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As filed with the Securities and Exchange Commission on February 15, 2000.
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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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COMMISSION FILE NUMBER 1-9579
ECOGEN INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2487948
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(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 W. CABOT BOULEVARD, #170
LANGHORNE, PENNSYLVANIA 19047-1811
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (215) 757-1590
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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 $15,594,428 AS OF JANUARY 31, 2000. (A)
10,509,263
---------------------------------------------------------------------
(NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF JANUARY 31, 2000)
------
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
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DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement with respect to the Annual Meeting of
Stockholders scheduled to be held on April 6, 2000 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 3,578,406 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 31, 2000. Exclusion of shares held
by any person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the registrant, or that such person is controlled by or under common
control with the registrant.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Ecogen Inc. ("Ecogen" or the "Company"), a Delaware
corporation incorporated in 1983, is a biotechnology company specializing in the
development and marketing of environmentally compatible products for the control
of pests in agricultural and related markets. Ecogen's product revenues are
generated substantially by sales of biological insecticides derived from the
bacterial microorganism Bacillus thuringiensis ("Bt") and biological fungicide
products for the control of powdery mildew and post-harvest rot disease. The
Company also distributes products for others including soil amendments. 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 February 2000, the Company completed its acquisition of
certain assets of the sprayable Bt biopesticide business of Mycogen Corporation,
an affiliate of Dow AgroSciences LLC. The transaction included the purchase of
Mycogen's Bt bioinsecticides, trademarks, product inventories and a license to
certain proprietary genes and strains for use in sprayable bioinsecticides. The
Company issued 1.4 million shares of common stock valued at $3.0 million upon
the closing of the transaction. Prior to the closing, the Company acquired
approximately $.4 million of Mycogen's inventory of sprayable Bt products under
a distribution agreement beginning January 1, 2000, pending the signing of final
agreements. Principal products acquired include: MVP for control of lepidopteran
pests in vines and vegetables, MVPII for control of lepidopteran pests in trees,
nuts, vines and row crops and Mattch for control of lepidopteran pests in
vegetables. (See Management's Discussion and Analysis and note 18 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. 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
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insect's intestinal tract. The proteins produced by various strains of Bt are
highly active against specific, targeted insect pests. Many insects are also
susceptible to bacterial spores. Bt has no adverse activity against non-target
insects, fish, birds or mammals (including humans). The genes for the
insecticidal proteins reside on specific non-essential DNA molecules termed
plasmids. Bt bacteria in nature generally contain several different genes that
endow different insecticidal activities. Plasmids can either be removed
("cured") from cells that harbor them or they can be transferred between
different strains by a natural mating process called conjugal transfer that
occurs in nature between Bt strains and 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 ended 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. Monsanto has utilized Ecogen's Cry3Bb Bt toxin gene as the active
ingredient for corn rootworm control in Monsanto's Bt corn that was filed for
registration with the U.S. EPA in 1999. 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.
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Ecogen focuses biofungicide research and development efforts on two biofungicide
technologies: hyperparasitic fungi which kill other fungi, such as powdery
mildews that infect plant leaves, flowers and fruit; and a yeast formulation
which protects stored fruit from post-harvest rot pathogens.
A fungal hyperparasite, Ampelomyces quisqualis, has been
identified that infects most, if not all, types of powdery mildews harmful to
agricultural products. Ecogen has obtained an exclusive license to this
hyperparasite. Powdery mildew is a significant fungal disease affecting many
crops. Special structures of the mildew penetrate the plant epidermal cells and
feed on cellular tissue, causing dwarfing of the plant and fruit and cosmetic
damage which is particularly undesirable on fresh produce. Plants severely
infected with these pathogens have reduced yields. Historically, chemical
fungicides have been used for the control of these fungal pathogens, but these
pathogens 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. Ecogen's distribution partner in Italy,
Intrachem Bio Italia Srl, has been granted approval for the use of Ecogen's AQ10
biofungicide on grapes. Ecogen has received an initial order for AQ10 from
Intrachem Bio Italia and expects to ship product in early 2000. AQ10 is the
first powdery mildew biofungicide to be approved according to the new E.U.
directives (91/414).
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.
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Glossary
The following glossary of terms may be helpful in understanding the
technology described in this document.
<TABLE>
<CAPTION>
<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.
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.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Soil Amendments - Products that, among other things, negate the influence of salt on plant
growth and enhance the growth of permanent crops.
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 over 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 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. AQ10 also is marketed
in Italy for use on grapes.
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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.
CRUISER INSECTICIDE -- Cruiser Insecticide contains the
Heterorhabditis bacteriophora nematode and is being developed for the control of
a variety of insect pests.
During fiscal 1999, the foregoing products represented
approximately 94% of Ecogen's net product sales. Net product sales represented
approximately 91% of the Company's total revenues in fiscal 1999. Bt products
and biofungicide products represented approximately 90% and 4%, respectively, of
Ecogen's total net product sales in fiscal 1999.
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 also has distribution
agreements for certain of its products in the United States. In January 1999,
FMC Corporation agreed to distribute Lepinox for the Company in the United
States. Also in January 1999, Plant Health Care Inc. agreed to distribute
certain of the Company's product's into non-agricultural markets in the United
States.
Ecogen's domestic product sales for fiscal 1999, 1998 and 1997
totaled $4.5 million, $7.0 million and $7.2 million, respectively.
For 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: Zeneca (for Mexico), 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. In March 1999, Lances Link S.A. agreed to distribute
certain of the Company's products in parts of Western Europe, all of Eastern
Europe, Egypt, Turkey and all Arab speaking countries of the Near East. In
February 2000, the Company agreed to grant Dow AgroSciences exclusive
distribution rights for certain products in Mexico, New Zealand and Australia,
subject to negotiation of final agreements. International product sales totaled
$2.1 million for fiscal 1999, $3.5 million for fiscal 1998, and $1.6 million for
fiscal 1997.
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
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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.
The most important raw materials needed by Ecogen to conduct
its product manufacturing and research and development activities include (1)
fermentation media components and formulation chemicals, which are readily
available from a variety of independent sources, and (2) 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.
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 $.3 million for fiscal 1999,
$.7 million for fiscal 1998, and $1.2 million for fiscal 1997. Costs incurred
under Ecogen-funded research and development programs aggregated approximately
$2.3 million, $2.9 million and $3.8 million for fiscal 1999, 1998 and 1997,
respectively.
During fiscal 1999, the Company derived approximately 9% of
its revenues from research and development contracts. This contrasts with
approximately 33% in 1998 and 25% in 1997, as a result of the wind-down of the
Monsanto research program.
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.
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GEOGRAPHIC SEGMENT DATA
Information regarding geographic segment data is provided in
note 12 to notes to consolidated financial statements.
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 and has obtained patents covering certain of its
technologies. In addition, 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, Florida and New York
have their own extensive registration requirements. To develop and commercialize
a pesticide product, detailed and complex procedures must be followed and
federal approvals must be obtained under FIFRA. Small-scale field testing
usually may be conducted prior to product registration to evaluate product
efficacy. To conduct large-scale tests, a company must obtain an Experimental
Use Permit ("EUP"), which generally requires satisfactory completion of certain
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toxicology and environmental studies. Synthetic chemical pesticides require
additional extensive toxicology and environmental testing that typically is not
required of biopesticides to substantiate product safety prior to obtaining a
product registration. Commercial sale of a pesticide requires a registration for
each pest and crop for which the product is used. Registration requirements
include submission and U.S. EPA approval of the text of a label which must be
included on every pesticide product.
The United States Congress has mandated under the Food Quality
Protection Act of 1996 that all U.S. EPA tolerances be reassessed using new
standards within 10 years. All tolerances will now be based on a "reasonable
certainty of no harm" and there will be a specific determination of risk to
infants and children.
The U.S. EPA has recognized that biochemical and microbial
pesticides are distinguished from standard chemical pesticides and has
established different data requirements as part of its registration regulations.
These data requirements are set out in Subdivision M of the U.S. EPA's Pesticide
Assessment Guidelines. Biopesticides currently are subject to a three-tier
toxicology testing procedure and a four-tier environmental testing procedure. A
biopesticide product which satisfactorily completes both the Tier I toxicology
and environmental tests is not required to go through the tests specified in
subsequent tiers. This has been the case for product registration applications
filed by the Company to date. However, should questions arise during any tier of
testing, additional tests may be required. For a biopesticide product required
to complete only Tier I testing, approximately one year of laboratory testing is
required. Subsequent U.S. EPA registration generally takes approximately 12-18
months. 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.
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<PAGE> 12
From time to time, governmental authorities review the need
for additional laws and regulations for biotechnology products and for pesticide
products that could, if adopted, apply to the business of Ecogen. Ecogen is
unable to predict whether any such new regulations will be adopted or whether,
if adopted, such regulations will adversely affect its business.
