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As filed with the Securities and Exchange Commission on January 21, 1997.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
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COMMISSION FILE NUMBER 1-9579
ECOGEN INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2487948
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(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2005 CABOT BOULEVARD WEST 19047
LANGHORNE, PENNSYLVANIA (Zip Code)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (215) 757-1590
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
WARRANTS TO PURCHASE COMMON STOCK AT AN EXERCISE PRICE OF $43.75 PER SHARE.
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.
/X/ YES / / NO
THE APPROXIMATE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT IS $20,493,052 AS OF JANUARY 3, 1997. (A)
7,801,523
(NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF JANUARY 3, 1997)
5,834
(NUMBER OF SHARES OF CONVERTIBLE PREFERRED STOCK OUTSTANDING
AS OF JANUARY 3, 1997)
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
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DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Document Form 10-K Part
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<S> <C> <C>
(1) Definitive Proxy Statement with respect III
to the Annual Meeting of Stockholders
scheduled to be held in March, 1997,
to be filed by Ecogen Inc. with the
Commission (hereinafter the
"Proxy Statement")
</TABLE>
(A) Excludes 1,021,831 shares of common stock held of record by
directors, officers and stockholders known to the registrant to hold more than
five percent of the common stock outstanding as of January 3, 1997. Exclusion
of shares held by any person should not be construed to indicate that such
person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of the registrant, or that such person
is controlled by or under common control with the registrant.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Ecogen Inc. ("Ecogen" or the "Company"), a Delaware corporation
incorporated in 1983, is a biotechnology company specializing in the
development and marketing of environmentally compatible products for the
control of pests in agricultural and related markets. Ecogen's product
revenues are generated by sales of biological insecticides derived from the
bacterial microorganism Bacillus thuringiensis ("Bt"), various pest control and
crop pollination products based on pheromone and related technologies, and
biological fungicide products for the control of powdery mildew and
post-harvest rot disease. In addition, Ecogen is developing for introduction
into certain niche markets insecticidal nematodes (microscopic roundworms) for
the control of insect pests. Ecogen was the first company to sell genetically
enhanced biological pesticide products which are registered with the United
States Environmental Protection Agency (the "U.S. EPA") for commercial sale.
In addition, Ecogen is the only company to have received U.S. EPA approvals to
sell Bt insecticides incorporating a recombinant Bt strain.
On January 24, 1996, the Company entered into a strategic
alliance with Monsanto Company ("Monsanto") for the joint development of Bt
technology. As part of the transaction, Monsanto agreed to purchase 943,397
shares of the Company's common stock for $10 million, acquired certain rights
with respect to Ecogen's Bt technology for $5 million and agreed to fund a
four-year $10 million research and development program.
On January 29, 1996, the stockholders of the Company approved an
amendment to the Company's Certificate of Incorporation that effected a
one-for-five reverse stock split of the Company's outstanding common stock (the
"Reverse Split"). As a result of the Reverse Split, the outstanding shares of
common stock of the Company were reduced from approximately 30,109,000 to
6,022,000. All references in this document to shares of common stock take into
account the effect of the Reverse Split unless the context otherwise requires.
On December 28, 1994, the Company changed its fiscal year end
from December 31 to October 31 so that its fiscal year would better conform to
the agricultural growing season in its primary markets. Unless the context
otherwise requires, all references in this document to the year 1996 shall mean
fiscal year 1996 beginning on November 1, 1995 and ending on October 31, 1996,
all references to the year 1995 shall mean fiscal year 1995 beginning on
November 1, 1994 and ending on October 31, 1995, and all references to fiscal
1994 shall mean the ten months beginning on January 1, 1994 and ending on
October 31, 1994.
TECHNOLOGY
Many naturally-occurring organisms are either antagonistic to or
produce substances toxic to agricultural pests. These include a variety of
microorganisms such as bacteria, yeast, fungi, viruses and protozoans that
either directly kill or produce compounds that interfere with certain insects,
fungal pathogens or plant disease organisms. In addition, more complex
organisms such as insecticidal nematodes (microscopic roundworms) that attack
insect pests have been long recognized as a potential source of pest control.
Insect pheromones, which are natural odors emitted by insects, are also a
recognized source of environmentally compatible, biorational insect pest
control. All of these natural agents when isolated and formulated as
commercially useful products are commonly called "biopesticides."
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Bacillus thuringiensis ("Bt")
Bt is a bacterium found in soil. The insecticidal activity of
Bt derives from production of spores and specific proteins in the form of
crystals found within the Bt bacteria. These insecticidal agents are produced
by the bacterial cells during a fermentation production process. They are then
formulated into products that are applied to plants by conventional ground and
aircraft spray equipment. When susceptible insects feed on plant foliage
sprayed with Bt-based products, the crystals are ingested and generate soluble
proteins that attack and destroy the insect's intestinal tract. The proteins
produced by various strains of Bt are highly active against specific, targeted
insect pests. Many insects are also susceptible to bacterial spores. Bt has
no adverse activity against non-target insects, fish, birds or mammals
(including humans). The genes for the insecticidal proteins reside on specific
non-essential DNA molecules termed plasmids. Bt bacteria in nature generally
contain several different genes that endow different insecticidal activities.
Plasmids can either be removed ("cured") from cells that harbor them or they
can be transferred between different strains by a natural mating process called
conjugal transfer that occurs in nature between Bt strains and that can be
replicated in the laboratory.
Ecogen has developed, through genetic modification techniques,
novel Bt bioinsecticide products that have higher levels of effectiveness and
that can act against a broader array of significant insect pests than Bt
products previously in use. Ecogen has developed and characterized
approximately 10,000 Bt strains and maintains one of the world's largest
collections of Bt strains. The Company uses strains from this collection to
screen and test for insecticidal activities. The characterization of the
diversity of Bt insecticidal proteins found in Ecogen's strain collection,
coupled with the ability to transfer or cure plasmids that contain the genetic
code for those proteins, was the basis for Ecogen's early-stage development of
new Bt bioinsecticides. Potent insecticidal crystal proteins produced by new
Bt strains containing novel and desirable combinations, which are obtained by
plasmid curing and conjugal transfer techniques, have been the active
ingredients in Ecogen's Bt bioinsecticides.
These natural genetic approaches to Bt bioinsecticide
development can be applied, however, only to those plasmids that can be
transferred or cured. Certain insecticidal proteins are encoded by plasmids
that are not transferable, and some plasmid combinations are unstable or yield
undesired insecticidal activities. Under these circumstances, the development
of genetically manipulated strains of Bt having novel activities against
specific insects is greatly facilitated by the application of recombinant DNA
technology. Ecogen has developed a proprietary Bt-based cloning vector system,
its SSR System(TM), that utilizes recombinant DNA technology to develop new Bt
strains having either increased potency or activity on a broader array of
insect species. Ecogen believes that the use of Bt (as opposed to other
microorganisms) as the host microorganism in which new Bt insecticidal gene
combinations are constructed facilitates regulatory review in obtaining field
trial permission and subsequent registrations for recombinant-derived products.
For example, in July, 1992, Ecogen received a generic approval from the United
States Environmental Protection Agency to field test recombinant Bt
insecticides using this approach. In February, 1996, the Company received U.S.
EPA approval to commercialize CRYMAX(TM) Bioinsecticide and in December, 1996,
the Company received U.S. EPA approval to commercialize Lepinox(TM)
Bioinsecticide, each of which is a recombinant Bt product based on a Bt strain
into which protein genes from different Bt strains were combined. Ecogen's
genetically enhanced bioinsecticides contain multiple insecticidal genes and
have complex modes of action, and Ecogen therefore believes that pest
populations will have difficulty developing resistance to them.
Ecogen has also developed technology to improve the insecticidal
capabilities of the Bt proteins through its work on the mechanisms involved in
the insecticidal activity. This technology, collectively referred to as
Mechanism Assisted Insecticidal Design, permits Ecogen to move beyond naturally
occurring proteins to identify new and commercially valuable proteins.
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Pheromone and Crop Pollination Technology
Insect pheromones are natural odors emitted by insects that are
undetectable to humans. Pheromones and related technologies act as behavior
modifying agents that can be used to suppress insect mating by disrupting
communications between potential mates, to attract target insects or to
stimulate foraging by target insects.
Pheromones can be used either alone to control insect
populations or in conjunction with biological or chemical insecticides in order
to reduce the amount of such insecticides required to control insect pests.
Pheromone products may be used to disrupt insect mating cycles. These
products, which duplicate the mating attractant emitted by female insects,
control insect populations by making it more difficult for male insects to find
females with which to mate. After application of the pheromone product, male
insects become confused and are attracted to the pheromone products rather than
potential mates. In addition, the mating attractant of the pheromone product
camouflages the natural attractant emitted by the female which also works to
disrupt the mating cycle and to control insect populations. Pheromones can
also be used to attract insects to trap devices for the purpose of monitoring
insect populations or to sources of chemical insecticides that are lethal to
the target insects.
Crop pollination technology is designed to attract honey bees to
crops to increase plant quality and grower yields through increased
pollination. Products incorporating this technology assist honey bees in
finding plants, thereby maximizing the number of visitations by such bees to
the flowers of various fruit and vegetable crops. Fruit and vegetable quality
may be increased and grower yields may be optimized through such increased
pollination. Ecogen's Bee-Scent(R) Attractant is based on this crop
pollination technology.
Biofungicide Technologies
Biofungicide technologies are based on naturally occurring
organisms such as fungi or yeast that can control harmful fungi that reduce
crop yields or infect crops after harvesting. Ecogen focuses biofungicide
research and development efforts on two biofungicide technologies:
hyperparasitic fungi which kill other fungi, such as powdery mildews that
infect plant leaves, flowers and fruit; and a yeast formulation which protects
stored fruit from post-harvest rot pathogens.
A fungal hyperparasite, Ampelomyces quisqualis, has been
identified that infects most, if not all, types of powdery mildews harmful to
agricultural products. Ecogen has obtained an exclusive license to this
hyperparasite. Powdery mildew is a significant fungal disease affecting many
crops. Special structures of the mildew penetrate the plant epidermal cells
and feed on cellular tissue, causing dwarfing of the plant and fruit and
cosmetic damage which is particularly undesirable on fresh produce. Plants
severely infected with these pathogens have reduced yields. Historically,
chemical fungicides have been used for the control of these fungal pathogens,
but these pathogens typically develop resistance to these chemical fungicides
over time. In response to this market need, the Company developed its AQ10(TM)
Biofungicide, which is based on the fungal hyperparasite Ampelomyces
quisqualis, for use in an integrated pest management system with other
fungicide products to control powdery mildew. AQ10 was the first biofungicide
registered by the U.S. EPA to protect crops from powdery mildew.
Several non-antibiotic producing strains of yeast have been
found to control a number of post-harvest rot pathogens of citrus, pome fruits,
grapes and other fruits and vegetables. The Company has incorporated a
selection of these strains into its Aspire(TM) Biofungicide. Aspire, which may
be applied by processors and packers in a manner consistent with the method of
application of standard chemicals, provides control of post-harvest rot
pathogens.
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Insecticidal Nematodes
Insecticidal or entomopathogenic nematodes are microscopic
roundworms that attack insect pests in the soil or in plant stems.
Insecticidal nematodes are not directly responsible for insect mortality, but
rather harbor bacteria that are released into and cause an infection of the
insect after nematode entry into the pest. Normally, the insect dies within 48
hours after infection. The natural characteristics of insecticidal nematodes
give nematode-based insecticides certain advantages over other insecticides.
For example, nematodes attack insect pests in the soil where approximately 90%
of insect pests spend at least a portion of their life cycle. In addition,
insecticides using nematodes, which cause no adverse effects to humans, animals
or plants, are currently exempt from U.S. EPA pesticide regulations and, unlike
other insecticides, including other bioinsecticides, are subject to
significantly lower levels of regulation or are exempt from registration by
state agencies.
Nematode product development is dependent on the implementation
of production technology developed at a pilot scale, particularly to obtain
higher yields at larger commercial scale production and to reduce the costs of
production. In addition, current shelf life of the insecticidal nematode
products being developed by Ecogen is insufficient for widespread
commercialization. Ecogen is exploring methods of formulating and preserving
the nematodes to further increase shelf life while maintaining the nematodes'
insecticidal capabilities, including the development of formulations that would
be stable at various temperatures.
RELATIONSHIP WITH MONSANTO
On January 24, 1996, the Company closed a transaction with
Monsanto forming a strategic alliance for development of the Company's
proprietary Bt technology.
Under the terms of the agreement, Monsanto purchased 943,397
shares of Ecogen common stock for $10.60 per share for an aggregate purchase
price of $10 million. Monsanto is required to maintain its ownership position
in Ecogen stock during the term of the four-year Research and Development
Agreement between Ecogen and Monsanto and Monsanto is prohibited, for three
years after closing, from acquiring more than a 25% aggregate equity interest
in the Company without the prior consent of the Company. These restrictions,
however, terminate upon the occurrence of certain defined events relating to a
change of control of the Company. Monsanto has certain registration rights
with respect to the shares of Company common stock. In addition, Monsanto has
a right of first refusal to purchase securities from the Company so as to
maintain its percentage ownership interest in the Company.
In addition, Monsanto acquired for $5 million certain rights to
Ecogen's existing Bt strain library and insecticidal crystal protein gene
library, and the intellectual property rights associated with such libraries
including certain patents and patent applications (the "Bt Technology").
