<PAGE> 1
As filed with the Securities and Exchange Commission on January 15, 1999.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
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
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 $10,922,000 AS OF JANUARY 8, 1999. (A)
8,366,541
(NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF JANUARY 8, 1999)
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. [X]
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement with respect to the Annual Meeting of
Stockholders scheduled to be held on March 11, 1999 to be filed by Ecogen Inc.
with the Commission (hereinafter the "Proxy Statement") is incorporated by
reference into Part III of this Form 10-K.
(A) Excludes 1,645,308 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 8, 1999. 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.
2
<PAGE> 3
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"), biological fungicide products for
the control of powdery mildew and post-harvest rot disease, and certain pest
control and crop pollination products based on pheromone and related technology.
In addition, Ecogen is developing for introduction into certain niche markets
insecticidal nematode-based products 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. The Company's fiscal year begins on November 1 and ends on October
31. Unless the context otherwise requires, all references in this document to a
particular year shall mean the Company's fiscal year.
In fiscal 1998, the Company sold substantially all of the
assets (other than receivables from product sales) associated with the Company's
Pheromone Product Line to Scentry Biologicals Inc. (See Managements' Discussion
and Analysis and note 17 of notes to the accompanying consolidated financial
statements.)
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 round worms) 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." A glossary of certain terms used
in this section is set forth at the end of this section.
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
3
<PAGE> 4
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 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
through protein engineering. 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, Ecogen has received a generic approval from the U.S. EPA
to field test recombinant Bt insecticides using this approach. The Company has
received U.S. EPA approval to commercialize CRYMAX(R) Bioinsecticide and
Lepinox(R) 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 therefore, Ecogen believes that pest
populations will have difficulty developing resistance to them.
In January 1996, Ecogen and Monsanto Company ("Monsanto") undertook a
joint research and development program for the purpose of identifying, enhancing
and testing Bt technology for use by Monsanto in transgenic plants. This joint
Research and Development Program, which will end in January 1999, has resulted
in a number of new Bt genes that are now being considered by Monsanto for
incorporation into Monsanto's future transgenic plant products. Ecogen will
receive commercialization success fees from Monsanto for any revenue received by
Monsanto from products incorporating technology developed under this program.
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.
4
<PAGE> 5
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 can develop resistance to chemical fungicides over time. In response
to this market need, the Company developed its AQ10(R) 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.
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.
Glossary
The following glossary of terms may be helpful in
understanding the technology described in this document.
<TABLE>
<S> <C>
Ampelomyces quisqualis - A parasitic fungus with a host range that includes
numerous powdery mildew species.
Bacillus thuringiensis - Spore-forming bacteria that produces insecticidal
crystal proteins during sporulation. Many different
varieties of Bt exist in nature producing crystal
proteins with a wide range of insecticidal activity.
</TABLE>
5
<PAGE> 6
<TABLE>
<S> <C>
Conjugal transfer - Natural genetic transfer system operating in bacteria
that involves the exchange of plasmid DNA.
Gene - Smallest unit of inheritance occupying a specific site
on a DNA molecule (chromosome).
Hyperparasite - A parasite of a parasitic organism, e.g., a fungus that
lives off of a plant parasitic fungus.
Insecticidal crystal protein - Proteins produced by sporulating Bt bacteria that form
crystalline inclusions within the cell.
Insecticidal nematodes - Microscopic round worms that penetrate, infect and kill
insect pests.
Plasmid - Small, usually circular, DNA molecule that is separate
from the bacterial chromosome and is not absolutely
required for cell viability.
Protein - Molecules composed of chains of amino acids. Examples of
proteins are enzymes, hormones, and antibodies.
Protein engineering - Technology of altering specific properties of protein by
introducing structural changes in the protein molecule.
Changes are introduced by making changes in the DNA
encoding the protein using recombinant DNA technology.
Recombinant DNA - May also be referred to as genetic engineering and
involves the in vitro cutting and splicing of DNA
molecules. DNA encoding the desired trait is joined
to a DNA molecule that is subsequently introduced into
the host organism.
SSR System - Ecogen's proprietary site-specific recombination system
for the construction of recombinant Bt strains lacking
foreign DNA.
Transconjugant - Bacterial cell that is produced as a result of the
conjugation process.
Vector - A genetic construct that can transfer genetic material
from one host to another.
</TABLE>
ECOGEN TECHNOLOGIES I INCORPORATED
The Company maintains a 70% ownership interest in Ecogen
Technologies I Incorporated ("ETech"). 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 pesticide
products based on technology for: (i) the control of powdery mildew disease
(AQ10 Biofungicide); (ii) the
6
<PAGE> 7
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
(Cruiser(R) Bioinsecticide); (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. Ecogen
is currently marketing AQ10 and Aspire and is continuing work on the development
of Cruiser. The other ETech projects have been suspended.
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 and
protein engineering techniques. CRYMAX is marketed for the control of
caterpillar pests primarily on vegetable crops.
LEPINOX BIOINSECTICIDE - Lepinox Bioinsecticide is a U.S. EPA
registered product that was developed by Ecogen using recombinant DNA and
protein engineering techniques for the control of fall armyworm on sweet corn
crops.
CONDOR BIOINSECTICIDE -- Condor 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, tree and nut
crops, and forestry applications.
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.
AQ10 BIOFUNGICIDE -- AQ10 Biofungicide is the first
biofungicide registered by the U.S. EPA to protect crops from powdery mildew.
Ecogen markets AQ10 in California and other areas of the western United States
for control of powdery mildew on grapes and other crops.
ASPIRE BIOFUNGICIDE -- Aspire Biofungicide is the first
biofungicide registered by the U.S. EPA to protect crops from post-harvest rot
pathogens. Aspire is marketed for use by fruit packinghouses in the United
States.
NOMATE(R) PHEROMONE PRODUCTS -- Ecogen markets NoMate BHF MEC
and NoMate LRX MEC for control of the blackheaded fireworm on cranberries and
various leafrollers in tree fruits, respectively. Ecogen markets the products in
the United States as a distributor of Scentry Biologicals Inc.
BEE-SCENT(R) ATTRACTANT -- Ecogen markets Bee-Scent Attractant
in the United States as a distributor of Scentry Biologicals Inc. 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.
CRUISER INSECTICIDE -- Cruiser Insecticide contains the
Heterorhabditis bacteriophora nematode and is being developed for the control of
a variety of insect pests.
During fiscal 1998, the foregoing products represented
approximately 96% of Ecogen's product sales. Product sales represented
approximately 64% of the Company's total
7
<PAGE> 8
revenues in fiscal 1998. Bt products, pheromone and related products (through
the date of the sale of the pheromone product line), and biofungicide products
represented approximately 72%, 23%, and 5%, respectively, of Ecogen's total
product sales in 1998.
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 that 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. The Company has a non-exclusive
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 distributes Aspire to fruit packinghouses, primarily in the
United States.
Ecogen's domestic product sales for fiscal 1998, 1997 and 1996
totaled $7.0 million, $7.2 million and $7.0 million, respectively.
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 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), Jia Non Enterprises (for Taiwan) and Incitec Ltd.
(for Australia and New Zealand). In September 1998, FMC Corporation agreed to
distribute Lepinox in Mexico and Central and South America. International
product sales totaled $3.5 million for fiscal 1998, $1.6 million for fiscal
1997, and $1.6 million for fiscal 1996.
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 believes that adequate fermentation,
formulation and other services are available from a number of third-party
contract manufacturers, but the engagement of contract manufacturers other than
the Company's current contract manufacturers may cause at least short-term
disruptions of the Company's manufacturing operations.
Ecogen is a party to an agreement with Archer-Daniels-Midland
Company ("ADM") pursuant to which Ecogen's Bt-based insecticides as well as
Aspire Biofungicide will be fermented at ADM's facility in Decatur, Illinois.
The current agreement with ADM continues through December 31, 1999 and may be
extended upon the agreement of both parties.
8
<PAGE> 9
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.
The Company distributes Bee-Scent Attractant as well as NoMate
BHF MEC and NoMate LRX MEC under an agreement with Scentry Biologicals Inc.
Scentry Biologicals Inc. is the sole supplier of these products.
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 $.7 million for fiscal 1998,
$1.2 million for fiscal 1997, and $1.0 million for fiscal 1996. Costs incurred
under Ecogen-funded research and development programs aggregated approximately
$2.9 million, $3.8 million and $3.9 million for fiscal 1998, 1997 and 1996,
respectively.
During fiscal 1998, the Company derived approximately 32% of
its revenues from research and development contracts. This contrasts with
approximately 25% in 1997 and 13% in 1996.
Bacillus thuringiensis Products
The Company is working 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.
Biofungicide
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.
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 12 to
notes to consolidated financial statements.
9
<PAGE> 10
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 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
10
<PAGE> 11
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).
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 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.
11
<PAGE> 12
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 biopesticides 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 of 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 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 Dow AgroSciences, as well as
specialized biotechnology firms. Many of these companies have considerably
greater financial and marketing resources than has 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.
SEASONALITY
The bulk of the Company's current products are 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
12
<PAGE> 13
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 December 31, 1998, Ecogen and its subsidiaries have 43
full-time employees, of whom nine hold Ph.D. degrees. 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.
13
<PAGE> 14
EXECUTIVE OFFICERS
The executive officers of the Company and their respective
ages and positions with the Company are as follows:
Name Age Position
- ---- --- --------
James P. Reilly, Jr. 52 Chairman, President, and Chief Executive
Officer and Director
James A. Baum 44 Vice President, Research
Richard A. Deak 44 Vice President, General Counsel and
Secretary
Timothy B. Johnson 42 Vice President, Sales and Marketing
Mary E. Paetzold 49 Vice President, Chief Financial Officer
and Treasurer
All executive officers are elected by the Board of Directors.
There is no family relationship among any of the officers or directors.
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.
Dr. Baum has served as Vice President, Research since 1998.
From June 1987 to February 1998, Dr. Baum served Ecogen in various positions
including Director of Bt Research. Dr. Baum received a B.S. in Biology from the
University of Notre Dame and a Ph.D. in Genetics from North Carolina State
University.
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 B.B.A. in Accountancy from the
University of Notre Dame.
Dr. Johnson has served as Vice President, Sales and Marketing
since October 1998. From 1985 to October 1998, Dr. Johnson served Ecogen in
various positions including Business Director. Dr. Johnson received a B.S. in
Entomology from Iowa State University and a Ph.D. in Entomology from Purdue
University.
14
<PAGE> 15
Ms. Paetzold has served as Vice President, Chief Financial
Officer and Treasurer of the Company since she joined Ecogen in August 1994. Ms.
Paetzold served as a director of the Company from March 1996 to September 1997.
Prior to joining the Company, Ms. Paetzold was a partner with KPMG LLP,
certified public accountants, where she worked for over 20 years. Ms. Paetzold
received a B.A. in Mathematics from Montclair State University and is a
Certified Public Accountant.