Historically, the cost to Ecogen of compliance with federal,
state and local provisions enacted for the protection of the environment has not
been material. Toxicology testing, field development trials and related costs
for U.S. EPA registrations incurred to date by Ecogen have averaged under
$500,000 for each product registration, while state registration and related
costs per product have been nominal. This does not mean that such costs are
unlikely to increase in the future, particularly if more restrictive approval
requirements are adopted by federal, state or local authorities. Also, delays in
obtaining necessary product registrations can have a significant impact upon
Ecogen's revenues and competitive position in the way of delayed product sales
and lost market opportunities.
The regulation of field development and testing, as well as
the commercial sale, of Ecogen's 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 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
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<PAGE> 13
conditions during field tests or failure to receive regulatory approvals prior
to the growing season may require additional field tests in subsequent growing
seasons, with resulting delays in product development and commercialization. In
addition, because of the seasonal nature of its business, the Company's product
revenues are likely to be concentrated in the fiscal quarters prior to and
during a particular growing season and may result in substantial variations in
quarter-to-quarter financial results. Product sales from year to year are also
affected by unusual weather conditions, such as droughts or floods, and the
level of insect infestation in grower areas.
EMPLOYEES
As of December 31, 1999, Ecogen and its subsidiaries have 34
full-time employees, of whom 7 hold Ph.D. degrees. Degrees held by employees of
Ecogen encompass the areas of entomology, microbiology, molecular genetics,
plant physiology and plant pathology.
Employees of the Company are required to enter into
confidentiality agreements with Ecogen. Pursuant to these agreements, the
employees have agreed not to disclose Ecogen's proprietary information and to
assign to Ecogen all rights to any inventions made during their employment or
relating to Ecogen's activities, and not to engage in activities similar to
their activities at Ecogen for any other person or entity during the term of
their employment and for one year thereafter. Ecogen believes that its
relationship with its employees is good.
EXECUTIVE OFFICERS
The executive officers of the Company and their respective
ages and positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
James P. Reilly, Jr. 53 Chairman, President, and Chief Executive Officer and Director
Timothy B. Johnson 43 Vice President, Sales and Marketing
Mary E. Paetzold 50 Vice President, Chief Financial Officer and Treasurer
</TABLE>
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. 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.
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<PAGE> 14
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 21,000 square feet of
space for its administrative offices and research and development operations in
a building located in the Bucks County Business Park, Langhorne, Pennsylvania.
The lease for this facility expires in March 2005. Approximately 15,000 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.
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<PAGE> 15
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, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1999 HIGH LOW
- -------------------------------------------------------------------------------
<S> <C> <C>
First Quarter $ 2-1/4 $ 1-3/16
Second Quarter 3-5/16 1-3/4
Third Quarter 3-1/2 2-1/2
Fourth Quarter 3-1/8 1-1/2
</TABLE>
<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>
A. Holders
On January 1, 2000, there were approximately 904 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 loan agreements.
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
Years ended October 31, 1999, 1998, 1997, 1996 and 1995
(all amounts in thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
1999 1998(1) 1997 1996 1995(2)
---- ---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C> <C>
Product sales $ 6,566 $ 10,472 $ 8,783 $ 8,600 $ 9,135
Other revenues 676 5,266 2,939 7,825 2,855
Gross margins 590 1,871 2,491 2,901 3,627
Expenses:
Research & development 2,637 3,616 5,042 4,922 8,951
Selling, general &
administrative 6,833 6,824 8,661 8,547 10,672
Special charges:
- Purchased technology -- -- -- -- 9,143
- Restructuring -- -- 1,626 -- 1,041
Net loss (8,611) (2,997) (9,810) (2,860) (23,324)
Dividends on preferred stock,
including incremental yield 1,142 116 2 -- --
Net loss allocable to common
stockholders ($9,753) ($ 3,113) ($9,812) ($2,860) ($23,324)
Basic and diluted net loss
per common share ($ 1.05) ($ 0.39) ($ 1.23) ($ 0.40) ($ 4.34)
Weighted average common
shares outstanding 9,248 8,059 7,958 7,178 5,373
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------------ ----- ---- ---- ----
Unaudited
Pro forma(3)(4) Actual
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and
temporary investments 2,552 -- $ 2,823 $ 2,374 $ 9,611 $ 1,775
Total assets 16,543 10,462 14,677 17,558 23,861 12,371
Long-term debt 1,250 250 1,328 3,916 1,297 620
Stockholders' equity 5,645 1,023 6,925 4,870 14,403 5,507
</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 loan agreements.
(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.
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<PAGE> 17
(3) Subsequent to October 31,1999, the Company acquired certain sprayable Bt
biopesticides from Mycogen Corporation, an affiliate of Dow AgroSciences
Inc. (See note 18 of notes to consolidated financial statements.)
(4) Subsequent to October 31, 1999, the Company (i) sold $1.5 million of 7%
convertible preferred stock to institutional investors and (ii) closed a
$1.5 million secured loan. (See note 18 of notes to consolidated financial
statements.)
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 decreased $8.5 million or 54% in fiscal 1999 to
$7.2 million from $15.7 million in fiscal 1998. In fiscal 1999, product sales
decreased 37% from $10.5 million in fiscal 1998 to $6.6 million in fiscal 1999.
Fiscal 1998 included approximately $2.0 million in net product sales of
pheromone products, a product line that was sold in April 1998. On a pro forma
basis, assuming the pheromone product line had been sold at the beginning of
fiscal 1998, continuing product sales decreased $1.9 million or 22% from fiscal
1998 to fiscal 1999. Contract research revenue decreased to $.7 million for
fiscal 1999 from $5.3 million for the year-ago period. The decrease was
primarily the result of the expiration in January 1999 of the research and
development agreement with Monsanto Company that had contributed more than $10
million in research contract revenue over its three-year term.
The operating loss was $4.9 million higher in fiscal 1999 when
compared to fiscal 1998, due principally to the $4.6 million lower contract
research revenue. A reduction in operating expenses of $1.0 million or 9% from
$10.4 million in fiscal 1998 to $9.5 million in fiscal 1999, partially offset
the effect of the decrease in net product sales. Net loss allocable to common
stockholders increased from ($3.1) million or ($.39) per basic and diluted share
in fiscal 1998 to ($9.8) million or ($1.05) per share in fiscal 1999. Included
in dividends on preferred stock in fiscal 1999 is the assumed incremental yield
of $.8 million. Weighted average shares were 9.2 million and 8.1 million in
fiscal 1999 and 1998, 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 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 allocable 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.
RESULTS OF OPERATIONS - YEAR ENDED OCTOBER 31, 1999 COMPARED TO
YEAR ENDED OCTOBER 31, 1998
REVENUES
Total revenues decreased $8.5 million or 54% in fiscal 1999 to
$7.2 million from $15.7 million in fiscal 1998. Net product sales decreased $3.9
million or 37% principally due to
17
<PAGE> 18
volume. On a pro forma basis, assuming the sale of the pheromone product line
took place at the beginning of fiscal 1998, continuing product sales decreased
$1.9 million or 22% from fiscal 1998 to fiscal 1999. Other revenue decreased
$4.6 million or 87% due primarily to the expiration in January 1999 of the
research and development contract with Monsanto. Sales of the Company's Bt
product line, representing 91% of Company product sales, decreased 19% in fiscal
1999. The decrease was principally due to decreased sales of CRYMAX, the
Company's Bt bioinsecticide for control of caterpillars in the vegetable, tree,
nut and vine markets, partially offset by an increase in sales of Lepinox, the
Company's bioinsecticide for control of diamondback moth and a variety of
armyworms in vegetables and row crops that was introduced in the fourth quarter
of fiscal 1998. Biofungicide product sales, which represented 4% of product
sales in fiscal 1998, decreased $.3 million or 52% from the year-ago period,
principally due to lower sales of Aspire, the Company's biofungicide for control
of post harvest rot disease and lower sales of AQ10, the Company's biofungicide
for control of powdery mildew. Continuing pheromone product sales, representing
1% of total sales, decreased 66% in fiscal 1999. Discontinued pheromone product
sales were $2.0 million in fiscal 1998. In fiscal 1999, the Company recognized
the first sales of its soil amendment product line, representing 4% of total
sales in fiscal 1999.
Contract research revenues decreased $4.6 million or 87% in
fiscal 1999 due to the expiration in January 1999 of the research and
development agreement with Monsanto that had contributed more than $10 million
in contract research revenue over its three-year term. Other income decreased
$.5 million in fiscal 1999 over the year-ago period, principally as a result of
the $.5 million gain on the sale of the pheromone product line recognized in
fiscal 1998.
COSTS AND EXPENSES
Gross margins decreased to 9% in fiscal 1999 from 18% in
fiscal 1998, primarily as a result of lower absorption of fixed overhead due to
lower sales during fiscal 1999 and higher reserve for obsolescence and rework.
