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As filed with the Securities and Exchange Commission on August 7, 1997.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 3
[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___________
COMMISSION FILE NUMBER 1-9579
ECOGEN INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2487948
(State or other Jurisdiction of (I.R.S. Employer 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
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
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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")
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(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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Item I is hereby amended to read in its entirety as set forth below:
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.
GEOGRAPHIC SEGMENT DATA
Information regarding geographic segment data is provided in
Note 14 of Notes to Consolidated Financial Statements.
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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
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<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
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<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.
The regulation of field development and testing, as well as the
commercial sale, of Ecogen's biopesticide products varies widely outside of the
United States. Some countries permit the field development testing and sale of
biopesticide products registered for commercial sale in the United States upon
the filing of certain notifications or other non-extensive documentation. In
other countries the regulation of biopesticides is not as well defined as in
the United States and in such countries, biopesticides are regulated like
chemical pesticides. These countries require significantly more toxicity and
ecotoxicity studies than are required in the United States for biopesticides,
as well as a minimum of two years field efficacy studies, for registration for
commercial sales. Due to the variety of regulatory structures in countries
other than the United States and the evolving nature of such regulatory
schemes, the impact of government regulation of biopesticides on Ecogen's
international business can not 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.
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<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.
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<PAGE> 16
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this Amendment to the Annual Report on Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized.
ECOGEN INC.
By:/s/ James P. Reilly, Jr.
-------------------------------------
James P. Reilly, Jr.
Chairman and Chief Executive Officer
Date: August 6, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Amendment to the Annual Report on Form 10-K/A has been signed by the
following persons in the capacities indicated as of the 6th of August, 1997.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James P. Reilly, Jr. Chairman of the Board, August 6, 1997
- ------------------------ President and Chief Executive
James P. Reilly, Jr. Officer (Principal Executive Officer)
/s/ Mary E. Paetzold Vice President, Chief Financial August 6, 1997
- -------------------- Officer and Director (Principal
Mary E. Paetzold Financial and Accounting Officer)
* Director August 6, 1997
- ---------------------------
John E. Davies
* Director August 6, 1997
- ---------------------------
Jack D. Early
* Director August 6, 1997
- ---------------------------
Esteban A. Ferrer
* Director August 6, 1997
- ---------------------------
Lowell N. Lewis
* Director August 6, 1997
- ---------------------------
John R. Sutley
*/s/ Mary E. Paetzold Attorney-in-fact August 6, 1997
--------------------
Mary E. Paetzold
</TABLE>
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