Ecogen maintains rights to the Bt Technology for applications other than
in-plant uses. Monsanto did not acquire any rights to Ecogen's fermentation
and formulation technology, Ecogen's insectary technology or Ecogen's
technology related to the movement of Bt genes from Bt and back into Bt without
foreign DNA.
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Monsanto and Ecogen also entered into a Research and Development
Agreement to perform research and development focusing on Bt Technology (the "R
& D Program"). Under the R & D Program, Monsanto will provide Ecogen with a
minimum of $10 million over four years, of which $3 million has been received
to date. The results of the R & D Program will be owned by Monsanto and
licensed to Ecogen for use outside of in-plant applications. Under the terms
of the agreements with Monsanto, Ecogen will also share in the
commercialization success of transgenic plants incorporating the Bt Technology.
Monsanto shall pay a commercialization success fee based on sales and license
fees revenue received by Monsanto from products which incorporate the Bt
Technology or the results from the R & D Program.
ECOGEN TECHNOLOGIES I INCORPORATED
Between November, 1992 and January, 1993, Ecogen Technologies I
Incorporated ("ETech"), a company incorporated by but not then affiliated with
Ecogen, completed a private placement of 300 ETech units, each unit consisting
of four shares of common stock of ETech and 2,000 warrants, each to purchase
one share of common stock of Ecogen at a per share purchase price of $43.75 as
adjusted for the Reverse Split (the "Ecogen Warrants"). The Ecogen Warrants
may be exercised at any time prior to January 31, 1998, and the Ecogen Warrants
and the underlying shares of Ecogen common stock are freely tradable.
ETech was formed to initiate or accelerate research and
development of certain products using technology exclusively licensed or
sublicensed by Ecogen to the subsidiaries of ETech. The licensed rights
include the right to develop and commercialize insecticide products based on
technology for: (i) the control of powdery mildew disease (AQ10
Bioinsecticide); (ii) the control of post-harvest rot disease on agricultural
crops (Aspire Biofungicide); (iii) the control of the European corn borer
insect, which affects corn production (Condor(R) G Bioinsecticide); (iv) the
control of black vine weevil, citrus weevil, wireworm and black cutworm
utilizing insecticidal nematodes; (v) the control of corn rootworm; and (vi)
the control of certain insects which cause damage to turf. Ecogen has agreed
to commercialize and market products on behalf of ETech pursuant to various
Marketing Agreements that provide for Ecogen to receive a fee from ETech based
on product sales for Ecogen's commercialization and marketing activities.
In January, 1995, the Company exchanged 822,400 shares of its
common stock for 854 shares of the common stock of ETech (approximately 70% of
the outstanding common stock of ETech). As a result of this exchange, ETech is
a majority-owned subsidiary of Ecogen and its financial condition and results
of operations are included in the Company's consolidated financial statements.
PRODUCTS
The following are Ecogen's current principal products:
CRYMAX BIOINSECTICIDE - CRYMAX Bioinsecticide is a U.S. EPA
registered product that was developed by Ecogen using recombinant DNA
techniques. CRYMAX is being introduced generally to the marketplace in 1997
for the control of caterpillar pests on vegetable crops.
LEPINOX BIOINSECTICIDE - Lepinox Bioinsecticide is a U.S. EPA
registered product that was developed by Ecogen using recombinant DNA
techniques for the control of fall armyworm on sweet corn crops. Ecogen
expects to introduce Lepinox to the market in 1997.
CONDOR XL BIOINSECTICIDE -- Condor XL Bioinsecticide is a U.S.
EPA registered genetically enhanced Bt product developed by Ecogen for the
control of caterpillar pests in cotton, soybean, corn and other row crops and
tree and nut crops, and forestry applications. Condor is marketed primarily in
the southern United States for use on cotton, soybeans and other row crops.
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CUTLASS(R) BIOINSECTICIDE -- Cutlass Bioinsecticide is a U.S. EPA
registered genetically enhanced Bt product developed by Ecogen for the control
of caterpillar pests that damage vegetable, tree, nut and vine crops. Cutlass
is sold primarily in international markets, including Malaysia, Mexico, Spain
and Italy.
NOMATE(R) PHEROMONE PRODUCTS -- Ecogen markets various U.S. EPA
registered NoMate pheromone products for the control of pink bollworm on
cotton, tomato pinworm, codling moth, as well as for other applications. NoMate
products are marketed primarily in the south-western United States, Mexico and
the Republic of South Africa.
BEE-SCENT ATTRACTANT -- Bee-Scent Attractant directs honey bees
to treated blossoms to improve crop pollination, thereby increasing grower
yields and crop quality. Bee-Scent is marketed in various regions of the
United States, including California, the Pacific Northwest and the Great Lakes
region, and in Korea.
SCENTRY(R) TRAP & LURE PRODUCTS - Ecogen markets a variety of
insect trap and lure products for insect monitoring that are sold commercially
and pursuant to government contracts.
AQ10 BIOFUNGICIDE -- AQ10 Biofungicide is the first biofungicide
registered by the U.S. EPA to protect crops from powdery mildew. In 1996,
Ecogen began to introduce AQ10 on a limited basis for use on grapes in
California.
ASPIRE BIOFUNGICIDE -- Aspire Biofungicide is the first
biofungicide registered by the U.S. EPA to protect crops from post-harvest rot
pathogens. In 1996, Ecogen began to introduce Aspire for use on citrus by
fruit packinghouses in the United States.
CRUISER(TM) INSECTICIDE -- Cruiser Insecticide contains the
Heterorhabditis bacteriophora nematode and is being developed for the control
of a variety of insect pests.
During fiscal 1996, the foregoing products represented
substantially all of Ecogen's product sales. Product sales represented
approximately 52% of the Company's total revenues in fiscal 1996. Ecogen's Bt
products and pheromone and related products represented approximately 45% and
50%, respectively, of Ecogen's total product sales in 1996.
MARKETING
Agricultural pesticides and related products are sold in the
United States primarily through traditional agricultural chemical distribution
channels consisting of large wholesale distributors and dealers which serve
extensive farm areas. Ecogen makes use of these traditional channels for the
domestic distribution of its current products. To coordinate these
distribution activities and generate grower interest in its products, the
Company employs a marketing staff including several domestic sales
representatives who are located in key agricultural chemical distribution
locations, primarily in the southern and western areas of the United States.
In April, 1996, the Company entered into a distribution agreement for its
Aspire Biofungicide product with Decco, a business unit of Elf Atochem North
America, Inc. Under the terms of the agreement, Decco will distribute Aspire
to fruit packinghouses, primarily in the United States. Ecogen's domestic
product sales for fiscal 1996, fiscal 1995 and the ten months of fiscal 1994
totaled $7.0 million, $8.4 million and $7.7 million, respectively.
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For the international distribution of its products, Ecogen has
entered into several collaborations with companies that have a significant
presence in the markets covered by their respective agreements. In 1991, the
Company and Hoechst Schering AgrEvo, S.A. ("AgrEvo") entered into a
distribution and product supply agreement that grants to AgrEvo exclusive
distribution rights to certain of the Company's primary Bt products in Europe
(except Germany, which is excluded, and Spain, Portugal and Italy, where rights
are co-exclusive), Africa, the People's Republic of China, Australia, the
Middle East and Latin America (except Mexico). In addition to its agreement
with AgrEvo, Ecogen has international distribution agreements for certain of
its products with a number of other companies including: Green Marketing
International (for the Republic of South Africa), Nissan Chemical (for Japan),
Intrachem (International) S.A. (for Italy, Spain and Portugal), ISK Biotech
Corporation (for Mexico), Jia Non Enterprises (for Taiwan) and Incitec Ltd.
(for Australia and New Zealand). International product sales totaled $1.6
million for fiscal year 1996, $716,000 for fiscal year 1995 and $897,000 for
the ten months of fiscal 1994.
PRODUCTION
The manufacturing process for Ecogen's Bt-based bioinsecticide
and biofungicide products involves fermentation of the desired microorganism.
Upon completion of this fermentation process, the pesticidal agent is recovered
using standard techniques, such as centrifugation, and is formulated into
commercial products. Ecogen operates a fermentation and formulation pilot
plant to support some product requirements for field trials and to facilitate
the transition of products from laboratory to large-scale manufacturing. For
commercial production of its products, Ecogen generally engages third party
contract manufacturers to perform one or more steps in the manufacturing
process for the Company's products.
Ecogen is a party to an arrangement with Archer Daniels Midland
Company ("ADM") pursuant to which ADM will manufacture Ecogen's Bt-based
insecticides as well as Aspire Biofungicide at ADM's facility in Decatur,
Illinois. This facility has both fermentation and formulation capability and
is designed to supply Ecogen with finished goods of the Company's Bt products.
The current arrangement with ADM resulted from ADM's guarantee of the
performance of Ecogen's prior supplier, biosys, Inc., which filed a bankruptcy
petition in September, 1996. Ecogen believes that adequate fermentation,
formulation and other services are available from other contract manufacturers,
but the engagement of such other contract manufacturers may cause at least
short-term disruptions of the Company's manufacturing.
The Company purchases the active ingredients for its pheromone
products from various suppliers and manufactures its pheromone products at its
facility in Billings, Montana. In addition, the Company obtains certain
manufacturing services from 3M Corporation with respect to the formulation of
some of its NoMate products. The Company believes that its Billings, Montana
facility has sufficient capacity to meet its current and near-term anticipated
pheromone product needs.
The most important raw materials needed by Ecogen to conduct its
product manufacturing and research and development activities include both
fermentation media components and formulation chemicals, which are readily
available from a variety of independent sources, and microbial strains that are
either proprietary to Ecogen or are licensed from outside parties. Ecogen does
not anticipate any shortages of these or other raw materials that would
materially affect product availability or cost.
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RESEARCH AND PRODUCT DEVELOPMENT
The Company's operating expenses to date have included costs
associated with the research and development of products for future
commercialization. Costs incurred by Ecogen under third-party funded research
and development programs aggregated approximately $1.0 million for fiscal 1996,
$1.7 million for fiscal 1995 and $6.0 million for the ten months of fiscal
1994. Costs incurred under Ecogen-funded research and development programs
aggregated approximately $3.9 million, $7.3 million and $3.3 million for fiscal
1996, 1995 and 1994, respectively.
During fiscal 1996, the Company derived approximately 43% of its
revenues from research and development contracts and technology license
agreements. This contrasts with approximately 24% in 1995 and 54% in 1994.
Bacillus thuringiensis Products
Ecogen's Bt product development activities are focused on
improving, through recombinant DNA and other technologies, the efficacy of its
bioinsecticides already in the market, adapting such products for application
to additional uses, and developing new bioinsecticides. In addition, Ecogen is
attempting to improve its fermentation and formulation processes in order to
increase product yield and reduce the costs of product manufacturing.
Pheromone and Related Products
Ecogen is exploring additional formulations of its pheromone
products in order to develop alternative application techniques for such
products. Tests also are being conducted by the Company in order to expand its
pheromone product line for the control of additional pests.
Yeast, Fungal and Other Products
The Company is continuing to develop processes for the commercial
production by fermentation of AQ10 and Aspire Biofungicides. The Company is
also continuing to develop stable and efficacious formulations for these
products. With respect to Aspire Biofungicide, the Company is working to
develop formulations that provide Aspire with increased shelf life at room
temperatures. In addition, the Company is working on different types of
bacteria that may be used for the control of certain plant parasitic nematodes
that feed on or enter roots of growing plants causing damage and reduced crop
yields. In laboratory tests and greenhouse trials, Ecogen has identified
bacterial isolates with activity against root knot nematodes which attack a
variety of crop plants.
Insecticidal Nematodes
The Company is working to implement at a commercial scale
production technology developed at a pilot scale so as to obtain higher yields
and reduce the costs of production. The Company is also investigating methods
for increasing the shelf life of nematode products (particularly at ambient
temperatures). In addition, the Company is continuing the development of
formulations that are designed to make the Company's products easier to use and
to increase product shelf life.
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PATENT AND TRADE SECRETS
Ecogen pursues a policy of seeking patent protection, both in the
United States and abroad, to protect its novel technologies, compositions of
matter and processes. With respect to the Company's two biofungicide products,
AQ10 Biofungicide and Aspire Biofungicide, and with respect to certain of its
Bt technology, the Company holds licenses to patents covering the base
technologies.
There can be no assurance that patents or license rights under
patents for all of the Company's products and processes will be obtained, or
that issued patents will provide substantial protection or be of commercial
benefit to the Company. The issuance of a patent is not conclusive as to its
validity or enforceability, nor does it provide the patent holder with freedom
to operate without infringing the patent rights of others. A patent could be
challenged by litigation and, if the outcome of such litigation were adverse to
the patent holder, competitors could be free to use the subject matter covered
by the patent or the patent holder could be required to license the technology
to others.
Because of the uncertainty concerning patent protection, the
Company relies, in certain cases, upon trade secret protection and continuing
technological innovation to maintain its competitive position. All Ecogen
employees and consultants sign confidentiality agreements under which they
agree not to use or disclose the Company's confidential information as long as
that information remains proprietary or, in other cases, for fixed time
periods. There can be no assurance, however, that such proprietary technology
will not be independently developed or that secrecy will not be breached. The
Company's research, development and commercialization partners, as well as its
biopesticide production subcontractors, are provided access to know-how under
confidentiality agreements. To the extent that such entities use this
technological information, disputes may arise as to the proprietary and patent
rights to such technological information and related developments.
