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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 0-19746
ECOSCIENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2912632
(State of incorporation) (I.R.S. Employer Identification No.)
10 ALVIN COURT 08816
EAST BRUNSWICK, NEW JERSEY (Zip Code)
(Address of principal executive offices)
732-432-8200
(Registrant's telephone number, including area code).
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No_____
Indicate 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 the 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 [ ].
As of September 29, 1997, there were outstanding 10,401,177 shares of Common
Stock, $.01 par value per share. The aggregate market value of shares of
Common Stock held by non-affiliates of the registrant, based upon the last
sales price for such stock on that date as reported by NASDAQ, was
approximately $9,861,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 1997 Special Meeting in
lieu of the Annual Meeting of Stockholders to be held on November 25, 1997
are incorporated by reference into Part III.
Number of Pages: 60 Exhibit Index on Page: : 57
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PART I
Item 1. Business
General
EcoScience Corporation ("EcoScience") is a marketing, sales and product
development company, servicing the needs of the agricultural specialties
markets and professional pest control operators ("PCOs"). The Company
provides (i) sophisticated growing systems to greenhouse operators, (ii)
technologically advanced sorting, grading and packing systems to produce
packers, (iii) equipment, coatings and disease control products, including
natural biologicals for protecting fruits, vegetables and ornamentals in
storage and transit to market, and (iv) a unique biological pest control
product to PCOs. The Company focuses on the technical marketing of
agricultural specialties products and services, and the development of
biological pest control products.
The Company serves the specialty agriculture market through its three
subsidiaries: Agro Dynamics, Inc. and Agro Dynamics Canada Inc.
(collectively, "AGRO") and EcoScience Produce Systems Corp. ("EPSC") which
are hereinafter referred to collectively with EcoScience as the "Company."
EcoScience was incorporated under the laws of the State of Florida on August
27, 1982, and was reincorporated in the State of Delaware on June 29, 1988.
On November 18, 1992, EcoScience acquired all of the outstanding capital
stock of AGRO, an East Brunswick, New Jersey based company that engineers,
designs, markets and distributes advanced technologies, products, growing
systems and services for the North American intensive farming, horticulture
and produce packing industries. On May 24, 1994, the Company acquired
certain assets and liabilities of American Machinery Corporation ("AMC"), an
Orlando, Florida based business that provided postharvest coating products
and services to the fresh fruit and vegetable markets throughout the United
States, the Caribbean, Central America and South America. Concurrent with
the acquisition of AMC, the Company formed EPSC to combine the AMC product
line and operating unit with the Company's existing activities in those
markets. EcoScience sells to PCO's through a marketing collaboration with
Terminix International Company L.P. ("Terminix"). Additionally, EcoScience
has initiated an extensive testing, development and marketing program with
Maruwa Biochemical Co., Ltd. ("Maruwa Biochemical") and Shinto Paint Co.,
Ltd., for biological products in Japan. See "Collaborative Agreements."
The Company's primary products are (i) advanced growing systems based on
Stonewool-Registered Trademark-, manufactured by Grodania A/S, (ii)
sophisticated sorting, grading and packing systems manufactured by Aweta,
B.V., (iii) computerized environmental and irrigation control systems
manufactured by H. Hoogendorn Automation B.V., (iv) PacRite-Registered
Trademark- and Indian River Gold-TM- coatings manufactured by EPSC, (v)
Bio-Save-TM- PostHarvest BioProtectant line of products and (vi)
Bio-Blast-TM- Biological Termiticide manufactured by EcoScience. In
addition, the Company distributes a broad array of specialty products used in
greenhouses and in fruit, vegetable and ornamental packing.
The Company operates from its headquarters in East Brunswick, New Jersey,
where it maintains sales, marketing and warehousing operations, and its
Orlando, Florida facility which contains the Company's major coatings and
biologicals production facility. The Company also maintains sales and
customer service offices in Visalia, California; Ventura, California;
Englewood, Colorado; Union Gap, Washington; and Milton, Ontario, Canada.
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The Company's technology encompasses the development and application of
natural microbial pest control agents. The Company's technology enables it
to provide products and technical support for PCOs, growers and packers of
specialty crops. The Company also conducts research on the use of microbial
agents to control plant diseases and insect pests, as well as on new
applications for natural coatings to sustain nutrition and overall quality in
fresh fruits and vegetables.
In fiscal year ended June 30, 1997, the Company (i) expanded marketing of
its Bio-Save line of products for the control of postharvest fruit diseases
in a wide range of commercial applications, (ii) initiated the U.S.
commercial launch of its Bio-Blast Biological Termiticide ("Bio-Blast") and
(iii) began research on a USDA funded Phase-2 Small Business Innovation
Research ("SBIR") program on the prevention of postharvest diseases of
bananas, which will continue through fiscal years 1998 and 1999. In
addition, the Company expects to conduct tests to extend the range of
performance and applicability for both its Bio-Save line of products and for
its Bio-Blast insect control product.
Products
The Company's focus is on development and commercialization of products
for the following major markets: (i) specialty agriculture; (ii) postharvest
packing of fruits and vegetables; and (iii) biological pest control for the
professional pest control operator.
Specialty Agriculture
The Company, through AGRO, engineers, designs, markets and distributes
commercial products and provides services to the greenhouse and nursery
market in the United States, Canada and Mexico.
Commercial Products
Growing Systems. The Company is the exclusive distributor in the United
States and Canada of the Grodan brand of stonewool, an inert growing medium
supplied by Grodania A/S, a Denmark based wholly owned subsidiary of Rockwool
International A/S. Stonewool is made by melting rock, processing it to a
fibrous material which can be flocculent or formed into solid structures. It
is both solid and porous and designed to support the hydroponic growth of
high value crops and to improve plant root distribution and plant yields
through more efficient use of oxygen, water and fertilizer. Stonewool is
used worldwide for cultivation of a variety of plants in controlled growing
environments such as greenhouses. The distribution agreement expires on
December 31, 1997; however, the Company is actively negotiating a new
agreement with Grodania A/S. The sale of products under the distribution
agreement with Grodania A/S accounted for 42%, 45% and 43% of the Company's
total product sales in fiscal 1997, 1996 and 1995, respectively. The Company
believes that revenues under this distribution agreement will account for
more than 10% of the Company's consolidated product sales in fiscal 1998.
Automated Irrigation and Environmental Control Systems. The Company
through its ISYS-TM- Division engineers, designs, fabricates, assembles and
distributes greenhouse irrigation and fertilization systems, computerized
environmental control systems and application products. In addition, to these
products and systems, the Company provides customers with technical support,
product service, turnkey installation, product marketing and other
supplementary services. The Company is the exclusive distributor in the
United States, Canada and Mexico of computerized environmental control
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systems and accessories produced by H. Hoogendoorn Automation B.V, a
Netherlands based company. The Company also distributes various accessories
and other product lines for use in the intensive farming and horticulture
industries in the North American market on both an exclusive and
non-exclusive basis.
Postharvest Industry
The fruit and vegetable production industry requires specialized
services, equipment and products for the harvesting, processing and storage
of produce.
Through AGRO and EPSC, the Company provides equipment, coatings and
disease control products to the fruit, vegetable and ornamental packing
markets.
Commercial Products
Sorting, Grading and Packing. Once harvested, produce must be sorted,
graded and packaged for shipment and storage. The Company is the exclusive
distributor in the United States, Canada, Mexico and the Caribbean of
computerized color, weight and size sorting, grading and packing automated
systems and ancillary equipment produced by Aweta, B.V., a Netherlands based
company. The sale of products under the distribution agreement with Aweta,
B.V. accounted for 26% and 20% of the Company's total product sales in fiscal
1997 and 1996, respectively. The Company believes that revenues under this
distribution agreement will account for more than 10% of the Company's
consolidated product sales in fiscal 1998.
Traditional Coating Products. Prior to shipping or storage, fruits and
vegetables are typically treated with a variety of processing and storage
aids. These are designed to enhance the appearance and preserve the quality
of stored produce. The Company manufactures, markets and provides a broad
spectrum of postharvest coating and cleaning products and services. Its
traditional protective coating and storage products include Indian River
Gold, PacRite, SEALBRITE-Registered Trademark- and DURA-FRESH-Registered
Trademark-. These products were originally acquired in May 1994 with the
asset purchase of AMC. These traditional coating products are conventional
shellac and carnauba based coatings which have been used successfully in the
citrus and pome fruit markets. These traditional coating products, together
with the Company's Bio-Save coating products, maintain the quality and extend
the shelf life of produce by (i) providing a barrier to free gas exchange,
(ii) providing a barrier against abrasion, scuffing, bruising and other
injuries, (iii) providing a carrier for decay preventing agents, (iv)
providing a glossy appearance that is aesthetically appealing to consumers,
(v) reducing shrinkage caused by water loss and (vi) maintaining firmness of
the fruit or vegetable. The Company's traditional coating products contain
materials that are U.S. Food and Drug Administration ("FDA") approved
additives or have been listed by the FDA as "Generally Recognized As Safe"
("GRAS") and accordingly, these coatings do not require FDA approval or
registration. PacRite, SEALBRITE, and Indian River Gold currently are sold
by the Company in the United States, the Caribbean, Central America and South
America.
Bio-Save PostHarvest BioProtectant. The Bio-Save line of biological
disease inhibitors are sold through EPSC to the pear, apple and citrus
markets. Postharvest diseases and damage during storage and shipment can
account for losses ranging from 10% to 25% of total annual production of
fruits and vegetables, depending on the crop and climate. The Company has
developed and registered for sale biological products using the EPA natural
Pseudomonas syringae microorganisms, which can control the development of
Blue Mold (Penicillium expansum), Gray Mold (Botrytis cinerea) and Mucor Rot
(Mucor pyriformis) on apples and pears, and Blue Mold (P. italium), Green
Mold (P.