ITEM 2. PROPERTIES
Ecogen currently occupies approximately 30,000 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 in March 2000 and Ecogen
has renewal options to March 2005. Approximately 25,000 square feet of this
space is devoted to research and development facilities, including laboratories,
an insectary and a fermentation and formulation pilot plant. 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 closing prices
of the Company's common stock during the years ended October 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C>
First Quarter $2-3/4 $ 1-17/32
Second Quarter 3-1/8 1-7/16
Third Quarter 3-7/16 1-7/8
Fourth Quarter 1-7/8 1
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C>
First Quarter $ 4 $ 2-1/2
Second Quarter 4-1/8 2-5/8
Third Quarter 4 2-1/2
Fourth Quarter 3-7/8 2-1/2
</TABLE>
A. Holders
On January 1, 1999, there were approximately 856 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 on its common
stock in the foreseeable future. The Company is precluded from paying
cash dividends on its common stock under its line of credit agreement.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
Years ended October 31, 1998, 1997, 1996 and 1995, and ten months ended October
31, 1994, (all amounts in thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
10 Months
Ended
Year Ended October 31, October 31,
1998(1) 1997 1996 1995(2) 1994(3)
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $10,472 $8,783 $8,600 $9,135 $8,550
Other revenues 5,926 3,028 7,825 2,855 11,275
Gross margins 1,871 2,491 2,901 3,627 2,659
Expenses:
Research & development 3,616 5,042 4,922 8,951 9,278
Selling, general &
administrative 6,824 8,661 8,547 10,672 9,249
Special charges:
- Purchased technology -- -- -- 9,143 --
- Restructuring -- 1,626 -- 1,041 --
Net loss available to common
stockholders $(3,113) $(9,812) $(2,860) $(23,324) $(4,593)
Basic and diluted net loss
per common share $(0.39) $(1.23) $(0.40) $(4.34) $(1.24)
Weighted average common
shares outstanding 8,059 7,958 7,178 5,373 3,715
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
At October 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
temporary investments $2,823 $2,374 $9,611 $1,775 $8,828
Total assets 14,677 17,558 23,861 12,371 19,471
Long-term debt 1,328 3,916 1,297 620 -
Stockholders' equity 6,925 4,870 14,403 5,507 9,651
</TABLE>
No cash dividends have ever been paid on the Company's common stock, and the
Company does not intend to pay cash dividends on its common stock in the
foreseeable future. The Company is precluded from paying cash dividends on its
common stock under its line of credit agreement.
(1) During fiscal 1998, the Company disposed of its pheromone product line
(see note 17 of notes to consolidated financial statements.)
(2) During fiscal 1995, the Company acquired a controlling interest in
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 research
contract revenue from ETech in its consolidated financial statements.
(3) 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.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Company 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.
OVERVIEW
Total revenues increased 39% in fiscal 1998 to $16.4 million
from $11.8 million in fiscal 1997. In fiscal 1998, product sales increased 19%
from $8.8 million in fiscal 1997 to $10.5 million in 1998. Other revenues,
including revenue under the research and development program with Monsanto that
ends in January 1999 and the net gain on the sale of the pheromone product line,
increased to $5.8 million for fiscal 1998 from $3.0 million for the year-ago
period. Net loss available to common stockholders exclusive of special charges
decreased from ($8.2) million or ($1.03) per basic and diluted share in fiscal
1997 to ($3.1) million or ($.39) per share in fiscal 1998. Fiscal 1997 results
included special charges of $1.6 million relating primarily to costs associated
with the realignment of the Company's manufacturing process and the shut-down of
its research facility in Israel. Net loss available to common stockholders,
including the special charges, narrowed by 68% in fiscal 1998 to ($3.1) million
or ($.39) per basic and diluted share compared to ($9.8) million or ($1.23) per
share in fiscal 1997. Weighted average shares were 8.1 million and 8.0 million
in fiscal 1998 and 1997, respectively.
In April 1998, the Company sold its pheromone product line to a newly-formed
company for aggregate net proceeds of $2.4 million and recognized a gain on the
sale of approximately $.5 million. On an unaudited pro forma basis, assuming
that the sale of the pheromone product line had taken place at the start of
fiscal 1997 and excluding the $.5 million gain on the sale, the Company's net
loss available to common stockholders for fiscal 1998 would have been ($3.9)
million, or ($.48) per basic and diluted share, compared with ($9.9) million, or
($1.25) per basic and diluted share for the year-ago period.
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
1998 1997 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Total Revenues 100% 100% 39%
Product Sales 64% 74% 19%
Other Revenues 36% 26% 96%
Gross Margins on Product Sales 18% 28% (25%)
Research & Development
Expenses 22% 43% (28%)
Selling, General & Administrative
Expenses 42% 73% (21%)
</TABLE>
18
<PAGE> 19
RESULTS OF OPERATIONS - YEAR ENDED OCTOBER 31, 1998 COMPARED TO YEAR ENDED
OCTOBER 31, 1997
REVENUES
Total revenues increased $4.6 million or 39% in fiscal 1998 to
$16.4 million from $11.8 million in fiscal 1997. Net product sales increased
$1.7 million or 19% and other revenue increased $2.9 million or 96%. Sales of
the Company's Bt product line, representing 72% of Company product sales,
increased 95% in fiscal 1998 principally due to increased sales of CRYMAX, the
Company's Bt bioinsecticide for control of caterpillars in the vegetable, tree,
nut and vine markets, which was introduced in fiscal 1997, and the introduction
of Lepinox, the Company's bioinsecticide for control of diamondback moth and a
variety of armyworms in vegetables and row crops. Biofungicide product sales,
which represented 5% of product sales in fiscal 1998, decreased $1.3 million or
71% from the year-ago period, principally due to lower sales of Aspire, the
Company's biofungicide for control of post harvest rot disease. Sales of Aspire
decreased in fiscal 1998 as a result of carryover inventory at the Company's
sole distributor for this product. The Company is currently expanding its
distribution for Aspire. Pheromone product sales, representing 23% of total
sales, decreased 24% due to the sale of the Company's pheromone product line in
the second quarter of fiscal 1998. On an unaudited pro forma basis, assuming the
sale of the pheromone product line had taken place at the beginning of fiscal
1997, continuing product sales increased 42% in fiscal 1998.
Research contract revenues increased $2.3 million or 79% in
fiscal 1998 due to payments received under an amendment to the Monsanto research
and development contract. Under the amendment, the research program was
accelerated to terminate one year earlier (January 1999) with the Company
receiving the full $10.0 million in revenue provided for under the original
four-year research program with Monsanto. License fees and other income
increased $.7 million in fiscal 1998 over the year-ago period, principally as a
result of the $.5 million gain on the sale of the pheromone product line.
COSTS AND EXPENSES
Gross margins decreased to 18% in fiscal 1998 from 28% in
fiscal 1997, primarily as a result of a change in product mix caused by lower
high-margin biofungicide sales and lower domestic sales as a result of a
depressed market in the U.S. due to severe weather conditions early in the
Company's fiscal year combined with higher low-margin international sales.
Another factor impacting margins was a reduction in the price charged to
distributors for certain products as a result of the elimination of certain
promotional programs with distributors.
Total operating expenses, consisting of research and
development expenses and selling, general and administrative expenses, exclusive
of special charges in fiscal 1997, decreased $3.3 million or 24% to $10.4
million in fiscal 1998 compared to $13.7 million in 1997. Research and
development costs decreased $1.4 million or 28% in fiscal 1998 compared to the
year-ago period, as a result of lower process development and start-up costs and
lower personnel and related costs, due to the wind-down of the Monsanto Research
Program and lower basic research. Selling, general and administrative expenses
decreased $1.8 million or 21% in fiscal 1998, principally as a result of a
reduction in personnel and other cost saving measures and a decrease in selling
and promotional expenses, due in part to the sale of the pheromone product line
and as a result of higher expenses in fiscal 1997 due to the introduction of new
products. The Company expects that fiscal 1999 will reflect a further reduction
in operating expenses, due in part to the fact that the cost saving measures
implemented in fiscal 1998 will be reflected for the full fiscal year 1999.
Net interest expense was $.4 million in fiscal 1998 compared
to net interest income of $.1 million in fiscal 1997. The higher interest
expense was due primarily to interest on the
19
<PAGE> 20
Company's convertible note in fiscal 1998 and lower average investments. The
note was converted to preferred stock in the fourth quarter of fiscal 1998.
Net loss available to common stockholders for fiscal 1998 was
($3.1) million, or ($.39) per basic and diluted share, compared with a net loss
of ($9.8) million or ($1.23) per basic and diluted share in the same period in
fiscal 1997. The 1997 fiscal year included special charges of $1.6 million
principally due to the shut-down of the Company's research facility in Israel
and the realignment of the Company's manufacturing process. Weighted average
shares were 8.1 million in fiscal 1998 compared to 8.0 million in fiscal 1997.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO YEAR
ENDED OCTOBER 31, 1996
REVENUES
Total revenues decreased 28% in fiscal 1997 from $16.4 million
in 1996 to $11.8 million. In 1996, the Company recorded nonrecurring revenue of
$4.8 million from the transaction between the Company and Monsanto for certain
Bt technology rights. Net product sales increased 2% or $.2 million in fiscal
1997 compared to fiscal 1996. Sales of the Company's Bt product line,
representing 44% of the Company's product sales, decreased 1% in fiscal 1997
principally on lower sales volume, due principally to lower cotton acreage
available for sprayable Bt insecticides due to the continued acceptance of
transgenic Bt cotton, substantially offset by sales into the vegetable market of
the Company's new CRYMAX Bt Bioinsecticide. Sales of pheromone products,
representing 36% of total sales, decreased 26% primarily due to decreased
volume, including lower sales of the Company's NoMate PBW product for control of
pink bollworm in the cotton market, due primarily to the introduction of Bt
transgenic cotton seed. Sales of biofungicide products, representing 20% of
total sales, increased 305% due to increased sales volume of both Aspire and
AQ10, the Company's new biofungicide products.
Research contract revenues increased 39% in fiscal 1997, due
primarily to the fact that the Company's research and development program with
Monsanto, which was not effective until the second quarter of fiscal 1996, was
in effect for the full fiscal year of 1997. License fees and other income
decreased $5.0 million in fiscal 1997 principally as a result of the
nonrecurring revenue from the Company's research and development program with
Monsanto recorded in fiscal 1996. Interest income decreased approximately $.6
million in fiscal 1997 as a result of the decrease in funds available for
investment.
COSTS AND EXPENSES
Gross margins decreased to 28% for fiscal 1997 compared to 34%
in fiscal 1996, primarily as a result of a change in product mix caused by lower
pheromone sales, which carry high gross margins, and the fact that the Company's
new Bt water dispersible granule ("WDG") products carried lower margins, due to
higher production start-up costs in the WDG process.
Research and development costs were substantially consistent
with fiscal 1996. Higher process development costs in the first half of fiscal
1997 were offset by lower research and development costs in Israel during the
second half of the year. Selling, general and administrative expenses in fiscal
1997 were substantially consistent with fiscal 1996 at approximately $8.6
million.
Net loss for fiscal 1997 was ($9.8) million, or ($1.23) per
share, compared with a net loss of ($2.7) million or ($.40) per share in the
same period in fiscal 1996 on weighted average shares of 7,958,000 and 7,178,000
in 1997 and 1996, respectively. Net loss, exclusive of special charges, was
($8.2) million or ($1.03) per share in fiscal 1997. The increase in the net
loss,
20
<PAGE> 21
exclusive of special charges, principally relates to lower gross margins and the
$4.8 million of other nonrecurring revenue favorably impacting the 1996 fiscal
year.