The Company is aware that substantial research efforts in
biotechnology are taking place at universities, government laboratories and
other corporations around the world and that numerous patent applications have
been filed, and patents have been issued, relating to fundamental technologies
and to specific biological pesticide products and processes. The Company may
have to obtain licenses under certain of these patents. No assurance can be
given concerning the terms on which such licenses would be available, if at
all.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and
other countries is a significant factor affecting the success of products
resulting from biotechnological research.
The pesticide industry is heavily regulated in the United States.
The U.S. EPA regulates pesticide products under the Federal Insecticide,
Fungicide and Rodenticide Act ("FIFRA"). Pesticides also are regulated by
various state agencies. Some states, such as California, have their own
extensive registration requirements. To develop and commercialize a pesticide
product, detailed and complex procedures must be followed and federal approvals
must be obtained under FIFRA. Small-scale field testing usually may be
conducted prior to product registration to evaluate product efficacy. To
conduct large-scale tests, a company must obtain an Experimental Use Permit
("EUP"), which generally requires satisfactory completion of certain
11
<PAGE> 12
toxicology and environmental studies. Synthetic chemical pesticides require
additional extensive toxicology and environmental testing that typically is not
required of biopesticides to substantiate product safety prior to obtaining a
product registration. Commercial sale of a pesticide requires a registration
for each pest and crop for which the product is used. Registration
requirements include submission and U.S. EPA approval of the text of a label
which must be included on every pesticide product.
The United States Congress has mandated under the Food Quality
Protection Act of 1996 that all U.S. EPA tolerances be reassessed using new
standards within 10 years. All tolerances will now be based on a "reasonable
certainty of no harm" and there will be a specific determination of risk to
infants and children.
The U.S. EPA has recognized that biochemical and microbial
pesticides are distinguished from standard chemical pesticides and has
established different data requirements as part of its registration
regulations. These data requirements are set out in Subdivision M of the U.S.
EPA's Pesticide Assessment Guidelines. Biopesticides currently are subject to
a three-tier toxicology testing procedure and a four-tier environmental testing
procedure. A biopesticide product which satisfactorily completes both the Tier
I toxicology and environmental tests is not required to go through the tests
specified in subsequent tiers. This has been the case for product registration
applications filed by the Company to date. However, should questions arise
during any tier of testing, additional tests may be required. For a
biopesticide product required to complete only Tier I testing, approximately
one year of laboratory testing is required. Subsequent U.S. EPA registration
generally takes approximately one year. Although the process for obtaining
regulatory approval to test and market biopesticides that are genetically
modified is designed to be less complex and time-consuming than the regulatory
approval process for synthetic chemical pesticides, there can be no assurance
that approvals will be granted on a timely basis, if at all.
Certain of Ecogen's products under development utilize
recombinant DNA technology. The Federal government regulates certain
recombinant DNA research activity through the National Institute of Health's
Guidelines for Research Involving Recombinant DNA Molecules ("NIH Guidelines").
The NIH Guidelines, among other things, set laboratory procedures and establish
levels of biological and physical containment and other standards for
recombinant DNA molecules that must be met for various types of research.
Ecogen believes that it is in compliance with the NIH Guidelines. In August,
1992, Ecogen received blanket permission from the U.S. EPA to conduct
small-scale field trials of its recombinant Bt strains without prior notice
(generally required for small-scale field testing of microbial pesticides).
Pheromone and related products (other than trap and lure
products) generally require U.S. EPA and state registrations.
Insecticidal nematodes are currently exempt from registration
under U.S. EPA pesticide regulations and, unlike other insecticides, including
other bioinsecticides, are subject to significantly lower levels of regulation
or are exempt from registration by state agencies.
Ecogen's activities, including operation of its laboratories and
pilot-scale manufacturing facilities, are, or may be, subject to regulation (i)
under various other state and federal laws and regulations, including the
Occupational Safety and Health Act, the Toxic Substances Control Act, the
Federal Food, Drug and Cosmetic Act, the Solid Waste Disposal Act, the Resource
Conservation and Recovery Act, the Emergency Planning and Community
Right-to-Know Act, the Clean Air Act, the Clean Water Act, and other state and
federal laws regulating
12
<PAGE> 13
environmental quality, and the implementation of regulations for all such laws;
and (ii) by other state and federal agencies, including the U.S. Department of
Agriculture and the U.S. Food and Drug Administration. In addition, the
actions of federal agencies in reviewing applications by Ecogen or issuing
permits or other authorizations may be subject to the National Environmental
Policy Act, and state or local agencies may be required to comply with similar
state laws. Historically, the cost of compliance with such laws and
regulations has not had a material impact on Ecogen's business.
From time to time, governmental authorities review the need for
additional laws and regulations for biotechnology products and for pesticide
products that could, if adopted, apply to the business of Ecogen. Ecogen is
unable to predict whether any such new regulations will be adopted or whether,
if adopted, such regulations will adversely affect its business.
Historically, the cost to Ecogen of compliance with federal,
state and local provisions enacted for the protection of the environment has
not been material. Toxicology testing, field development trials and related
costs for U.S. EPA registrations incurred to date by Ecogen have averaged
under $500,000 for each product registration, while state registration and
related costs per product have been nominal. This does not mean that such
costs are unlikely to increase in the future, particularly if more restrictive
approval requirements are adopted by federal, state or local authorities.
Also, delays in obtaining necessary product registrations can have a
significant impact upon Ecogen's revenues and competitive position in the way
of delayed product sales and lost market opportunities.
Field development and testing, as well as the commercial sale, of
Ecogen's biopesticide products outside the United States can be highly
regulated. The impact of such regulation upon Ecogen's business cannot be
assessed at this time.
COMPETITION
Competition in the pesticide market is intense. Competition is
based principally on price and efficacy, but safety and ease of application are
also factors. Competitors of Ecogen include manufacturers and marketers of
synthetic chemical pesticides and biopesticides, including large chemical
companies such as Abbott Laboratories, Novartis and DowElanco, as well as
specialized biotechnology firms. Many of these companies have considerably
greater financial and marketing resources than Ecogen. Competitors with
respect to research and development activities also include universities and
public and private research organizations. In addition, Ecogen's
bioinsecticide products compete with certain transgenic seed and plant products
that have insecticidal capabilities.
Ecogen believes that its ability to compete in the pesticide
market may be enhanced by heightened concerns about the effects of chemical
pesticides upon the environment and, in some cases, by the increasing
resistance of plant pests to synthetic pesticides. However, Ecogen expects
competition in the agricultural pesticide industry to intensify as technical
advances in the fields of pesticides and pest-resistant plants are made. There
can be no assurance that developments by others will not render the Company's
products or technology obsolete or noncompetitive.
13
<PAGE> 14
SEASONALITY
The bulk of the Company's current products are presently marketed
for agricultural applications in the northern hemisphere, where the growing
season generally runs from spring until fall. Commercial introduction of the
Company's new products is contingent upon, 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 and may result in substantial variations in
quarter-to-quarter financial results. Product sales from year to year are also
affected by unusual weather conditions, such as droughts or floods, and the
level of insect infestation in grower areas.
EMPLOYEES
As of January 3, 1997, Ecogen and its subsidiaries employed full
time 88 persons, of whom 16 hold Ph.D. degrees and 18 hold other advanced
degrees. Doctoral degrees held by employees of Ecogen encompass the areas of
biochemical engineering, biochemistry, entomology, microbiology, molecular
genetics, physiology and plant pathology.
Employees of the Company are required to enter into
confidentiality agreements with Ecogen. Pursuant to these agreements, the
employees have agreed not to disclose Ecogen's proprietary information and to
assign to Ecogen all rights to any inventions made during their employment or
relating to Ecogen's activities, and not to engage in activities similar to
their activities at Ecogen for any other person or entity during the term of
their employment and for one year thereafter. Ecogen believes that its
relationship with its employees is good.
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages
and positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
James P. Reilly, Jr. 50 Chairman and Chief Executive Officer
and Director
Richard A. Deak 42 Vice President, General
Counsel and Secretary
Leigh H. English 41 Vice President, Research
Mary E. Paetzold 47 Vice President, Chief Financial
Officer and Treasurer and Director
</TABLE>
All executive officers are elected by the Board of Directors.
There is no family relationship among any of the officers or directors.
14
<PAGE> 15
BUSINESS EXPERIENCE
Mr. Reilly has served as Chairman since November 1, 1995 and as a
director of the Company since June, 1992. Since January, 1994, he has been the
Chief Executive Officer of the Company and since June, 1992, he has been the
Company's President. From June, 1992 to January, 1994, Mr. Reilly served as
Chief Operating Officer of the Company. From 1976 until he joined the Company,
Mr. Reilly was employed in various management capacities at Rhone-Poulenc,
Inc., most recently, from April, 1991 to May, 1992, as Vice President and
General Manager of the Fine Chemicals Division. He received a B.S. in Business
Administration from Boston College.
Mr. Deak has served as Vice President and General Counsel of the
Company since August 1993 and as Secretary since May, 1995. From January, 1993
to July, 1993, Mr. Deak served as General Counsel of the Company. From
January, 1985 until he joined the Company, Mr. Deak was employed by Unisys
Corporation in various positions, including Associate General Counsel,
Corporate, Acquisitions and Finance. Prior to joining Unisys Corporation, Mr.
Deak practiced law with Mann & Ungar and Dechert Price & Rhoads. Mr. Deak
received a J.D. from the University of Pennsylvania Law School and a BBA in
Accountancy from the University of Notre Dame.
Dr. English has served as Vice President, Research of the Company
since March, 1995. From March, 1986 until March, 1995, Dr. English served
Ecogen in various positions including Principal Research Scientist and Team
Leader. Prior to joining Ecogen, Dr. English was a Research Associate at Tufts
University School of Medicine. Dr. English received a B.S. in Entomology from
Cornell University, a Ph.D in Membrane Biochemistry from North Dakota State
University and was an NIH postdoctoral fellow at Harvard University Department
of Biochemistry and Molecular Biology.
Ms. Paetzold has served as a director of the Company since March,
1996 and as Vice President, Chief Financial Officer and Treasurer of the
Company since she joined Ecogen in August, 1994. Prior to joining the Company,
Ms. Paetzold was a partner with KPMG Peat Marwick LLP, certified public
accountants, where she worked for over twenty years. Ms. Paetzold received a
B.A. in Mathematics from Montclair State University and is a Certified Public
Accountant.
ITEM 2. PROPERTIES
Ecogen currently leases approximately 44,000 square feet of space
for its administrative offices and research and development operations in two
buildings located in the Bucks County Business Park, Langhorne, Pennsylvania.
The leases for these facilities expire on March 31, 2000 and Ecogen has renewal
options to March 31, 2005. Approximately 32,000 square feet of this space is
devoted to research and development facilities, including laboratories, an
insectary and a fermentation and formulation pilot plant. In addition, Ecogen
currently leases approximately 20,000 square feet of space in Billings, Montana
for its pheromone business, under a lease which expires December 31, 1997. The
Company believes that its leased space is sufficient for current needs.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
A. Market Information
The Company's common stock trades under the NASDAQ symbol EECN
and is included in the National Market System. The high and low prices of the
Company's common stock during the years ended October 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
1996 HIGH LOW
--------------------------------------------------------------------------
<S> <C> <C>
First Quarter $10 $ 5-5/16
Second Quarter 7-1/2 4-3/8
Third Quarter 6 3
Fourth Quarter 4-3/4 2-5/8
<CAPTION>
--------------------------------------------------------------------------
1995 HIGH LOW
--------------------------------------------------------------------------
<S> <C> <C>
First Quarter $20 $11-1/4
Second Quarter 18-3/4 8-7/16
Third Quarter 13-7/16 6-9/16
Fourth Quarter 9-11/16 3-1/8
</TABLE>
A. Holders
On January 3, 1997, there were approximately 2,040 stockholders
of record.
B. Dividends
No cash dividends have ever been paid on the Company's Common
Stock, and the Company does not intend to pay cash dividends in
the foreseeable future.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
Years ended October 31, 1996 and 1995, ten months ended October 31, 1994,
and years ended December 31, 1993 and 1992
(all amounts in thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
10 Months
Ended
Year Ended October 31, October 31, Year Ended December 31,
1996 1995(1) 1994(2) 1993 1992(3)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $8,600 $9,135 $8,550 $7,151 $3,519
Other revenues 7,825 2,855 11,275 12,501 5,438
Gross margins 2,901 3,627 2,659 1,514 292
Expenses:
Research & development 4,923 8,951 9,278 12,096 8,345
Selling, general &
administrative 8,547 10,672 9,249 9,821 8,757
Special charges for
purchased technology - 9,143 - 350 4,349
Net loss ($2,743) ($23,324) ($4,593) ($11,858) ($21,366)
Net loss per common
share ($0.40) ($4.34) ($1.24) ($3.39) ($6.30)
Weighted average common
shares outstanding 7,178 5,373 3,715 3,495 3,385
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
At October 31, At December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents
and temporary
investments $9,611 $1,775 $8,828 $11,601 $17,470
Total assets 23,861 12,371 19,471 21,277 25,356
Long-term debt 1,297 620 - - -
Stockholders' equity 14,403 5,507 9,651 9,496 18,465
- ------------------------------------------------------------------------------------------------------------
</TABLE>
No cash dividends have ever been paid on the Company's common stock, and the
Company does not intend to pay cash dividends in the foreseeable future.