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digitatum) and Sour Rot (Geotrichum candidum) on citrus fruit. The Company
has conducted successful field trials over the last five years utilizing
selected microbial disease inhibiting agents in the U.S. in Florida,
California, Oregon, West Virginia, Massachusetts, Michigan and Washington;
and Chile. The Company initiated commercial product launch of its Bio-Save
products in fiscal 1997 and plans for wider product marketing and development
in fiscal 1998. In 1997, the Company received EPA registration for the use
of Bio-Save on cherries and continues to investigate the application of
Bio-Save to control other postharvest diseases on fruits and vegetables, such
as on potatoes.
Biological Insect Control
In the biological insect control market, the Company, with
collaborative partners, has been focused on developing and selling cost
effective bioinsecticide alternatives to synthetic chemical insecticides for
use in specific applications, including sensitive use environments such as
homes, restaurants, schools and food processing facilities.
Commercial Products
Bio-Blast Biological Termiticide. The Company, together with its
collaborator, Terminix, has developed a natural fungal product to control
termites, the Bio-Blast Biological Termiticide. See "Collaborative
Arrangements." This product contains a fungus selected for its ability to
infect and kill termites, which has been formulated for application utilizing
conventional equipment in a termite infested structure. The product uses
Metarhizium anisopliae, a naturally occurring insect killing fungus. The
product is a dry powder, packaged and portioned for ease of storage and use;
and used as a water suspension. Through commercial trials, the Company has
demonstrated that Bio-Blast is an effective method for the control of termite
infestations. The Company has demonstrated that termites exposed to the
fungus in the product can spread the fungus by contact to nest mates that
have not directly contacted the fungal agent, thereby infecting and killing
other termites through the Horizontal Transfer-Registered Trademark- effect.
The Company received EPA product registration for the termiticide in October
1994, and subsequently received approval for registration from 47 states. In
fiscal 1996, the Company made its initial sales to both Terminix and Maruwa
Biochemical. In fiscal 1997, the Company initiated the U.S. commercial
launch of Bio-Blast in collaboration with Terminix.
Sales and Distribution
Specialty Agriculture Products. The Company sells directly into this
market through AGRO. AGRO has a force of 36 people involved in sales,
marketing and distribution, engineering and design, and system installation
and service at its distribution and service centers in East Brunswick, New
Jersey; Milton, Ontario, Canada; and Ventura, California, and in its
sales/service office in Englewood, Colorado.
Postharvest Packing. The Company uses its AGRO and EPSC direct sales
operations to market and sell its packing equipment, and its traditional
coatings and Bio-Save BioProtectants to fruit and vegetable growers, packers
and processors in the United States, the Caribbean, Central America and South
America. EPSC has a sales and technical support services force of nine
people located in its distribution and service centers in Orlando, Florida
and Visalia, California. AGRO has a force of nine people involved in sales
and marketing, engineering and design, and system installation and service in
this market at its sales and service centers in Union Gap, Washington; East
Brunswick, New Jersey and Englewood, Colorado.
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Biological Pest Control. In June 1992, the Company entered into a
product development and license agreement with Terminix for collaboration on
the development and marketing of termite control products in the United
States and Canada. See "Collaborative Agreements." In fiscal 1996, the
Company initiated sales to Terminix for its Bio-Blast termiticide product and
in fiscal 1997 initiated the U.S. commercial launch of the product in
collaboration with Terminix.
International Sales. The Company expects to market products
internationally primarily through local and regional distributors and
partners. The Company has a development and distribution agreement with
Maruwa Biochemical for distribution of its Bio-Path-Registered Trademark-
Cockroach Control Chamber and Bio-Blast Biological Termiticide in Japan upon
registration there. See "Collaborative Agreements."
Financial information segregated by major geographic area (United States
and Canada) is set forth in Note 10 to the Company's Consolidated Financial
Statements, incorporated herewith.
Manufacturing
The Company has established supply arrangements for the manufacture of
fungal conidia, the active ingredient in the Bio-Blast product. Upon receipt
of the raw active ingredient, the Company processes, formulates and packages
this material to produce the Bio-Blast product in its Orlando, Florida
manufacturing facility.
Traditional coating products are manufactured at the EPSC facility in
Orlando, Florida. Production of the Company's postharvest fruit disease
control products, Bio-Save, requires large-scale fermentation and formulation
capacity. Currently, a single sub-contractor manufactures the Bio-Save
products for the Company. However, the Company believes other entities would
be capable of manufacturing these products. Although, to date, the Company
has been able to acquire a sufficient supply of the Bio-Save product for its
commercial sales; the inability of the sub-contractor to meet the Company's
needs for the Bio-Save products or a change in supplier could cause a delay
in filling orders, as well as a possible loss of sales, which would affect
operating results adversely.
Collaborative Agreements
Maruwa Biochemical Co., Ltd. In June 1993, the Company entered into a
Development and Distribution Agreement with Maruwa Biochemical (the "Maruwa
Agreement") to commercialize the Company's Bio-Path Cockroach Control Chamber
in Japan. In addition, the Company has shipped product to and is working with
Maruwa on commercialization of its Bio-Blast product in Japan. Under the
Maruwa Agreement, Maruwa Biochemical will pursue at its own expense the
registration and commercialization of the Company's cockroach and termite
control products in Japan, including the initiation of field trials and, if
required, the commencement of toxicology studies. At this time emphasis has
shifted to the Bio-Blast product and the Company anticipates entering into a
formal agreement with Maruwa for the Bio-Blast product. Following receipt of
all required approvals, Maruwa Biochemical is obligated to distribute certain
products supplied by the Company and sold to Maruwa Biochemical at prices to
be determined by agreement.
The Terminix International Company, L.P. In June 1992, the Company
entered into a Product Development and License Agreement with Terminix (the
"Terminix Agreement") for collaboration on the development and marketing of
termite control products. Under the Terminix Agreement, Terminix provided
funding to the Company for the development of biological termite control
products and received exclusive rights to use and distribute any resulting
products in the United States and Canada.
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The Company has retained all rights elsewhere. The Company manufactures and
sells products to Terminix at an agreed markup over the Company's
manufacturing cost. The Company will share in any profit realized by Terminix
over specified levels. The Terminix Agreement extends until expiration of
the last to expire of any patents which may issue covering the Company's
biological termite control technology, subject to Terminix's right to
terminate the agreement at any time. The Company received EPA product
registration for the termite control product in October 1994, and
subsequently received approval for registration from 47 states. In October
1996, the Company and Terminix initiated the U.S. commercial launch of
Bio-Blast.
Technology
The Company's technology has application in three broad areas: (i) the
development of natural microbial biological pesticides; (ii) the development
of fresh fruit and vegetable coatings; and (iii) providing assistance and
advice to customers on technical production methods for high value and
specialty crops and ornamentals, and the proper handling and packing of
produce after harvest.
Microbial Pest Control
Microbial pesticide products are based on microorganisms isolated from
the environment, formulated and delivered to a target pest so that they kill
the pest or control or inhibit its proliferation on the target. The
microorganisms form the foundation of the biological pest control products,
are packaged alive and perform their function through proliferation in the
pest environment. Much of the formulation and delivery technology developed
for synthetic chemical pesticides or microbial products is inappropriate for
microbial products which employ and preserve living organisms. EcoScience
microbial technology uses live microorganisms which either attack and kill a
target pest (e.g. Bio-Blast) or through natural growth inhibit the ability of
a target pest to proliferate (e.g. Bio-Save).
The following list describes the Company's proprietary microbial pest
control technologies including methods to (i) identify and isolate active
microbial agents, (ii) manufacture commercial quantities of those microbial
agents, (iii) formulate and package them as products with commercially
acceptable stability and shelf life and (iv) deliver them to the target pest.
See "Patents and Trade Secrets."
Identification of Active Ingredients. The Company has developed
proprietary assays for the screening and identification of microbial
agents which are effective in the prevention of certain plant diseases or
which are lethal to certain pests. The Company has been awarded a patent
for the use of a microbial agent identified through these proprietary
assays and may file additional patent applications.
Development of Manufacturing Methods. The Company has access to or has
developed a variety of proprietary methods for growing, processing and
harvesting microbial agents which it believes can be used to produce
commercial quantities of active ingredients for the Company's products.
Development of Formulation Systems. The Company has access to or has
developed proprietary processing systems to stabilize and extend the
shelf life of fungal and bacterial agents and ensure their stability,
longevity and activity in use. These systems lead to formulations which
allow living fungi and bacteria to remain viable in dry, aqueous or oil
based formulations until use. This technology is the basis for the
Bio-Save and Bio-Blast products. EcoScience has been awarded
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U.S. patents which cover certain of its advances in this area.
Additionally, it serves as the basis for the contract formulation
business EcoScience is developing.
Development of Delivery Systems. The Company has developed proprietary
delivery systems including insect infection chambers, sprays, dusts and
gels, optimizing performance of microbial agents by facilitating accurate
delivery of concentrated doses. EcoScience has been awarded U.S. patents
which cover certain of its advances in this area.
Development of Packaging Systems. The Company believes to be
commercially successful, biopesticide products must remain viable in
conventional distribution channels and have a minimum shelf life of 18 to
24 months. The Company has developed and patented certain proprietary
packaging systems to extend the shelf life of microbial agents during
storage and transportation for such a shelf life period.