Total operating expenses, consisting of research and
development expenses and selling, general and administrative expenses, decreased
$1.0 million or 9%. Research and development costs decreased $1.0 million or 27%
in fiscal 1999 compared to the year-ago period, as a result of lower personnel
and related costs, due to the wind-down of the Monsanto Research Program and
lower basic research. Selling, general and administrative expenses were constant
at $6.8 million in fiscal 1998 and 1999. General and administrative expenses
decreased 6%. The decrease was offset by an increase in selling and marketing
expenses due to staff increases and promotional programs to support the
Company's distributors' efforts in introducing the Company's novel
biopesticides.
Net interest expense was $.5 million in fiscal 1999 compared
to $.4 million in fiscal 1998. The higher interest expense was due primarily to
lower interest income as a result of lower cash and temporary investments in
fiscal 1999.
Net loss allocable to common stockholders for fiscal 1999 was
($9.8) million, or ($1.05) per basic and diluted share, compared with a net loss
of ($3.1) million or ($.39) per basic and diluted share in the same period in
fiscal 1998. The 1999 fiscal year included assumed incremental yield on
preferred stock issue during the year of $.8 million. Weighted average shares
were 9.2 million in fiscal 1999 compared to 8.1 million in fiscal 1998.
18
<PAGE> 19
RESULTS OF OPERATIONS - FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO
YEAR ENDED OCTOBER 31, 1997
REVENUES
Total revenues increased $4.0 million or 34% in fiscal 1998 to
$15.7 million from $11.7 million in fiscal 1997. Net product sales increased
$1.7 million or 19% and other revenue increased $2.3 million or 79%. 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. 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, 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.
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 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.
19
<PAGE> 20
Net loss allocable 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 shutdown 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.
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, revenues from
research and development alliances and product sales. In addition, in 1998 the
Company obtained a working capital line of credit.
At October 31, 1999, cash and temporary investments decreased
$2.8 million from October 31, 1998. Net borrowings under long-term debt
facilities increased $1.1 million and $2.9 million was raised in net proceeds
from the sale of equity securities in fiscal 1999. During fiscal 1999, the
Company used $6.8 million of cash for operations.
In May 1999, the Company sold 15,000 shares of Series 1999 A
7% convertible preferred stock to an institutional investor for net proceeds of
$1.4 million. In connection with the sale of preferred stock, the holder of the
preferred stock was issued five-year warrants to purchase 120,000 shares of
common stock at $3.98 per share. In July 1999, the Company sold 500,000 shares
of common stock to an institutional investor in a private placement for net
proceeds of $1.5 million.
Subsequent to October 31, 1999, the Company obtained a $1.5
million variable rate secured loan. Principal on this loan is required to be
repaid in 2000 and 2001.
In February 2000, the Company raised net proceeds of $1.4
million pursuant to a private placement of 7% convertible preferred stock to
institutional investors. In accordance with the terms of the preferred stock,
the Company is required to recognize a non-cash, assumed incremental yield of
approximately $.6 million, calculated at the date of issuance based on 95% of
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<PAGE> 21
the average conversion feature, as defined in the agreement. The terms of the
preferred stock are disclosed in note 18 of the notes to the consolidated
financial statements.
On February 15, 2000, the Company completed its acquisition of
certain sprayable Bt biopesticides from Mycogen Corporation, an affiliate of Dow
AgroSciences Inc. (the "Mycogen Transaction") for aggregate consideration of
$3.4 million including shares of common stock with a market value of $3.0
million. (See note 18 of notes to the consolidated financial statements.)
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 2000 based on reduced
spending levels, if necessary. However, the Company's two-year working capital
line of credit for up to $5.0 million expires in August 2000. Presently $1.6
million is outstanding under this credit facility. Further, the Company's
working capital and working capital requirements are affected by numerous
factors and there is no assurance that such factors will not have a negative
impact on the Company's liquidity. Principal among these factors 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.
The Company continues to pursue the raising of additional
funds and other strategic initiatives to improve its working capital position
and its capital structure. Also, during fiscal 2000 the Company will need to
extend its working capital line of credit with its current lender or obtain
alternative financing. There is no assurance that access to financings will be
available on terms acceptable to the Company or at all. If the Company is not
successful in refinancing its working capital line of credit or in raising
additional funding, the Company would take a number of steps to conserve cash,
including reducing expenditures to provide the necessary resources to repay the
outstanding balances under its line of credit. Over the long-term, the Company's
liquidity is dependent on market acceptance of its products and technology.
At October 31, 1999, the Company had no material commitments
for capital expenditures.
Through October 31, 1999, the Company had available Federal
net operating loss carryforwards of approximately $83.3 million which expire at
various times through 2014. 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 2000 or 2001 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.
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<PAGE> 22
OTHER ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Inventory increased $1.1 million at October 31, 1999 when
compared to October 31, 1998 primarily due to lower then expected sales in
fiscal 1999. Accounts receivable at October 31, 1999 decreased $1.7 million as a
result of lower sales in the fourth quarter of fiscal 1999.
Accounts payable and accrued expenses increased $.3 million in
fiscal 1999 as a result of the timing of payments to vendors. Deferred contract
revenue at October 31, 1999 decreased $.5 million as a result of revenue earned
under the Monsanto contract in fiscal 1999. Debt under the working capital line
of credit increased $1.4 million in fiscal 1999 as a result of borrowings to
fund operations.
YEAR 2000
The Company undertook initiatives to ensure that its systems
were Year 2000 compliant as well as contacting major customers and vendors to
assess their status. As of the date of this filing, the Company has not
experienced any disruption of its operations due to Year 2000 issues. The cost
of Year 2000 modifications have not been significant and no additional Year 2000
costs are anticipated.
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, 2001. 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. We do not expect adoption of this
standard to have a material impact on our financial statements.
In December 1999, the staff of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). SAB 101 summarizes certain of the staff's views
in applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 101 requires a company to follow its guidance no later
than the first quarter of its fiscal year beginning after December 15, 1999
through a cumulative effect of a change in accounting principle. We do not
expect adoption of this standard to have a material impact on our financial
statements.
FORWARD LOOKING STATEMENT
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. These risks and uncertainties include:
(1) We may need additional funding in the future and these funds may not
be available to us.
We have not yet generated positive cash flow from
operations. Since our inception, we have financed our working capital needs
primarily through sales of equity securities, revenues from research and
development agreements and product sales. Our 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 our liquidity. These
factors include: (1) the success of our product commercialization and marketing
efforts and the efforts of our strategic partners in commercializing and selling
products based on our technology; (2) the technological advantages
22
<PAGE> 23
and pricing of our products; (3) economic and environmental considerations that
impact agricultural crop production and the agricultural sector generally; (4)
competitive conditions in the agricultural pest control market; and (5) access
to capital markets that can provide us with the resources necessary to fund our
strategic priorities.
We may need additional financing to support current
levels of product development and commercialization.
There is no assurance that such financing will be available on terms acceptable
to us or at all. Over the long-term, our liquidity is dependent on market
acceptance of our products and technology.
(2) We are in the early stage of product sales and are not able to predict
future commercial acceptance.
We are in the early years of significant commercial
sales of a line of environmentally compatible products for the control of pests
in agricultural and related markets. Currently, our primary products include a
line of biological insect control products and products based on naturally
occurring organisms such as fungi and yeast that can control harmful fungi that
reduce crop yields or infect crops after harvesting, also known as biofungicide
products. There can be no assurance that our existing or future products will be
commercially accepted.
(3) We are not profitable; we must increase sales of our products to be
profitable.
We have incurred net losses since our inception. To
date, we have not generated profits or positive cash flow from operations. There
can be no assurance that we will achieve operating profits or generate a
positive cash flow. Our ability to become profitable will depend, in part, on
our ability to increase our sales volumes of our line of biological insect
control products and biofungicide products. No assurance exists that we will be
able to market these products at prices and in quantities that will enable us to
achieve profitability.
(4) We rely upon third parties to manufacture our products; we must be able to
mass produce new products.
A key to achieving our product sales objectives is
our ability to mass produce our products in a timely and cost-effective manner.
In order for our product sales to be profitable, we must be able to increase our
production to meet anticipated needs. There can be no assurance that we will be
able to scale-up our production of new products on commercially reasonable terms
or at all. Our production plans rely upon third parties for most of our product
manufacturing, formulation and packaging requirements. Although we believe that
such third parties have sufficient operating capacity to satisfy our product
manufacturing needs, the failure of any such party to provide products to us
under our product manufacturing arrangements could have a material and adverse
effect on our ability to meet the demand for our products.
(5) We depend on key members of our staff and must retain and recruit qualified
Individuals if we are to be competitive.
