribution agreements will each account for
more than 10% of the Company's product sales in fiscal 1996.
The increase in the Company's total product sales in the nine months ended March
31, 1996 was offset partially by a decrease in research, development and
licensing fee income of $155,000 and a decrease in investment income of
$301,000. The decrease in research, development and licensing fee income in the
nine months ended March 31, 1996 primarily resulted from a reduction in license
fees and product support payments received from Terminix, as its contractual
payment obligations had been fulfilled. The decrease in investment income in the
nine months ended March 31, 1996 resulted from a decline in the average funds
available for investment.
Cost of goods sold increased $401,000 or 5% to $8,177,000 for the nine months
ended March 31, 1996 from $7,776,000 for the same period in 1995 due primarily
to the increases in AGRO's and EPSC's cost of goods sold of $1,537,000 and
$108,000, respectively, which
-18-
resulted from higher product sales, offset by a $1,244,000 decrease in
EcoScience's cost of goods sold which resulted from the cessation of
manufacturing activities at the Northborough facility during the nine months
ended March 31, 1996. Gross margin on product sales increased $1,619,000 to
$3,277,000 for the nine months ended March 31, 1996 from $1,658,000 in the same
period in 1995, while gross margin percentage on product sales increased to 29%
in the 1996 period from 18% in the same period in 1995 due primarily to AGRO's
higher sales volume, a shift in product mix that included a significant increase
in the sales of sorting and grading equipment, and EcoScience's sale of $120,000
of product previously written-off and the cessation of manufacturing activities
at the Northborough facility.
Research and development expenses decreased $2,628,000 or 77% to $782,000 for
the nine months ended March 31, 1996 from $3,410,000 for the same period in 1995
due primarily to the implementation of the Company's restructuring program at
the close of fiscal 1995, which curtailed and deferred research and development
activities for certain product programs, as well as, significantly reduced
personnel and facility costs. The Company has and will continue to incur ongoing
research and development expenses for its Bio-Save PostHarvest BioProtectant,
Bio-Blast termiticide and to a lesser extent the second generation Bio-Path
Cockroach Control Chamber product technologies in fiscal 1996.
Selling and marketing expenses decreased $834,000 or 30% to $1,922,000 for the
nine months ended March 31, 1996 from $2,756,000 for the same period in 1995 due
primarily to the decreases in EcoScience's and EPSC's selling and marketing
expenses of $679,000 and $255,000, respectively and an increase of $100,000 at
AGRO. The decrease in EcoScience's selling and marketing expenses for the nine
months ended March 31, 1996 was primarily attributable to the restructuring
program initiatives discussed above. The decrease in EPSC's selling and
marketing expenses for the nine months ended March 31, 1996 was primarily
attributable to the reduction of selling and marketing department personnel and
related costs during the latter part of fiscal 1995. The increase in AGRO's
selling and marketing expenses was primarily due to additional personnel and
related costs to support new product sales and sales increases.
General and administrative expenses decreased $231,000 or 12% to $1,659,000 for
the nine months ended March 31, 1996 from $1,890,000 for the same period in 1995
due primarily to the decreases in EcoScience's and EPSC's general and
administrative expenses of $283,000 and $20,000, respectively, which was offset
by an increase in such expenses for AGRO of $72,000. The decrease in
EcoScience's general and administrative expenses for the nine months ended March
31, 1996 was primarily attributable to the restructuring program initiatives
discussed above. The increase in AGRO's general and administrative expenses was
primarily due to additional personnel and related costs to support its increased
business activity.
On January 11, 1996, the Company and its landlord for its Worcester corporate
headquarters and research and development facility entered into a lease
termination agreement, under which the Company paid the landlord $125,000 on
January 18, 1996 and issued 500,000 shares of the Company's common stock on
January 22, 1996 in exchange for an immediate termination of the lease.
Additionally, the Company expects to incur approximately $25,000 for expenses
related to the completion of the transaction. After accounting for these
settlement provisions ($650,000), the Company was able to reverse $1,550,000 of
accrued restructuring costs in the third quarter of fiscal 1996 that relates to
restructuring costs originally recorded in the fourth quarter of 1995
($2,000,000) and the remaining balance of restructuring costs originally
recorded in the fourth quarter of 1994 ($554,000 as of June 30, 1995).
During the nine months ended March 31, 1996, the Company sold certain surplus
property and equipment, relating to the closure of its Massachusetts facilities
for approximately $368,000 with related net book value of approximately
$294,000, resulting in a gain of approximately
-19-
$74,000. During the same period, the Company settled EcoScience and EPSC related
debt totaling $756,000 for $455,000, resulting in a gain on settlement of
$292,000 after related settlement expenses of $9,000.