Fresh Fruit and Vegetable Coatings
The Company's coating technology utilizes FDA food grade and/or GRAS
listed products to protect fruits and vegetables after harvest, and during
storage and transit to market. The technology focuses on controlling
respiration (oxygen transport) and water loss of fruits and vegetables.
Restricting respiration and reducing water loss ensures delivery of fresher
products to the consumer. The key to the Company's approach is to design the
appropriate coating for each type of produce. Different types of produce
respond differently to respiration and water loss, and therefore different
coatings are required for different classes of produce. In May 1994, the
Company acquired a line of traditional coating products which utilize
conventional shellac and carnauba as their main ingredients that have been
used successfully in the citrus and pome fruit markets. The Company's
coating products provide a protective preservative film on fruits and
vegetables to maintain quality and enhance overall appearance.
Technical Advice and Service
The Company, as an adjunct to its sales and service efforts, advises its
customers on improved technical growing methods and systems, and packing
techniques and systems. To successfully service our customers requires
knowledge of the customers' challenges and problems, and technical solutions
available to solve those problems. Customers frequently depend on the
Company for such service and advice.
Research and Development
The Company's technology has applicability to a variety of potential
products and product systems. These include various insect spray and chamber
products, plant and root fungal disease control systems, and preharvest and
postharvest coatings and disease control systems which are currently in
varying stages of development. As part of the Company's prior restructuring
program, and current cost control programs, certain research and product
development programs and the funding thereof have been suspended, curtailed
or deferred. Future development and funding of these and other select
research and product development programs will depend on a number of factors,
including market conditions, availability of financial, technical and other
resources, technological advancements, manufacturing capabilities, commercial
viability potential of resultant end products, governmental regulations, and
other relevant matters which may confront the Company in the future.
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The Company's operating costs and expenses to date have related to a
large extent to the research and development of products and product systems
for future commercialization. Expenses incurred by the Company under third
party funded research and development programs totaled approximately $7,000,
$0 and $155,000 in fiscal 1997, 1996 and 1995, respectively. Expenses
incurred under Company funded research and development programs totaled
approximately $501,000, $1,018,000 and $4,328,000 in fiscal 1997, 1996 and
1995, respectively.
Technology Licensing
United States Department of Agriculture ("USDA"). The Company has an
agreement with the USDA granting the Company exclusive rights to the use of a
microbial strain developed at the USDA for the control of postharvest
diseases of pome fruits. This organism is the basis for one of the Bio-Save
products and is the subject of a pending U.S. patent application by the USDA.
The license agreement provides for a royalty to the USDA based on sales by
the Company of products incorporating the licensed microbial strain. The
Company has also licensed the worldwide rights to develop and commercialize
additional biological disease control organisms recently patented by the
USDA. The organisms are naturally occurring yeasts which effectively control
the development of blue mold (Penicillium expansum), gray mold (Botrytis
cinerea) and Mucor rot on apples and pears.
J.R. Brooks & Son, Inc. and Seald-Sweet Growers, Inc. In June 1993, the
Company acquired from J.R. Brooks & Son, Inc. ("J.R. Brooks") and Seald-Sweet
Growers, Inc. ("Seald-Sweet") an exclusive, worldwide sub-license to use the
technology underlying the Nature Seal coatings, the rights to which J.R.
Brooks and Seald-Sweet licensed from the USDA, subject to the rights of the
USDA to use the technology on a royalty free, non-exclusive basis for
governmental purposes only. Under its sub-license with J.R. Brooks and
Seald-Sweet, the Company agreed to pay a royalty or, in certain
circumstances, a percentage of profits on sales of products incorporating the
Nature Seal technology and certain minimum annual licensing fees payable to
the USDA. While the sub-license agreement extends until expiration of the
last to expire patents covering the Nature Seal technology, the Company has
elected to no longer pursue this technology.
Competition
The Company faces substantial competition from a few large companies and
several smaller companies in the sale of certain products and growing systems
to greenhouses and nurseries in North America. The Company believes that its
range of products and services, and product quality, will allow it to compete
effectively in North America.
Competition in the fruit and vegetable coatings market is also intense.
Fruit and vegetable coating products are developed and marketed primarily by
several large companies which offer a full range of products. In addition,
several smaller companies offer a limited range of fruit and vegetable
coating products. The Company believes that it can compete effectively in
this market with its Bio-Save PostHarvest BioProtectant and other traditional
coating products based on the cost effectiveness and the quality of its
coating formulations and services.
In the pesticide industry, the Company competes with large manufacturers
of synthetic chemical pesticides and established biopesticide companies. The
pesticide industry is dominated by large chemical companies located in the
United States, Japan and Europe. These companies have substantial financial
and technical resources, extensive sales and distribution capabilities,
varied product registration experience and the ability to manufacture
products efficiently. The Company
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believes that its commercial success in the pesticide market will depend upon
the continuing development of cost effective products which compete with
synthetic chemical pesticides on the basis of effectiveness, safety and
ecological benefit, as well as establishment of strong sales and distribution
networks for the Company's products.
Government Regulation and Product Registration
In most countries throughout the world, governmental authorities require
registration of pesticides before sales are allowed. In the United States,
the EPA regulates pesticides under the Federal Insecticide, Fungicide and
Rodenticide Act ("FIFRA"). Pesticides are also regulated by the individual
states. Some states, such as California, Florida and New York, have their own
extensive registration requirements. In order to market products outside the
United States, the Company must receive regulatory approval from the
authorities of each applicable jurisdiction. In addition, the FDA
administers the Federal Food, Drug and Cosmetic Act ("FFDCA") and establishes
standards for pesticide residues in food to protect public health.
Detailed and complex procedures must be followed in order to obtain
approvals under FIFRA to develop and commercialize a pesticide product. A
registration application must be submitted to the EPA for each product and
must list each pest for which the product will be used. Evaluation data for
registration includes, but may not be limited to, non-target organism
testing, environmental data, product analysis and residue studies, product
performance, and toxicology (hazards to human beings and domestic animals).
The EPA has established specific testing requirements for the
registration of microbial pesticides, which are set out in Subdivision M of
the EPA's Pesticide Assessment Guidelines. Chemical pesticides are currently
subject to a three tier toxicology testing procedure, and a four tier
environmental evaluation process. A microbial pesticide product which
satisfactorily completes both the toxicology Tier 1 tests and environmental
evaluation is not required to go through the increasingly difficult testing
requirements of subsequent tiers. Additional tests may be required, however,
in response to any questions which may arise during Tier 1 testing. The
Company's product development cycle typically anticipates two to three years
of field evaluation and up to two years for product registration, which can
run concurrently with the last year of field trials.
In October 1994, the Company received EPA registration for its Bio-Blast
termiticide. The Company subsequently received registration from 47 states.
In March 1995, the Company received EPA registration for Bio-Save 10 and
Bio-Save 11 biofungicides in all states requested. In March 1996, the
Company received EPA registration for Bio-Save 1000, Bio-Save 100 and
Bio-Save 110. These registrations are for new formulations of the original
Bio-Save 10 and 11 products. In addition, in May 1997, the Company received
approval from the EPA for a label extension for the use of Bio-Save 1000 on
cherries.
Certain of the Company's activities, including the operation of its
laboratories and manufacturing facilities, have been, or may be, subject to
regulation (i) under various other state and federal laws and regulations
including the Occupational Safety and Health Act, the National Environmental
Policy Act, the Clean Air Act, the Clean Water Act, the Emergency Planning
and Community Right-To-Know Act and other state and federal statutes
regulating environmental quality and (ii) by state and federal agencies,
including the USDA and the FDA. From time to time, governmental authorities
review the need for additional laws and regulations for biotechnology and
pesticide products that could, if adopted, apply to the business of the
Company. The Company is
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unable to predict whether any such new regulations will be adopted or
whether, if adopted, they will adversely affect its business. Historically,
compliance with applicable federal, state and local provisions which have
been enacted or adopted regulating the discharge of materials into the
environment by the Company's manufacturing or laboratory operations has had
an immaterial effect upon the Company's capital expenditures, results of
operations and competitive position.
Patents and Trade Secrets
The Company owns or has rights to certain proprietary information,
including patents and patent applications, which relate to its technology and
products. The Company actively seeks protection, when appropriate, for its
products and proprietary information by means of United States and foreign
patents. In addition, the Company may rely upon confidentiality agreements
and other contractual arrangements to protect certain proprietary information.
Six of the Company's eight U.S. patents cover its fungal technology, and
principally relate to the control of insects, with corresponding foreign
patents and patent applications. The six patents are: (i) Method and Device
for the Biological Control of Cockroaches, (ii) Method and Device for the
Biological Control of Insects, (iii) Insect Contamination Chamber, (iv)
Method and Device for the Biological Control of Flying Insects, (v) Device
for Biological Control of Cockroaches, and (vi) Device Containing Fungus for
Biological Control of Insects. These patents are central to the Bio-Path
chamber technology which covers cockroaches. In addition, this technology
can be extended to any other insect that can be controlled via a chamber
system. An additional patent, Maintenance and Long-Term Stabilization of
Fungal Conidia Using Surfactants, describes methods utilizing a unique class
of surfactants for fungal formulation. The Company has also received a
notice of allowance for its patent application for Packaged Fungal Culture
Stabile to Long-Term Storage.