(1) During fiscal 1995, the Company acquired a controlling interest in Ecogen
Technologies I Inc. (ETech) which was accounted for as a purchase with the
operations of ETech consolidated from the date of acquisition. As a result
of the acquisition, a special charge to operations was recorded in 1995 for
purchased technology and the Company no longer recorded contract revenue
from ETech on its consolidated financial statements.
(2) In December, 1994, the Company changed from a calendar year end to a fiscal
year ended October 31. Accordingly, results of operations in 1994
represent the ten-month period ended October 31, 1994.
(Footnotes continue on next page)
17
<PAGE> 18
(3) In March, 1992, the Company acquired a company in Australia involved in the
research and development of insecticidal nematode technology. In
September, 1992, the Company acquired certain assets of Scentry, a company
that develops and markets insect pheromone products. These acquisitions
were accounted for as purchases, with the operations of the business
acquired included in the consolidated financial statements from the date of
acquisition. As a result of the acquisitions, a special charge to
operations was recorded in 1992 for purchased technology.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Ecogen is an agricultural biotechnology company specializing in
the development and marketing of quality biorational products for the control
of pests in agricultural and related markets. On December 28, 1994, the
Company changed its fiscal year end from December 31 to October 31 so that its
fiscal year end would better conform to the agricultural growing season in its
primary markets. Accordingly, in the discussion below, fiscal 1995 results
have been compared to results for a pro forma year ended October 31, 1994. The
unaudited consolidated financial statements for the year ended October 31, 1994
are not presented separately herein.
OVERVIEW
Total revenues increased 37% in fiscal 1996 to $ 16.4 million
from $ 12.0 million in fiscal 1995. In fiscal 1996, product sales decreased
5.9% from $9.1 million in fiscal 1995 to $8.6 million in 1996. Gross margins
decreased to 34% in fiscal 1996 compared to 40% in fiscal 1995 due principally
to lower volumes and product mix. Net loss before special charges decreased
from ($13.1) million in fiscal 1995 to ($2.7) million in fiscal 1996 as a
result of lower operating expenses and higher other revenue. Other revenue
included $4.8 million in upfront payments from Monsanto in 1996 for the rights
to certain Bt technology. The 1995 results included special charges of $10.2
million relating to purchased technology from ETech, the shutdown of Ecogen
Australia and other severance costs. Net loss in fiscal 1995 was ($23.3)
million or ($4.34) per share compared to ($2.7) million or ($.40) per share in
fiscal 1996.
The following is a summary of results as a percentage of total revenues, unless
otherwise indicated, as well as the percentage change in dollar amounts
compared to the prior period:
<TABLE>
<CAPTION>
Year Ended October 31, Increase
1996 1995 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Total Revenues 100% 100% 37%
Product Sales 52% 76% (6%)
Other Revenues 48% 24% 174%
Gross Margins on Product Sales 34% 40% (20%)
Research & Development
Expenses 30% 75% (45%)
Selling, General & Administrative
Expenses 52% 89% (20%)
</TABLE>
18
<PAGE> 19
RESULTS OF OPERATIONS - YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED
OCTOBER 31, 1995
REVENUES
Total revenues increased 37% in fiscal 1996 from $12.0 million to
$16.4 million, principally as a result of the Company's research and
development strategic alliance with Monsanto. Net product sales decreased 6%
or $.5 million in fiscal 1996 compared to fiscal 1995. The Company's product
sales did not increase in fiscal 1996 at the levels expected, principally as a
result of manufacturing equipment design issues which delayed certain new
product introductions and lower insect pressure in the Mississippi Delta in
late season cotton and southern soybeans. The Company believes that the design
issues have been addressed and the Company expects to have the equipment
operating by the end of its first fiscal quarter which will allow the Company
to proceed with commercial scale-up of its new products in fiscal 1997. Sales
of the Company's Bt product line, representing 15% of Company product sales,
decreased 29% in fiscal 1996 principally on lower sales volume due principally
to lower cotton acreage available for sprayable Bt insecticides and low insect
pressure in the Delta and in southern soybeans. Bt product sales were ($.7)
million in the fourth quarter as a result of higher than expected returns of
Condor XL from the cotton market. Sales of the pheromone product line,
representing 50% of total sales, increased 22% primarily due to increased
volume, including initial international sales of NoMate(R) CM for the control
of codling moth on apple trees, and increased sales of insect trap and lure
products pursuant to contracts with governmental entities. Sales of
biofungicide products, representing 5% of total sales for fiscal 1996,
represented initial sales of the Company's first two biofungicide products,
AQ10 and Aspire, in fiscal 1996.
Research contract revenues decreased 8% in fiscal 1996, due
primarily to the divestiture of Ecogen Europe S.r.l., the Company's former
majority-owned European research subsidiary, partially offset by research
contract revenues resulting from the Company's research and development
strategic alliance with Monsanto. License fees and other income increased $5.0
million principally as a result of the Company's strategic alliance with
Monsanto. Interest income increased approximately $.2 million in fiscal 1996 as
a result of the increase in funds available for investment.
COSTS AND EXPENSES
Gross margins decreased to 34% for 1996 compared to 40% in fiscal
1995, primarily as a result of a change in product mix caused by higher
pheromone sales pursuant to lower margin government contracts, and higher
international sales which carry lower margins and unabsorbed overhead charged
to costs of sales during the fourth quarter of 1996 as a result of a production
slow-down due to manufacturing equipment design issues. As discussed above,
the Company believes that the design issues have been addressed and expects to
proceed with commercial scale-up of new products in 1997.
Research and development costs decreased $4.0 million or 45%
principally as a result of cost savings from restructuring decisions made by
the Company in 1995, including the divestiture of Ecogen Europe S.r.l., other
reductions of research and development personnel, and a reduction in outside
consulting expenditures. During the fourth quarter of 1996, the Company
recorded in research and development costs $.3 million in start-up expenses
associated with the scale-up of new products. Selling, general and
administration expenses decreased $2.1 million or 20% principally as a result
of a reduction in personnel and other cost saving measures.
Net loss for fiscal 1996 was ($2.7) million, or ($.40) per share,
compared with a net loss of ($23.3) million or ($4.34) per share in the same
period in fiscal 1995. The 1995 fiscal year included special charges of $10.2
million principally due to the write-off of in-process research and development
as a result of the Company's acquisition of a controlling interest in ETech.
Net loss of
19
<PAGE> 20
($2.7) million or ($.40) per share in fiscal 1996 represents a sharp decline
from the net loss exclusive of special charges of ($13.1) million or ($2.45)
per share in 1995 on weighted average shares of 7,149,000 and 5,373,000 in 1996
and 1995, respectively, due principally to cost reductions of $6.2 million
noted above and $5.0 million of other revenue.
RESULTS OF OPERATIONS - YEAR ENDED OCTOBER 31, 1995 COMPARED TO UNAUDITED PRO
FORMA YEAR ENDED OCTOBER 31, 1994
REVENUES
Total revenues decreased $10.9 million or 48% in fiscal 1995
compared to the same period in 1994 principally due to lower research contract
revenue as a result of the acquisition of ETech. Product sales in 1995
approximated the same level as the comparable period in 1994. Sales of Bt
products increased marginally due to volume increases in 1995 despite adverse
weather conditions in the Mississippi Delta, the Company's primary sales region
for its Bt product line. Sales of the Company's pheromone product line
decreased 3% as a result of volume primarily due to economic uncertainties in
the Mexican market and inventory carryover in the Pacific Northwest. Gross
margins on product sales increased to 40% in 1995 from 31% in the same period
in 1994 in spite of the fact that pheromone product sales, other than pursuant
to government contracts, which generally have the highest gross margins,
decreased in 1995. The increase in gross margins in 1995 reflects the
continuing impact of lower manufacturing costs due to improvements made to the
Bt manufacturing process.
OPERATING COSTS
Research and development costs decreased $3.0 million or 25.0%
in fiscal 1995 compared to the same period in 1994 due principally to scheduled
reductions in spending under ETech programs for which research effort had been
accelerated in 1993 and 1994 as a result of the ETech financing. Selling and
marketing expenses increased $.8 million or 18.5% as a result of costs
associated with the preparation for new product introductions. General and
administrative expenses decreased $1.2 million or 17.6% in fiscal 1995 compared
to the same period in 1994 as a result of personnel reductions and other cost
containment measures taken in late 1994 and in 1995.
Total operating expenses were $29.8 million during fiscal 1995
compared to $23.3 million in the same period in 1994. The increase in
operating expenses was due to special charges of $10.2 million in 1995 that are
detailed below. Operating expenses exclusive of special charges decreased 14%
from $22.9 million in fiscal 1994 to $19.6 million in the comparable period in
1995 due to the factors noted above.
Net loss for fiscal 1995 was ($23.3) million or ($4.34) per
share compared to ($6.8) million or ($1.84) per share in the same period in
1994. The net loss exclusive of special charges was ($13.1) million or ($2.45)
per share in 1995 compared to ($6.5) million or ($1.75) per share in 1994. The
increase in net loss exclusive of special charges is due to the decrease in
research contract revenue partially offset by lower operating costs and higher
gross margins.
SPECIAL CHARGES
The following represents a summary of special charges in 1995 (in thousands):
<TABLE>
<S> <C>
Purchased Technology $ 9,143
Restructuring Costs 1,042
--------
$ 10,185
========
</TABLE>
20
<PAGE> 21
Restructuring costs include $.9 million of severance costs of
which $.3 million was paid in fiscal 1996 and $.2 million is payable in each of
fiscal 1997 and 1998.
SEASONALITY OF BUSINESS
The bulk of the Company's current products are presently marketed
for agricultural applications in the northern hemisphere, where the growing
season generally runs from spring until fall. Commercial introduction of the
Company's new products is contingent upon, 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 the Company's business, product
revenues are likely to be concentrated in the fiscal quarters prior to and
during a particular growing season and may result in substantial variations in
quarter-to-quarter financial results. Product sales from year to year are also
affected by unusual weather conditions, such as droughts, and the level of
insect infestation in grower areas.
INFLATION
To date and for the foreseeable future, inflation has not had nor
is it anticipated to have a significant impact on revenues or costs and
expenses of the Company, except to the extent of normal cost of living
adjustments related to personnel costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital needs primarily
through private and public offerings of equity securities, research revenues
and license and other fees from research and development contracts and product
sales.
At October 31, 1996, the Company had cash, cash equivalents and
temporary investments of $9.6 million, a net increase of $7.8 million from
October 31, 1995. Cash and cash equivalents increased $3.8 million and
investments increased $4.0 million. Such increases resulted primarily from
$11.4 million received from financing transactions in fiscal 1996 offset by
cash expenditures during the year of $3.1 million for operations, and $.5
million for the purchase of plant and equipment.
During 1996, the Company completed the Monsanto transaction,
which resulted in an immediate cash infusion to the Company of $18.0 million
including $10 million in gross proceeds from the sale of 943,397 shares of the
Company's common stock. Further, the Company sold 122,000 shares of Series C
preferred stock at $25 per share in a private placement to institutional
investors for aggregate net proceeds of $2.8 million, all of which converted to
common stock in fiscal 1996. In connection with the private placement, the
Company issued warrants to purchase 77,877 shares of the Company's common stock
at $7.30 per share exercisable for five years.
To date, the Company has not generated positive cash flow from
operations. The Company believes that its existing working capital and cash
flow generated from total revenues in 1997 should be sufficient to meet its
capital and liquidity requirements for at least the next year based on reduced
spending levels, if necessary. The Company may need additional financing to
support current levels of product development and commercialization. There is
no assurance that such financing will be available on terms acceptable to the
Company or at all. Further, 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
21
<PAGE> 22
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.
At October 31, 1996 the Company had commitments for capital
expenditures of $.4 million.
Through October 31, 1996, the Company had available Federal net
operating loss carryforwards of approximately $63.7 million which expire at
various times through the year 2010. In addition, the Company had research and
experimentation tax credits of approximately $2.4 million, which credits expire
at various times through the year 2010.
As a result of certain equity transactions, the Company
experienced ownership changes as defined by rules enacted with the Tax Reform
Act of 1986 (the "Act"). Accordingly, the Company's ability to use its net
operating loss and research and experimentation credit carryforwards is subject
to certain limitations as defined by the Act. The Company believes that such
limitations should not have a significant impact in 1997 or 1998 since
anticipated taxable profits, if any, will not exceed the amount of the
limitation. In addition, to the extent that the Company recognizes gains, if
any, on the disposition of assets held on the date of the ownership change, the
annual limitation is increased by the amount of the "built-in" gains
attributable to those assets. The built-in gain on a particular asset is the
excess of its fair market value over its cost basis on the date of the
ownership change.
OTHER ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Inventory increased $.5 million principally as a result of lower
than expected Bt sales and increased purchases of certain raw materials offered
at favorable prices. Accounts receivable increased $1.0 million principally as
a result of international sales on extended payment terms. Prepaid expenses
and other current assets increased $.3 million due principally to accrued
income on the investment portfolio.
Accounts payable increased $1.1 million as a result of increased
refunds due on product returns in October 1996 and amounts due for construction
in progress partially offset by the timing of payments on other trade payables.
Deferred contract revenue increased $1.1 million in fiscal 1996 as a result of
unearned advanced payments received from Monsanto pursuant to the Research and
Development Contract.