Our future success is dependent upon the efforts and
abilities of our employees. We have assembled a highly qualified technical
staff, many of whom have considerable prior experience with bioinsecticides. The
loss of certain key employees could materially and adversely affect our business
and impede the achievement of our business objectives. Our success will depend
on our ability to retain key employees and to replace them, if any depart, with
personnel of comparable scientific and management capability.
23
<PAGE> 24
(6) We compete against larger, more established entities.
The markets in which we operate are highly
competitive. Our competition is based principally on price and efficacy, but
safety and ease of application are also factors. Our competitors include: (1)
manufacturers and marketers of synthetic chemical pesticides and biopesticides
including large chemical companies, such as Abbott Laboratories, Novartis and
Dow AgroSciences; ( 2) specialized biotechnology firms; (3) universities and
public and private research organizations; and (4) in the case of our biological
insecticide products, certain genetically altered, also known as "transgenic",
seed and plant products that have insecticidal capabilities.
Many of these organizations have considerably
greater financial and marketing resources. The agricultural pesticide industry
is undergoing, and is expected to continue to undergo, rapid and significant
technological change. We expect competition to intensify as technical advances
in the field are made and become more widely known. As a result, there can be no
assurances that such competitive pressures and technological advances will not
result in a reduction in prices of our products which could adversely affect our
profitability or render our products or technology obsolete or noncompetitive.
(7) Our product use and development is seasonal.
The bulk of our products are marketed for
agricultural applications in the northern hemisphere, where the growing season
generally runs from spring until fall. Because of the seasonal nature of our
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. Droughts, floods, other
unusual weather conditions and the level of insect infestation in grower areas
will also affect product sales from year-to-year. In addition, commercial
introduction of our new products is contingent on, among other factors,
completion of field testing and receipt of required regulatory approvals. Field
testing, regulatory approval and commercial introduction of our products that
are not yet registered with the EPA must occur at certain times before or during
the growing season. Unusual weather conditions during field tests or the failure
to receive regulatory approval prior to the growing season may require
additional field tests to be conducted in subsequent growing seasons, with
resulting delays in new product development and commercialization.
(8) We must comply with strict governmental regulation.
Pesticides are subject to rigorous testing and
approval processes by the EPA and similar regulatory authorities in certain
states and in other countries. The process of obtaining these approvals can be
time-consuming and costly. There can be no assurance that such approvals will be
granted on a timely basis, if at all. Delays in obtaining necessary product
registrations could have a significant impact upon our revenues and competitive
position by delaying product sales and causing lost market opportunities.
Additionally, while the EPA has in place a registration procedure for
biopesticides that is less burdensome in comparison to the registration
procedures for synthetic chemical pesticides, there can be no assurance that
additional requirements will not be added by the EPA which could make the
procedure more time-consuming and costly. Additionally, there is no assurance
that a particular product developed in the future will qualify for registration
as a biopesticide. Furthermore, there is no assurance that any registrations
that have been granted will not be revoked or that, if we apply for any
additional registrations or approvals, they will be issued.
(9) We rely on proprietary technology and trade secrets, the loss of any of
which would negatively affect our business.
Although we have issued and pending patents with
respect to certain of our technologies, there can be no assurance that any
additional patents will be issued or that any
24
<PAGE> 25
issued patents will provide adequate protection for our products or processes.
Although we pursue a policy of seeking patent protection, in the United States
and abroad, for our novel compositions of matter and processes, 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, we also rely upon unpatented proprietary technology and trade
secrets. All of our employees and consultants sign confidentiality agreements
under which they agree not to use or disclose our confidential information as
long as that information remains proprietary or, in some cases, for fixed time
periods. There can be no assurance that others have not developed or will not
independently develop such proprietary technology or substantially equivalent
information and techniques or that secrecy will not be breached. Our ability to
compete will depend, in part, on maintaining the proprietary nature of our
technology.
We are aware that substantial research efforts in
biotechnology are taking place at universities, government laboratories and
public corporations around the world and that numerous patent applications have
been filed, and that patents have been issued, relating to fundamental
technologies and to specific biological pesticide products and processes. The
costs associated with the enforcement of our patents and with obtaining
licenses, if required, under patents held by third parties can be significant
and thus could materially and adversely affect our business. There can be no
assurance that we could obtain licenses with respect to such patents on
favorable terms, if at all.
(10) We are subject to product liability claims and we may not have sufficient
product liability insurance.
Our business exposes us to potential product
liability claims based upon our technology or products. We currently maintain
product liability insurance in an amount we believe is adequate for our needs,
taking into account the risks involved and the cost of coverage. There can be no
assurance that our insurance coverage is sufficient to cover potential
liabilities, or that we will have sufficient resources to satisfy any product
liability claims. A successful product liability claim in excess of our
insurance coverage could have a material adverse effect on our financial
condition.
(11) Our stock price is highly volatile and investing in our stock involves a
high degree of risk.
The market price for shares of our common stock, like
the price of common stock and other securities of
biotechnology companies generally, fluctuates over a wide range and is expected
to continue to be extremely volatile in the future. Factors that may effect the
market price of our common stock include: (1) fluctuation in our operating
results; (2) announcements of technical innovations and new commercial products
by us or potential competitors; (3) adverse results in our field tests or
product sales; (4) adverse litigation; (5) adverse legislation; (6)
develop-ments or disputes concerning patent or our other proprietary rights; and
(7) general market conditions.
In addition, the future sale of a substantial number
of shares of common stock by existing stockholders or by us may have an adverse
impact on the market price of the shares of common stock offered hereby. There
can be no assurance that the trading price of our common stock will remain at or
near its current level. Because our stock price is so volatile, investing in our
common stock is highly risky and a potential investor must be able to withstand
the loss of his entire investment in our common stock.
25
<PAGE> 26
(12) Options and convertible securities we have previously issued or may issue
in the future may dilute our common stock.
We have granted options to purchase common stock
under employee benefit plans and agreements with our management and directors.
Warrants, options, convertible securities (including shares of our outstanding
preferred stock) and other rights to purchase common stock are also outstanding
under financing arrangements and other transactions. We regularly examine
opportunities to expand our technology base and product line through means such
as licenses, joint ventures and acquisition of assets or ongoing businesses
(including the acquisition of outstanding minority interests in our Ecogen
Technologies I Incorporated subsidiary) and may issue securities in connection
with such transactions. We may issue additional stock, warrants and/or options
or other convertible securities in order to raise funds or for other purposes in
the future and may also issue additional securities in connection with our
employee benefit plans. During the terms of any such options, warrants and other
convertible securities, the holders thereof have an opportunity to profit from a
future rise, if any, in the market price of the common stock. The exercise of
any such outstanding options, warrants or other convertible securities or the
issuance of any such additional warrants, options or other equity or derivative
securities may adversely affect the market value of the common stock offered
hereby. It may also adversely affect the terms on which we may obtain additional
equity financing.
(13) We do not pay dividends.
We have never paid a dividend on our common stock
and do not anticipate paying dividends on our common stock in the foreseeable
future. We currently intend to retain earnings, if any, for use in our business.
There can be no assurance that we will ever pay dividends on our common stock.
(14) Possible Nasdaq delisting; potential regulation as a penny stock.
Our common stock is currently listed for trading on
the Nasdaq National Market. The continued trading of our common stock on the
Nasdaq National Market is conditioned upon our meeting certain quantitative and
qualitative requirements regarding assets, capital, earnings surplus, stock
price and corporate governance features. The National Association of Securities
Dealers standards for continued listing include maintenance of: (1) 750,000
shares publicly held; (2) Market value of publicly held shares of $5 million;
(3) Tangible net assets of at least $4 million; (4) 400 stockholders in round
lots; and (5) Minimum bid price per share of $1.
There can be no assurance that we will be successful in
continuing to meet the Nasdaq National Market maintenance criteria. From time to
time our tangible net assets have been less than $4 million and our bid price
has dipped below $1 per share. To the extent we are unable to satisfy the
maintenance criteria, our common stock may be delisted. Trading in the common
stock thereafter, if any, will likely be conducted in the over-the-counter
markets in the so-called "pink sheets" or the National Association of Securities
Dealers' Electronic Bulletin Board and could also be subject to additional
restrictions. As a consequence of any such delisting, it is expected that our
stockholders would find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the common stock. In addition, any such
delisting will make our common stock substantially less attractive as collateral
for margin and purpose loans, for investment by financial institutions under
their internal policies or state legal investment laws, or as consideration in
future capital raising transactions.