In fiscal 1997, the Company recorded a special charge of $1.6
million for the realignment of its manufacturing process and the shut-down of a
research laboratory in Israel.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital needs primarily
through private and public offerings of equity securities, research contract
revenues and license and other fees from research and development alliances and
product sales.
At October 31, 1998, the Company had cash, cash equivalents
and temporary investments of $2.8 million, a net increase of $.4 million from
October 31, 1997. During fiscal 1998, the Company used $3.5 million of cash for
operations, $.4 million for the purchase of plant and equipment and $.2 million
for principal payments on capital leases. Such amounts were funded by $2.9
million received from financing transactions in fiscal 1998 and the net cash
proceeds of $1.7 million from the sale of the pheromone product line. During the
fourth quarter of fiscal 1998, the Company sold preferred stock for net proceeds
of $1.8 million and obtained a secured working capital line of credit for up to
$5.0 million, of which $1.1 million was borrowed under the line.
To date, the Company has not generated positive cash flow from
operations. The Company believes that its existing working capital and amounts
available under its working capital line of credit should be sufficient to meet
its capital and liquidity requirements through fiscal year 1999 based on reduced
spending levels, if necessary. However, the Company's working capital and
working capital requirements are affected by numerous factors and there is no
assurance that such factors will not have a negative impact on the Company's
liquidity. Principal among these are the success of its product
commercialization and marketing efforts and the efforts of its strategic
partners in commercializing and selling products based on the Company's
technology, the technological advantages and pricing of the Company's products,
economic and environmental considerations which impact agricultural crop
production and the agricultural sector generally, competitive conditions in the
agricultural pest control market, and access to capital markets that can provide
the Company with the resources when necessary to fund its strategic priorities.
There is no assurance that access to capital markets will be available on terms
acceptable to the Company or at
21
<PAGE> 22
all. Over the long term, the Company's liquidity is dependent on market
acceptance of its products and technology.
At October 31, 1998 the Company had no material commitments
for capital expenditures.
Through October 31, 1998, the Company had available Federal
net operating loss carryforwards of approximately $73.1 million which expire at
various times through 2013. In addition, the Company had research and
experimentation tax credits of approximately $2.4 million, which credits expire
at various times through 2012.
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 1999 or 2000 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 decreased $4.1 million at October 31, 1998 when
compared to October 31, 1997 primarily due to the sale of the pheromone product
line and increased sales in the fourth quarter of fiscal 1998. Accounts
receivable at October 31, 1998 increased $1.6 million as a result of higher
sales in the fourth quarter of fiscal 1998.
Accounts payable and accrued expenses decreased $1.9 million
in fiscal 1998 as a result of the sale of the pheromone product line and the
timing of payments to vendors. Deferred contract revenue at October 31, 1998
decreased $.5 million as a result of revenue earned under the Monsanto contract
in fiscal 1998. Long-term debt decreased $2.6 million in fiscal 1998 as a result
of payments under capital leases and the conversion of a convertible note to
equity during the fourth quarter of fiscal 1998.
YEAR 2000
The Company has completed its Year 2000 assessment and
believes that it is Year 2000 compliant on internal hardware and software. The
Company is still in the process of contacting major customers and vendors to
assess their status as to Year 2000 compliance. The Company expects that this
process will be completed in the first half of fiscal 1999. Once this process is
completed, however, there is no assurance that service interruptions will not
occur from vendors, suppliers or service providers, including financial
institutions or governments. The Company believes that alternative suppliers
exist and, therefore, if services are interrupted from suppliers, the situation
should be temporary.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities which becomes effective for
our financial statements beginning November 1, 2000. SFAS No. 133 requires a
company to recognize all derivative instruments as assets or liabilities in its
balance sheet and measure them at fair value. The American Institute of
Certified
22
<PAGE> 23
Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use and
SOP 98-5, Reporting on the Costs of Start-up Activities, which are effective for
our fiscal 1999 financial statements. We do not expect adoption of these
standards to have a material impact on our financial statements.
FORWARD LOOKING STATEMENTS
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 results to differ
materially from expected results. The Company intends to market and sell a
number of new and recently 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK
Not Applicable.
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
Not Applicable.
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.
23
<PAGE> 24
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.
24
<PAGE> 25
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:
Page in
Form 10-K
---------
Independent Auditors' Report F-1
Consolidated Balance Sheets - October 31, 1998 and 1997 F-2
Consolidated Statements of Operations - Years Ended October 31, 1998,
1997 and 1996 F-3
Consolidated Statements of Stockholders' Equity - Years Ended
October 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows - Years Ended
October 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements - October 31, 1998,
1997 and 1996 F-7
Financial Statement Schedule: Valuation and Qualifying Accounts F-20
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.
25
<PAGE> 26
(a)(3) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of Ecogen Inc. (Form 10-K for
fiscal quarter ended January 31, 1996)*
3.2 Bylaws of Ecogen Inc., as amended. (Form S-1 Registration
Statement)*
3.3 Certificate of Designations, Preferences and Rights of Series 1998-A
Convertible Preferred Stock (Form 10-Q for fiscal quarter ended
April 30, 1998) *
3.4 Certificate of Designations, Preferences and Rights of Series 1998-C
Convertible Preferred Stock (Form 8-K dated September 2, 1998) *
4.3 Ecogen Inc. Stock Option Plan, as amended. (Form 10-K for fiscal
year ended December 31, 1992)*
4.4 Ecogen Inc. 1998 Stock Option Plan
10.14 Form of Confidentiality Agreement between Ecogen Inc. and all Ecogen
Inc. employees. (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)*
10.62 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, dated April 11, 1991, between Ecogen Inc.
and Pioneer Hi-Bred International, Inc. (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)*
- ----------
* 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
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, dated October 23, 1995, among the
Company, Ecogen Europe S.r.l. and 3A Parco Technologico
Agroalimentare. (Form 10-K for fiscal year ended October 31, 1995)*
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)*
10.125 Form of Indemnification Agreement for Directors and Officers (Form
10-Q for fiscal quarter ended January 31, 1997)*
10.127 Amendment No. 1 to Technology Assignment by and between Monsanto
Company and Ecogen Inc. dated September 15, 1997. (Form 10-K for
fiscal year ended October 31, 1997)*
10.128 Convertible Note Purchase Agreement by and among Ecogen Inc., Ecogen
Investment Inc., Ecogen-Bio Inc. and United Equities (Commodities)
Company dated October 31, 1997. (Form 10-K for fiscal year ended
October 31, 1997)*
10.129 8% Convertible Note due October 31, 2002 issued to United Equities
(Commodities) Company dated October 31, 1997. (Form 10-K for fiscal
year ended October 31, 1997)*
10.130 Security Agreement by and among Ecogen Inc., Ecogen Investment Inc.,
Ecogen-Bio Inc. and United Equities (Commodities) Company dated
October 31, 1997. (Form 10-K for fiscal year ended October 31,
1997)*
10.131 Contract Manufacturing Agreement dated November 6, 1997 by and
between Ecogen Inc. and Archer-Daniels-Midland Company. (Form 10-Q
for fiscal quarter ended January 31, 1998)*
10.132 Amended and Restated Research and Development Agreement dated
January 30, 1998 by and between Monsanto Company and Ecogen Inc.
(Form 10-Q for fiscal quarter ended January 31, 1998)*
- ----------
* 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
10.133 Asset Purchase and Sale Agreement among Ecogen Inc., Ecogen-Bio Inc.
and Scentry Biologicals Inc. dated April 28, 1998. ( Form 10-Q for
fiscal quarter ended April 30, 1998)*
10.134 Convertible Preferred Stock Purchase Agreement between United
Equities (Commodities) Company and Ecogen Inc. dated August 20,
1998. (Form 8-K filed on September 2, 1998)*
10.135 Registration Rights Agreement between United Equities (Commodities)
Company and Ecogen Inc., dated August 20, 1998. (Form 8-K filed on
September 2, 1998)*
10.136 Loan and Security Agreement between Congress Financial Corporation
and Ecogen Inc., dated August 20, 1998. (Form 8-K filed on September
2, 1998)*
10.137 Guarantee by Ecogen Investments Inc., Ecogen Technologies I
Incorporated, Ecogen-Bio Inc., Ecoresearch Mildew I Inc.,
Ecoresearch Harvest Rot II Inc., Ecoresearch Corn Borer III Inc.,
Ecoresearch Nematodes IV Inc., Ecoresearch Rootworm V Inc. and
Ecoresearch Turf VI Inc. to Congress Financial Corporation, dated
August 20, 1998. (Form 8-K filed on September 2, 1998)*
10.138 Pledge and Security Agreement by Ecogen Inc. in favor of Congress
Financial Corporation, dated August 20, 1998. (Form 8-K filed on
September 2, 1998)*
10.139 Pledge and Security Agreement by Ecogen Technologies I Incorporated
in favor of Congress Financial Corporation dated August 20, 1998.
(Form 8-K filed on September 2, 1998)*
10.140 Amended and Restated Convertible Preferred Stock Purchase Agreement
between Ecogen Inc. and KA Investments LDC dated as of June 5, 1998.
(Form S-3 Registration Statement filed on September 14, 1998)*
10.141 Warrant Agreement between Ecogen Inc. and KA Investments LDC dated
June 5, 1998. (Form S-3 Registration Statement filed on September
14, 1998)*
10.142 Amended and Restated Registration Rights Agreement between Ecogen
Inc. and KA Investments LDC dated as of June 5, 1998. (Form S-3
Registration Statement filed on September 14, 1998)*
10.143 Stock Award Agreement between Ecogen Inc. and James P. Reilly, Jr.
dated September 23, 1998.
21. List of Subsidiaries
24. Consent of KPMG 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.
28
<PAGE> 29
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.
A Current Report on Form 8-K was filed on September 2, 1998 with
respect to: (i) the obtainment by the Company of a secured,
revolving loan valued at up to $5,000,000 from Congress Financial
Corporation; and (ii) the issuance by the Company of 32,354 shares
of newly issued 8% Series 1998-C Convertible Preferred Stock to
United Equities (Commodities) Company in exchange for an 8% secured
convertible note due October 31, 2002 in the amount of $3,235,400
held by United Equities (Commodities) Company.
A Current Report on Form 8-K was filed on May 15, 1998 with respect
to the sale by the Company of substantially all of the assets (other
than receivables from product sales) associated with the Company's
pheromone product line to Scentry Biologicals Inc. An unaudited pro
forma condensed consolidated balance sheet as of January 31, 1998
and unaudited pro forma condensed consolidated statements of
operations for the year ended October 31, 1997 and the three-month
period ended January 31, 1998 were filed as part of such Current
Report.