Interest and other expenses decreased $340,000 or 38% to $544,000 for the nine
months ended March 31, 1996 from $884,000 for the same period in 1995 due
primarily to the decrease in interest expense resulting from the lower average
level of long-term debt and capital lease obligations outstanding during the
nine months ended March 31, 1996 as compared to the same period in 1995.
The Company had net income of $460,000 or $0.05 per share for the nine months
ended March 31, 1996 compared to a net loss of $6,652,000 or $0.75 per share for
the same period in 1995. As discussed above, due to the termination and
settlement of the facility lease obligation for the Company's corporate
headquarters and research and development facility in Worcester, Massachusetts,
in the third quarter of fiscal 1996, the Company reversed $1,550,000 or $0.17
per share in accrued restructuring costs. Additionally, as discussed above, the
Company sold property and equipment, and settled debt resulting in gains
totaling $366,000 or $0.04 per share. The Company believes the net loss for
fiscal 1996 will be substantially less than those reported in recent years
notwithstanding the effect of the termination and settlement of the facility
lease obligation, and gains on the sale of property and equipment and debt
settlements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company's cash expenditures have exceeded its revenues. The
Company's operations have been funded through public and private placements of
its equity securities, bank loans and lease financing, revenues from product
sales, licensing, collaborative research and development arrangements, and
investment income. In conjunction with the asset valuation and restructuring
charges recorded in the fourth fiscal quarter of 1995, the Company has
implemented a program to reduce its operating losses and conserve its cash
reserves for use in the Company's operating businesses. The Company anticipates
that this program will significantly reduce research and development, and
general and administrative costs from historical levels and that a portion of
the accrued restructuring charges of $3,700,000 recorded in fiscal 1995 will be
funded in fiscal 1996 and the remaining portion of the $2,500,000 noncurrent
portion of this charge after reversal of $1,550,000 for a January 1996 lease
termination discussed above is expected to be funded in fiscal 1997 and
thereafter. The Company expects to incur administrative, business development,
and commercialization expenditures in the future for the continued development
and marketing of its Bio-Save PostHarvest BioProtectant, Bio-Blast termiticide
and to a lesser extent the second generation Bio-Path Cockroach Control Chamber
product technologies. In addition, the Company expects to incur incremental
costs associated with its plans to expand the product line at AGRO. The Company
may also use cash to acquire technology, products or companies that support the
strategy of the Company.
Cash and cash equivalents were $787,000 at March 31, 1996 compared to $481,000
at June 30, 1995. Unrestricted and restricted cash, cash equivalents and
short-term investments totaled $2,693,000 at March 31, 1996 compared to
$7,831,000 at June 30, 1995. Restricted cash and cash equivalents at March 31,
1996 included amounts totaling $1,205,000, as security for a certain bank loan
and a standby letter of credit obligations. Cash flows used for operating
activities totaled $2,743,000 during the nine months ended March 31, 1996 and
primarily represented (i) $1,455,000 expended for obligations accrued as part of
the Company's restructuring program discussed above, and (ii) reduction of
accounts payable and accrued expenses. Cash flows used for financing activities
totaled $2,768,000 during the nine months ended March 31, 1996 and consisted
primarily of long-term debt and capital lease obligation payments of $2,776,000.
Cash flows provided by investment activities totaled $5,811,000, which included
$6,159,000 in proceeds from the sale of short-
-20-
term investments and $368,000 in proceeds from the sale of property and
equipment, offset by $71,000 in purchases of property and equipment, and
$705,000 of purchases of restricted cash equivalents and short-term investments.
The Company's working capital and current ratio were $1,697,000 and 1.4 to 1,
respectively, at March 31, 1996, compared to $3,347,000 and 1.4 to 1,
respectively, at June 30, 1995.
In June 1994, the Company sold certain manufacturing equipment and leasehold
improvements with an original cost of approximately $3,800,000 to a financing
company. The Company, in turn, leased the equipment and improvements back from
the financing company. The lease has been accounted for as a capital lease
obligation. The lease bears interest at an effective rate of approximately 14%
and had been payable in monthly installments of principal and interest of
approximately $88,000 over 50 months. As of March 31, 1996, the present value of
the minimum remaining lease payments under this capital lease was $1,490,000. On
October 11, 1995, the Company and the financing company entered into an
agreement which modified the lease pursuant to which the financing company
agreed to waive a payment default which occurred in September 1995 in exchange
for an advance payment of approximately $1,135,000 which was applied to satisfy
the total obligation outstanding under rental schedule No. 2 to the lease. The
Company will continue to make the remaining monthly payments of approximately
$55,000 under rental schedule No. 1 to the lease.