Long-term debt and other long-term liabilities increased $.4
million in 1996 principally as a result of additions to capital leases.
Stockholders' equity increased $8.9 million as a result of 1996
equity financings offset by operating losses in 1996.
In March, 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of," which is effective for fiscal years beginning after December 15,
1995. This standard is not expected to have a significant effect on either
the results of operations or financial position of the Company.
Discussions set forth by the Company in public documents including the Annual
Report contain forward looking statements that involve a number of risks and
uncertainties that could cause actual
22
<PAGE> 23
results to differ materially from expected results. The Company intends to
market and sell a number of newly introduced products. Some of these products
utilize new formulations which have not to date been produced on a commercial
scale or produced on a commercial scale that has been replicated. Certain of
the manufacturing processes for such products include newly developed equipment
and techniques which are being incorporated into commercial scale manufacturing
processes. Risks and uncertainties associated with the successful
commercialization of the products include: (i) the successful scale-up of the
Company's manufacturing process in time to meet targeted sales opportunities;
(ii) the market acceptance of the Company's current and newly introduced
products; (iii) the efficacy, pricing, ease of use and performance of the
Company's products; (iv) the successful development, registration,
commercialization and marketing of technologically advanced new products; (v)
the continued and uninterrupted supply of the Company's products from
third-party toll manufacturers and the continued financial viability of such
manufacturers; (vi) economic and environmental considerations which impact
agricultural crop production and agricultural crop protection, including the
number of acres of target crops planted, the cost and efficacy of competitive
products, weather conditions and the level of insect and disease infestation on
target crops, and (vii) the ability of the Company to fund its strategic
priorities through operations or access to capital markets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 for an Index to Financial Statements and Financial
Statement Schedules. Such Financial Statements and Schedules are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
1. The section labeled "Election of Directors" appearing in the
Proxy Statement is hereby incorporated herein by reference.
2. Information concerning the Company's Executive Officers is set
forth in Part I of this Form 10-K.
3. The section labeled "Election of Directors" appearing in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section labeled "Executive Compensation" appearing in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Principal Stockholders" appearing in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Transactions" appearing in the Proxy
Statement is hereby incorporated herein by reference.
23
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Ecogen Inc. and Subsidiaries
are included in Item 8:
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets - October 31, 1996 and 1995 F-2
Consolidated Statements of Operations - Years Ended
October 31, 1996 and 1995, and
Ten Months Ended October 31, 1994 F-3
Consolidated Statements of Stockholders' Equity -
Years Ended October 31, 1996 and 1995, and
Ten Months Ended October 31, 1994 F-4
Consolidated Statements of Cash Flows - Years Ended
October 31, 1996 and 1995, and Ten Months Ended
October 31, 1994 F-5
Notes to Consolidated Financial Statements -
October 31, 1996, 1995 and 1994 F-7
Financial Statement Schedule: Valuation and Qualifying
Accounts F-21
</TABLE>
All other schedules are omitted for the reasons that they are
not applicable or that equivalent information has been included in the
consolidated financial statements, and notes thereto, or elsewhere herein.
24
<PAGE> 25
(a)(3) 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)*
4.3 Ecogen Inc. Stock Option Plan, as amended. (Form 10-K for fiscal year
ended December 31, 1992)*
4.4 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock of Ecogen Inc. dated September 21, 1995.
(Form 10-K for fiscal year ended October 31, 1995)*
4.5 Certificate of Designations, Rights and Preferences of Series C
Convertible Preferred Stock of Ecogen Inc. dated December 6, 1995.
(Form 10-K for fiscal year ended October 31, 1995)*
10.4 Restructure Agreement, dated August 3, 1990, between PruTech Research
and Development Partnership II and Ecogen Inc. (Form 8 to Form
10-Q for fiscal quarter ended September 30, 1990)*
10.14 Form of Confidentiality Agreement between Ecogen Inc. and all Ecogen
Inc. employees. (Form S-1 Registration Statement)*
10.18 Agreement for License or Sale of Technology, dated as of December 12,
1985, between PruTech Research and Development Partnership II and
Ecogen Inc. (Form S-1 Registration Statement)*
10.30 Lease Agreement, dated June 4, 1985, between Linpro Bucks County II,
Limited and Ecogen Inc. (Form S-1 Registration Statement)*
10.41 Form of Director Indemnification Agreement between Ecogen Inc. and the
members of the Board of Directors. (Form 10-K for fiscal year ended
December 31, 1987)*
- ---------------
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except where noted, Commission File No.
1-9579, File No. 33-14119 in the case of the Form S-1 Registration
Statement and File No. 33-40319 in the case of the Form S-1 Registration
Statement filed on May 1, 1991, as amended) and are made part of this
Report.
25
<PAGE> 26
Exhibit No. Description
10.62 Distribution Agreement, dated March 26, 1991, by and between Ecogen
Inc. and Roussel Uclaf. (Form 10-K for fiscal year ended December 31,
1990)*
10.67 Bt Gene License Agreement between Ecogen Inc. and Pioneer Hi-Bred
International, Inc. dated April 11, 1991. (Form S-1 Registration
Statement filed on May 1, 1991, as amended)*
10.87 Form of Services Agreement among Ecogen Inc., Ecogen Technologies
I Incorporated and the Program Subsidiaries. (Form 10-K for fiscal
year ended December 31, 1992)*
10.88 Form of Technology License Agreement between Ecogen-Bio Inc. and
certain Program Subsidiaries. (Form 10-K for fiscal year ended
December 31, 1992)*
10.89 Form of Research and Development Agreement between Ecogen Inc. and
certain Program Subsidiaries. (Form 10-K for fiscal year ended
December 31, 1992)*
10.90 Form of Marketing Option Agreement between Ecogen Inc. and certain
Program Subsidiaries. (Form 10-K for fiscal year ended December 31,
1992)*
10.91 Form of Warrant issued pursuant to the Sales Agency Agreement
among D. Blech & Company, Incorporated, Ecogen Technologies and Ecogen
Inc. dated as of June 5, 1992. (Form 10-K for fiscal year ended
December 31, 1992)*
10.94 Summary of Ecogen Inc. Deferred Compensation Plan. (Form 10-K for
fiscal year ended December 31, 1992)*
10.95 Lease Extension Agreement and Second Lease Extension Agreement,
each between Advent Realty Limited Partnership and Ecogen Inc. and each
dated March 31, 1992. (Form 10-K for fiscal year ended December 31,
1992)*
10.97 Form of Officer Indemnification Agreement entered into by the
Company and each executive officer of the Company. (Form 10-Q for
fiscal quarter ended June 30, 1993)*
10.99 Amendment to the Agreement for License or Sale of Technology
between the Company and PruTech Research and Development Partnership
II, dated July 21, 1993. (Form 10-Q for fiscal quarter ended June 30,
1993)*
- ---------------
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except where noted, Commission File No.
1-9579, File No. 33-14119 in the case of the Form S-1 Registration
Statement and File No. 33-40319 in the case of the Form S-1 Registration
Statement filed on May 1, 1991, as amended) and are made part of this
Report.
26
<PAGE> 27
Exhibit No. Description
10.101 Employment and Consulting Agreement by and between Ecogen Inc. and
John E. Davies, dated as of January 1, 1994. (Form 10-K for fiscal
year ended December 31, 1993)*
10.102 Employment Agreement by and between Ecogen Inc. and James P.
Reilly, Jr. dated as of January 1, 1994. (Form 10-K for fiscal year
ended December 31, 1993)*
10.105 Supply Agreement between the Company and biosys Inc., dated as of
June 1, 1994. (Form 10-Q for fiscal quarter ended June 30, 1994)*
10.118 Employment and Consulting Agreement between the Company and Bruce
C. Carlton dated as of February 22, 1995. (Form 10-Q for fiscal
quarter ended April 30, 1995)*
10.119 Form of Incentive Stock Option Agreement, as amended. (Form 10-K
for fiscal year ended October 31, 1994)*
10.120 Master Settlement Agreement among the Company Ecogen Europe S.r.l.
and 3A Parco Technologico Agroalimentare dated October 23, 1995. (Form
10-K for fiscal year ended October 31, 1995)*
10.121 Research and Development Agreement, dated as of January 24, 1996,
between the Company and Monsanto Company. (Form 10-Q for fiscal
quarter ended January 31, 1996)*
10.122 Investment Agreement, dated as of January 24, 1996, between the Company
and Monsanto Company. (Form 10-Q for fiscal quarter ended January 31,
1996)*
10.123 Technology Assignment Agreement, dated as of January 24, 1996, between
the Company, Ecogen-Bio Inc. and Monsanto Company. (Form 10-Q for
fiscal quarter ended January 31, 1996)*
10.124 Form of Severance Compensation Agreement between the Company and its
Executive Officers. (Form 10-Q for fiscal quarter ended January 31,
1996)*
21. List of Subsidiaries
24. Consent of KPMG Peat Marwick LLP
- ---------------
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except where noted, Commission File No.
1-9579, File No. 33-14119 in the case of the Form S-1 Registration
Statement and File No. 33-40319 in the case of the Form S-1 Registration
Statement filed on May 1, 1991, as amended) and are made part of this
Report.
27
<PAGE> 28
25. Powers of attorney executed by certain officers of the Company and the
individual members of the Board of Directors authorizing certain
officers of the Company to file amendments to the Company's annual
report on Form 10-K are located on the signature page to such Form
10-K.
27. Financial Data Schedule
(b) Reports on Form 8-K.
Current Report on Form 8-K was filed on October 22, 1996, with respect
to "Other Events."
- ---------------
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except where noted, Commission File No.
1-9579, File No. 33-14119 in the case of the Form S-1 Registration
Statement and File No. 33-40319 in the case of the Form S-1 Registration
Statement filed on May 1, 1991, as amended) and are made part of this
Report.