If our securities were delisted from the Nasdaq
National Market, our common stock may become subject to
regulation as a "penny stock." The Securities and Exchange Commission has
adopted regulations which generally define "penny stock" to be any equity
security that has a
26
<PAGE> 27
market price or exercise price less than $5.00 per share, subject to certain
exceptions, including listing on the Nasdaq National Market. If our common stock
is delisted from the Nasdaq National Market and no other exception applies, our
common stock may be subject to the SEC's Penny Stock Rules, Rules 15g-1 through
Rule 15g-9 under the Exchange Act. For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
such securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the rules require the delivery, prior to the
transaction, of a risk disclosure document mandated by the SEC relating to the
penny stock market. The broker-dealer must also disclose the commission payable
to both the broker-dealer and the registered representative, current quotations
for the securities and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the penny stock rules may restrict
the ability of broker-dealers to sell our securities and may affect the ability
of holders to sell our securities in the secondary market and the price at which
such holders can sell any such securities. Rule 15g-9 under the Exchange Act
imposes additional sales practice requirements on broker-dealers who sell such
securities except in transactions exempted from such rule. Such exempt
transactions include those meeting the requirements of Rule 505 or 506 of
Regulation D promulgated under the Securities Act and transactions in which the
purchaser is an institutional accredited investor or an established customer of
the broker-dealer.
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.
ITEM 11. EXECUTIVE COMPENSATION
The section labeled "Executive Compensation" appearing in the
Proxy Statement is hereby incorporated herein by reference.
27
<PAGE> 28
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Ecogen Inc. and subsidiaries
are included in Item 8:
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets - October 31, 1999 and 1998 F-2
Consolidated Statements of Operations - Years Ended October 31, 1999,
1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity - Years Ended
October 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows - Years Ended
October 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements - October 31, 1999,
1998 and 1997 F-7
Financial Statement Schedule: Valuation and Qualifying Accounts F-22
</TABLE>
All other schedules are omitted for the reasons that they are
not applicable or that equivalent information has been included in the
consolidated financial statements, and notes thereto, or elsewhere herein.
28
<PAGE> 29
(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) *
3.5 Corrected Certificate of Designations, Preferences and Rights of
Series 1999-A Convertible Preferred Stock (Form 10-Q for fiscal
quarter ended April 30, 1999)*
3.6 Certificate of Designations, Preferences and Rights of Series
2000-A Convertible Preferred Stock.
4.3 Ecogen Inc. Stock Option Plan, as amended.
4.4 Ecogen Inc. 1998 Stock Option Plan, as amended.
4.5 Ecogen Inc. 1999 Stock option Plan, as amended.
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)*
10.67 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)*
10.88 Form of Technology License Agreement between Ecogen-Bio Inc. and
certain Program Subsidiaries. (Form 10-K for fiscal year ended
December 31, 1992)*
10.89 Form of Research and Development Agreement between Ecogen Inc. and
certain Program Subsidiaries. (Form 10-K for fiscal year ended
December 31, 1992)*
10.90 Form of Marketing Option Agreement between Ecogen Inc. and certain
Program Subsidiaries. (Form 10-K for fiscal year ended
December 31, 1992)*
10.119 Form of Incentive Stock Option Agreement, as amended. (Form 10-K
for fiscal year ended October 31, 1994)*
- ----------------------------
* 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.
29
<PAGE> 30
Exhibit No. Description
- ----------- -----------
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)*
10.125 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)*
10.132 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)*
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)*
10.135 Loan and Security Agreement between Congress Financial Corporation
and Ecogen Inc., dated August 20, 1998. (Form 8-K filed on
September 2, 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.
30
<PAGE> 31
Exhibit No. Description
- ----------- -----------
10.136 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.*
10.145 Amended and Restated Stock Award Agreement between Ecogen Inc. and
James P. Reilly, Jr. dated as of April 9, 1999 (Form 10-Q for
fiscal quarter ended April 30, 1999)*
10.146 Warrant Agreement between Ecogen Inc. and KA Investments LDC dated
May 12, 1999 (Form 10-Q for fiscal quarter ended April 30, 1999)*
10.147 Convertible Preferred Stock Purchase Agreement between Ecogen Inc.
and KA Investments LDC dated May 12, 1999 (Form 10-Q for fiscal
quarter ended April 30, 1999)*
10.148 Registration Rights Agreement between Ecogen Inc. and KA
Investments LDC dated May 12, 1999 (Form 10-Q for fiscal quarter
ended April 30, 1999)*
10.149 Restated Severance Compensation Agreement, dated December 9, 1999,
between Ecogen Inc, a Delaware corporation and James P. Reilly,
Jr.
10.150 Term Loan and Security Agreement, dated as of December 23, 1999,
between Ecogen Inc. and The Berkshire Bank
----------------------------
* 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. 10.151
31
<PAGE> 32
Exhibit No. Description
- ----------- -----------
10.151 Warrant Agreement between Ecogen Inc. and Momar Corporation dated
December 23, 1999
10.152 Amendment No. 2 to Lease Agreement, dated December 17, 1999 by
and between Brandywine Realy and Ecogen Inc.
21. List of Subsidiaries
24. Consent of KPMG LLP
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 August 11, 1999 with
respect to the sale of 500,000 shares of common stock to an
accredited investor at a purchase price of $3.09 per share.
- ----------------------------
* 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.
32
<PAGE> 33
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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 1999 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 16, 1999, except
as to note 18 which is as of
February 15, 2000
F-1
<PAGE> 34
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
ASSETS Pro Forma Actual
------ October 31, 1999 October 31,
(see note 18) 1999 1998
----------------- ---- ----
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,552,000 $ -- $ 2,009,437
Temporary investments -- -- 813,150
Trade receivables, less allowances of $129,023
and $80,000 in 1999 and in 1998, respectively 1,685,950 1,685,950 3,338,897
Inventory, net 6,349,017 5,358,017 4,298,374
Prepaid expenses and other current assets 387,043 387,043 624,072
------------- ------------- -------------
Total current assets 10,974,010 7,431,010 11,083,930
Plant and equipment, net 2,374,462 2,374,462 2,771,255
Other assets, net 1,428,300 656,800 818,559
Intangible assets, net 1,766,000 -- 2,717
------------- ------------- -------------
$ 16,542,772 $ 10,462,272 $ 14,676,501
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit due within one year 2,693,145 2,193,145 26,019
Accounts payable and accrued expenses 3,968,620 4,010,120 3,076,300
Deferred revenue -- -- 485,853
------------- ------------- -------------
Total current liabilities 6,661,765 6,203,265 3,588,172
Long-term debt 1,250,186 250,186 1,327,875
Long-term deferred revenue 1,451,928 1,451,928 1,301,333
Minority interest in subsidiaries 1,533,854 1,533,854 1,533,854
------------- ------------- -------------
Total liabilities 10,897,733 9,435,948 7,751,234
------------- ------------- -------------
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized 7,500,000 shares:
Series 2000 A convertible preferred stock 30,000 authorized;
15,000 shares issued pro forma (liquidation value $1,500,000) 150 -- --
Series 1999 A convertible preferred stock 30,000 authorized;
15,000 shares outstanding pro forma and actual 1999
(liquidation value $1,500,000) 150 150 --
Series 1998 A convertible preferred stock - 35,000 shares authorized;
19,500 shares issued and outstanding in 1998
(liquidation value $1,950,000) -- -- 195
Series 1998 C convertible preferred shares: 50,000 shares authorized;
32,354 shares issued and outstanding pro forma and actual
1999 and 1998, respectively (liquidation value $3,235,400) 324 324 324
Common stock, par value $.01 per share; authorized 42,000,000
shares; 11,337,221, 9,985,860 and 8,246,035 shares issued pro forma
and actual 1999 and 1998, respectively 113,373 99,859 82,426
Additional paid-in capital 129,163,213 124,554,877 122,162,964
Accumulated deficit (123,632,171) (123,632,171) (114,665,164)
Net unrealized gain on securities -- -- 3,912
Treasury stock, at cost (none and 51,960 shares in 1999
and 1998, respectively) -- -- (659,390)
------------- -------------
Total stockholders' equity 5,645,039 1,023,039 6,925,267
------------- ------------- -------------
Commitments
$ 16,542,772 $ 10,462,272 $ 14,676,501
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE> 35
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended October 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product sales, net 6,566,022 $ 10,471,945 $ 8,783,461
Research contract revenue 676,277 5,265,952 2,938,790
----------- ----------- -----------
Total revenues 7,242,299 15,737,897 11,722,251
----------- ----------- -----------
Costs and expenses, including related party amounts
of $155,879, $436,142, and $837,841
in 1999, 1998 and 1997, respectively:
Cost of products sold 5,975,954 8,600,903 6,291,928
Research and development:
Funded by third parties 318,559 725,169 1,218,107
Self funded 2,318,334 2,890,454 3,823,503
Selling, general and administrative 6,832,761 6,823,931 8,661,750
Special charges -- -- 1,625,892
----------- ----------- -----------
Total costs and expenses 15,445,608 19,040,457 21,621,180
----------- ----------- -----------
Operating loss (8,203,309) (3,302,560) (9,898,929)
Other income (expense)
Net interest (expense) income (522,894) (354,785) 88,837
Other income, net 114,932 660,239 --
----------- ----------- -----------
Total other income (expense), net (407,962) 305,454 88,837
----------- ----------- -----------
Net loss (8,611,271) (2,997,106) (9,810,092)
Dividends on preferred stock, including assumed