Two additional U.S. patents held by the Company relate to bacterial
bio-fungicides technology. The patent Pseudomonas syringae ATCC 55389 and
Use Thereof for Inhibiting Microbial Decay on Fruit, has been awarded
covering a microorganism that is the active ingredient in Bio-Save 10, 100,
and 1000. In addition, the patent application Method and Composition for
Producing Stabile Bacteria and Bacterial Formulation has received a notice of
allowance. Provided maintenance fees are paid, U.S. design patents have a
term of 14 years from the date of issue; and U.S. utility patents that are
based on applications filed before June 8, 1995, and that have not expired as
of June 8, 1995, have a term that is the longer of 20 years from the earliest
effective filing date or 17 years from issuance. In certain instances,
however, the term may be limited to the term of a related patent claiming
similar technology. The Company has an additional pending patent application
relating to a method of extending microbial shelf life. There can be no
assurance that any patents will issue from any of the Company's patent
applications or that issued patents will provide adequate protection for the
Company.
The Company has exclusive sub-licenses to two issued U.S. patents
covering the Nature Seal technology from J.R. Brooks and Seald-Sweet, which
licensed the patents from the USDA. This sub-license is under active
re-evaluation by the Company. See "Technology Licensing." The patents were
issued to the USDA in March 1993 and December 1994.
The Company has acquired the exclusive rights to the use of microbial
strains developed by the USDA for the control of postharvest diseases of pome
fruits. The USDA has been granted one patent covering this technology and
has filed a patent application covering additional coatings.
11
<PAGE>
Much of the Company's technology and many of its processes are dependent
upon the knowledge, experience and skills of certain scientific and technical
personnel. To protect its rights to its proprietary information and
technology, the Company requires all employees, consultants, advisors and
collaborators to enter into confidentiality agreements which prohibit the
disclosure of confidential information to persons unaffiliated with the
Company and which require disclosure of and assignment to the Company ideas,
developments, discoveries and inventions made by such persons. There can be
no assurance that these agreements will prevent disclosure of the Company's
confidential information or will provide meaningful protection for the
Company's confidential information. Additionally, in the absence of patent
protection, the Company's business may be adversely affected by competitors
who develop substantially equivalent technology.
Personnel
As of September 25, 1997, the Company had 67 full time employees. A
total of three persons are employed full time in manufacturing and
production; 32 in sales, marketing and distribution; three in engineering and
design; 11 in system installation and service; four in research and
development; and 14 in management and administration.
None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
12
<PAGE>
Item 2. Properties
The Company's corporate headquarters and research and development
operations, and AGRO's New Jersey operations are located in two facilities in
East Brunswick, New Jersey. These facilities consist of 23,375 and 10,000
square foot spaces and are under leases that expire in July 1999, and which
provide an option to renew for an additional five year term. In addition,
AGRO leases 10,000 square feet of space for its sales/service center and
warehouse facility located in Milton, Ontario, Canada under a one year lease
which expires in June 1998, and which provides an option to renew for an
additional four year term. AGRO also leases a 12,000 square foot facility
for its sales/service and warehouse center located in Ventura, California; as
well as, sales/service and warehouse centers in Englewood, Colorado; and
Union Gap, Washington, under various lease terms.
The Company's wholly owned subsidiary, EPSC, leases approximately 24,000
square feet of space for its headquarters, production and warehouse
facilities located in Orlando, Florida, under a five year lease which expires
in May 1999, and which provides an option to renew for an additional five
year term. In addition, EPSC leases on a month to month basis approximately
4,000 square feet of space for its sales/service center and warehouse located
in Visalia, California.
The Company believes that its existing facilities are adequate to meet
current requirements and that suitable additional or substitute space will be
available as needed to accommodate any expansion of operations and additional
offices.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1997.
13
<PAGE>
Executive Officers of the Registrant
The executive officers of the Company as of September 29, 1997, are
listed below:
<TABLE>
<CAPTION>
Executive
Name Age Position Officer Since
---- --- -------- -------------
<S> <C> <C> <C>
Michael A. DeGiglio 43 President, Chief Executive Officer and Director 1993
Harold A. Joannidi 46 Treasurer, Corporate Controller and Secretary 1995
David W. Miller 45 Vice President-Technology 1988
</TABLE>
Mr. DeGiglio joined the Company upon its acquisition of AGRO in November
1992, and has served as President of AGRO since that time. In July 1995, Mr.
DeGiglio assumed the offices of President and Chief Executive Officer of the
Company. From 1984 until joining the Company, Mr. DeGiglio was employed by
AGRO, where he served as President. Prior to co-founding AGRO, Mr. DeGiglio
was Vice President of International Sales for NYPCO International Inc. Mr.
DeGiglio served on active duty in the United States Navy as an Officer and
Jet Aviator from July 1976 through December 1982, and the Naval Air Reserves
from 1983 to present, currently holding the rank of Captain with the United
States Naval Reserve. Throughout his Naval career, he has held various
department head positions, completed a tour as Commanding Officer of a Jet
Aviation Squadron, performed multiple tours overseas, and has completed
numerous Senior Advanced Management courses. Mr. DeGiglio also serves as
Chief Executive Officer and Director of Agro Power Development, Inc. Mr.
DeGiglio received a B.S. in Aeronautical Science and Aviation Management from
Embry Riddle Aeronautical University.
Mr. Joannidi joined the Company in 1995 as Corporate Controller. In
March 1996, Mr. Joannidi became Treasurer and Secretary of the Company. In
1992 and from 1994 until joining the Company, Mr. Joannidi also served as a
financial and systems consultant to the Company. Prior to joining and in
addition to being a consultant to the Company in 1992, Mr. Joannidi operated
a manufacturing company from 1992 to 1994, served as a financial and systems
consultant to various companies from 1988 to 1992, and held financial
management positions at Tel Plus International, Inc./Siemens AG, Johnson
Matthey Jewelry Corporation and Refinemet International Company from 1980 to
1988. Mr. Joannidi attained Certified Public Accountant designation while
employed at the public accounting firm of Coopers & Lybrand. He attended
Tufts University and Northeastern University, receiving a B.S. degree in
Accounting and Economics from Northeastern University.
Dr. Miller joined the Company in May 1988 and currently serves as Vice
President- Technology. Dr. Miller received a B.S. in Biochemistry from the
University of California, Davis, and a Ph.D. in Biochemistry and Molecular
Biology from Harvard University, where he studied the molecular biology of
insects. Dr. Miller also was a National Institutes of Health post-doctoral
Fellow studying insect viruses at the University of Idaho. Prior to joining
the Company, Dr. Miller was employed from 1983 to 1988 as Staff Scientist and
Project Leader at Genetics Institute, Inc., in Cambridge, Massachusetts.
Throughout his professional career, Dr. Miller has focused on the development
and commercialization of microbial pesticides.
14
<PAGE>
PART II
- ------------------------------------------------------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
The Company's Common Stock is traded on the National Association of
Securities Dealers Automatic Quotation System ("NASDAQ") Small Capitalization
Market System under the NASDAQ symbol "ECSC". As of September 23, 1997, there
were approximately 265 holders of record of the Common Stock. The Company has
never declared or paid any cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future.
The table below sets forth, for the fiscal quarters indicated, the reported
high and low closing sales prices of the Common Stock as reported by NASDAQ
based on published financial sources.
1997 HIGH LOW
----------------------- ------- -------
Fourth Quarter.......... 1 3/4 27/32
Third Quarter........... 2 1/2 1
Second Quarter.......... 1 3/8 7/8
First Quarter........... 1 5/8 1
1996 HIGH LOW
------------------------ ------- -------
Fourth Quarter.......... 1 5/8 1 1/4
Third Quarter........... 1 3/8 1 1/16
Second Quarter.......... 1 7/16
First Quarter........... 1 1/2 13/16
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------
The selected financial data presented below has been derived from the
Company's audited consolidated financial statements for each year in the five
year period ended June 30, 1997. The information below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements and related
notes which appear elsewhere in this document.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: -----------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Product sales.............................................. $ 20,853 $ 14,151 $ 12,335 $ 9,246 $ 3,802
Cost of goods sold......................................... 15,702 10,394 10,153 7,875 3,288
--------- --------- --------- --------- ---------
Gross profit............................................... 5,151 3,757 2,182 1,371 514
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................. 508 1,018 4,483 8,156 6,294
Acquired research and development........................ -- -- -- -- 750
Selling and marketing.................................... 2,463 2,594 3,672 3,043 1,690
General and administrative............................... 2,107 2,244 2,631 3,382 3,159
Asset valuation and restructuring (reversal) charges..... (377) (1,550) 6,000 5,800 --
--------- --------- --------- --------- ---------
Total operating expenses................................ 4,701 4,306 16,786 20,381 11,893
--------- --------- --------- --------- ---------
Operating income (loss).................................... 450 (549) (14,604) (19,010) (11,379)
--------- --------- --------- --------- ---------
Other income (expense):
Research, development, licensing fees and other income.. 7 125 155 812 545
Investment income....................................... 105 199 590 853 1,525
Interest and other expense.............................. (177) (603) (1,235) (208) (95)
--------- --------- --------- --------- ---------
Total other (expense) income.......................... (65) (279) (490) 1,457 1,975
--------- --------- --------- --------- ---------
Income (loss) before extraordinary gain.................... 385 (828) (15,094) (17,553) (9,404)
Extraordinary gain on early extinguishment of debt......... -- 241 -- -- --
--------- --------- --------- --------- ---------
Net income (loss).......................................... $ 385 ($ 587) ($ 15,094) ($ 17,553) ($ 9,404)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share:
Income (loss) before extraordinary gain.................. $ 0.04 ($ 0.09) ($ 1.71) ($ 2.27) ($ 1.41)
Extraordinary gain....................................... -- 0.03 -- -- --
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ 0.04 ($ 0.06) ($ 1.71) ($ 2.27) ($ 1.41)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common and common equivalent
shares outstanding....................................... 10,233 9,070 8,839 7,748 6,664
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
CONSOLIDATED BALANCE SHEET DATA: -----------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- --------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Unrestricted and restricted cash, cash equivalents, short-term
investments and marketable securities........................ $ 1,775 $ 2,639 $ 7,831 $ 20,141 $ 24,576
Total assets................................................... 8,875 10,111 18,769 33,990 31,843
Debt and capital leases........................................ 11 2,452 8,290 7,933 3,156
Stockholders' investment....................................... 4,014 2,473 2,492 18,110 25,123
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
GENERAL
EcoScience is engaged in marketing, sales and product development, servicing
the needs of the agricultural specialties markets and professional pest control
operators. The Company provides (i) sophisticated growing systems to greenhouse
operators, (ii) technologically advanced sorting, grading and packing systems to
produce packers, (iii) equipment, coatings and disease control products,
including natural biologicals for protecting fruits, vegetables and ornamentals
in storage and transit to market, and (iv) a unique biological pest control
products to PCOs. The Company focuses on the technical marketing of agricultural
specialties products and services, and the development of biological pest
control products.