28
<PAGE> 29
Independent Auditors' Report
The Board of Directors and Stockholders
Ecogen Inc.:
We have audited the consolidated financial statements of Ecogen
Inc. and subsidiaries as listed in the accompanying index in Item 14. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index in Item 14. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Ecogen Inc. and subsidiaries as of October 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended and the ten
months ended October 31, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
KPMG Peat Marwick LLP
Short Hills, New Jersey
December 14, 1996
F-1
<PAGE> 30
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
October 31,
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,620,701 $1,775,213
Temporary investments 3,990,410 -
Contract and trade receivables, less allowance for doubtful
accounts of $42,769 in 1996 and $80,000 in 1995 1,783,605 733,146
Inventory 6,854,472 6,345,452
Prepaid expenses and other current assets 493,519 145,770
----------- -----------
Total current assets 18,742,707 8,999,581
Plant and equipment, net 4,569,327 2,768,318
Intangible and other assets, net 549,210 603,600
----------- -----------
$23,861,244 $12,371,499
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses 5,172,090 4,077,095
Deferred contract revenue 1,101,367 43,550
----------- -----------
Total current liabilities 6,273,457 4,120,645
----------- -----------
Long-term debt 1,297,469 619,978
----------- -----------
Other long-term obligations 1,887,078 2,123,489
----------- -----------
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized 7,500,000 shares - -
Series B convertible preferred stock - 350,000 shares authorized;
5,834 and 35,000 shares issued and outstanding in 1996 and
1995, respectively (liquidation value $20 per share) 58 350
Common stock, par value $.01 per share; authorized 42,000,000
shares; issued 7,928,171 and 5,978,542 in 1996 and 1995,
respectively 79,282 59,785
Additional paid-in capital 117,548,065 105,343,444
Accumulated deficit (101,741,946) (98,878,279)
Foreign currency translation adjustment 161,536 270,867
Net unrealized gain on securities 9,742 -
Treasury stock, at cost ( 126,648 and 36,156 shares in 1996
and 1995, respectively ) (1,653,497) (1,288,780)
----------- -----------
Total stockholders' equity 14,403,240 5,507,387
----------- -----------
Commitments and contingencies
$23,861,244 $12,371,499
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 31
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Ten Months
Ended
Year Ended October 31, October 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product sales, net $ 8,599,582 $9,135,203 $8,549,523
Contract revenue 2,109,622 2,299,822 10,412,213
License and other income 5,000,000 - 200,000
Interest income, net 715,511 555,935 663,612
------------ ----------- ----------
Total revenues 16,424,715 11,990,960 19,825,348
------------ ----------- ----------
Costs and expenses, including related
party amounts of $1,044,121, $1,122,877
and $1,086,886:
Cost of products sold 5,698,578 5,507,641 5,890,670
Research and development:
Funded by third parties 986,204 1,673,617 5,985,066
Self funded 3,936,484 7,277,224 3,292,939
Selling, general and administrative 8,546,793 10,671,572 9,249,277
Special charges - 10,184,502 -
------------ ----------- ----------
Total costs and expenses 19,168,059 35,314,556 24,417,952
------------ ----------- ----------
Net loss ($ 2,743,344) ($23,323,596) ($4,592,604)
============ =========== ==========
Net loss per common share available
to common stockholders ($0.40) ($4.34) ($1.24)
============ =========== ==========
Weighted average common shares
outstanding 7,178,000 5,373,000 3,715,000
============ =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 32
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1996 AND 1995, AND TEN MONTHS ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL ACCUMULATED
PREFERRED STOCK COMMON STOCK PAID-IN CAPITAL DEFICIT
--------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $2,600 $179,863 $81,745,457 ($70,962,079)
Issuance of 494,773 shares of common stock
upon exercise of stock options and warrants - 24,738 4,051 -
Issuance of 10,000 shares of common stock
in connection with consulting agreement - 500 248,875 -
Private placement of 70,000 shares of common
stock, net of issuance costs - 3,500 1,828,928 -
Private placement of 83,640 shares of common
stock and 83,640 warrants, net of issuance costs - 4,182 2,437,621 -
Issuance of 9,594 shares of common
stock in connection with license agreement - 480 191,408 -
Cancelled subscription of 8,500 shares of common stock - (425) (422,425) -
Foreign currency translation - - - -
Net loss - - - (4,592,604)
---------------- ------------- ---------------- ------------
BALANCE, OCTOBER 31, 1994 2,600 212,838 86,033,915 (75,554,683)
Issuance of 822,240 shares of common
stock in connection with ETech exchange offer - 41,112 11,264,687 -
Issuance of 129,015 shares of common stock
upon exercise of stock options and warrants - 6,451 1,240,139 -
Issuance of 723,750 shares of common stock
in connection with private placements, net - 36,187 5,794,931 -
Issuance of 5,517 shares of common stock
in connection with a research agreement - 275 96,279 -
Conversion of 260,000 shares of Series A
preferred stock to common stock (2,600) 2,600 - -
Issuance of 35,000 shares of Series B convertible
preferred stock in connection with a private
placement, net 350 - 673,815 -
One-for-five reverse stock split - (239,678) 239,678 -
Foreign currency translation - - - -
Net loss - - - (23,323,596)
---------------- ------------- ---------------- ------------
BALANCE, OCTOBER 31, 1995 350 59,785 105,343,444 (98,878,279)
Issuance of 122,000 shares of Series C convertible
preferred stock in connection with a private
placement,net 1,220 - 2,792,723 -
Issuance of 943,397 shares of common stock, net - 9,434 9,325,831 -
Conversion of 29,166 shares of Series B convertible
preferred stock to 122,313 shares of common stock (292) 1,223 (931) -
Conversion of 122,000 shares of Series C convertible
preferred stock to 851,308 shares of common stock (1,220) 8,513 (7,293) -
Dividends on preferred stock - 327 109,675 (120,323)
Purchase of 91,000 shares of common stock for Treasury - - - -
Transfer of 1,508 shares of Treasury for Employee
Benefits - - (15,384) -
Foreign currency translation - - - -
Net unrealized gain on securities - - - -
Net loss - - - (2,743,344)
---------------- ------------- ---------------- ------------
BALANCE, OCTOBER 31, 1996 $58 $79,282 $ 117,548,065 ($101,741,946)
================ ============= ================ ==============
</TABLE>
<TABLE>
<CAPTION>
EQUITY SUBSCRIPTIONS TREASURY
ADJUSTMENTS RECEIVABLE STOCK AT COST TOTAL
----------- ------------- ------------- -----
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $241,623 ($422,850) ($1,288,780) $9,495,834
Issuance of 494,773 shares of common stock
upon exercise of stock options and warrants - - 28,789
Issuance of 10,000 shares of common stock
in connection with consulting agreement - - - 249,375
Private placement of 70,000 shares of common
stock, net of issuance costs - - - 1,832,428
Private placement of 83,640 shares of common
stock and 83,640 warrants, net of issuance costs - - 2,441,803
Issuance of 9,594 shares of common
stock in connection with license agreement - - 191,888
Cancelled subscription of 8,500 shares of common
stock - 422,850 - -
Foreign currency translation 3,281 - - 3,281
Net loss - - - (4,592,604)
------------ ------------- ------------- ------------
BALANCE, OCTOBER 31, 1994 244,904 - (1,288,780) 9,650,794
Issuance of 822,240 shares of common
stock in connection with ETech exchange offer - - - 11,305,799
Issuance of 129,015 shares of common stock
upon exercise of stock options and warrants - - - 1,246,590
Issuance of 723,750 shares of common stock
in connection with private placements, net - - - 5,831,118
Issuance of 5,517 shares of common stock
in connection with a research agreement - - - 96,554
Conversion of 260,000 shares of Series A
preferred stock to common stock - - - -
Issuance of 35,000 shares of Series B convertible
preferred stock in connection with a private
placement, net - - - 674,165
One-for-five reverse stock split - - - -
Foreign currency translation 25,963 - - 25,963
Net loss - - - (23,323,596)
------------ ------------- ------------- ------------
BALANCE, OCTOBER 31, 1995 270,867 - (1,288,780) 5,507,387
Issuance of 122,000 shares of Series C convertible
preferred stock in connection with a private
placement,net - - - 2,793,943
Issuance of 943,397 shares of common stock, net - - - 9,335,265
Conversion of 29,166 shares of Series B convertible
preferred stock to 122,313 shares of common stock - - - -
Conversion of 122,000 shares of Series C convertible
preferred stock to 851,308 shares of common stock - - -
Dividends on preferred stock - - - (10,321)
Purchase of 91,000 shares of common stock for Treasury - - (385,625) (385,625)
Transfer of 1,508 shares of Treasury for Employee
Benefits - - 20,908 5,524
Foreign currency translation (109,331) - - (109,331)
Net unrealized gain on securities 9,742 - - 9,742
Net loss - - - (2,743,344)
------------ ------------- ------------- ------------
BALANCE, OCTOBER 31, 1996 $171,278 $0 ($1,653,497) $14,403,240
============ ============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 33
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Ten Months
Ended
Year Ended October 31, October 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($2,743,344) ($23,323,596) ($4,592,604)
Adjustments to reconcile net loss
to net cash used in operating activities:
Noncash portion of special charges - 9,717,737 -
Depreciation and amortization expense 403,827 613,965 423,300
Foreign currency transaction (gain) loss (9,831) 16,940 (33,452)
Changes in operating assets and liabilities,
net of effects from acquisitions/dispositions:
(Increase) decrease in inventory (509,020) 250,501 (2,982,188)
(Increase) decrease in contract
and trade receivables, net (1,050,459) 476,136 (86,206)
Decrease in contract receivable from
Ecogen Technologies I Incorporated - - 2,253,872
Increase in prepaid expenses
and other current assets (347,749) (344,130) (117,648)
(Increase) decrease in other assets 80,940 (189,564) 7,850
Increase in accounts payable and
accrued expenses 285,789 382,756 344,727
Increase (decrease) in deferred contract
revenue 1,057,817 (2,255,508) (2,900,646)
Decrease in other long-term obligations (236,411) - -
---------- ----------- ----------
Net cash used in operating activities (3,068,441) (14,654,763) (7,682,995)
---------- ----------- ----------
Cash flows from investing activities:
Proceeds from maturities of temporary
investments - 734,285 1,522,056
Purchase of temporary investments (3,990,410) - (1,456,341)
Purchase of plant and equipment (488,326) (930,852) (446,291)
Net cash change from disposition - (3,270,274) -
---------- ----------- ----------
Net cash used in investing activities (4,478,736) (3,466,841) (380,576)
---------- ----------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock, warrants
and convertible preferred stock, net of
issuance costs 12,129,209 7,751,873 4,303,020
Repayment of capital lease obligation (389,528) - -
Purchase of treasury stock (364,717) - -
Proceeds from issuance of long-term debt - 154,000 -
Cash received from ETech investors - 4,015,732 -
---------- ----------- ----------
Net cash provided by financing activities 11,374,964 11,921,605 4,303,020
---------- ----------- ----------
</TABLE>
(Continued)
F-5
<PAGE> 34
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
Ten Months
Ended
Year Ended October 31, October 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Effect of foreign exchange rate changes on cash 17,701 (118,863) $1,053,898
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents 3,845,488 (6,318,862) (2,706,653)
Cash and cash equivalents, beginning of period 1,775,213 8,094,075 10,800,728
--------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $5,620,701 $1,775,213 $8,094,075
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $114,894 $7,859 $8,178
Income taxes - - -
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
In 1996 and 1995 debt totalling approximately $1,540,000 and $466,000,
respectively, was incurred by the Company for the acquisition of equipment.
At October 31, 1996, approximately $686,000 is included in accounts payable
for construction in progress.
In 1994, the Company issued 489,706 shares of common stock in connection
with the exercise of warrants on a net issuance method in which 389,706
shares of common stock were surrendered.
In 1995 and 1994, the Company issued 5,517 and 19,598 shares of common
stock, respectively, in connection with research and development and
consulting agreements.
In 1994, subscriptions receivable aggregating $422,850 were eliminated
against paid-in capital as the underlying shares were retired upon
foreclosure.
In 1995, holders of the Company's Series A convertible preferred stock
converted 260,000 shares of preferred stock to 260,000 shares of common
stock. In 1996, holders of the Company's Series B convertible preferred
stock converted 29,160 shares of preferred stock to 122,313 shares of common
stock and holders of the Company's Series C convertible preferred stock
converted 122,000 shares of preferred stock to 851,308 shares of common
stock.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 35
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
Organization and business activities:
The consolidated financial statements include the accounts of Ecogen
Inc. ("Ecogen" or the "Company") and its wholly-owned and
majority-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
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 on,
among other things, the success of the Company's commercialization
efforts and market acceptance of the Company's products.
Fiscal year end:
In December 1994, the Company changed its year end from a calendar year
end to a fiscal year ending October 31. Accordingly, the accompanying
consolidated financial statements include balance sheets at October 31,
1996 and 1995 and statements of operations, cash flows, and
stockholders' equity for the years ended October 31, 1996 and 1995, and
for the ten months ended October 31, 1994.
Inventory:
Inventory is stated at the lower of cost, as determined by the average
cost method, or net realizable value.
Plant and equipment:
Plant and equipment are recorded at cost. Depreciation is computed by
utilizing an accelerated method over the estimated useful lives of the
related assets which range from three to ten years. Amortization of
leasehold improvements is computed using the straight-line method over
the lesser of the estimated useful lives of the improvements or the
remaining lease term.
Research and development:
All research and development costs are charged to operations as
incurred.
Revenue recognition:
Revenue from research and development contracts is recognized in
accordance with the terms of the respective contracts. Revenue from
certain contracts is recognized on a prorata basis over the life of the
contract. Related contract costs are generally incurred ratably over
the contract term. Revenue from achievement of milestone events is
recognized when all parties concur that the scientific results and/or
milestones stipulated in the agreement have been met. Revenue from
time and materials contracts is recognized in the period in which the
related services have been rendered and costs incurred by the Company.
Revenue recognized in the accompanying consolidated statements of
operations is not subject to repayment. Revenue received that is
related to future performance under such contracts is deferred and
recognized as revenue when earned.
F-7
<PAGE> 36
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, cont.
Revenues from product sales are recognized upon shipment and passage of
title to the customer.
Concentration of credit risk:
The Company's product sales are made primarily to distributors of
agricultural products, located predominantly in North America. The
Company does not generally require collateral or other security to
ensure collection of trade receivables, except for certain
international sales, where letters of credit are obtained.
Intangible and other assets:
Intangible and other assets include purchased proprietary technology,
patents, license fees and cost in excess of net assets acquired.
Amounts capitalized are amortized over their estimated useful lives
which range from 2.5 years to 15 years. Technology acquired that is
still in the research and development stage is charged to operations.
Amortization expense on intangible assets amounted to $26,550, $135,631
and $118,761 in fiscal 1996, 1995 and 1994, respectively.
Cash and cash equivalents:
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid temporary investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of U.S. Government obligations,
commercial paper and foreign money market accounts and are carried at
cost which approximates market value.
Temporary investments:
Temporary investments consist of U.S. Government obligations and
corporate debt securities with original maturities greater than three
months. The Company's temporary investments are available for sale to
fund operations.
Fair value of financial instruments:
The fair value of the long-term debt approximates its carrying value
due to its short-term maturity, and the interest rate approximates
current market rates. For all other financial instruments, their
carrying value approximates fair value due to the short maturity of
those instruments.
Net loss per common share:
Net loss per common share available to common stockholders, adjusted
for preferred stock dividends of $116,700 in the year ended October 31,
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
since the effect would be anti-dilutive for both primary and fully
diluted earnings per share using the treasury stock method.
Foreign currency translation:
Substantially all assets and liabilities of the Company's foreign
subsidiaries are translated at fiscal year-end exchange rates, while
related income and expenses are translated at rates which approximate
the exchange rates prevailing during the year. The resulting
adjustments are accumulated as a separate component of stockholders'
equity. Foreign currency transaction gains (losses) are charged to
operations as incurred and amounted to ($20,245), ($16,940) and $33,452
in fiscal 1996, 1995 and 1994, respectively.
F-8
<PAGE> 37
(1) Summary of Significant Accounting Policies, cont.
Income Taxes:
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109") "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and the benefits arising from the realization of
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered
or settled. A valuation allowance is provided when it is more likely
than not that some portion or all of the deferred tax assets will not
be realized. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date of the tax rate change.
Reclassification:
Certain amounts contained in the 1995 and 1994 consolidated financial
statements have been reclassified to conform to the 1996 presentation.
Use of Estimates:
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
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) Investments
Effective November 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The effect of adopting
this statement was not material. Under this new accounting standard,
securities for which there is not the positive intent and ability to
hold to maturity are classified as available for sale and are carried
at fair value. Unrealized holding gains and losses on securities
classified as available for sale are carried as a separate component of
stockholders' equity. The Company considers all of its current
investments to be available for sale. Consequently, pursuant to SFAS
115, a $9,742 unrealized holding gain has been recorded in a separate
component of stockholders' equity as of October 31, 1996.