incremental yield of $786,444 for 1999 1,142,180 116,020 1,815
----------- ----------- -----------
Net loss allocable to common stockholders ($9,753,451) ($3,113,126) $(9,811,907)
=========== =========== ===========
Basic and diluted net loss per common share ($1.05) ($0.39) ($1.23)
====== ====== ======
Weighted average common shares
outstanding 9,248,000 8,059,000 7,958,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 36
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL ACCUMULATED
PREFERRED STOCK COMMON STOCK AID-IN CAPITAL DEFICIT
--------------- ------------ -------------- -------
<S> <C> <C> <C> <C>
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 200 240 1,794,549 --
Conversion of convertible note for 32,354 shares of
Series 1998 A convertible preferred stock 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)
Issuance of 1,738 shares of common stock
and transfer of 5,037 shares of treasury stock for
employee benefits -- 17 (52,527) --
Private placement of 500,000 shares of common stock,
net of issuance costs -- 5,000 1,530,208 --
Private placement of 15,000 shares of convertible
preferred stock, net of issuance costs,
including 20,000 shares of common stock 150 200 1,356,650 --
Conversion of 19,500 shares of Series 1999 A convertible
preferred stock to 1,155,975 shares of common stock
including the transfer of 15,175 shares
out of treasury stock (195) 11,408 (600,908) -- --
Issuance of 17,221 shares of common stock in
connection with consulting agreement -- 172 49,828 --
Dividends on preferred stock 636 108,662 (355,736) (246,438)
Net reduction in unrealized gain on securities -- -- -- --
Net loss -- -- -- (8,611,271)
--------- ------------ -------------
Balance, October 31, 1999 $ 474 $ 99,859 $124,554,877 ($123,632,171)
======= ========= ============ =============
EQUITY TREASURY
ADJUSTMENTS STOCK AT COST TOTAL
----------- ------------- -----
<S> C> <C> <C>
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 -- -- 1,794,989
Conversion of convertible note for 32,354 shares of
Series 1998 A convertible preferred stock -- -- 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
Issuance of 1,738 shares of common stock
and transfer of 5,037 shares of treasury stock for
employee benefits -- 69,695 17,185
Private placement of 500,000 shares of common stock,
net of issuance costs -- -- 1,535,208
Private placement of 15,000 shares of convertible
preferred stock, net of issuance costs,
including 20,000 shares of common stock -- -- 1,357,000
Conversion of 19,500 shares of Series 1999 A convertible
preferred stock to 1,155,975 shares of common stock
including the transfer of 15,175 shares
out of treasury stock (195) 589,695 --
Issuance of 17,221 shares of common stock in
connection with consulting agreement -- -- 50,000
Dividends on preferred stock
Net reduction in unrealized gain on securities (3,912) -- (3,912)
Net loss -- -- (8,611,271)
----------- ----------- ------------
Balance, October 31, 1999 $ -- $ -- $ 1,023,039
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 37
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended October 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($8,611,271) ($2,997,106) ($9,810,092)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss (gain) on sale or disposition of assets 101,000 (542,268) --
Depreciation and amortization expense 702,399 762,149 1,355,310
Noncash interest and other expense 351,861 336,933 --
Changes in operating assets and liabilities,
net of effects from acquisitions/dispositions:
(Increase) decrease in inventory (1,059,643) 2,352,999 (1,502,295)
Decrease (increase) in trade receivables, net 1,652,947 (1,569,383) 4,091
Decrease (increase) in prepaid expenses
and other current assets 237,028 (52,844) (77,708)
Increase (decrease) in accounts payable and
accrued expenses 619,053 (1,650,833) (105,868)
(Decrease) increase in deferred revenue (485,853) (471,941) 856,427
(Decrease) increase in other long-term obligations -- 297,071 (116,530)
Other 90,404 47,937 137,795
----------- ----------- -----------
Net cash used in operating activities (6,402,075) (3,487,286) (9,248,870)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities of temporary
investments 813,150 1,263,000 3,441,068
Purchase of temporary investments -- (1,530,135) --
Purchase of plant and equipment (101,796) (351,886) (520,144)
Net proceeds from sale of pheromone
product line -- 1,659,410 --
----------- ----------- -----------
Net cash provided by investing activities 711,354 1,040,389 2,920,924
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from sale of common
and convertible preferred stock, net of
issuance costs 2,892,208 1,794,989 --
Net proceeds from issuance of common
shares under stock option plan 4,449 10,565 9,752
Repayment of capital lease obligation (297,304) (223,823) (476,089)
Net proceeds from line of credit 1,081,931 1,050,000 --
Proceeds from issuance of convertible note -- -- 3,000,000
----------- ----------- -----------
Net cash provided by financing activities 3,681,284 2,631,731 2,533,663
----------- ----------- -----------
</TABLE>
(Continued)
F-5
<PAGE> 38
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
ECOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
Year Ended October 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Effect of foreign exchange rate changes on cash -- -- (1,815)
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents (2,009,437) 184,834 (3,796,098)
Cash and cash equivalents, beginning of year 2,009,437 1,824,603 5,620,701
---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR -- $2,009,437 $ 1,824,603
========== ========== ===========
- -------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $211,226 $171,136 $142,489
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 1999 and 1997, debt totaling approximately $304,810 and $262,000,
respectively, was incurred by the Company for the acquisition of equipment.
In 1999 and 1998, holders of the Company's Series 1998 A convertible
preferred stock converted 19,500 and 500 shares, respectively, of preferred
stock to 1,155,975 and 50,000 shares of common stock. In 1997, holders of
the Company's Series B convertible preferred stock converted 5,834 shares
of preferred stock to 44,030 shares of common stock. Noncash dividends on
preferred shares settled through the issuance of common stock amounted to
$109,298, $116,020 and $1,815 in fiscal 1999, 1998 and 1997, respectively.
In 1999, 1998 and 1997, the Company transferred 5,037, 15,273 and 9,755
shares, respectively, of treasury stock to outstanding shares pursuant to
certain employee benefit plans. Also in 1999, the Company issued 1,738
shares of common stock pursuant to certain employee benefit plans.
In 1999, the Company issued 17,221 shares of common stock pursuant to a
consulting agreement.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 39
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998 and 1997
(1) Basis of Presentation and Summary of Significant Accounting Policies
Organization, business activities and liquidity:
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. In 1998, the Company obtained a two-year working capital
line of credit; such credit facility expires in August 2000 and
approximately 1.6 million is outstanding under that credit facility as
of February 15, 2000. 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 2000 based on reduced spending levels, if necessary.
However, the Company's working capital line of credit will need to be
renewed or refinanced in August 2000. (See note 18 of the notes to the
consolidated financial statements.) The Company continues to evaluate
various programs to raise additional funds, pursue strategic
initiatives and refinance its working capital facility. At this time
the Company is unable to predict whether it will be successful in its
efforts. If the Company is not successful refinancing its working
capital line of credit or in raising additional funding, the Company
would take a number of steps to conserve cash, including reducing
expenditures.
Effective November 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes new rules
for the reporting and display of comprehensive income and its
components. The adoption of SFAS No. 130 had no impact on the Company's
results of operations for the fiscal year ended October 31, 1999 and an
immaterial impact for the fiscal years ended October 31, 1998 and 1997.
The net loss is substantially equal to the comprehensive loss for the
periods.
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.
F-7
<PAGE> 40
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Basis of Presentation and Summary of Significant Accounting Policies, cont.
Temporary investments:
At October 31, 1999, the Company held no temporary investments.
Temporary investments had consisted of certificates of deposit, U.S.
Government obligations and corporate debt securities with original
maturities greater than three months. The Company's temporary
investments were available for sale to fund operations. Securities for
which there is not the positive intent and ability to hold to maturity
were 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. Unrealized holding gains and losses on securities
classified as available for sale are carried as a separate component of
stockholders' equity. Pursuant to SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," a $3,912 unrealized holding
gain had been recorded in a separate component of stockholders' equity
as of October 31, 1998.
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.
F-8
<PAGE> 41
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Basis of Presentation and Summary of Significant Accounting Policies, cont.
Revenues from product sales are recognized upon shipment and passage of
title to the customer.
Concentration of credit risk:
The Company's product sales are made primarily to distributors of
agricultural products. 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.
Other assets:
Other long-term assets include prepaid royalties that are charged to
expense in relation to sales.
Net loss per common share:
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, 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.
Reclassification:
Certain amounts contained in the 1998 and 1997 consolidated financial
statements have been reclassified to conform to the 1999 presentation.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-9
<PAGE> 42
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Basis of Presentation and Summary of Significant Accounting Policies, cont.