The Company's primary products are (i) advanced growing systems based on
Stonewool, manufactured by Grodania A/S, (ii) sophisticated sorting, grading and
packing systems manufactured by Aweta, B.V., (iii) computerized environmental
and irrigation control systems manufactured by H. Hoogendorn Automation B.V.,
(iv) PacRite and Indian River Gold coatings manufactured by EPSC, (v) Bio-Save
PostHarvest BioProtectant line of products and (vi) Bio-Blast Biological
Termiticide manufactured by EcoScience. In addition, the Company distributes a
broad array of specialty products used in greenhouses and in fruit, vegetable
and ornamental packing.
EcoScience sells to PCO's through a marketing collaboration with Terminix.
In fiscal 1997, the Company initiated the U.S. commercial launch of Bio-Blast in
collaboration with Terminix. Additionally, EcoScience has initiated an extensive
testing, development and marketing program with Maruwa BioChemical and Shinto
Paint Co., Ltd. for biological products in Japan. The Company initiated
shipments of Bio-Blast to Maruwa in fiscal 1997.
The Company's technology is used for the development and application of
natural microbial pest control agents and coatings to sustain the freshness of
fruits and vegetables. The Company's technology enables it to provide technical
support for growers and packers of specialty crops. The Company conducts
research on the use of microbial agents to control plant diseases and insect
pests, as well as on new applications for natural coatings to sustain nutrition
and overall quality in fresh fruits and vegetables.
In fiscal 1997, the Company (i) expanded marketing of its Bio-Save line of
products for the control of postharvest fruit diseases in a wide range of
commercial applications, (ii) initiated the U.S. commercial launch of its
Bio-Blast Biological Termiticide and (iii) began research on a USDA funded
Phase-2 Small Business Innovation Research program on the prevention of
postharvest diseases of bananas, which will continue through fiscal years 1998
and 1999. In addition, the Company expects to conduct tests to determine the
possibility of extending the range of performance and applicability for both its
Bio-Save line of products and its Bio-Blast insect control product.
The Company derives most its revenues from the AGRO and EPSC operations
through the sale of (i) growing medium products to the North American intensive
farming and horticulture industries; (ii) sorting, grading and packing systems
to the produce packing industry; and (iii) postharvest coating products to the
fresh fruit and vegetable markets throughout the western hemisphere.
17
<PAGE>
Prior to the acquisition of AGRO in November 1992 and EPSC in May 1994,
substantially all revenues generated by the Company were from collaborative
research and development arrangements and investment income. During this period,
the Company had devoted substantially all of its efforts toward new product
research and development, and commercialization of certain products.
The Company believes that inflation and changing prices have not had a
material effect on its operations to date.
1997 Compared to 1996
The Company's product sales increased $6,702,000 or 47% to $20,853,000 in
1997 from $14,151,000 in 1996. This increase was primarily due to the increase
in product sales by AGRO of $6,294,000. The following table sets forth the
Company's product sales by operating company for 1997 and 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 INCREASE
- ---------------------------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
AGRO.............................................................................. $ 17,388 $ 11,094 $ 6,294
EPSC.............................................................................. 3,045 2,882 163
EcoScience........................................................................ 420 175 245
--------- --------- -----------
Consolidated...................................................................... $ 20,853 $ 14,151 $ 6,702
--------- --------- -----------
--------- --------- -----------
</TABLE>
AGRO is the exclusive distributor in the United States and Canada of the
Grodan brand of stonewool, which is an inert growing medium supplied by Grodania
A/S, a Denmark based company. The sale of products under the distribution
agreement with Grodania A/S accounted for 42%, 45% and 43% of the Company's
total product sales in 1997, 1996 and 1995, respectively. Although there are a
limited number of sources of the particular growing medium products that are
sold under this distribution agreement, the Company's management believes that
other suppliers could provide similar products on comparable terms. A change in
suppliers, however, could cause a delay in filling orders as well as a possible
loss of sales, which would affect operating results adversely. In August 1995,
AGRO entered into a distribution agreement with Aweta B.V., a Netherlands based
company, for the exclusive right to sell Aweta B.V.'s sorting, grading and
packing products and equipment to the fruit, vegetable and flower markets in the
United States, Canada, Mexico and the Caribbean. The sale of products under the
distribution agreement with Aweta B.V. accounted for 26% and 20% of the
Company's total product sales in 1997 and 1996, respectively. Although there are
a limited number of sorting, grading and packing equipment manufacturers in the
world, the Company's management believes that other suppliers could provide
equipment on comparable terms. A change in supplier, however could cause a delay
in filling orders as well as a possible loss of sales, which would affect
operating results adversely. The Company believes that revenues under these
distribution agreements will each account for more than 10% of the Company's
consolidated product sales in 1998.
The Company sold product to an affiliated group of companies ("Affiliates")
in the amount of $2,893,000 or 14% of product sales in 1997 and $556,000 or 4%
of product sales in 1996. An officer of the Company is also an officer of the
Affiliates. Management believes that prices and fees charged to the Affiliates
18
<PAGE>
are reasonable. Loss of revenue from this customer would adversely affect
operations. Sales to the Affiliates are expected to account for more than 10% of
the Company's product sales in 1998.
The Company's biological product sales increased $598,000 to $795,000 for
1997 compared to $197,000 for 1996. The increase in sales was primarily due to
EcoScience's Bio-Blast Biological Termiticide and EPSC's Bio-Save PostHarvest
BioProtectant, representing broader market exposure and customer acceptance for
both products.
Cost of goods sold increased $5,308,000 or 51% to $15,702,000 in 1997 from
$10,394,000 in 1996 primarily due to product sales increases.
Gross margin on product sales increased $1,394,000 or 37% to $5,151,000 in
1997 from $3,757,000 in 1996, while gross margin percentage on product sales
decreased to 25% in 1997 from 27% in 1996. The decrease in gross margin
percentage was primarily due to a change in product mix and lower margin on
sales to achieve greater market penetration and competitive factors.
Research and development expenses decreased $510,000 or 50% to $508,000 in
1997 from $1,018,000 in 1996, due primarily to reductions in personnel and
related costs at EcoScience and EPSC. The Company has and will continue to incur
ongoing research and development expenses for its Bio-Save PostHarvest
BioProtectant, Bio-Blast Biological Termiticide and other select programs in
fiscal 1998.
Selling and marketing expenses decreased $131,000 or 5% to $2,463,000 in
1997 from $2,594,000 in 1996, due primarily to the decreases in EPSC's selling
and marketing expenses of $236,000, partially offset by an increase of $101,000
at AGRO. The decrease in EPSC's selling and marketing expenses for 1997 was
primarily attributable to the reduction of selling and marketing department
personnel and related costs during fiscal 1997. The increase in AGRO's selling
and marketing expenses was primarily due to additional personnel, promotional
and related costs to support new product sales and sales increases.
General and administrative expenses decreased $137,000 or 6% to $2,107,000
in 1997 from $2,244,000 in 1996, primarily due to the decreases in EcoScience's
and EPSC's general and administrative expenses of $16,000 and $123,000,
respectively. The decrease in EcoScience's general and administrative expenses
for 1997 was primarily attributable to personnel costs, professional fees and
related cost reductions. The decrease in EPSC's general and administrative
expenses for 1997 was primarily due to personnel costs and related cost
reductions.
In June 1997, the Company reversed $300,000 of accrued restructuring costs
no longer deemed necessary for facilities consolidation and relocation, which
relate to accrued restructuring costs originally recorded in 1995.
In August 1996, the Company and a finance company reached a lease settlement
agreement under which the Company paid $880,000 to satisfy the remaining lease
obligation of approximately $1,248,000 of principal and $17,000 of accrued
interest, and returned certain leased equipment with a net book value of
$308,000 to the financing company, which resulted in a reversal of a
restructuring charge of $77,000 in 1997.
19
<PAGE>
The Company charged costs and expenses totaling $273,000 against the
restructuring accruals during 1997. The Company completed most of its
restructuring activities by the end of fiscal 1997.
In 1996, the Company reversed $1,550,000 of accrued restructuring costs that
related to a termination of a lease for its Worcester corporate headquarters and
research and development facility (see Note 9 to the Consolidated Financial
Statements).
Operating income increased $999,000 to $450,000 for 1997 compared to an
operating loss of ($549,000) for 1996. The increase in operating income resulted
from a $1,394,000 increase in gross profits in 1997 compared to 1996, partially
offset by a $395,000 increase in operating expenses. Operating income for 1997
increased $2,172,000 to $73,000 after exclusion of the reversal of restructuring
charges of $377,000 and $1,550,000 in 1997 and 1996, respectively. Operating
expenses decreased $778,000 or 13% to $5,078,000 for 1997 compared to $5,856,000
for 1996 when the restructuring reversals are excluded for both periods.