29
<PAGE> 30
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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 1998 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 LLP
Short Hills, New Jersey
December 17, 1998
F-1
<PAGE> 31
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,009,437 $ 1,824,603
Temporary investments 813,150 549,342
Trade receivables, less allowance for doubtful accounts
of $80,000 and $77,769 in 1998 and in 1997, respectively 3,338,897 1,769,514
Inventory, net 4,298,374 8,356,767
Prepaid expenses and other current assets 624,072 571,227
------------- -------------
Total current assets 11,083,930 13,071,453
Plant and equipment, net 2,771,255 3,649,579
Intangible and other assets, net 821,316 837,020
------------- -------------
$ 14,676,501 $ 17,558,052
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 3,102,319 5,043,626
Deferred revenue 485,853 957,794
------------- -------------
Total current liabilities 3,588,172 6,001,420
------------- -------------
Long-term debt 1,327,875 3,916,433
------------- -------------
Other long-term obligations 2,835,187 2,770,548
------------- -------------
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized 7,500,000 shares:
Series 1998 A convertible preferred stock - 35,000 shares authorized;
19,500 and 0 shares issued and outstanding in 1998 and
1997, respectively (liquidation value $1,950,000 in 1998) 195 --
Series 1998 C convertible preferred shares: 50,000 shares authorized;
32,354 and 0 shares issued and outstanding in 1998 and 1997,
respectively (liquidation value $3,235,400 in 1998) 324 --
Common stock, par value $.01 per share; authorized 42,000,000
shares; 8,246,035 and 8,118,573 shares issued in 1998 and 1997,
respectively 82,426 81,186
Additional paid-in capital 122,162,964 117,861,372
Accumulated deficit (114,665,164) (111,552,038)
Net unrealized gain on securities 3,912 7,239
Treasury stock, at cost (51,960 and 116,893 shares in 1998
and 1997, respectively) (659,390) (1,528,108)
------------- -------------
Total stockholders' equity 6,925,267 4,869,651
------------- -------------
Commitments
$ 14,676,501 $ 17,558,052
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 32
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended October 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales, net $ 10,471,945 $ 8,783,461 $ 8,599,582
Research contract revenue 5,265,952 2,938,790 2,109,622
License and other income 660,239 -- 5,000,000
Interest income, net -- 88,837 715,511
------------ ------------ ------------
Total revenues 16,398,136 11,811,088 16,424,715
------------ ------------ ------------
Costs and expenses, including related
party amounts of $436,142, $837,841
and $1,044,121 in 1998, 1997 and 1996,
respectively:
Cost of products sold 8,600,903 6,291,928 5,698,578
Research and development:
Funded by third parties 725,169 1,218,107 986,204
Self funded 2,890,454 3,823,503 3,936,484
Selling, general and administrative 6,823,931 8,661,750 8,546,793
Special charges -- 1,625,892 --
Interest expense, net 354,785 -- --
------------ ------------ ------------
Total costs and expenses 19,395,242 21,621,180 19,168,059
------------ ------------ ------------
Net loss (2,997,106) (9,810,092) (2,743,344)
Dividends on preferred stock 116,020 1,815 116,700
------------ ------------ ------------
Net loss available to common stockholders ($ 3,113,126) ($ 9,811,907) ($ 2,860,044)
============ ============ ============
Basic and diluted net loss per common share ($ 0.39) ($ 1.23) ($ 0.40)
============ ============ ============
Weighted average common shares
outstanding 8,059,000 7,958,000 7,178,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 33
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL ACCUMULATED
PREFERRED STOCK COMMON STOCK PAID-IN CAPITAL DEFICIT
--------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Balance, November 1, 1995 $ 350 $59,785 $ 105,343,444 ($ 98,878,279)
Issuance of 122,000 shares of Series C convertible
preferred stock in connection with a private placement, net 1,220 -- 2,792,723 --
Issuance of 943,397 shares of common stock, net -- 9,434 9,325,831 --
Conversion of 29,166 shares 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 stock 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)
Issuance of 5,793 shares of common stock
for employee benefits -- 58 (84,639) --
Issuance of 136,000 shares of common stock
in settlement of a royalty obligation -- 1,360 386,240 --
Conversion of 5,834 shares of Series B convertible preferred
stock to 44,030 shares of common stock (58) 440 (382) --
Dividends on preferred stock -- 46 12,088 --
Foreign currency translation -- -- -- --
Net reduction in unrealized gain on securities -- -- -- --
Net loss -- -- -- (9,810,092)
------- ------- ------------- -------------
Balance, October 31, 1997 -- 81,186 117,861,372 (111,552,038)
Issuance of 115,273 shares of common stock
to employees -- 1,000 (41,263) --
Private placement of 20,000 shares of convertible preferred
stock, net of issuance costs (including 24,000 shares
of common stock paid as a placement fee) 200 240 1,794,549 --
Conversion of convertible note for 32,354 shares of
Series 1998 A convertible preferred stock,
plus accrued interest thereon 324 -- 3,219,922 --
Conversion of 500 shares of Series 1998 B convertible
preferred stock to 50,000 shares of common stock (5) -- (652,995) --
Dividends on preferred stock -- -- (18,621) (116,020)
Net reduction in unrealized gain on securities -- -- -- --
Net loss -- -- -- (2,997,106)
------- ------- ------------- -------------
Balance, October 31, 1998 $ 519 $82,426 $ 122,162,964 ($114,665,164)
======= ======= ============= =============
</TABLE>
<TABLE>
<CAPTION>
EQUITY TREASURY
ADJUSTMENTS STOCK, AT COST TOTAL
----------- -------------- ------------
<S> <C> <C> <C>
Balance, November 1, 1995 $ 270,867 ($1,288,780) $ 5,507,387
Issuance of 122,000 shares of Series C convertible
preferred stock in connection with a private placement, net -- -- 2,793,943
Issuance of 943,397 shares of common stock, net -- -- 9,335,265
Conversion of 29,166 shares 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 stock 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 (1,653,497) 14,403,240
Issuance of 5,793 shares of common stock
for employee benefits -- 125,389 40,808
Issuance of 136,000 shares of common stock
in settlement of a royalty obligation -- -- 387,600
Conversion of 5,834 shares of Series B convertible preferred
stock to 44,030 shares of common stock -- -- --
Dividends on preferred stock -- -- 12,134
Foreign currency translation (161,536) -- (161,536)
Net reduction in unrealized gain on securities (2,503) -- (2,503)
Net loss -- -- (9,810,092)
--------- ----------- ------------
Balance, October 31, 1997 7,239 (1,528,108) 4,869,651
Issuance of 115,273 shares of common stock
to employees -- 195,553 155,290
Private placement of 20,000 shares of convertible preferred
stock, net of issuance costs (including 24,000 shares
of common stock paid as a placement fee) -- -- 1,794,989
Conversion of convertible note for 32,354 shares of
Series 1998 A convertible preferred stock,
plus accrued interest thereon -- -- 3,220,246
Conversion of 500 shares of Series 1998 B convertible
preferred stock to 50,000 shares of common stock -- 653,000 --
Dividends on preferred stock -- 20,165 (114,476)
Net reduction in unrealized gain on securities (3,327) -- (3,327)
Net loss -- -- (2,997,106)
--------- ----------- ------------
Balance, October 31, 1998 $ 3,912 ($ 659,390) $ 6,925,267
========= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 34
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended October 31,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($2,997,106) ($9,810,092) ($ 2,743,344)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of assets (542,268) -- --
Depreciation and amortization expense 762,149 1,355,310 403,827
Noncash interest and other expense 336,933 -- --
Changes in operating assets and liabilities,
net of effects from acquisitions/dispositions:
Decrease (increase) in inventory 2,352,999 (1,502,295) (509,020)
(Increase) decrease in trade
receivables, net (1,569,383) 14,091 (1,050,459)
Increase in prepaid expenses
and other current assets (52,844) (77,708) (347,749)
(Decrease) increase in accounts payable and
accrued expenses (1,650,833) (105,868) 285,789
(Decrease) increase in deferred revenue (471,941) 856,427 1,057,817
Increase (decrease) in other long-term obligations 297,071 (116,530) (236,411)
Other 47,937 137,795 71,109
----------- ----------- ------------
Net cash used in operating activities (3,487,286) (9,248,870) (3,068,441)
----------- ----------- ------------
Cash flows from investing activities:
Proceeds from maturities of temporary
investments 1,263,000 3,441,068 --
Purchase of temporary investments (1,530,135) -- (3,990,410)
Purchase of plant and equipment (351,886) (520,144) (488,326)
Net proceeds from sale of pheromone
product line 1,659,410 -- --
----------- ----------- ------------
Net cash provided by (used in) investing activities 1,040,389 2,920,924 (4,478,736)
----------- ----------- ------------
Cash flows from financing activities:
Net proceeds from sale of common
and convertible preferred stock, net of
issuance costs 1,794,989 -- 12,129,209
Net proceeds from issuance of common
shares under stock option plan 10,565 9,752 --
Repayment of capital lease obligation (223,823) (476,089) (389,528)
Proceeds from line of credit, net 1,050,000 -- --
Purchase of treasury stock -- -- (364,717)
Proceeds from issuance of convertible note -- 3,000,000 --
----------- ----------- ------------
Net cash provided by financing activities 2,631,731 2,533,663 11,374,964
----------- ----------- ------------
</TABLE>
(Continued)
F-5
<PAGE> 35
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
Year Ended October 31,
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Effect of foreign exchange rate changes on cash -- (1,815) 17,701
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 184,834 (3,796,098) 3,845,488
Cash and cash equivalents, beginning of year 1,824,603 5,620,701 1,775,213
---------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,009,437 $ 1,824,603 $5,620,701
========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 171,136 $ 142,489 $ 114,894
Income taxes -- -- --
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1998, the Company issued 32,354 shares of Series 1998 C convertible
preferred stock in exchange for an 8% convertible secured note in the
amount of $3,235,400, including accrued interest.
In 1998, the Company issued 24,000 shares of common stock as a fee in
connection with a private placement. In 1997, the Company issued 136,000
shares of common stock in satisfaction of future royalty obligations.
In 1997 and 1996, debt totaling approximately $262,000 and $1,540,000,
respectively, was incurred by the Company for the acquisition of equipment.
In 1998, holders of the Company's Series 1998 A convertible preferred stock
converted 500 shares of preferred stock to 50,000 shares of common stock.
In 1997 and 1996, holders of the Company's Series B convertible preferred
stock converted 5,834 and 29,160 shares of preferred stock to 44,030 and
122,313 shares of common stock, respectively. In 1996, holders of the
Company's Series C convertible preferred stock converted 122,000 shares of
preferred stock to 851,308 shares of common stock. Noncash dividends on
preferred shares settled through the issuance of common stock amounted to
$116,020, $1,815 and $116,700 in fiscal 1998, 1997 and 1996, respectively.
In 1998 and 1997, the Company transferred 15,273 and 9,755 shares,
respectively, of treasury stock to outstanding shares pursuant to certain
employee benefit plans.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 36
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1998, 1997 and 1996
(1) Basis of Presentation and 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. Included in other long-term
obligations is approximately $1.5 million which represents cash
received from the minority stockholders of the Company's research and
development subsidiary. Such amounts were recorded as other long-term
obligations in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 68, "Research and Development Arrangements."
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.
Since its inception in 1983, the Company's source of funds has been
primarily dependent on private and public offerings of equity
securities, revenues from research and development alliances, and
product sales. The Company believes that its existing working capital
and amounts available under its working capital line of credit should
be sufficient to meet its capital and liquidity requirements through
fiscal 1999 based on reduced spending levels, if necessary.
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 certificates of deposit, 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. 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.
At October 31, 1998 the Company held a corporate debt security and a
certificate of deposit with contractual maturities of greater than
three months but less than one year, with costs of $513,000 and
$296,238, respectively and fair values of $513,000 and $300,150,
respectively. At October 31, 1997, the Company held a U.S. debt
security and a corporate debt security, both with contractual
maturities of greater than one year, with costs of $243,780 and
$298,323, respectively and fair values of $250,890 and $298,452,
respectively. Unrealized holding gains and losses on securities
classified as available for sale are carried as a separate component of
stockholders' equity. Pursuant SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," a $3,912 and $7,239
F-7
<PAGE> 37
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Basis of Presentation and Summary of Significant Accounting Policies, cont.