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).
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, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials and packaging supplies $ 530,739 $ 526,914
Work in process 588,889 827,573
Finished goods 4,238,389 2,943,887
--------- ---------
$5,358,017 $4,298,374
========== ==========
</TABLE>
(3) Plant and Equipment
Plant and equipment consist of the following components as of October
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Manufacturing and laboratory equipment $3,524,898 $4,468,802
Office furniture and sales equipment 810,103 785,128
Leasehold improvements 2,949,089 3,161,850
--------- ---------
7,284,090 8,415,780
Less accumulated depreciation and amortization (4,909,628) (5,644,525)
----------- -----------
$2,374,462 $ 2,771,255
========== ===========
</TABLE>
Included in plant and equipment is $108,000 of capitalized interest as
of October 31, 1999 and 1998.
(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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current portion of capital lease obligations $ 360,851 $ 402,886
Dividends 362,339 115,900
Payroll costs 104,637 100,342
Other 825,110 604,077
--------- ------------
$1,652,937 $1,223,205
========== ==========
</TABLE>
F-10
<PAGE> 43
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 expires in August 2000 (subject to
earlier termination on certain events of default), bears interest at
prime plus 1.25% (prime + 3.25 % on certain events of default) and is
fully collateralized by the Company's assets other than certain of its
intellectual property rights. The lending formula is based on eligible
receivables and finished goods inventory. At October 31, 1999, the
balance outstanding under the line was $2.2 million. The loan agreement
contains certain financial covenants and has certain restrictions on
the Company's ability to pay dividends on its common stock. At January
31, 2000, the Company was not in compliance with such covenants;
however, such noncompliance has been waived by the lender.
(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 $304,000,
$325,000 and $574,000 for fiscal 1999, 1998 and 1997, respectively.
Minimum lease payments under noncancelable long-term leases for the
years subsequent to October 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
2000 379,631 255,876
2001 213,779 236,743
2002 48,376 220,903
2003 -- 206,662
2004 -- 84,680
-------- ----------
Total minimum lease payments $641,037 $1,004,864
Less: Interest and fees 30,749 ==========
--------
Present value of net minimum
lease payments. 611,037
Less: Current portion of capital
lease obligations (included in
accounts payable and accrued
expenses) 360,851
--------
Long-term capital obligations
(included in long-term debt) $250,186
========
</TABLE>
F-11
<PAGE> 44
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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, expired
in January 1999, for the further development of the Company's Bt gene
library for a minimum of $10.0 million. Under this agreement, the
Company recognized as research contract revenue approximately $.5, $5.0
million and $2.9 million in fiscal 1999, 1998 and 1997, respectively.
During fiscal 1997 and 1998, Monsanto advanced a total of $1.2 million
of commercialization success fees. These payments, plus related
interest, are 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. 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
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.
During fiscal 1999, the Company issued 1,155,975 shares of its common
stock in exchange for 19,500 shares of the Company's Series 1998A
convertible preferred stock. The Company also issued 63,506 shares of its
common stock in payment of cumulative dividends at the time of
conversion.
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
F-12
<PAGE> 45
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Preferred Stock, cont.
Series 1998 C Convertible Preferred Stock, cont.: 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.
Series 1999 A Convertible Preferred Stock:
In May 1999, the Company sold 15,000 shares of Series 1999A 7%
convertible preferred stock, stated value $100 per share, to an
institutional investor for net proceeds of $1.4 million. The holder of
the preferred stock was issued five-year warrants to purchase 120,000
shares of common stock at $3.98 per share. Dividends are payable
semi-annually 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 $3.69 per share or 95%
of the average market price, as defined in the agreement, over a
twenty-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 warrants and the convertible
preferred stock Included in the fee paid to the placement agent in
connection with the transaction were 20,000 shares of the Company's
common stock. In accordance with the terms of the Series 1999A
preferred stock the Company is required to recognize an assumed
incremental yield of $.8 million (calculated at the date of issuance
based on the conversion formula in the agreement). Such amounts are
being amortized as preferred stock dividends over a seven-month period
beginning with the date of issuance. Subsequent to October 31, 1999,
the holder of the preferred converted 5,500 shares of preferred stock
into 498,747 shares of the Company's common stock.
F-13
<PAGE> 46
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Common Stock
In July 1999, the Company sold 500,000 shares of common stock to an
institutional investor in a private placement for $3.09 per share for
net proceeds of $1.5 million.
Certain shareholders have been granted demand and piggyback
registration rights with respect to its shares, and have the right of
first refusal to purchase securities of the Company so as to maintain
its ownership percentage in the Company.
(10) Warrants and Other Options
As of October 31, 1999, 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>
Shares of Price Range Per Expiration
Common Stock Share/Unit Dates
------------ ---------- -----
<S> <C> <C> <C>
Warrants 377,877 $3.53 - 7.31 2000 - 2004
Other Options 51,244 $11.70 - 63.00 2001 - 2003
</TABLE>
Subsequent to October 31, 1999, the Company issued 200,000 five-year
warrants priced at $1.25 in connection with a guarantee of a loan
agreement. (See note 18 of notes to consolidated financial statements.)
The estimated value of such warrants, $183,556, will be capitalized and
amortized as additional interest expense over the term of the loan.
(11) Stock Option Plan and Other Matters
During 1999 the Company's stockholders approved the 1999 stock option
plan ("1999 Option Plan") under which 1,500,000 shares of common stock
may be issued. The Option Plan permits the granting of both incentive
stock options and non-statutory stock options. The option price of the
shares for incentive stock options may not be less than the fair market
value of such stock at the grant date as determined under the 1999
Option Plan. Options are exercisable over a period determined by the
Board of Directors, but not longer than ten years after grant date.
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. Upon the
approval of the 1999 Option Plan, 825,000 options available for grant
under the 1998 Stock Option Plan were cancelled.
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
F-14
<PAGE> 47
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stock Option Plan and Other Matters, cont.
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Loss Available to Common Stockholders:
As Reported ($9,753,451) ($3,113,126) ($9,811,907)
Pro Forma ($10,088,417) ($3,268,710) ($9,994,255)
Basic and Diluted Net Loss Per Common Share:
As Reported ($1.05) ($.39) ($1.23)
Pro Forma ($1.09) ($.41) ($1.26)
</TABLE>
The resulting compensation expense may not be representative of
compensation expense to be incurred on a pro forma basis in future
years.
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 1999, 1998 and 1997 were $1.51, $.73 and $2.04, respectively.
The following weighted-average assumptions were used for grants in
fiscal 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected Dividend Yield 0% 0% 0%
Expected Volatility 85% 82% 70%
Risk-Free Interest Rate 9.5% 8% 8%
Expected Option Lives (years) 3 3 3
</TABLE>
A summary of the status of the Option Plans as of October 31,1999, 1998 and 1997
and changes during the years then ended are as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Shares Weighted-Average Exercise Price
------ -------------------------------
<S> <C> <C>
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
Granted 968,000 $ 2.50
Exercised 1,738 $ 2.56
Canceled (339,397) $ 2.68
Balance, October 31, 1999 1,777,526 $ 3.16
</TABLE>
F-15
<PAGE> 48
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stock Option Plan and Other Matters, cont.
The following table summarizes information about fixed stock options
outstanding at October 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------- -------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Price at 10/31/99 Contractual Life Exercise Price at 10/31/99 Exercise Price
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.25 - $ 3.25 1,601,326 9.13 years 2.15 391,167 2.10
$ 5.88 - $10.94 174,600 5.03 years 8.69 171,800 8.73
$14.38 - $53.06 1,600 3.67 years 34.45 1,600 34.45
--------- ------
$ 1.25 - $53.06 1,777,526 8.72 years 2.82 564,567 4.21
</TABLE>
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 compensation expense in
connection with the award of $5,208 and $114,583 in fiscal 1999 and
1998, respectively.
(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,
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States:
Unaffiliated customers $ 7,357,231 $16,398,136 $ 11,411,109
Transfers to other
geographic areas -- -- 413,849
----------- ----------- ------------
7,357,231 16,398,136 11,824,958
----------- ----------- ------------
Other:
Unaffiliated customers -- -- 399,979
Eliminations and adjustments -- -- (413,849)
----------- ----------- ------------
Total revenues $ 7,357,231 $16,398,136 $ 11,811,088
----------- =========== ============
</TABLE>
F-16
<PAGE> 49
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Geographic Area and Related Information, cont.