F-9
<PAGE> 38
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Investments, cont.
Marketable securities at October 31, 1996 consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
1996 Cost Gains Losses Value
---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities with contractual
maturities from date of
acquisition of one year
or less - corporate debt securities $1,486,125 $262 $12 $1,486,375
---------- ------ ------- ----------
Securities with contractual
maturities from date of
acquisition of greater than
one year:
U.S. debt securities $1,996,864 $7,986 - $2,004,850
Corporate debt securities 497,659 1,526 - 499,185
---------- ------ ------- ----------
2,494,523 9,512 - 2,504,035
---------- ------ ------- ----------
Total marketable securities $3,980,648 $9,774 $12 $3,990,410
========== ====== ======= ==========
</TABLE>
(3) Inventory
Inventory consists of the following components as of October 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials and packing supplies $2,121,123 $ 1,782,565
Work in process 1,653,692 2,323,434
Finished goods 3,079,657 2,239,453
---------- ------------
$6,854,472 $ 6,345,452
========== ============
</TABLE>
(4) Plant and Equipment
Plant and equipment consist of the following components as of October
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Manufacturing and laboratory equipment $4,168,985 $4,048,146
Office furniture and equipment 910,750 865,215
Leasehold improvements 2,032,169 2,109,154
Construction in progress 2,929,057 910,482
---------- ----------
10,040,961 7,932,997
Less accumulated depreciation and amortization (5,471,634) (5,164,679)
---------- ----------
$4,569,327 $2,768,318
========== ==========
</TABLE>
Included in construction in progress is $76,000 of capitalized
interest.
F-10
<PAGE> 39
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following
components as of October 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Trade accounts payable $3,499,170 $ 2,733,584
Amounts due on construction in progress 686,012 -
License fees - 200,000
Payroll costs 259,719 503,488
Other 727,189 640,023
---------- -----------
$5,172,090 $ 4,077,095
========== ===========
</TABLE>
Included in trade accounts payable are refunds due to customers for
product returns in October 1996.
(6) Long-term Debt
As of October 31, 1996 the Company has borrowed approximately $143,000
from an Israeli Bank. Principal payments of approximately $72,000 and
$71,000 are due in 1999 and 2000, respectively. The loan bears
interest at 18%.
During 1996 the Company established a two-year $5.0 million revolving
working capital line of credit with a commercial bank. At October 31,
1996, the Company had not used the line of credit. The line bears
interest at the Company's option at either the bank's prime rate less
1.25%, or LIBOR plus .5%, or the bank's certificate of deposit rate
plus .75%. Borrowings would be collateralized by the Company's
investments. Under the loan agreement, the Company must maintain a
consolidated tangible net worth of $5.0 million. The loan agreement
may be renewed annually for a two-year period.
(7) Commitments and Contingencies
Leases:
The Company leases its facilities and certain equipment and
automobiles under various noncancelable operating and capital leases.
Rental expense charged to operations aggregated approximately $673,000,
$816,000 and $721,000 for the years ended October 31, 1996 and 1995,
and for the ten months ended October 31, 1994, respectively.
F-11
<PAGE> 40
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Commitments and Contingencies, cont.
Minimum lease payments under noncancelable leases for the years
subsequent to October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1997 $436,000 $ 490,000
1998 426,000 429,000
1999 219,000 406,000
2000 - 179,000
2001 - 8,000
----------- -----------
Total minimum lease payments 1,081,000 $1,512,000
===========
Less: Interest (161,000)
-----------
Present value of net minimum
lease payments. 920,000
Less: Current portion of capital
lease obligations (included in
accounts payable and accrued
expenses) (309,000)
-----------
Long-term capital obligations
(included in long-term debt) $ 611,000
===========
</TABLE>
The Company has obtained a $2.0 million line of credit to be used
for the leasing of production equipment. The Company is required to
pay interest only until the equipment is delivered, at which time the
notes are converted to a capital lease obligation. At October 31,
1996, the Company had borrowed approximately $1.7 million, of which
approximately $1.2 million has been converted to a capital lease
obligation. The lease facility requires a 15% security deposit, which
has been made.
Machinery included in construction in progress at October 31, 1996
includes approximately $1.2 million of equipment under capital leases
that have been capitalized.
(8) Ecogen Technologies I Incorporated
In 1992 Ecogen Technologies I Inc. ("ETech"), a corporation organized
by but not affiliated with the Company, was formed to initiate or
accelerate research and development of certain products using
technology exclusively licensed or sublicensed by the Company to
subsidiaries of ETech. Pursuant to research and development agreements
between Ecogen and each of the subsidiaries of ETech, Ecogen was
conducting research, development and testing on the technology licensed
to the subsidiaries of ETech in exchange for receiving reimbursement
from ETech equal to Ecogen's development costs, as defined, plus a
research management fee equal to 3.89% of such costs. Further, pursuant
to a services agreement, ETech paid the Company a management fee equal
to 5.75% of ETech's program subsidiaries' fully burdened costs.
Effective October 1, 1994, the Company discontinued recording contract
revenue and management fees under the ETech agreements because it was
the Company's intention to initiate an exchange offer for 20% or more
of the ETech shares. During fiscal 1994, the Company earned contract
revenue and management fees of $6,844,000 and $731,000, respectively.
F-12
<PAGE> 41
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Ecogen Technologies I Incorporated, cont.
During fiscal 1995, the Company acquired approximately 70% of the
outstanding stock of ETech pursuant to an exchange offer. The Company
issued 822,240 shares of its common stock having a market value of
approximately $11.3 million. At the date of the Exchange offer,
investors were still obligated under ETech Investor notes issued in
connection with the prior sale of equity securities by ETech. The
acquisition of approximately 70% of ETech was accounted for under the
purchase method of accounting, and in fiscal 1995 the Company recorded
approximately $9.1 million as a special charge to operations for the
value of in-process research and development acquired from ETech.
Market feasibility and acceptance has not yet been established with
respect to the ETech research programs and there is no assurance that
the Company will be successful in its commercialization efforts.
As a result of the acquisition, effective January 1, 1995, ETech's
consolidated financial statements are consolidated with those of the
Company, resulting in the Company recording 100% of the research and
development expenses of ETech programs and reflecting any payments from
ETech investors, subsequent to the Exchange Offer, as a long-term
obligation. (See note 9 for unaudited pro forma information as a result
of the acquisition.) At October 31, 1995 approximately $1.6 million
had been recorded as a long-term obligation for cash received from
ETech investors not electing to exchange their ETech shares for the
Company's shares. The Company assumed the obligation to fund the final
installment ($1.6 million) for those units participating in the
exchange. During fiscal 1995, prior to the Company's acquisition of
ETech, ETech collected from investors participating in the Exchange
Offer and remitted to the Company approximately $3.0 million of
payments under the ETech Investor Notes.
(9) Research, Development and License Agreements
During 1991 and 1992, the Company, through Ecogen Europe S.r.l.
("Ecogen Europe"), a majority-owned subsidiary of Ecogen Inc., entered
into two long-term research and development agreements with 3A S.r.l.
("3A"), an Italian corporation. Ecogen Europe was owned 75% by the
Company and 25% by 3A. On October 23, 1995 the Company terminated its
European research and development agreements with 3A. As part of the
transaction, Ecogen transferred its ownership interest in Ecogen Europe
to 3A and Ecogen Europe changed its name to Bio Integrated Technology
S.r.l. ("BIT").
As a result of the deal, Ecogen is released from the obligation to
provide $5.6 million of funding to Ecogen Europe. Further, as part of
the transaction, the Company received cash of approximately $1.0
million and 683,202 of its common shares that had been held by Ecogen
Europe. The Company licensed to BIT the Company's existing nematode
technology for use solely in Europe, Africa and the Middle East ("BIT
Territory") and agreed to provide BIT with improvements to certain of
its nematode formulation technology. BIT licensed to the Company
nematode technology for use outside of BIT Territory. The Company also
licensed to BIT certain of its existing Bt technology, principally 12
non-commercialized strains and process and formulation technology,
solely for use in BIT Territory. The Company recorded a gain of
approximately $.2 million on the transaction in fiscal 1995. The
Company will also pay BIT until the year 2002 a royalty on net sales in
BIT's Territory of certain biofungicide products.
F-13
<PAGE> 42
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Research, Development and License Agreements, cont.
The following unaudited pro forma results of operations for the years
ended October 31, 1995 and 1994 give effect to the acquisition of
ETech and the disposition of the Company's interest in Ecogen Europe as
though they had occurred on November 1, 1993. The unaudited pro forma
results include adjustments to eliminate Ecogen Europe's operations,
including principally contract revenue, interest income and research
and development expense, as if Ecogen Europe was not a consolidated
subsidiary on November 1, 1993. The unaudited pro forma results also
include adjustments to eliminate contract revenue and management fees
from ETech (see note 6) and to include all operating expenses of ETech
as if ETech was a consolidated subsidiary on November 1, 1993. The
unaudited pro forma results of operations do not include the 1995
non-recurring gain of approximately $.2 million ($.04 per share)
recorded on the Ecogen Europe transaction and $9.1 million for
purchased technology for ETech.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Total revenues $10,180,250 $11,107,242
Net loss (14,348,494) (14,107,077)
Net loss per share ($2.67) ($3.80)
=========== ===========
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of the actual results of operations that would have occurred
had the acquisition/disposition been made on November 1, 1993, or the
results which may occur in the future.
In connection with one of the 3A research agreements, the Company had a
consulting agreement with a corporation whose president was a director
of Ecogen Europe and a former director of the Company. Under this
agreement, the Company was obligated to issue 10,000 unregistered
shares of common stock as a stock award. The estimated fair value of
this stock of $249,375 was recorded as a research agreement expense.
Such shares of common stock were issued in fiscal 1994. The Company
also paid consulting fees to this individual aggregating $75,000 in
fiscal 1994. Further, in fiscal 1994 the Company paid 3A, $132,000 for
management fees and facilities costs in Italy.
Monsanto Transaction
On January 24, 1996 the Company entered into an agreement with Monsanto
Company (Monsanto) for an equity investment (see note 11), 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 includes the acquisition by Monsanto of certain rights in
the Company's Bt technology for an aggregate non-refundable purchase
price of $5.0 million in cash which was recorded as other revenue in
the first quarter of fiscal 1996, and a four year research and
development collaboration arrangement with Monsanto for the further
development of the Company's Bt gene library for a minimum of $10.0
million, of which $3.0 million was paid in advance and recorded as
deferred contract revenue during the first quarter of fiscal 1996.
During fiscal 1996, $1.9 million was earned under the terms of the
agreement and recorded as contract revenue.
F-14
<PAGE> 43
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Preferred Stock
Series A Convertible Preferred Stock
During fiscal 1995, holders converted 260,000 shares of the Series A
convertible preferred stock to common stock in accordance with its
terms.
Series B Convertible Preferred Stock
In September 1995, the Company raised $.7 million, net of expenses,
from two institutional investors in exchange for 35,000 shares of 8%
Series B Convertible Preferred Stock (the "Series B Preferred Stock").
Dividends are payable annually in either cash, shares of Series B
Preferred Stock or shares of the Company's common stock at the
discretion of the Company. Each share of Series B Preferred Stock
entitles the holder, to one vote on all matters presented to the
Company's stockholders for a vote. At the election of the holder, the
Series B Preferred Stock may be converted at various dates to shares of
the Company's common stock, subject to adjustments for stock splits and
adjustments, at predetermined discounts from the average market price
per share over a five day trading period preceding the date of
conversion. At any time after September 8, 2996, the Company may elect
to convert the shares to common stock. At any time after September 15,
1997, the Company may redeem the Series B Preferred Stock at a
predetermined premium to the original issuance price. In the event of
liquidation the holders of the Series B Preferred Stock have the right
to $20.00 per shares plus all accrued and unpaid dividends. During
fiscal 1996, 29,166 shares of the Company's Series B Preferred Stock
were converted into 122,313 shares of the Company's common stock.
Series C Convertible Preferred Stock
In November 1995, the Company raised $2.8 million, net of expenses,
from institutional investors in exchange for 122,000 shares of 8%
Series C Convertible Preferred Stock (the "Series C Preferred Stock").
During fiscal 1996, 122,000 shares of the Series C Preferred Stock were
converted into 851,308 shares of the Company's common stock in
accordance with its terms.
(11) Common Stock
During fiscal 1994, the Company raised an aggregate of $1.8 million,
net of issuance costs, from two institutional investors in exchange for
70,000 shares of the Company's common stock. In connection with the
transaction, five year warrants to purchase 7,000 shares of the
Company's common stock at $29.00 per share were issued.
In fiscal 1994, the Company also completed a private placement
consisting of 83,640 shares of common stock and 418,200 warrants, each
to purchase one fifth of a share of common stock at an exercise price
of $8.75 per share until January 1998. The Company raised an aggregate
of $1.8 million, net of issuance costs, from this private placement.
In connection with the private placement, the placement agent was
granted unit purchase options to purchase 8,364 shares of common stock
at $35 per share, and 41,820 warrants to purchase one fifth of a share
of common stock at $8.75 per share, expiring in 1998.
During fiscal 1995, the Company raised an aggregate of $7.1 million,
net of issuance costs, in private placements to institutional investors
in exchange for 723,750 shares of the Company's common stock.