Temporary investments, cont.:
unrealized holding gain has been recorded in a separate component of
stockholders' equity as of October 31, 1998 and 1997, respectively.
Fair value of financial instruments:
The fair value of the long-term debt approximates its carrying value
due to the fact that 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.
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
time and materials contracts is recognized in the period in which the
related services have been rendered and costs have been incurred by the
Company. 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 other contracts
is recognized on a pro rata basis over the life of the contract.
Contract costs of such contracts are generally incurred ratably over
the contract term. Revenue recognized in the accompanying consolidated
statements of operations under these contracts is not subject to
repayment. Revenue received that is related to future performance under
such contracts is deferred and recognized as revenue when earned.
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. 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 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 $2,717, $4,981
and $26,550 in fiscal 1998, 1997 and
F-8
<PAGE> 38
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Basis of Presentation and Summary of Significant Accounting Policies, cont.
Intangible and other assets, cont.:
1996, respectively. Other long-term assets include prepaid royalties
that are charged to expense in relation to sales.
Net loss per common share:
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." The Company adopted SFAS No. 128 in the
first quarter of fiscal 1998. Prior year information has been restated
as necessary.
Under SFAS No. 128, basic income (loss) per share is based on net
income (loss) for the relevant period, divided by the weighted average
number of common shares outstanding during the period. Diluted income
(loss) per share is based on net income (loss) for the relevant period
divided by common shares outstanding and other potential common shares
if they are dilutive.
Because the Company reported a net loss per share, there is no
difference between the Company's historic net loss per share
calculation and basic and diluted net loss as calculated under SFAS No.
128, since all potential common shares were anti-dilutive. The
conversion of the convertible preferred stock into common shares and
adding back dividends and interest expense incurred during the year was
not included in the net loss per share calculation since the effect was
anti-dilutive. Stock options and warrants were not considered because
they were anti-dilutive.
Income Taxes:
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes." Under the asset and liability method of SFAS No.
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 No. 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.
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.
Stock-Based Compensation:
SFAS No. 123, "Accounting for Stock-Based Compensation," presents
companies with the alternative of retaining the current accounting for
stock-based compensation or adopting a new accounting method based on
the estimated fair value of equity instruments granted to employees
during the year. The Company elected to adopt the disclosure provisions
as required by SFAS No. 123 (see note 11).
F-9
<PAGE> 39
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Basis of Presentation and Summary of Significant Accounting Policies, cont.
Long-Lived Assets:
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the
Company reviews long-lived assets for impairment whenever events or
changes in business circumstances occur that indicate that the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of long-lived assets held and to be used and assets to
be sold based on fair value.
(2) Inventory
Inventory consists of the following components as of October 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials and packaging supplies $ 526,914 $2,446,240
Work in process 827,573 2,145,027
Finished goods 2,943,887 3,765,500
---------- ----------
$4,298,374 $8,356,767
========== ==========
</TABLE>
(3) Plant and Equipment
Plant and equipment consist of the following components as of October
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Manufacturing and laboratory equipment $ 4,468,802 $ 5,287,483
Office furniture and equipment 785,128 857,465
Leasehold improvements 3,161,850 3,101,418
----------- -----------
8,415,780 9,246,366
Less accumulated depreciation and amortization (5,644,525) (5,596,787)
----------- -----------
$ 2,771,255 $ 3,649,579
=========== ===========
</TABLE>
Included in plant and equipment is $108,000 of capitalized interest as
of October 31, 1998 and 1997.
(4) Accrued Expenses
Included in accounts payable and accrued expenses on the accompanying
balance sheet are accrued expenses that consist of the following
components as of October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current portion of capital lease obligations $ 402,886 $ 412,000
Amounts due for construction in progress -- 210,000
Payroll costs 100,342 108,106
Other 719,977 347,640
---------- ----------
$1,223,205 $1,077,746
========== ==========
</TABLE>
F-10
<PAGE> 40
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Long-term Debt
During 1997, the Company sold, in a private placement, a $3.0 million
8% convertible secured note (the "Note") to an institutional
shareholder of the Company. In 1998, the Note plus accrued interest was
exchanged for 32,354 shares of Series 1998 A 8% convertible preferred
stock (see note 8).
During 1998, the Company obtained a secured, revolving working capital
line of credit for up to $5.0 million with a financial institution. Up
to $1.0 million of the line may be used for letters of credit. The
working capital line of credit is for a minimum of two years (subject
to termination on certain events of default), bears interest at prime
plus 1.25% and is fully collateralized by the Company's assets other
than its intellectual property rights. The lending formula is based on
eligible receivables and finished goods inventory. At October 31, 1998,
the balance outstanding under the line was $1.1 million, the minimum
loan balance required under the loan agreement. Further, a $.7 million
letter of credit was outstanding under the line. The loan agreement
contains certain financial covenants and has certain restrictions on
the Company's ability to pay dividends on its common stock.
The Company is in compliance with such covenants at October 31, 1998.
(6) Commitments
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 $325,000,
$574,000 and $673,000 for fiscal 1998, 1997 and 1996, respectively.
Minimum lease payments under noncancelable long-term leases for the
years subsequent to October 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
<S> <C> <C>
1999 $457,559 $ 448,623
2000 298,405 214,849
2001 - 39,010
2002 - 13,818
2003 - 2,156
--------- ---------
Total minimum lease payments $755,964 $ 718,456
=========
Less: Interest (75,204)
---------
Present value of net minimum
lease payments. 680,760
Less: Current portion of capital
lease obligations (included in
accounts payable and accrued
expenses) (402,886)
---------
Long-term capital obligations
(included in long-term debt) $ 277,874
=========
</TABLE>
F-11
<PAGE> 41
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Commitments, cont.
Leases, cont.:
A sublease agreement was entered into effective October 1, 1997 for a
portion of the Company's corporate facility. This sublease extends
through March 2000. Expected sublease income is $114,416 for fiscal
1999 and $28,605 for fiscal 2000.
(7) Research, Development and License Agreements
In January 1996, the Company entered into an agreement with Monsanto
Company ("Monsanto") for an equity investment, purchase of technology
and joint research and development arrangement relating to the
Company's proprietary Bacillus thuringiensis ("Bt") technology for
in-plant applications (collectively, the "Monsanto Transaction"). The
transaction included (i) the acquisition by Monsanto of certain rights
to the Company's Bt technology for an aggregate nonrefundable purchase
price of $5.0 million in cash, which was recorded as license and other
income in the first quarter of fiscal 1996, (ii) the sale by the
Company to Monsanto of common stock for an aggregate purchase price of
$10.0 million, and (iii) a research and development ("R&D")
collaboration arrangement with Monsanto, which, by amendment, expires
in January 1999, for the further development of the Company's Bt gene
library for a minimum of $10.0 million, of which $4.3 million, $2.9
million and $3.0 million were received in fiscal 1998, 1997 and 1996,
respectively. Under this agreement, the Company recognized as research
contract revenue approximately $5.0 million, $2.9 million and $1.9
million in fiscal 1998, 1997 and 1996, respectively. During fiscal 1997
and 1998, Monsanto advanced a total of $1.2 million of
commercialization success fees. These payments, plus related interest,
were recorded as deferred revenue in other long-term liabilities and
will be recognized as revenue when earned as Monsanto commercializes
products with technology developed by Ecogen.
(8) Preferred Stock
Series 1998 A Convertible Preferred Stock:
In June 1998, the Company sold 20,000 shares of Series 1998 A 8%
convertible preferred stock, stated value $100 per share, to an
institutional investor for net proceeds of $1.8 million. The holder of
the preferred stock was also issued five-year warrants to purchase
180,000 shares of common stock at $3.525 per share. Dividends on the
preferred stock are payable semiannually in cash or stock at the option
of the Company. The preferred stock has no voting rights except with
respect to certain matters affecting the Company's preferred stock. At
the election of the holder, the preferred stock may be converted at
various dates to shares of the Company's common stock at the lesser of
$3.39 per share (subject to adjustment under certain circumstances) or
an average market price, as defined in the agreement, over a ten-day
period at the time of conversion. The Company, at its option, may
redeem the preferred stock at 125% of the stated value. If the Company
is unable to issue sufficient shares of common stock within a specified
period of time after the holder has requested conversion, the dividend
rate may increase and the Company may be required to issue additional
warrants. Further, in certain circumstances, all of which are in the
control of the Company, the Company may be required to redeem the
shares at various premiums over stated value. The holder of the
preferred stock has certain registration rights with respect to the
shares of common stock underlying the preferred stock and warrants.
Included in the fee paid to the placement agent in connection with the
transaction were 24,000 shares of the Company's common stock. During
fiscal 1998, 500
F-12
<PAGE> 42
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Preferred Stock, cont.
Series 1998 A Convertible Preferred Stock cont.:
shares of Series 1998 A convertible preferred stock were converted into
50,000 shares of the Company's common stock in accordance with its
terms.
Series 1998 B Convertible Preferred Stock:
During 1998, the Board of Directors authorized 10,000 shares of 8%
Series 1998 B convertible preferred stock, par value $.01 per share. No
shares of Series 1998 B have been issued. The preferred stock shall
have respective rights, preferences and privileges identical to the
Series 1998 A preferred stock and ranks pari passu with the 1998 Series
A preferred stock, except that the conversion price shall be determined
by the Company's Board of Directors when issued.
Series 1998 C Convertible Preferred Stock:
In August 1998, the Company exchanged an 8% convertible secured note
due in October 2002 in the amount of $3.2 million for 32,354 shares of
newly issued 8% Series 1998 C convertible preferred stock with a stated
value of $100 per share. The holder of the Note is a principal
stockholder of the Company. Dividends on the preferred stock are
payable semi-annually in cash or shares of preferred stock at the
option of the Company. The preferred stock has no voting rights except
with respect to certain matters affecting the preferred stock. At the
election of the holder, the preferred stock may be converted into
common stock of the Company at any time and from time-to-time beginning
in August 1999 at a conversion price equal to the lesser of $2.125 per
share (subject to adjustment under certain circumstances) and the
average market price, as defined in the agreement, over a five-day
period at the time of conversion. The Company, at its option, may
require conversion of the preferred stock if the average market value
of the Company's common stock is greater than $4.00 per share over a
ten-day period. The Company, at its option, may redeem the preferred
stock at 125% of the stated value. Furthermore, in certain
circumstances, all of which are in the control of the Company, the
Company may be required to redeem the preferred stock at various
premiums over stated value. If the Company is unable to issue
sufficient shares of common stock within a specified period of time
after the holder has requested conversion, or the common stock has a
market value of less than $1.00 per share for 30 consecutive days, the
dividend rate may increase and the Company could be required to pay
such dividends in cash. In such event and if the unpaid dividends
exceed $37,500 for a period of 30 days, the Company may be required to
appoint two designees of the holders of a majority of the outstanding
preferred stock to the Company's Board of Directors.
(9) Common Stock
During fiscal 1996, Monsanto 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 until
January 1999 to maintain its share ownership position during the term
of the research and development agreement and to refrain 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.