The Company entered into a fifteen year lease agreement for a manufacturing
facility in Northborough, Massachusetts, in May 1993 which was accounted for as
a capital lease. The lease had borne interest at an effective annual rate of
approximately 13% and had been payable in monthly installments of principal and
interest of approximately $44,000. On September 29, 1995, the Company and the
lessor entered into a lease termination agreement under which the Company paid
on, October 31, 1995, approximately $195,000, released approximately $305,000
held in an escrow account to the lessor and agreed to make an advance lease
payment for the period October 1995 through December 1995 to the lessor in
exchange for an early termination and release from the remaining lease
obligations effective December 31, 1995. The non-cash effect of the settlement
on the financial statements as of March 31, 1996 was net reductions of assets
under capital lease of $2,936,000 and capital lease obligations of $3,500,000,
and a net increase in accrued restructuring costs of $73,000.
The Company issued a promissory note in the amount of $430,000 in connection
with the acquisition of AMC in May 1994. This promissory note was payable in
sixteen equal quarterly installments plus accrued interest calculated at the
prime rate (8.25% at March 31, 1996) plus 1%, not to exceed 9%. This promissory
note was part of the EPSC debt settlement discussed above in the Results of
Operations section.
In October 1994, the Company established a $250,000 line of credit with a bank
for the purchase of equipment. Funds borrowed under that line had been payable
over 36 months commencing February 5, 1995 at an interest rate of prime (8.25%
at March 31, 1996) plus 2%. In addition, the Company established a $1,500,000
revolving line of credit with the same bank for AGRO under which borrowings had
borne interest at a rate of prime (8.25% at March 31, 1996) plus 1% and is
secured by all the assets of AGRO and the outstanding common stock of AGRO owned
by the Company. The loan proceeds from the revolving line of credit have been
used to finance the working capital needs of AGRO and any principal amounts
outstanding were originally due on January 5, 1996. As of March 31, 1996, the
Company had principal obligations of $1,050,000 under the revolving line of
credit. Under the terms of the credit agreements, the Company was required to
maintain a minimum consolidated tangible net worth of $5,000,000 ("Net Worth
Covenant"), a consolidated quick asset to current liabilities ratio of 1.50 to 1
through June 30, 1995 and 1.25 to 1 thereafter ("Quick Ratio Covenant"), and a
minimum aggregate cash, cash equivalents and short-term investment balance of
$5,000,000 ("Cash Covenant"). As June 30, 1995 and through October 5, 1995, the
Company was in violation of the Net Worth Covenant and Quick Ratio Covenant. On
October 5, 1995, the Company and the bank entered into an amendment to the
revolving and equipment lines of credit agreements pursuant to which the bank
waived the violations of Net
-21-
Worth and Quick Ratio Covenants at June 30, 1995 and through October 5, 1995,
eliminated the Net Worth and Quick Ratio Covenants for compliance periods
commencing after June 30, 1995, and reduced the Cash Covenant from $5,000,000 to
$1,000,000 for compliance periods commencing after June 30, 1995. In addition,
the amendment to the credit agreements required repayment of all outstanding
obligations under the equipment line of credit (approximately $194,000 as of
October 5, 1995); increased the interest rate on borrowings under the revolving
line of credit to prime plus 1.5% effective October 1, 1995; and expanded the
collateral requirements to include a certificate of deposit in the amount of
$700,000 to be held by the bank as partial cash collateral for the borrowings
currently outstanding under the revolving line of credit. Any additional
borrowings under the revolving line of credit will require 66.7% cash collateral
coverage in the form of a certificate of deposit to be held by the bank. The
amendment also extended the expiration date of the credit agreement from January
5, 1996 to July 5, 1996 and any principal amounts outstanding, together with
accrued interest thereon are due on such date.
On January 11, 1996, the Company and its landlord for its Worcester corporate
headquarters and research and development facility entered into a lease
termination agreement, under which the Company paid the landlord $125,000 on
January 18, 1996 and issued 500,000 shares of the Company's common stock on
January 22, 1996 in exchange for an immediate termination of the lease.