<TABLE>
<CAPTION>
Net loss:
<S> <C> <C> <C>
United States ($ 8,611,271) ($ 2,997,106) ($ 9,188,902)
Other -- -- (528,223)
Eliminations and adjustments -- -- (92,967)
------------ ------------ ------------
Total operating loss ($ 8,611,271) ($ 2,997,106) ($ 9,810,092)
============ ============ ============
Identifiable assets:
United States $ 10,422,208 $ 14,636,437 $ 17,509,332
Other 40,064 40,064 48,720
Eliminations and adjustments -- -- --
------------ ------------ ------------
Total identifiable assets $ 10,462,272 $ 14,676,501 $ 17,558,052
============ ============ ============
</TABLE>
Of the United States revenues from unaffiliated customers included
above, $2,072,352, $3,479,218 and $1,605,247 were export revenues in
fiscal 1999, 1998 and 1997, respectively.
Sales derived from one customer aggregated 22% of total revenues in
fiscal 1999. Sales derived from another customer aggregated 13% of
total revenues in fiscal 1999. Sales derived from another 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% and
25% of total revenues in fiscal 1998 and 1997, 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, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Purchased research, development and
investment in affiliated companies $ 9,667,000 $ 9,667,000
Net operating loss carryforwards 28,325,000 25,463,000
Research experimentation credit
carryforward 2,414,000 2,414,000
Other 1,687,000 1,638,000
------------ ------------
Total gross deferred tax assets 42,093,000 39,182,000
Less valuation allowance 41,849,000 38,935,000
------------ ------------
Net deferred tax assets 244,000 247,000
------------ ------------
Deferred tax liabilities:
Furniture, equipment, and leasehold
improvements, principally due to
differences in depreciations (244,000) (247,000)
------------ ------------
Total gross deferred tax
liabilities (244,000) (247,000)
------------ ------------
Net deferred taxes $ -- $ --
============ ============
</TABLE>
The net change in the total valuation allowance for fiscal 1999 and
1998 was an increase
F-17
<PAGE> 50
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.:
of approximately $3,022,000 and $1,211,000, respectively.
At October 31, 1999, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $83.3 million,
expiring from 2000 through 2014, 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, expiring from 2000, which are
available to reduce future Federal income taxes, if any, expiring from
2000 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 1999, the Company recorded an
addition to the reserve for inventory obsolescence and rework of
$400,000.
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 shutdown 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% 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 $115,000,
$132,000 and $161,000 to the 401(k) Plan in fiscal 1999, 1998 and 1997,
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 $156,000, $187,000 and $51,000 to this law
firm during fiscal 1999, 1998 and 1997, 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 dividends of approximately
$261,000 during fiscal 1999 and interest and dividends of approximately
$249,000 during fiscal 1998 to this investment firm. During fiscal
1997, the Company also recorded interest of approximately $38,000 to
this investment firm.
F-18
<PAGE> 51
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.
(18) Subsequent Events
Preferred Stock:
Series 2000-A Convertible Preferred Stock:
On February 14, 2000, the Company sold 15,000 shares of Series 2000-A
7% convertible preferred stock, stated value $100 per share, to
institutional investors for net proceeds of $1.4 million. The holders
of the preferred stock were issued five-year warrants to purchase
200,000 shares of common stock at $2.66 per share. Dividends are
payable quarterly 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
holders, the preferred stock may be converted at various dates to
shares of the Company's common stock at the lesser of $2.73 per share
or 95% of the average market price, as defined in the agreement, over a
twenty-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
F-19
<PAGE> 52
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(18) Subsequent Events, cont.
Preferred Stock, cont.:
Series 2000-A Convertible Preferred Stock, cont.: 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 holders of
the preferred stock has certain registration rights with respect to the
shares of common stock underlying the warrants and the convertible
preferred stock. Included in the fee paid to the placement agent in
connection with the transaction were 20,000 shares of the Company's
common stock. In accordance with the terms of the Series 2000-A
preferred stock the Company is required to recognize an assumed
incremental yield of $592,496 (calculated at the date of issuance based
on the conversion formula in the agreement). Such amounts will be
amortized as preferred stock dividends over a seven-month period
beginning with the date of issuance.
Loan Agreement:
On December 24, 1999, the Company obtained a secured loan for
$1,500,000 with a financial institution that is controlled by a
principal stockholder of the Company. The loan requires a $500,000
principal payment in June 2000 with the balance due in June 2001. The
loan bears interest at prime plus 2% and is payable monthly. The loan
is collateralized by the Company's assets. The loan is guaranteed by a
corporation controlled by one of the Company's principal shareholders.
In connection with the guarantee, the corporation was issued a
five-year warrant to purchase 200,000 shares of the Company's common
stock at $1.25 per share. Such warrants have a value of $183,556 and
will be recorded as deferred debt expense. This amount will be
amortized as interest expense over the life of the loan.
Acquisition:
On February 15, 2000, the Company completed its acquisition of certain
assets of the sprayable Bt bioinsecticide business of Mycogen
Corporation, an affiliate of Dow AgroSciences LLP. The Company issued
1,351,351 shares of the Company's common stock valued at $3,000,000
upon the closing of the transaction. Prior to the closing, the Company
acquired approximately $391.000 of Mycogen's inventory of sprayable Bt
products, under a distribution agreement effective January 1, 2000.
Under the terms of the agreement, Mycogen has agreed to hold the shares
for a three-year period, except in the event of certain change in
control transactions. Mycogen was granted certain demand and piggyback
registration rights with respect to the shares. In addition, Mycogen
has the right of first refusal to purchase securities of the Company so
as to maintain its ownership percentage in the Company and market price
protection at the time that they sell the shares. The Company and Dow
AgroSciences LLC also entered into a five- year supply agreement and
the companies have agreed to enter into distribution agreements
granting exclusive rights to Dow AgroSciences to sell the acquired
products in Mexico, New Zealand and Australia.
The transaction will be accounted for as a purchase and, accordingly,
the total purchase price for the assets of $3,400,000 will be allocated
based upon their fair value at the date of acquisition. The assets
acquired include inventory and intangible assets including a
F-20
<PAGE> 53
ECOGEN INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(18) Subsequent Events, cont.
Acquisition, cont.:
license to certain genes and strains and product registration rights.
The agreement also provides that the Company has no obligation for past
or future royalties under a 1998 settlement agreement with Mycogen on a
patent infringement dispute. Under purchase accounting, part of the
purchase price has been allocated to other assets for the fully paid up
royalty and any amounts previously accrued under the settlement
agreement have been eliminated in purchase accounting.
The unaudited pro forma balance sheet at October 31,1999 has been
adjusted as follows for the allocation of the purchase price from the
Mycogen acquisition:
<TABLE>
<CAPTION>
Debit (Credit)
--------------
<S> <C>
Cash (345,000)
Inventory 991,000
Other assets 565,000
Accrued liabilities 64,000
Intangible assets 1,766,000
Common stock and additional paid in capital (3,041,000)
</TABLE>
The allocation of the purchase price is subject to adjustment based on
the final determination of fair value at the date of acquisition.
(19) Unaudited Pro Forma Consolidated Balance Sheet:
The unaudited pro forma consolidated balance sheet presented is based
upon the Company's historical consolidated balance sheet at October 31,
1999 after giving effect to (i) the $1,397,000 net proceeds from the
sale of the Series 2000-A convertible preferred stock, (ii) the
proceeds from the $1,500,000 secured loan and related warrants, and
(iii) the acquisition of Mycogen Corporation's sprayable Bt product
line as described in note 18 of the notes to the consolidated financial
statements.
F-21
<PAGE> 54
Schedule II
ECOGEN INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<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>
1999:
Allowance for doubtful accounts $ 80,000 $ 92,928 $ $ 43,905 $ 129,023
Reserve for inventory obsolescence 401,371 900,000 600,967 700,404
========== ======== ============ ========== ==========
1998:
Allowance for doubtful accounts $ 77,769 $115,872 $ -- $ 113,641 $ 80,000
Reserve for inventory obsolescence 1,006,426 500,000 -- 1,105,055 401,371
========== ======== ============ ========== ==========
1997:
Allowance for doubtful accounts $ 42,769 $ 35,000 $ -- $ -- $ 77,769
Reserve for inventory obsolescence 675,894 500,000 -- 169,468 1,006,426
========== ======== ============ ========== ==========
</TABLE>
F-22
<PAGE> 55
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: February 15, 2000
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 February 15, 2000.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James P. Reilly, Jr. Chairman, Chief Executive Officer February 15, 2000
- ------------------------ and Director (Principal Executive
James P. Reilly, Jr. Officer)
/s/ Mary E. Paetzold Vice President, Chief Financial February 15, 2000
- -------------------- Officer and Treasurer (Principal
Mary E. Paetzold Financial and Accounting Officer)
/s/ Esteban A. Ferrer Director February 15, 2000
- ---------------------
Esteban A. Ferrer, Esquire
/s/ Philippe D. Katz Director February 15, 2000
- --------------------
Philippe D. Katz
/s/ Lowell N. Lewis Director February 15, 2000
- -------------------
Lowell N. Lewis
/s/ John R. Sutley Director February 15, 2000
- ------------------
John R. Sutley
</TABLE>