F-13
<PAGE> 43
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Warrants and Other Options
As of October 31, 1998, 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 11) as follows:
<TABLE>
<CAPTION>
Price
Shares of Range Per Expiration
Common Stock Share/Unit Dates
------------ -------------- -----------
<S> <C> <C> <C>
Warrants 264,877 $3.525 - 29.00 1999 - 2003
Other Options 51,244 $11.70 - 63.00 2001 - 2003
-------
316,121
=======
</TABLE>
(11) Stock Option Plan and Other Matters
During 1998, the Company's Board of Directors approved the 1998 Stock
Option Plan (the "Plan"), under which 1,500,000 shares of common stock
may be issued. The Plan permits the granting of nonstatutory stock
options. The option price may not be less than the fair market value of
the common stock at the grant date as determined under the Plan.
Options are exercisable over a period determined by the Board of
Directors, but not longer than ten years after the grant date. At
October 31, 1998, 825,000 options were available for issuance under the
Plan.
Effective November 1, 1996, Ecogen adopted SFAS No. 123. As permitted
by the standard, the Company has elected to continue following the
guidance of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," for measurement and
recognition of stock-based transactions with employees. In accordance
with APB No. 25, no compensation cost has been recognized for the
Company's option plans. Had the determination of compensation cost for
these plans been based on fair value at the grant dates for awards
under these plans, consistent with the method under SFAS No. 123, the
Company's net loss available to common stockholders and basic and
diluted net loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net Loss Available to
Common Stockholders:
As Reported ($ 3,113,126) ($ 9,811,907) ($ 2,860,044)
Pro Forma ($ 3,268,710) ($ 9,994,255) ($ 2,980,965)
Basic and Diluted Net Loss
Per Common Share:
As Reported ($ .39) ($ 1.23) ($ .40)
Pro Forma ($ .41) ($ 1.26) ($ .42)
</TABLE>
The resulting compensation expense may not be representative of
compensation expense to be incurred on a pro forma basis in future
years.
F-14
<PAGE> 44
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stock Option Plan and Other Matters, cont.
The fair value of each option grant is estimated on the date of grant
by using the Black-Scholes Option Pricing Model. The per share
weighted-average fair values on the date of grant for options granted
during 1998, 1997, and 1996 were $.98, $2.04 and $4.49, respectively.
The following weighted-average assumptions were used for grants in
fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 and 1996
---- -------------
<S> <C> <C>
Expected Dividend Yield 0% 0%
Expected Volatility 82% 70%
Risk-Free Interest Rate 8% 8%
Expected Option Lives (years) 3 3
</TABLE>
A summary of the status of the Option Plans as of October 31, 1998,
1997 and 1996 and changes during the years then ended are as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Weighted-Average
Shares Exercise Price
---------- ----------------
<S> <C> <C>
Balance, November 1, 1995 501,460 $13.98
Granted 227,960 $ 6.86
Exercised -- --
Canceled (125,192) $15.11
----------
Balance, October 31, 1996 604,228 $11.06
Granted 410,694 $ 4.16
Exercised (11,096) $ 2.56
Canceled (305,703) $12.58
----------
Balance, October 31, 1997 698,123 $ 6.50
Granted 675,000 $ 1.25
Exercised (5,761) $ 2.56
Canceled (216,701) $ 6.10
----------
Balance, October 31, 1998 1,150,661 $ 3.08
========== ======
</TABLE>
The following table summarizes information about fixed stock options
outstanding at October 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------ ----------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Price at 10/31/98 Contractual Life Exercise Price at 10/31/98 Exercise Price
-------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.25 to $ 3.25 931,661 9.11 Years $ 1.71 111,878 $ 2.87
$ 5.88 to $10.94 215,600 6.11 Years $ 8.59 170,000 $ 9.01
$14.38 to $53.06 3,400 2.34 Years $ 28.31 3,400 $ 28.32
--------- -------
$ 1.25 to $53.06 1,150,661 8.53 Years $ 3.08 285,278 $ 6.83
========= =======
</TABLE>
F-15
<PAGE> 45
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stock Option Plan and Other Matters, cont.
During fiscal 1997, employees were given the right to exchange 254,392
options at exercise prices from $2.88 to $35.25 for new options at
exercise prices from $2.56 to $3.19, the fair market value at the grant
date for the exchange right. The new options are exercisable according
to a vesting schedule beginning on the new grant date, except for
options that terminate during the new vesting period, which are
immediately vested. Accordingly, options to purchase 254,392 shares
were canceled and an equal number of new options were issued, which is
reflected in the table above.
In fiscal 1998, 100,000 shares of common stock were awarded to an
officer of the Company. The Company recorded deferred compensation of
$125,000 at the grant date and is amortizing such amount over the
two-year vesting period.
(12) 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 the fiscal years ended October 31,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
United States:
Unaffiliated customers $ 16,398,136 $ 11,411,109 $ 16,209,900
Transfers to other
geographic areas -- 413,849 102,978
------------ ------------ ------------
16,398,136 11,824,958 16,312,878
------------ ------------ ------------
Other:
Unaffiliated customers -- 399,979 214,815
Eliminations and adjustments -- (413,849) (102,978)
------------ ------------ ------------
Total revenues $ 16,398,136 $ 11,811,088 $ 16,424,715
============ ============ ============
Operating income (loss):
United States ($ 2,997,106) ($ 9,188,902) ($ 1,713,209)
Other -- (528,223) (980,273)
Eliminations and adjustments -- (92,967) (49,862)
------------ ------------ ------------
Total operating loss ($ 2,997,106) ($ 9,810,092) ($ 2,743,344)
============ ============ ============
Identifiable assets:
United States $ 14,636,437 $ 17,509,332 $ 27,016,478
Other 40,064 48,720 333,715
Eliminations and adjustments -- -- (3,488,949)
------------ ------------ ------------
Total identifiable assets $ 14,676,501 $ 17,558,052 $ 23,861,244
============ ============ ============
</TABLE>
F-16
<PAGE> 46
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Geographic Area and Related Information, cont.
Of the United States revenues from unaffiliated customers included
above, $3,479,218, $1,605,247 and $1,666,024 were export revenues in
fiscal 1998, 1997 and 1996, respectively, from the following geographic
areas:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Europe $1,077,616 $ 348,367 $ 429,798
Other 2,401,602 1,256,880 1,236,226
---------- ---------- ----------
$3,479,218 $1,605,247 $1,666,024
========== ========== ==========
</TABLE>
Other:
Sales derived from one customer aggregated 20% of total revenues in
fiscal 1998. Sales derived from another customer aggregated 13% of
total revenues in fiscal 1997. Research contract revenues derived from
one entity aggregated 32%, 25% and 12% of total revenues in fiscal
1998, 1997 and 1996, respectively.
(13) 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, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Purchased research, development and
investment in affiliated companies $ 9,667,000 $ 10,380,000
Net operating loss carryforwards 25,463,000 23,433,000
Research experimentation credit
carryforward 2,414,000 2,414,000
Other 1,638,000 1,732,000
------------ ------------
Total gross deferred tax assets 39,182,000 37,959,000
Less valuation allowance 38,935,000 37,724,000
------------ ------------
Net deferred tax assets 247,000 235,000
------------ ------------
Deferred tax liabilities:
Furniture, equipment, and leasehold
improvements, principally due to
differences in depreciations (247,000) (235,000)
------------ ------------
Total gross deferred tax
liabilities (247,000) (235,000)
------------ ------------
Net deferred taxes $ -- $ --
============ ============
</TABLE>
F-17
<PAGE> 47
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
The net change in the total valuation allowance for fiscal 1998 and
1997 was an increase of approximately $1,211,000 and $2,487,000,
respectively.
At October 31, 1998, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $73.1 million,
expiring from 1999 through 2013, which are available to offset future
Federal taxable income, if any. 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 2012. 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.
(14) Special Charges
During the fourth quarter of fiscal 1997, the Company recorded a
special charge of $1,416,263 for the realignment of the Company's
manufacturing process involving its new water dispersible granular
products, including the write-down of plant and equipment and other
costs. During the third quarter of fiscal 1997, the Company recorded a
charge of $209,629 relating to the shut-down of a research laboratory
in Israel. Severance payments included in these charges are not
significant, and there are no future payouts associated with these
special charges.
(15) Profit Sharing 401(k) Plan
The Company has 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 for
employees with under five years of service, and 100% for employees with
greater than five years of service, subject to a maximum equal to 6% of
the employees' compensation. The matching Company contribution vests
over a five-year period. Employees may elect to have the Company
matching contribution in Ecogen common stock. The Company contributed
approximately $132,000, $161,000 and $124,000 to the 401(k) Plan in
fiscal 1998, 1997 and 1996, respectively.
(16) 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 recorded fees
and costs of approximately $187,000, $51,000 and $233,000 to this law
firm during fiscal 1998, 1997 and 1996, respectively.
A director elected during fiscal 1998 is a partner of an investment
firm that holds all of the Company's outstanding Series 1998 C
preferred stock. The Company recorded interest and dividends of
approximately $249,000 during fiscal 1998 and interest of approximately
$38,000 during fiscal 1997 to this investment firm.
F-18
<PAGE> 48
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(17) Sale of Pheromone Product Line
In April 1998, the Company sold substantially all of the assets
(excluding trade accounts receivable) associated with the pheromone
product line to Scentry Biologicals, Inc. ("Scentry") for total
consideration of approximately $2.4 million. The consideration included
cash of $1.7 million and the assumption of $.7 million of liabilities.
The Company recognized a gain of $.5 million on the sale which is
included in license and other income in the accompanying consolidated
statements of operations. As part of the transaction, the Company
entered into a distribution agreement with Scentry for three products,
BeeScent Attractant, NoMate LRX MEC and NoMate BHF MEC, in the United
States through December 2000. Scentry is a newly formed company, the
principals of which are the former manager of the Company's pheromone
production facility and a principal of one of the Company's
distributors in Central and South America. Unaudited pro forma
consolidated results of operations as if the product line had been sold
on November 1, 1996 are as follows, excluding the nonrecurring gain on
the sale of $.5 million:
<TABLE>
<CAPTION>
Year Ended October 31,
1998 1997
---- ----
($ in thousands except per share data)
<S> <C> <C>
Total revenues $ 13,790 $ 8,951
Net loss available to common
stockholders ($ 3,867) ($9,926)
Basic and diluted net
loss per common share ($ .48) ($ 1.25)
</TABLE>
The unaudited pro forma information is not necessarily indicative of the
results that would have been obtained had the disposition of the
pheromone product line actually occurred on the date indicated, nor is it
necessarily indicative of the Company's future consolidated results of
operations.
F-19
<PAGE> 49
Schedule II
ECOGEN INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<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>
1998:
Allowance for doubtful accounts $ 77,769 $115,872 $ -- $ 113,641 $ 80,000
Reserve for inventory obsolescence 1,006,426 500,000 -- 1,105,055(1) 401,371
========== ======== ============== ========== ==========
1997:
Allowance for doubtful accounts $ 42,769 $ 35,000 $ -- $ -- $ 77,769
Reserve for inventory obsolescence 675,894 500,000 -- 169,468 1,006,426
========== ======== ============== ========== ==========
1996:
Allowance for doubtful accounts $ 80,000 $ -- $ -- $ 37,231 $ 42,769
Reserve for inventory obsolescence 695,820 500,000 -- 519,926 675,894
========== ======== ============== ========== ==========
</TABLE>
(1) Included in deductions is $483,003 that related to the sale of the Pheromone
Product Line.