Additionally, the Company expects to incur approximately $25,000 for expenses
related to the completion of the transaction. After accounting for these
settlement provisions ($650,000), the Company was able to reverse $1,550,000 of
accrued restructuring costs in the third quarter of fiscal 1996 that relates to
restructuring costs originally recorded in the fourth quarter of 1995
($2,000,000) and the remaining balance of restructuring costs originally
recorded in the fourth quarter of 1994 ($554,000 as of June 30, 1995).
During the nine months ended March 31, 1996, the Company sold certain surplus
property and equipment, generating net proceeds of approximately $368,000.
The Company plans to finance the cash needs discussed above principally with
existing cash reserves, represented by approximately $1,992,000 of unrestricted
and restricted cash and cash equivalents, and $701,000 of short-term investments
as of March 31, 1996. The Company believes that such cash reserves, together
with the anticipated proceeds from sales of property and equipment and other
non-strategic assets, and funds available under the existing revolving line of
credit, will be sufficient throughout the next six to nine months to finance the
Company's working capital needs, planned capital expenditures, restructuring
program initiatives and related obligations, and to service its indebtedness.
The Company believes that it may need to raise additional funds to finance its
ongoing operations after June 30, 1996, although there can be no assurances that
such funds will be available on terms favorable to the Company, if at all. The
Company is continuing to explore potential mergers, joint ventures and various
other strategic options which are aimed at enhancing stockholder value and the
long-term commercial viability of the Company.
SEASONALITY
The timing of the Company's operating revenues may vary as a result of the
seasonal nature of its business. In addition, operating revenues may be affected
by the timing of new product launches, acquisitions and other economic factors.
Operating revenues may be concentrated in the Company's fourth quarter as a
result of the North American growing season and pesticide treatment season.
Although the Company believes the historical trend in quarterly revenues for the
fourth quarter of its fiscal year are generally higher than the first, second
and third quarters, there can be no assurance that this will occur in future
periods. Accordingly, quarterly or other interim results should not be
considered indicative of results to be expected for any other quarter or the
full fiscal year.
-22-
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings:
------------------
None
ITEM 2. Changes in Securities:
----------------------
None
ITEM 3. Defaults Upon Senior Securities:
--------------------------------
None
ITEM 4. Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
None
ITEM 5. Other Information:
------------------
None
ITEM 6. Exhibits and Reports on Form 8-K:
---------------------------------
a. Exhibits:
---------
1) Exhibit 27 - Financial Data Schedule as of
and for the Nine Months Ended March 31, 1996.
b. Reports on Form 8-K:
--------------------
1) Form 8-K dated, January 16, 1996, regarding
the lease termination agreement between the
Company and Worcester Business Development
Corporation and related Pro Forma Balance
Sheet as of November 30, 1995 to Nasdaq
reflecting the effect of the lease
termination.
2) Form 8-K dated, March 20, 1996, regarding the
issuance of a press release announcing the
Company's receipt of notices of allowances on
two patent applications from the U.S. Patent
and Trademark office, and the settlement of
EPSC debt totaling $501,000 for $251,000,
resulting in a gain of $241,000 after
settlement related expenses of $9,000.
-23-
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.
ECOSCIENCE CORPORATION
Date: May 14, 1996 By: /s/Michael A. DeGiglio
-----------------------
Michael A. DeGiglio
President & Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1996 By: /s/Harold A. Joannidi
----------------------
Harold A. Joannidi
Treasurer & Secretary
(Principal Financial & Accounting
Officer)
-24-
ECOSCIENCE CORPORATION
EXHIBIT INDEX
Exhibit No. Description of Exhibit Page No.
- - ----------- ---------------------- --------
27 Financial Data Schedule as of and for the
Nine Months Ended March 31, 1996 26
-25-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 AND
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,992
<SECURITIES> 701
<RECEIVABLES> 1,572
<ALLOWANCES> 137
<INVENTORY> 1,838
<CURRENT-ASSETS> 6,328
<PP&E> 3,628
<DEPRECIATION> 2,623
<TOTAL-ASSETS> 9,513
<CURRENT-LIABILITIES> 4,631
<BONDS> 1,061
0
0
<COMMON> 93
<OTHER-SE> 3,428
<TOTAL-LIABILITY-AND-EQUITY> 9,513
<SALES> 11,454
<TOTAL-REVENUES> 11,628
<CGS> 8,177
<TOTAL-COSTS> 8,177
<OTHER-EXPENSES> (1,550)
<LOSS-PROVISION> 31
<INTEREST-EXPENSE> 544
<INCOME-PRETAX> 460
<INCOME-TAX> 0
<INCOME-CONTINUING> 460
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 460
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