Other income / (expense) decreased $214,000 or 77% to ($65,000) net expenses
in 1997 compared to ($279,000) net expense in 1996. The decrease was primarily
attributable to a reduction in interest and other expenses of $426,000 or 71%,
primarily due to the decrease in interest expense resulting from the lower
average level of long-term debt and capital lease obligations outstanding during
1997 compared to 1996; partially offset by (i) a decrease in investment income
of $94,000 resulting from a decline in the average funds available for
investment in 1997 compared to 1996 and (ii) a $74,000 gain on sale of property
and equipment and a $51,000 gain on settlements of accounts payable recorded in
1996.
In 1996, the Company realized an extraordinary gain on the early
extinguishment of debt of $241,000 or $0.03 per share with no related income tax
effect (see Note 4 to the Consolidated Financial Statements).
The Company's net income increased $972,000 or $0.10 per share to net
income of $385,000 or $0.04 per share for 1997 compared to a net loss of
($587,000) or ($0.06) per share for 1996. Excluding non-recurring amounts,
net income for 1997 was $8,000 or $0.00 per share, a $2,386,000 or $0.26 per
share improvement, compared to the net loss of ($2,378,000) or ($0.26) per
share for 1996. The excluded non-recurring amounts are: (i) for 1997: the
$377,000 reversals of restructuring charges; and (ii) for 1996: (a) the
$1,550,000 reversal of accrued restructuring costs, and (b) the $241,000
extraordinary gain on early extinguishment of debt.
20
<PAGE>
1996 Compared to 1995
The Company's product sales increased $1,816,000 or 15% to $14,151,000 in
1996 from $12,335,000 in 1995 primarily due to an increase in AGRO sales of
$2,302,000, partially offset by EPSC and EcoScience's product sales decreases.
The following table sets forth the Company's product sales by operating company
for 1996 and 1995:
<TABLE>
<CAPTION>
INCREASE
(IN THOUSANDS) 1996 1995 (DECREASE)
- -------------------------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
AGRO............................................................................ $ 11,094 $ 8,792 $ 2,302
EPSC............................................................................ 2,882 3,018 (136)
EcoScience...................................................................... 175 525 (350)
--------- --------- -----------
Consolidated.................................................................... $ 14,151 $ 12,335 $ 1,816
--------- --------- -----------
--------- --------- -----------
</TABLE>
Cost of goods sold increased $241,000 or 2% to $10,394,000 in 1996 from
$10,153,000 in 1995. In 1996, AGRO's cost of goods sold increased by $1,947,000
due to increased product sales, while cost of goods sold at EcoScience decreased
$1,716,000 due to the cessation of manufacturing of the Bio-Path Cockroach
Control Chamber.
Gross margin on product sales increased $1,575,000 or 72% to $3,757,000 in
1996 from $2,182,000 in 1995, while gross margin percentage on product sales
increased to 27% in 1996 from 18% in 1995. Gross margin increased primarily due
to the cessation of manufacturing of Bio-Path and related cost savings at
EcoScience; and an increase in gross margin from AGRO's product sales increases,
partially offset by a gross margin decrease at EPSC from product sales
decreases.
Research and development expenses decreased $3,465,000 or 77% to $1,018,000
in 1996 from $4,483,000 in 1995, primarily due to a decrease at EcoScience of
$3,783,000 from the implementation of the Company's restructuring program at the
close of fiscal 1995, which curtailed and deferred research and development
activities for certain product programs, as well as reduced personnel and
facility costs. EPSC research and development expenses increased $318,000 in
1996, primarily due to additional personnel and related support expenses for the
Bio-Save PostHarvest BioProtectant and other product programs.
Selling and marketing expenses decreased $1,078,000 or 29% to $2,594,000 in
1996 from $3,672,000 in 1995, primarily due to the decreases in EcoScience's and
EPSC's selling and marketing expenses of $860,000 and $418,000, respectively and
an increase in AGRO's selling and marketing expenses of $200,000. The decrease
in EcoScience's selling and marketing expenses for 1996 was primarily
attributable to the Company's restructuring program initiatives. The decrease in
EPSC's selling and marketing expenses for 1996 was primarily attributable to the
reduction of selling and marketing department personnel and related costs during
the latter part of fiscal 1995. The increase in AGRO's selling and marketing
expenses was primarily due to additional personnel and related costs to support
new product sales and sales increases.
General and administrative expenses decreased $387,000 or 15% to $2,244,000
in 1996 from $2,631,000 in 1995, primarily due to the decreases in EcoScience's
and EPSC's general and administrative expenses of $208,000 and $207,000,
respectively, which were partially offset by an increase of $28,000 in such
expenses for AGRO. The decrease in EcoScience's general and administrative
21
<PAGE>
expenses for 1996 was primarily attributable to the Company's restructuring
program initiatives. The decrease in EPSC's general and administrative expenses
for 1996 was primarily due to a reduction in personnel and related cost
reductions. The increase in AGRO's general and administrative expenses was
primarily due to increased business activity and related support costs.
On January 11, 1996, the Company entered into a lease termination
agreement for its Worcester corporate headquarters and research and
development facility under which the Company paid the landlord $125,000 and
issued 500,000 shares of the Company's common stock with a market value of
$500,000 in exchange for an immediate termination of the lease. Additionally,
the Company incurred approximately $25,000 for expenses related to the
completion of the transaction. After accounting for these settlement
provisions, which totaled $650,000, the Company reversed $1,550,000 of
accrued restructuring costs in 1996 that related to the accrued restructuring
costs which were originally recorded in 1995 ($2,000,000) and the remaining
accrued restructuring costs which were originally recorded in 1994 ($200,000).
The Company charged costs and expenses totaling $1,674,000 against the
restructuring accruals during 1996. In addition, the Company reversed $1,550,000
in accrued restructuring costs after accounting for the termination of its
Worcester corporate headquarters and research and development facility lease in
the third quarter of fiscal 1996. The Company had completed a major portion of
its restructuring activities in fiscal 1996. The Company paid and charged
expenses totaling $1,746,000 against restructuring accruals during 1995. The
Company completed all of the employee terminations related to the 1994
restructuring program in the first half of fiscal 1995 and a portion of the
facility consolidation activities in fiscal 1995 (see Note 9 to the Consolidated
Financial Statements).
Operating loss decreased $14,055,000 to ($549,000) for 1996 compared to an
operating loss of ($14,604,000) for 1995. The decrease in operating loss
resulted from a $12,480,000 decrease of total operating expenses in 1996
compared to 1995, in addition to a $1,575,000 increase in gross profit. The
operating loss for 1996 was ($2,099,000), a decrease of $6,505,000 or 76%, when
the $1,550,000 reversal of restructuring charge discussed above is excluded,
compared to an operating loss of ($8,604,000) for 1995, when the $6,000,000
restructuring charge is excluded. Operating expenses decreased $4,930,000 or 46%
to $5,856,000 for 1996 compared to $10,786,000 for 1995 when the restructuring
charges / reversals are excluded from both periods.
Other income / (expense) decreased $211,000 or 43% to ($279,000) net expense
in 1996 compared to ($490,000) net expense in 1995. The decrease was primarily
attributable to a reduction in interest and other expense of $632,000 or 51%
primarily due to the decrease in interest expense resulting from the lower
average level of long-term debt and capital lease obligations outstanding during
1996 compared to 1995, offset by (i) a decrease in investment income of $391,000
resulting from a decline in the average funds available for investment for 1996
and (ii) a decrease in research, development, licensing fees and other income of
$30,000. In 1996, EcoScience recorded a $74,000 gain on sale of property and
equipment and a $51,000 gain on settlements of accounts payable. In 1995,
EcoScience recorded $155,000 in product support payments from Terminix.
In connection with the acquisition of AMC in May 1994, the Company issued a
promissory note in the principal amount of $430,000 to the shareholder of AMC.
In February 1996, the Company settled the remaining balance of the promissory
note and other acquisition related liabilities totaling $501,000 for $251,000,
excluding $9,000 of related transaction expenses, which resulted in an
22
<PAGE>
extraordinary gain on the early extinguishment of debt of $241,000 or $0.03 per
share with no related income tax effect.
The Company's net loss decreased $14,507,000 or $1.65 per share to a net
loss of ($587,000) or ($0.06) per share for 1996 compared to a net loss of
($15,094,000) or ($1.71) per share for 1995. Excluding non-recurring amounts,
the net loss for 1996 was ($2,378,000) or ($0.26) per share, a $6,716,000 or 74%
decrease compared to the net loss of ($9,094,000) or ($1.03) per share for 1995.
The excluded non-recurring amounts for 1996 are: (a) the $1,550,000 reversal of
accrued restructuring costs related to the facility lease settlement, and (b)
the $241,000 extraordinary gain on early extinguishment of debt; and for 1995:
the $6,000,000 restructuring charge.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have been funded through revenues from product
sales, public and private placements of its equity securities, bank loans and
lease financings, licensing, collaborative research and development
arrangements, and investment income.
Cash and cash equivalents were $1,247,000 at June 30, 1997 compared to
$734,000 at June 30, 1996. Unrestricted and restricted cash, cash equivalents,
and short-term investments totaled $1,775,000 compared to $2,639,000 at June 30,
1996. Cash provided by operating activities totaled $184,000 and principally
represented net income of $385,000. Cash used for financing activities totaled
$881,000 in 1997, which consisted principally of payments of $2,037,000 on debt
and capital leases, partially offset by proceeds from the issuance of stock of
$1,139,000. Cash provided by investment activities in 1997 totaled $1,211,000
and included the proceeds from the sales of short-term investments of $677,000
and the release of restricted cash of $1,205,000, partially offset by purchases
of short-term investments of $503,000 and property and equipment of $90,000. The
Company's working capital and current ratio were $1,635,000 and 1.3 to 1,
respectively, at June 30, 1997 compared to ($308,000) and 0.9 to 1,
respectively, at June 30, 1996.