F-20
<PAGE> 50
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report 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: January 15, 1999
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 January 15, 1999.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James P. Reilly, Jr. Chairman, Chief Executive Officer January 15, 1999
- ------------------------ and Director (Principal Executive
James P. Reilly, Jr. Officer)
/s/ Mary E. Paetzold Vice President, Chief Financial January 15, 1999
- -------------------- Officer and Treasurer (Principal
Mary E. Paetzold Financial and Accounting Officer)
/s/ Esteban A. Ferrer Director January 15, 1999
- ---------------------
Esteban A. Ferrer, Esquire
/s/ Philippe D. Katz Director January 15, 1999
- --------------------
Philippe D. Katz
/s/ Lowell N. Lewis Director January 15, 1999
- -------------------
Lowell N. Lewis
/s/ John R. Sutley Director January 15, 1999
- ------------------
John R. Sutley
</TABLE>
<PAGE> 1
Exhibit 4.4
ECOGEN INC.
1998 STOCK OPTION PLAN
(NON-STATUTORY)
1. Purpose.
The purpose of this plan (the "Plan") is to secure for ECOGEN
INC. (the "Company") and its stockholders the benefits arising from capital
stock ownership by employees of the Company (and its parent and subsidiary
corporations) who are expected to contribute to the Company's future growth and
success.
2. Authorization and Administration.
(a) Authorization. Options granted pursuant to the Plan shall
be authorized by action of the Board of Directors of the Company (or a
Committee, as defined in Section 2(b) below, designated by the Board of
Directors).
(b) Administration. Except as provided in Section 2(c) below,
the Plan will be administered by the Board of Directors of the Company, whose
construction and interpretation of the terms and provisions of the Plan shall be
final and conclusive. The Board of Directors may in its sole discretion grant
options to purchase shares of the Company's Common Stock, par value .01 per
share ("Common Stock") and authorize the Company to issue shares upon exercise
of such options as provided in the Plan. The Board of Directors shall have
authority, subject to the express provisions of the Plan, to construe the
respective option agreements and the Plan, to prescribe, amend and rescind rules
and regulations relating to the Plan, to determine the terms and provisions of
the respective option agreements, which need not be identical, to advance the
lapse of any waiting or installment periods and exercise dates, and to make all
other determinations in the judgment of the Board of Directors necessary or
desirable for the administration of the Plan. The Board of Directors may correct
any defect or supply any omission or reconcile any inconsistency in the Plan or
in any option agreement in the manner and to the extent it shall deem expedient
to carry the Plan into effect and it shall be the sole and final judge of such
expediency. No director shall be liable for any action or determination taken or
made under or with respect to the Plan or any option in good faith. The Board of
Directors may, to the full extent permitted by law, delegate any or all of its
powers under the Plan to a committee (the "Committee") of two or more directors
each of whom is a Non-Employee Director (as hereinafter defined) appointed by
the Board of Directors, and if the Committee is so appointed all references to
the Board of Directors in the Plan as may pertain to the powers so delegated
shall mean and relate to the Committee. For the purposes of the Plan, a director
or member of such Committee shall be deemed to be a "Non-Employee Director" only
if such person qualifies as a "Non-Employee Director" within the meaning of
paragraph (b)(3) of Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (or any successor rule).
(c) Non-Officer Employee Administration. Notwithstanding
paragraph (b) of this Section 2, the Chief Executive Officer ("CEO") may, in his
sole discretion, grant options to purchase shares of Common Stock under the Plan
to non-officer employees. The CEO will have authority, subject to the express
provisions of the Plan, (i) to determine which non-officer employees of the
Company will receive such stock options, (ii) to determine the number of shares
of Common Stock issuable upon the exercise of any such stock options, and (iii)
to determine the terms and provisions of each stock option grant.
<PAGE> 2
3. Eligibility.
Options shall be granted only to persons who are, at the time
of grant, officers, directors, employees of, or consultants or advisors to the
Company or of any Parent Corporation or Subsidiary (as defined in Section 17
hereof).
4. Stock Subject to Plan.
Subject to adjustment as provided in Sections 15 and 16 below,
the maximum number of shares of Common Stock of the Company which may be issued
and sold under the Plan is 1,500,000 shares. Such shares may be authorized and
unissued shares or may be shares issued and thereafter acquired by the Company.
If an option granted under the Plan shall expire or terminate for any reason
without having been exercised in full, the unpurchased shares subject to such
option shall again be available for subsequent option grants under the Plan.
Stock issuable upon exercise of an option granted under the Plan may be subject
to such restrictions on transfer, repurchase rights or other restrictions as
shall be determined by the Board of Directors.
5. Option Agreements.
As a condition to the grant of an option under the Plan, each
recipient of an option shall execute an option agreement not inconsistent with
the Plan as the Board of Directors shall determine at the time such option is
authorized to be granted. Such agreements need not be identical but shall comply
with, and be subject to, the terms and conditions set forth herein.
6. Purchase Price.
The purchase price per share of stock deliverable upon the
exercise of an option shall be determined by the Board of Directors on the date
such option is authorized to be granted. Payment of the exercise price of an
option shall be in cash or, in the sole discretion of the Board of Directors, in
capital stock of the Company, by the surrender of other options to purchase
capital stock of the Company, by purchase money note bearing interest at a rate
and coming due in installments determined by the Board of Directors at the time
the option is granted, or by any other lawful means.
7. Option Period.
Each option and all rights thereunder shall be expressed to
expire on such date as the Board of Directors shall determine on the date such
option is authorized to be granted, but in no event after the expiration of ten
years from the day on which the option is granted and shall be subject to
earlier termination as provided in the Plan. Notwithstanding the foregoing, if
at any time during the last six (6) months of the term of any option granted
under the Plan, the holder thereof is precluded from selling shares of Common
Stock underlying such option solely by reason of the application to such
optionee of the Company's policy regarding "Material Insider Information and
Insider Trading" (or similar successor policy), the term of such option shall be
deemed automatically extended by a period equal to six (6) months beginning with
the first day during which such optionee shall no longer be so precluded.
8. Exercise of Options.
Each option granted under the Plan shall be exercisable either
in full or in installments at such time or times and during such period as shall
be set forth in the agreement evidencing such option; provided, however, that,
subject to Section 7, (i) no option granted under the Plan shall have a term in
excess of ten years from the date of grant, and (ii) the periods of time
following the optionee's cessation of employment with the Company or service as
an Outside
<PAGE> 3
Director (as hereinafter defined) of or consultant or advisor to the Company, or
the optionee's death or disability, during which an option may be exercised, as
provided in paragraphs (a), (b) and (c) of Section 10, shall not be included for
purposes of determining the number of shares of Common Stock with respect to
which an option granted under the Plan may be exercised. An Outside Director is
a director who is not an employee of the Company or of any Parent Corporation or
Subsidiary.
9. Nontransferability of Options.
Except as otherwise approved by the Board of Directors, no
option granted under the Plan shall be assignable or transferable by the person
to whom it is granted, either voluntarily or by operation of law, except by will
or the laws of descent and distribution. Subject to the preceding sentence,
during the life of the recipient, the option shall be exercisable only by or on
behalf of such person.
10. Effect of Termination of Employment or Cessation of Services.
Notwithstanding anything contained in this Plan to the
contrary, no option may be exercised unless, at the time of such exercise, the
optionee is, and has been continuously since the date of grant of his or her
option, employed by or serving as an Outside Director of one or more of the
Company, a Parent Corporation or a Subsidiary, except that if and to the extent
the option agreement or instrument so provides:
(a) if the optionee ceases to be employed by or serve as an
Outside Director of or consultant or advisor to any of the foregoing entities
for any reason other than death or disability, the right to exercise the option
shall terminate three months after such cessation (or at such earlier date as
may be specified in the option agreement or instrument);
(b) if the optionee dies while in the employ of or while
serving as an outside Director of or consultant or advisor to any of the
foregoing entities or within three months after the optionee ceases to be such
an employee or director, the option may be exercised by the person to whom it is
transferred by will or the laws of descent and distribution within the period of
one year after the date of death (or within such lesser period as may be
specified in the option agreement or instrument); and
(c) if the optionee becomes disabled (within the meaning of
Section 22(e)(3) of the Code) while in the employ of or while serving as an
Outside Director of or consultant or advisor to any of the foregoing entities,
the option may be exercised within the period of one year after the date the
optionee ceases to be such an employee, Outside Director, consultant or advisor
because of such disability (or within such lesser period as may be specified in
the option agreement or instrument); provided, however, that in no event may any
option be exercised after the expiration date of the option. For all purposes of
the Plan and any option granted hereunder, "employment" shall be defined in
accordance with the provisions of Section 1.421-7(h) of the Income Tax
Regulations (or any successor regulations).
11. General Restrictions.
(a) Investment Representations. The Company may require any person
to whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his own account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws.
<PAGE> 4
(b) Compliance With Securities Laws. Each option shall be subject
to the requirement that, if at any time counsel to the Company shall determine
that the listing, registration or qualification of the shares subject to such
option upon any securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, is necessary as a
condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be accepted or exercised in whole or in part
unless such listing, registration, qualification, consent or approval shall have
been effected or obtained on conditions acceptable to the Board of Directors.
Nothing herein shall be deemed to require the Company to apply for or to obtain
such listing, registration or qualification.
12. Rights as a Stockholder.
The holder of an option shall have no rights as a stockholder with
respect to any shares covered by the option until the date of issue of a stock
certificate to him or her for such shares. Except as otherwise expressly
provided in the Plan, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date such stock certificate is issued.
13. Recapitalization.
In the event that the outstanding shares of Common Stock of the
Company are changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of any recapitalization,
reclassification, stock split, stock dividend, combination or subdivision,
appropriate adjustment shall be made in the number and kind of shares available
under the Plan and under any options granted under the Plan. Such adjustment to
outstanding options shall be made without change in the total price applicable
to the unexercised portion of such options, and a corresponding adjustment in
the applicable option price per share shall be made. No such adjustment shall be
made which would, within the meaning of any applicable provisions of the Code,
constitute a modification, extension or renewal of any option or a grant of
additional benefits to the holder of an option.
14. Reorganization.
In case the Company is merged or consolidated with another
corporation and the Company is not the surviving corporation, or in case all or
substantially all of the assets or more than 50% of the outstanding voting stock
of the Company is acquired by any other corporation, or in case of a
reorganization or liquidation of the Company, the Board of Directors of the
Company, or the board of directors of any corporation assuming the obligations
of the Company, shall, as to all outstanding options, either (i) make
appropriate provision for the protection of all such outstanding options by the
substitution on an equitable basis of appropriate stock of the Company, or of
the merged, consolidated or otherwise reorganized corporation which will be
issuable in respect of the shares of Common Stock of the Company, provided that
no additional benefits shall be conferred upon optionees as a result of such
substitution, and the excess of the aggregate fair market value of the shares
subject to the options immediately after such substitution over the purchase
price thereof is not more than the excess of the aggregate fair market value of
the shares subject to such options immediately before such substitution over the
purchase price thereof, or (ii) upon written notice to all optionees, provide
that all unexercised options must be exercised within a specified number of days
of the date of such notice or they will be terminated. In any such case, the
Board of Directors may, in its discretion, accelerate the exercise dates of all
outstanding options.