F-15
<PAGE> 44
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Common Stock, cont.
During fiscal 1996, Monsanto Company purchased 943,397 shares of the
Company's common stock at $10.60 per share resulting in net proceeds of
$9.3 million. Under the terms 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. 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.
On January 29, 1996 the shareholders approved an amendment to the
Company's Restated Certificate of Incorporation (the "Amendment") which
effected a one-for-five reverse split (the "Reverse Split") of the
Company's outstanding shares of common stock.
(12) Warrants and Other Options
As of October 31, 1996, the Company had the following warrants and
options outstanding and exercisable into shares of the Company's common
stock (excluding stock options issued under the Company's stock option
plan - see note 13) as follows:
<TABLE>
<CAPTION>
Price
Shares of Range Per Expiration
Common Stock Share/Unit Dates
------------ ---------- -----
<S> <C> <C> <C>
Warrants 828,516 $7.31 - 43.75 1998 - 2000
Unit Purchase Options 8,364 $35.00 1998
Other Options 53,044 $11.70 - 63.00 1998 - 2003
-------
889,924
=======
</TABLE>
(13) Stock Option Plan
The Company has a stock option plan ("Option Plan"), expiring in
October, 1997, under which the number of shares of common stock which
may be granted under the Option Plan may not exceed 800,000 shares.
The Option Plan permits the granting of both incentive stock options
and nonstatutory stock options. The option price of the shares for
incentive stock options may not be less than the fair market value of
such stock at the grant date as determined under the Option Plan.
Options are exercisable over a period determined by the Board of
Directors, but not longer than ten years after the grant date.
F-16
<PAGE> 45
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Stock Option Plan, cont.
The status of the Option Plan for the years ended October 31, 1996 and
1995, and the ten months ended October 31, 1994 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Price range
Shares per share
------ ---------
<S> <C> <C>
Balance January 1, 1994 497,620 $ 6.30 - $65.90
Granted 49,840 $32.25 - $36.30
Exercised (5,067) $ 6.30 - $35.20
Canceled (20,976) $11.70 - $65.90
------
Balance October 31, 1994 521,417 $ 6.30 - $65.90
Granted 408,919 $ 6.88 - $32.88
Exercised (8,437) $ 7.34 - $12.56
Canceled (420,439) $ 7.34 - $65.90
-------
Balance October 31, 1995 501,460 $ 7.34 - $65.90
Granted 227,960 $ 2.75 - $ 7.19
Exercised - ---
Canceled (125,192) $ 7.19 - $53.56
-------
Balance October 31, 1996 604,228 $ 2.75 - $53.06
======= ===============
Options exercisable at
October 31, 1996 361,459 $ 5.94 - $53.06
======= ===============
</TABLE>
During fiscal 1995, employees were given the right to exchange 290,079
options at exercise prices from $32.30 to $65.88 for new options at an
exercise price of $10.94, the fair market value at the grant date for
the exchange right. The new options are not exercisable until the
later of November 13, 1995 or the exercisable date of the option
exchanged. Accordingly, options to purchase 290,079 shares were
canceled and an equal number of new options were issued, which is
reflected in the table above.
F-17
<PAGE> 46
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Geographic Area and Related Information
The Company's operations consist primarily of the research, development
and marketing of biopesticide and related products, which constitutes
one industry segment. Information with respect to the Company's
operations by geographic area for fiscal years ended October 31, 1996
and 1995, and ten months ended October 31, 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States:
Unaffiliated customers $16,209,900 $ 9,940,018 $15,744,243
Transfers to other
geographic areas 102,978 826,537 1,253,064
----------- ------------ ------------
16,312,878 10,766,555 16,997,307
----------- ------------ ------------
Europe:
Unaffiliated customers - 1,810,710 2,728,301
Transfers to other
geographic areas - - -
----------- ------------ ------------
1,810,710 2,728,301
----------- ------------ ------------
Other:
Unaffiliated customers 214,815 240,232 1,352,804
Eliminations and adjustments (102,978) (826,537) (1,253,064)
----------- ------------ ------------
Total revenues $16,424,715 $11,990,960 $19,825,348
=========== ============ ============
Operating income (loss):
United States ($1,713,209) $(20,843,428) ($ 4,931,039)
Europe - (291,721) 140,772
Other (980,273) (1,361,910) (630,144)
Eliminations and adjustments (49,862) (826,537) 827,807
------------ ------------ ------------
Total operating loss ($ 2,743,344) ($23,323,596) ($ 4,592,604)
============ ============ ============
Identifiable assets:
United States $27,016,478 $14,567,805 $16,907,573
Europe - - 7,159,233
Other 333,715 482,590 836,529
Eliminations and adjustments (3,488,949) (2,678,896) (5,432,267)
----------- ------------ ------------
Total identifiable assets $23,861,244 $12,371,499 $19,471,068
=========== ============ ============
</TABLE>
Of the $16,209,900, $9,940,018 and $15,744,243 United States revenue
from unaffiliated customers in fiscal 1996, 1995 and 1994,
respectively, $1,666,024, $1,433,084 and $2,179,315 was export
revenue from the following geographic areas:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Europe $ 429,798 $ 954,398 $1,571,809
Other 1,236,226 478,686 607,506
---------- ---------- ----------
$1,666,024 $1,433,084 $2,179,315
========== ========== ==========
</TABLE>
F-18
<PAGE> 47
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Income Taxes
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities as of
October 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Purchased research, development and
investment in affiliated companies $10,380,000 $10,380,000
Net operating loss carryforwards 21,696,000 20,608,000
Research experimentation credit
carryforward 2,414,000 2,414,000
Other 980,000 1,166,000
------------ ------------
Total gross deferred tax assets 35,470,000 34,568,000
Less valuation allowance 35,237,000 34,337,000
------------ ------------
Net deferred tax assets 233,000 231,000
------------ -------------
Deferred tax liabilities:
Furniture, equipment, and leasehold
improvements, principally due to
differences in depreciations (233,000) (231,000)
------------ -------------
Total gross deferred tax
liabilities (233,000) (231,000)
------------ -------------
Net deferred taxes $ - $ -
============ =============
</TABLE>
The net change in the total valuation allowance for fiscal 1996 and
1995 was an increase of approximately $900,000 and $7,701,000,
respectively. At October 31, 1996, the Company has net operating loss
carryforwards for Federal income tax purposes of approximately $63.8
million which are available to offset future Federal taxable income, if
any, through 2011. The Company also has research and experimentation
tax credit carryforwards for Federal income tax purposes of
approximately $2.4 million which are available to reduce future Federal
income taxes, if any, through 2011. The Company's ability to use such
net operating loss and research and experimental credit carryforwards is
subject to certain limitations due to ownership changes, as defined by
rules enacted with the Tax Reform Act of 1986.
(16) Special Charges and Other Matters
Special Charges:
Special charges consist of the following during the year ended
October 31, 1995:
<TABLE>
<S> <C>
Purchased technology $ 9,143,002
Restructuring costs 1,041,500
-----------
$10,184,502
===========
</TABLE>
In fiscal 1995, the Company recorded a special charge for purchased technology
resulting from the acquisition of a majority interest in ETech. Also in fiscal
1995, restructuring costs represent amounts incurred in connection with the
shutdown of Ecogen Australia and personnel reductions at the Company
Headquarters, including agreements with a former officer and director of the
F-19
<PAGE> 48
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Special Charges and Other Matters, cont.
Special Charges, cont.:
Company and a former officer and current director. Included in
restructuring costs is $.7 million of severance costs, of which $281,000
was paid in 1996 and $165,000 and $165,000 which will be paid in fiscal
1997 and 1998, respectively. Such amounts are included in accounts
payable and accrued expenses and other long-term obligations in the
accompanying consolidated balance sheet at October 31, 1996 and 1995.
Other:
Sales derived from one customer aggregated 15% of total revenues in
fiscal 1995. Contract revenues derived from one entity aggregated 12% of
total revenues in fiscal 1996. Contract revenue from another entity
aggregated 11% of total revenue in fiscal 1995. Contract revenues
derived from another entity aggregated 35% of total revenues in fiscal
1994.
(17) Profit Sharing 401(k) Plan
Effective January 1, 1988, the Company established a 401(k) Profit
Sharing Plan (the "401(k) Plan") which covers substantially all
full-time U.S. employees. All eligible employees may elect to
contribute a portion of their wages to the 401(k) Plan, subject to
certain limitations. The Company contributes 75% (50% prior to July 1,
1996) of the employees' contributions, subject to a maximum equal to 6%
of the employees' compensation. The matching company contribution vests
over a five-year period. Effective July 1, 1996, employees may elect to
have the Company matching contribution in Ecogen common stock. The
Company contributed approximately $118,000, $126,000 and $127,000, to
the 401(k) Plan in 1996, 1995 and fiscal 1994, respectively.
(18) Related Party Transactions
A director, elected during fiscal 1996, is a partner of a law firm that
has acted as legal counsel to the Company. The Company paid fees and
costs of $233,000, $668,000 and $567,000 to this law firm during fiscal
1996, 1995 and 1994, respectively.
The Company has engaged an advertising agency whose principal is the son
of the Company's former Chairman, who is currently a director. Fees to
this agency aggregated approximately $811,000, $932,000 and $621,000 in
fiscal 1996, 1995 and 1994, respectively.
Management believes that all transactions with related parties were
conducted on an arm's-length basis.
F-20
<PAGE> 49
Schedule II
ECOGEN INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 31, 1996 AND 1995, AND TEN MONTHS ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions Deductions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Period
<S> <C> <C> <C> <C> <C>
1996:
Allowance for doubtful accounts $ 80,000 $ - $ - $ 37,231 $ 42,769
Reserve for inventory obsolescence 695,820 500,000 - 519,926 675,894
========== ======== ========= ======== ========
1995:
Allowance for doubtful accounts $ 90,000 $ - $ - $ 10,000 $ 80,000
Reserve for inventory obsolescence 332,941 575,000 - 212,121 695,820
========== ======== ========= ======== ========
1994:
Allowance for doubtful accounts $ 90,000 $ - $ - $ - $ 90,000
Reserve for inventory obsolescence 470,000 150,000 - 287,059 332,941
========== ======== ========= ======== ========
</TABLE>
F-21
<PAGE> 50
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James P. Reilly, Jr. and Mary E.
Paetzold, or any of them, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Annual Report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities
indicated as of the 20th day of January, 1997.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James P. Reilly, Jr.
----------------------- Chairman, Chief Executive Officer January 20, 1997
James P. Reilly, Jr. and Director (Principal Executive
Officer)
/s/ Mary E. Paetzold
----------------------- Vice President, Chief Financial January 20, 1997
Mary E. Paetzold Officer and Director (Principal
Financial and Accounting Officer)
/s/ John E. Davies
----------------------- Director January 20, 1997
John E. Davies
/s/ Jack D. Early
----------------------- Director January 20, 1997
Jack D. Early
/s/ Esteban A. Ferrer
----------------------- Director January 20, 1997
Esteban A. Ferrer, Esquire
/s/ Lowell N. Lewis
----------------------- Director January 20, 1997
Lowell N. Lewis
/s/ John R. Sutley
----------------------- Director January 20, 1997
John R. Sutley
</TABLE>
29
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES*
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION OR ORGANIZATION
<S> <C>
Ecogen-Bio Inc. Delaware
Ecogen Investments Inc. Delaware
Ecogen-Jerusalem Inc. Delaware
Ecogen-Israel Inc. Delaware
Ecogen Technologies I Incorporated Delaware
Ecogen-Bio Germany GmbH Germany
Ecogen Biotechnologies Israel Ltd. Israel
Ecogen Israel International Inc. Delaware
</TABLE>
* All of the subsidiaries listed above are wholly-owned subsidiaries with the
exception of Ecogen Technologies I Incorporated of which Ecogen Inc. owns
approximately 70% of the outstanding common stock.
<PAGE> 1
EXHIBIT 24
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Ecogen Inc.:
We consent to the incorporation by reference in the registration
statement (No. 33-23767) on Form S-8/S-3, registration statements (No. 33-39687,
No. 33-50478 and No. 33-70538) on Form S-8, and registration statements (No.
33-87510, No. 33-45975, No. 33-48020 and No. 33-71854) on Form S-3, of Ecogen
Inc. of our report dated December 14, 1996, relating to the consolidated balance
sheets of Ecogen Inc. and subsidiaries as of October 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows and related schedule for each of the years ended October 31, 1996 and 1995
and the ten months ended October 31, 1994, which report appears in the October
31, 1996 annual report on Form 10-K of Ecogen Inc.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 5,620,701
<SECURITIES> 3,990,410
<RECEIVABLES> 1,826,374
<ALLOWANCES> 42,769
<INVENTORY> 6,854,472
<CURRENT-ASSETS> 18,742,707
<PP&E> 10,040,961
<DEPRECIATION> 5,471,634
<TOTAL-ASSETS> 23,861,244
<CURRENT-LIABILITIES> 6,273,457
<BONDS> 1,297,469
0
58
<COMMON> 79,282
<OTHER-SE> 14,324,077
<TOTAL-LIABILITY-AND-EQUITY> 23,861,244
<SALES> 8,599,582
<TOTAL-REVENUES> 16,424,715
<CGS> 5,698,578
<TOTAL-COSTS> 19,168,059
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,894
<INCOME-PRETAX> (2,743,344)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,743,344)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,743,344)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