Debt and capital leases were reduced by $2,441,000 to $11,000 at June 30,
1997 compared to $2,452,000 at June 30, 1996. The reduction was achieved by: (i)
negotiating a more flexible and favorable line of credit with the existing
lender; (ii) reaching a relatively low borrowing point in seasonal financing
needs at June 30, 1997, and (iii) use of proceeds from the private placement of
stock to primarily paydown the last remaining capital lease.
On April 28, 1997, the Company and its lender entered into a new revolving
line of credit agreement, under which the Company may borrow up to the lesser of
$3,000,000 or the sum of (i) 85% of eligible account receivables, as defined,
and (ii) eligible inventory at stratified rates from 25% to 50% up to a maximum
of the lesser of $1,200,000 or 66.67% of the amount of eligible accounts
receivable. Funds borrowed under the new revolving line of credit bear interest
at a rate of prime (8.50% at June 30, 1997) plus 2.0% and are secured by all the
assets of the Company and all of the outstanding common stock of AGRO owned by
the Company. Interest on funds borrowed under the revolving line of credit is
payable monthly in arrears and repayment of principal is due on April 27, 1998,
subject to automatic renewal, as provided. The revolving line of credit imposes
a financial covenant on the Company that requires a minimum tangible net worth
of $750,000, as defined. In addition, the new line of credit eliminates certain
provisions under the old line of credit as follows: (i) the cash collateral
requirement, the balance of which was $749,000 at the time the new line of
23
<PAGE>
credit went into effect; (ii) the 67% cash collateral coverage requirement on
additional borrowings and (iii) the $1,000,000 minimum cash balance requirement.
On September 27, 1996, the Company sold 1,040,000 unregistered shares of
common stock in a private placement. Net proceeds realized from the equity
offering totaled $1,139,000 after fees and expenses totaling $161,000. On
September 27, 1996, pursuant to a lease settlement agreement dated August 8,
1996, between the Company and its financing company, the Company paid $880,000
and returned certain leased equipment with a net book value of $308,000 to the
financing company in satisfaction of a capital lease obligation, in the amount
of $1,248,000 of principal and $17,000 of accrued interest, which resulted in a
$77,000 reversal of a restructuring charge.
In conjunction with the asset valuation and restructuring charges recorded
in 1995, the Company implemented and has completed in fiscal 1997 and 1996 most
of the program to reduce operating losses and to conserve its cash resources for
use in the Company's operating businesses. This restructuring program
significantly reduced research and development and general and administrative
costs from historical levels. In 1997, the Company funded $273,000 of accrued
restructuring costs that had been recorded in 1994 and 1995. In June 1997, the
Company reversed $300,000 of accrued restructuring costs recorded in 1995, no
longer deemed necessary for facilities consolidation and relocation. The balance
of accrued restructuring costs, $457,000 (total current and noncurrent
portions), as of June 30, 1997, is expected to be utilized in 1998 and
thereafter.
The Company expects to incur administrative, business development and
commercialization expenditures in the future as it advances the development,
manufacturing and marketing of its Bio-Blast and Bio-Save products, and other
select development programs in its bio-technology operations. In addition,
the Company expects to incur incremental costs associated with its plans to
expand product lines at AGRO. The Company may also use cash to acquire
technology, products or companies that support the strategy of the Company.
The Company plans to finance its cash needs principally with existing cash
reserves, represented by approximately $1,247,000 of cash and cash equivalents
and $528,000 of short-term investments as of June 30, 1997. The Company believes
that such cash reserves, along with revenues from product sales, and funds
available under its revolving line of credit, will be sufficient to fund the
Company's working capital needs, planned capital expenditures, restructuring
program initiatives and related obligations, and to service its indebtedness
through June 30, 1998. The Company may need to raise additional funds to finance
its ongoing operations after June 30, 1998, although there can be no assurances
that such funds will be available on terms favorable to the Company. The Company
is continuing to explore potential mergers, joint ventures and various other
strategic opportunities, which are aimed at enhancing stockholder value and the
long-term commercial viability of the Company.
24
<PAGE>
SEASONALITY
The timing of the Company's operating revenues may vary as a result of the
seasonal nature of its businesses. In addition, operating revenues may be
affected by the timing of new product launches, acquisitions, sales orders,
sales product mix and other economic factors. Operating revenues may be
concentrated in the Company's second and fourth quarters as a result of the
North American growing and harvesting seasons. Although the Company believes
that the historical trend in quarterly revenues for the second and fourth
quarters of each year are generally higher than the first and third quarters;
there can be no assurance that this will occur in future periods. Accordingly,
quarterly or other interim results should not be considered indicative of
results to be expected for any other quarter or for the full fiscal year.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements that describe the Company's
business prospects. These statements involve risks and uncertainties including,
but not limited to, regulatory uncertainty, level of demand for the Company's
products and services, product acceptance, industry wide competitive factors,
seasonality factors, timing of completion of major equipment projects and
political, economic or other conditions. Furthermore, market trends are subject
to changes which could adversely affect future results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------------------------------------------------------------------------------
The Company's consolidated financial statements and supplementary
consolidated quarterly financial data for the years ended June 30, 1997, 1996
and 1995, are set forth on pages 26 through 46.
25
<PAGE>
ECOSCIENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------- --------- ---------
Current assets:
Cash and cash equivalents.................................................................. $ 1,247 $ 734
Short-term investments..................................................................... 528 700
Restricted cash and short-term investments................................................. -- 1,205
Accounts receivable, less reserves of $150 and $118 at June 30, 1997 and 1996,
respectively............................................................................. 1,788 1,552
Inventories................................................................................ 1,940 2,001
Other current assets....................................................................... 842 827
--------- ---------
Total current assets..................................................................... 6,345 7,019
--------- ---------
Property and equipment, net.................................................................. 562 998
Intangible assets, net....................................................................... 1,745 1,949
Other noncurrent assets...................................................................... 223 145
--------- ---------
Total assets............................................................................. $ 8,875 $ 10,111
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt....................................................... $ 10 $ 2,441
Accounts payable........................................................................... 2,641 2,347
Accrued restructuring costs................................................................ 307 730
Accrued expenses and other current liabilities............................................. 1,752 1,809
--------- ---------
Total current liabilities................................................................ 4,710 7,327
--------- ---------
Noncurrent liabilities:
Long-term debt, less current maturities.................................................... 1 11
Other long-term liabilities................................................................ 150 300
--------- ---------
Total noncurrent liabilities............................................................. 151 311
--------- ---------
Commitments and contingencies
Stockholders' investment:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
none issued and outstanding.............................................................. -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
10,401,177 and 9,342,177 shares issued and outstanding at
June 30, 1997 and 1996, respectively..................................................... 104 93
Additional paid-in capital................................................................... 57,222 56,077
Accumulated deficit.......................................................................... (53,312) (53,697)
--------- ---------
Total stockholders' investment........................................................... 4,014 2,473
--------- ---------
Total liabilities and stockholders' investment.......................................... $ 8,875 $ 10,111
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
ECOSCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Product sales......................................................... $20,853 $14,151 $12,335
Cost of goods sold.................................................... 15,702 10,394 10,153
--------- --------- ---------
Gross profit.......................................................... 5,151 3,757 2,182
--------- --------- ---------
Operating expenses:
Research and development............................................ 508 1,018 4,483
Selling and marketing............................................... 2,463 2,594 3,672
General and administrative.......................................... 2,107 2,244 2,631
Asset valuation and restructuring (reversal) charges................ (377) (1,550) 6,000
--------- --------- ---------
Total operating expenses........................................ 4,701 4,306 16,786
--------- --------- ---------
Operating income (loss)............................................... 450 (549) (14,604)
--------- --------- ---------
Other income (expense):
Research, development, licensing fees and other income.............. 7 125 155
Investment income................................................... 105 199 590
Interest and other expense.......................................... (177) (603) (1,235)
--------- --------- ---------
Total other expense............................................. (65) (279) (490)
--------- --------- ---------
Income (loss) before extraordinary gain............................... 385 (828) (15,094)
Extraordinary gain on early extinguishment of debt.................... -- 241 --
--------- --------- ---------
Net income (loss)..................................................... $ 385 ($ 587) ($15,094)
--------- --------- ---------
--------- --------- ---------
Net income (loss) per common share:
Income (loss) before extraordinary item............................. $ 0.04 ($ 0.09) ($ 1.71)
Extraordinary gain.................................................. -- 0.03 --
--------- --------- ---------
Net income (loss)................................................... $ 0.04 ($ 0.06) ($ 1.71)
--------- --------- ---------
--------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding................................ 10,233 9,070 8,839
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
ECOSCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(In thousands, except share amounts)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
------------------------- ADDITIONAL LOSS ON TOTAL
NUMBER OF $.01 PAID-IN ACCUMULATED SHORT-TERM STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT INVESTMENTS INVESTMENT
------------ ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994................... 8,841,836 $ 88 $ 56,287 ($ 38,016) ($ 249) $ 18,110
Exercise of stock options.................. 6,082 -- 1 -- -- 1
Retirement of common stock................. (7,407) -- -- -- -- --
Cash settlement of price guarantee for
common stock issued inpurchase of
American Machinery Corporation........... -- -- (707) -- -- (707)
Change in unrealized loss on short-term
investments.............................. -- -- -- -- 182 182
Net loss................................... -- -- -- (15,094) -- (15,094)