15. No Special Employment Rights.
Nothing contained in the Plan or in any option granted under the
Plan shall confer upon any option holder any right with respect to the
continuation of his or her employment by the Company (or any Parent Corporation
or Subsidiary) or interfere in any way with the right of the
<PAGE> 5
Company (or any Parent Corporation or Subsidiary), subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or decrease the compensation of the option holder from
the rate in existence at the time of the grant of an option. Whether an
authorized leave of absence, or absence in military or government service, shall
constitute termination or cessation of employment for purposes of this Plan
shall be determined by the Board of Directors.
16. Other Employee Benefits.
The amount of any taxable income deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute "earnings" with respect to which any
other employee benefits of such employee are determined, including without
limitation benefits under any pension, profit sharing, life insurance or salary
continuation plan.
17. Definition of Subsidiary and Parent Corporation.
(a) Subsidiary. The term "Subsidiary" as used in the Plan shall
mean any corporation in an unbroken chain of corporations beginning with the
Company if each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
(b) Parent Corporation. The term "Parent Corporation" as used in
the Plan shall mean any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if each of the corporations other
than the Company owns stock possessing 50% or more of the combined voting power
of all classes of stock in one of the other corporations in such chain.
18. Amendment of the Plan.
The Board of Directors may at any time and from time to time
modify, amend or terminate the Plan in any respect, except to the extent
stockholder approval is required by law. The termination or any modification or
amendment of the Plan shall not, without the consent of an optionee, affect his
or her rights under an option previously granted to him or her. With the consent
of the optionee affected, the Board of Directors may amend outstanding option
agreements in a manner not inconsistent with the Plan.
19. Withholding.
The Company's obligation to deliver shares upon the exercise of
any option granted under the Plan shall be subject to the option holder's
satisfaction of all applicable federal, state and local income and employment
tax withholding requirements.
20. Effective Date and Duration of the Plan.
(a) Effective Date. The Plan shall become effective when adopted
by the Board of Directors.
(b) Termination. Unless earlier terminated by the Board of
Directors, the Plan shall terminate upon the earlier of (i) the close of
business on the day next preceding the tenth anniversary of the date of its
adoption by the Board of Directors, or (ii) the date on which all shares
available for issuance under the Plan shall have been issued pursuant to the
exercise or cancellation of options granted under the Plan. If the date of
termination is determined under (i) above, then options outstanding on such date
shall continue to have force and effect in accordance with the provisions of the
instruments evidencing such options.
<PAGE> 1
Exhibit 10.143
STOCK AWARD AGREEMENT
This Stock Award Agreement (this "Agreement") is dated September 23,
1998 (the "Effective Date") between Ecogen Inc., a Delaware Corporation having
its principal place of business at 2005 Cabot Blvd. West, Langhorne,
Pennsylvania, 19047 (the "Company"), and James P. Reilly, Jr., whose principal
residence is 16 Inlet Terrace, Belmar, NJ 07719 ("Employee").
IN CONNECTION WITH AND IN CONSIDERATION OF SERVICES RENDERED TO THE
COMPANY BY EMPLOYEE, THE COMPANY DESIRES TO AWARD TO EMPLOYEE SHARES OF THE
COMPANY'S COMMON STOCK, $.01 PAR VALUE PER SHARE (THE "COMMON STOCK").
In consideration of the foregoing and of the mutual covenants and
benefits provided herein, the Company and Employee hereby agree as follows:
1. Award of Shares. Subject to the terms and conditions set forth
herein, the Company hereby awards to Employee 100,000 shares of Common Stock
(the "Award Shares").
2. Forfeiture of Award Shares.
(a) If, prior to September 24, 2000 (the "Forfeiture Period"), Employee
voluntarily resigns his employment with the Company, is terminated with "Cause"
(as defined in paragraph (c) below), dies or becomes permanently disabled, then
the percentage of Award Shares specified in the following table shall be
forfeited, whereupon Employee shall have no further rights whatsoever with
respect to such forfeited Award Shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
FORFEITURE PERIOD AWARD SHARES FORFEITED
----------------- ----------------------
<S> <C>
Before September 23, 1999 100%
September 24, 1999 - September 23, 2000 50%
On or after September 24, 2000 0%
</TABLE>
If the application of any percentage pursuant to the foregoing table
would result in any fractional share, then the number of Award Shares not
subject to forfeiture immediately after such application shall be rounded up to
the nearest whole share.
(b) If, during the Forfeiture Period, there is (i) any stock dividend,
stock split, combination or subdivision or other change in the character or
amount of any of the Company's outstanding securities or (ii) any consolidation,
merger or sale of all or substantially all of the Company's assets, then, in
such event, any and all new, substituted or additional securities to which
Employee is entitled by reason of his ownership of Award Shares which,
immediately prior to such event, were subject to forfeiture, will be immediately
subject to the forfeiture provisions of paragraph (a) and shall be included in
the term "Award Shares."
(c) "Cause" for purposes of this Agreement will include, but not be
limited to, any violation by Employee of the employee policies or standards of
the Company, including, but not limited to, fraud, theft, insubordination,
failure or refusal to perform job duties in accordance with the Company's
standards, any violation by Employee of his obligations to the Company of
non-disclosure, non-competition or non-solicitation, any breach by Employee of
any provision of this
<PAGE> 2
Agreement, or any act or conduct of Employee having, or likely to have, a
material and adverse effect upon the company's technical, scientific or business
reputation. All determinations of "Cause" under this Agreement will be made
reasonably by a majority vote of the Board of Directors of the Company, in the
exercise of its sole discretion, and will be final and binding upon Employee.
(d) As long as Employee's Award Shares have not been forfeited pursuant
to paragraph (a) of this Section, Employee shall have voting, dividend and all
other rights with respect to the Award Shares as of the date the Award Shares
are issued and registered in Employee's name.
(e) Certificates representing any Award Shares subject to forfeiture
pursuant to paragraph (a) of this Section will be held by the Company until such
Award Shares are no longer subject to forfeiture. Award Shares subject to
forfeiture may not be sold, transferred, pledged or otherwise disposed of
(including, but not limited to, through transfer by gift or donation).
3. Representations of Employee. Employee represents and warrants that
he is acquiring the Award Shares for his own account, for investment purposes
only and not with a view towards distribution.
4. Tax Consequences. Employee hereby represents that prior to or on
the date hereof, Employee has generally been advised of the tax consequences to
Employee of receiving the Award Shares and has obtained appropriate legal or tax
advice with respect thereto.
5. Legends. Stock certificates representing the Award Shares may bear
legends reflecting such restrictions as the Company deems appropriate and in its
best interest in accordance with the terms and conditions of this Agreement,
including a legend to the effect that the Award Shares may not be transferred
unless such Award Shares are registered under the Securities Act of 1933, as
amended or an exemption from such registration is available. In such event, the
Company may refuse to transfer ownership of the Award Shares on its corporate
record books until Employee has complied with any such restrictions.
6. Non-transferability of Stock Award Agreement. This Agreement is
personal and no rights hereunder may be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise) nor shall
such rights be subject to execution, attachment or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this
Agreement or of such rights contrary to the provision hereof, or upon the levy
of any attachment or similar process upon this Agreement or such rights, any
such rights shall, at the election of the Company, become null and void.
7. Delivery of Award Shares. Subject to the terms set forth in Section
2(e) hereof, the Company will make prompt delivery to Employee of the Award
Shares; provided that if any law or regulation requires the Company to take any
action with respect to such Award Shares before the issuance thereof, then the
date of delivery of such Award Shares will be extended for the period necessary
to complete such action. No Award Shares will be issued and delivered unless and
until, in the opinion of counsel for the Company, any applicable registration
requirements of the Securities Act of 1933, as amended, any applicable listing
or quotation requirements of any exchange or quotation system on which stock of
the same class is then listed or quoted and any other requirements of law or of
any regulatory bodies having jurisdiction over such issuance and delivery shall
have been fully complied with.
8. No Special Employment Rights. Employee acknowledges that nothing
contained in this Agreement will confer upon Employee any right with respect to
the continuation of his employment by the Company or interfere in any way with
the right of the Company, subject to the terms of any separate employment
agreement to the contrary, at any time to terminate such
<PAGE> 3
employment or to increase or decrease the compensation of Employee from the rate
in existence at the time of the stock award.
9. Miscellaneous.
(a) This Agreement and any instrument delivered pursuant to this
Agreement will be construed, interpreted and governed by the laws of the
Commonwealth of Pennsylvania without regard to the conflicts of laws rules
thereof.
(b) This Agreement will be binding upon Employee, his legal
representatives, heirs and distributees, and the Company, its successors and
assigns regardless of any change in the business structure of the Company, be it
through spinoff, merger, sale of stock, sale of assets or any other transaction.
(c) This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof. No waiver, modification or change of any
provision of this Agreement will be valid unless in writing and signed by both
parties. The headings of the sections of this Agreement are inserted for
convenience of reference only and will not be deemed to constitute a part hereof
or to affect the meaning hereof.
(d) The waiver of any breach of any duty, term or condition of this
Agreement will not be deemed to constitute a waiver of any preceding or
succeeding breach of the same or of any other duty, term or condition of this
Agreement.
(e) All notices pursuant to this Agreement will be in writing and will
be sent by prepaid certified mail, return receipt requested, addressed to the
parties hereto at the addresses set forth in this Agreement or to such other
addresses as may hereafter be specified by like notice in writing by either of
the parties.
(f) This Agreement may be executed in counterparts, each of which will
be deemed an original but all of which will together constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first above written.
Ecogen Inc.
By: /s/ Richard A. Deak
---------------------------------------
Name: Richard A. Deak
Title: Vice President and General Counsel
/s/ James P. Reilly, Jr.
------------------------------------------
James P. Reilly, Jr.
<PAGE> 1
Exhibit 21
LIST OF SUBSIDIARIES*
STATE OR OTHER JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION OR ORGANIZATION
- ------------------ -----------------------------
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
* 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
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, No. 33-71854 and No. 333-58535) on Form S-3, of Ecogen
Inc. of our report dated December 17, 1998 relating to the consolidated balance
sheets of Ecogen Inc. and subsidiaries as of October 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows and related schedule for each of the years in the three-year period ended
October 31, 1998, which report appears in the October 31, 1998 annual report on
Form 10-K of Ecogen Inc.
KPMG LLP
Short Hills, New Jersey
January 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 2,009,437
<SECURITIES> 813,150
<RECEIVABLES> 3,418,897
<ALLOWANCES> 80,000
<INVENTORY> 4,298,374
<CURRENT-ASSETS> 11,083,930
<PP&E> 8,415,780
<DEPRECIATION> 5,644,525
<TOTAL-ASSETS> 14,676,501
<CURRENT-LIABILITIES> 3,588,172
<BONDS> 0
0
519
<COMMON> 82,426
<OTHER-SE> 6,842,322
<TOTAL-LIABILITY-AND-EQUITY> 14,676,501
<SALES> 10,471,945
<TOTAL-REVENUES> 16,398,136
<CGS> 8,600,903
<TOTAL-COSTS> 10,439,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 354,785
<INCOME-PRETAX> (2,997,106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,997,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,997,106)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