------------ ----- ----------- ------------ ----------- ------------
Balance at June 30, 1995................... 8,840,511 88 55,581 (53,110) (67) 2,492
Exercise of stock options.................. 1,666 -- 1 -- -- 1
Issuance of common stock in settlement of
WBDC lease............................... 500,000 5 495 -- -- 500
Change in unrealized loss on short-term
investments.............................. -- -- -- -- 67 67
Net loss................................... -- -- -- (587) -- (587)
------------ ----- ----------- ------------ ----------- ------------
Balance at June 30, 1996................... 9,342,177 93 56,077 (53,697) -- 2,473
Exercise of stock options.................. 19,000 -- 17 -- -- 17
Issuance of common stock................... 1,040,000 11 1,128 -- -- 1,139
Net income................................. -- -- -- 385 -- 385
------------ ----- ----------- ------------ ----------- ------------
Balance at June 30, 1997................... 10,401,177 $ 104 $ 57,222 ($ 53,312) $ 0 $ 4,014
------------ ----- ----------- ------------ ----------- ------------
------------ ----- ----------- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
ECOSCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)................................................................. $ 385 ($ 587) ($ 15,094)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization................................................. 402 580 1,125
(Gain) loss on sale of investments............................................ (2) 58 23
Gain on sale of property and equipment........................................ -- (74) --
Gain on settlement of accounts payable........................................ -- (51) --
Gain on settlement of debt and other liabilities.............................. -- (241) --
(Reversal) accrual of restructuring charge.................................... (377) (1,550) 6,000
Foreign exchange (gain) loss.................................................. (29) (13) 58
Deferred rent................................................................. -- -- (38)
Changes in current assets and liabilities:
Accounts receivable, net..................................................... (236) 409 377
Inventories.................................................................. 61 (476) (39)
Other current assets......................................................... (15) (245) 183
Accounts payable and accrued expenses........................................ 268 713 (1,808)
Accrued restructuring costs.................................................. (273) (1,174) (1,746)
--------- --------- ---------
Net cash provided by (used for) operating activities........................... 184 (2,651) (10,959)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment................................................ (90) (127) (725)
Proceeds from sale of property and equipment....................................... -- 368 56
Payments for companies, net of cash acquired....................................... -- -- (707)
Purchases of restricted cash and short-term investments............................ (503) (705) (1,494)
Proceeds from sale of short-term investments....................................... 677 6,159 5,265
Proceeds from release of restricted cash........................................... 1,205 -- --
(Increase) decrease in other noncurrent assets..................................... (78) 95 (1,066)
--------- --------- ---------
Net cash provided by investing activities...................................... 1,211 5,790 1,329
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock.................................................... 1,139 -- --
Proceeds from exercise of stock options............................................ 17 1 1
Proceeds from long-term debt....................................................... -- 7 2,567
Payments on long-term debt and capital leases...................................... (2,037) (2,900) (2,278)
--------- --------- ---------
Net cash (used for) provided by financing activities........................... (881) (2,892) 290
Effect of exchange rate changes on cash.............................................. (1) 6 (65)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents..................................... 513 253 (9,405)
Cash and cash equivalents at beginning of period..................................... 734 481 9,886
--------- --------- ---------
Cash and cash equivalents at end of period........................................... $ 1,247 $ 734 $ 481
--------- --------- ---------
--------- --------- ---------
Total unrestricted and restricted cash, cash equivalents and
short-term investments at end of period............................................ $ 1,775 $ 2,639 $ 7,831
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
ECOSCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. OPERATIONS
EcoScience Corporation ("EcoScience") and its wholly owned subsidiaries
(collectively, the "Company"), Agro Dynamics, Inc. and Agro Dynamics Canada
Inc. (collectively, "AGRO") and EcoScience Produce Systems Corp. ("EPSC") are
engaged in marketing, sales and product development, servicing the needs of
the agricultural specialties markets and professional pest control operators
("PCOs"). The Company provides (i) sophisticated growing systems to
greenhouse operators, (ii) technologically advanced sorting, grading and
packing systems to produce packers, (iii) equipment, coatings and disease
control products, including natural biologicals for protecting fruits,
vegetables and ornamentals in storage and transit to market, and (iv) unique
biological pest control products to PCOs. The Company focuses on the
technical marketing of agricultural specialties products and services, and
the development of biological pest control products.
The Company derives a major portion of its revenues from the AGRO and
EPSC operations through the sale of growing medium products to the North
American intensive farming and horticulture industries, sorting, grading and
packing systems to the produce packing industry, and postharvest coating
products to the fresh fruit and vegetable markets throughout the western
hemisphere.
Prior to the acquisition of AGRO in November 1992 and EPSC in May 1994,
substantially all revenues generated by the Company were from collaborative
research and development arrangements and investment income. During this
period, the Company had devoted substantially all of its efforts toward new
product research and development, and commercialization of certain products.
The Company is subject to a number of risks similar to those of other
companies in similar stages of development, including dependence on key
individuals, competition from other products and companies, the necessity to
develop, register, and manufacture commercially usable products, the ability
to achieve profitable operations and the need to raise additional funds
through public or private debt or equity financing.
The Company believes cash reserves of $1,247,000 of cash and cash
equivalents and $528,000 of short-term investments as of June 30, 1997, along
with revenues from product sales, and funds available under its revolving
line of credit will be sufficient to fund the Company's working capital
needs, planned capital expenditures, restructuring program initiatives and
related obligations, and to service its indebtedness through June 30, 1998.
The Company may need to raise additional funds to finance its ongoing
operations after June 30, 1998, although there can be no assurances that such
funds will be available on terms favorable to the Company. The Company is
continuing to explore potential mergers, joint ventures and various other
strategic opportunities, which are aimed at enhancing stockholder value and
the long-term commercial viability of the Company.
See Note 9 for further discussion of the Company's prior restructuring
programs.
30
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of EcoScience
and its wholly owned subsidiaries, AGRO and EPSC. All material intercompany
transactions and balances have been eliminated in consolidation.
(b) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, and disclosures of
contingent assets and liabilities 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.
(c) Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments consist of highly
liquid investments and are stated at the lower of cost or market value. Cash
and cash equivalents consist of investments with original maturities of less
than 90 days. Short-term investments have original maturities greater than 90
days and such securities are classified as available for sale in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company uses the specific identification method in determining the cost basis
of short-term investments, and in computing any realized gains or losses from
the sale of such securities. Net realized gains on short-term investments
were $2,000 in 1997. Net realized losses on short-term investments were
$58,000 and $23,000 in 1996 and 1995, respectively.
Cash and cash equivalents consist of cash and highly liquid money market
funds, the balance of which was $1,247,000 and $734,000 at June 30, 1997 and
1996, respectively. Short-term investments consist of United States
government obligations with an original maturity date of greater than 90
days, the balance of which was $528,000 and $700,000 at June 30, 1997 and
1996, respectively. Restricted cash and short-term investment balance at June
30, 1997 was $0 and at June 30, 1996 consisted of $80,000 in cash and
$1,125,000 in certificate of deposits with original maturity of dates greater
than 90 days, for a total of $1,205,000. Aggregate fair value of the
Company's short-term investments held at June 30, 1997 and 1996 approximated
cost and therefore no unrealized holding gain or loss is reflected in the
consolidated financial statements.
(d) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash, cash equivalents, short-term
investments, accounts receivable and other receivables. The Company primarily
invests its available funds into United States Government securities as well
as investments with high quality financial institutions. The Company performs
ongoing evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company maintains reserves and
allowances for potential credit losses; which to date, such credit losses
have been insignificant and within management's expectations.
31
<PAGE>
(e) Inventories
Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market and consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Raw materials.............................................. $ 17 $ 226
Finished goods............................................. 1,923 1,775
--------- ---------
$1,940 $2,001
--------- ---------
--------- ---------
</TABLE>
Finished goods inventories include material, labor and manufacturing
overhead.
(f) Other Current Assets
Other current assets consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
-------------------
<S> <C> <C>
1997 1996
--------- ---------
Prepaid insurance.......................................... $ 35 $ 34
Prepaid equipment project costs............................ 653 639
Non-trade receivables...................................... 46 57
Other...................................................... 108 97
--------- ---------
$842 $827
--------- ---------
--------- ---------
</TABLE>
(g) Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
-------------------
<S> <C> <C>
1997 1996
--------- ---------
Laboratory equipment...................................... $ 65 $990
Furniture, fixtures and equipment......................... 926 1,543
Leasehold improvements.................................... 62 61
Assets under capital leases............................... -- 585
--------- ---------
1,053 3,179
Less accumulated depreciation and amortization............ (491) (2,181)
--------- ----------
$ 562 $ 998
--------- ----------
--------- ----------
</TABLE>
32
<PAGE>
The Company provides for depreciation and amortization using the
declining balance and straight line methods by charges to operations in
amounts estimated to allocate the cost of these assets over their useful
lives as follows:
<TABLE>
<CAPTION>
CLASSIFICATION ESTIMATED USEFUL LIFE
- -------------- ---------------------
<S> <C>
Laboratory equipment.................................... 5 Years
Furniture, fixtures and equipment....................... 5-7 Years
Leasehold improvements.................................. Life of Lease
Assets under capital leases............................. 3-25 Years
</TABLE>
Leasehold improvements are amortized over the term of the lease or the
useful life of the asset, whichever is shorter.
(h) Intangible Assets
Intangible assets consist primarily of goodwill and other intangible
assets resulting from acquisitions accounted for using the purchase method of
accounting. Goodwill is amortized using the straight line method over 20
years. Other intangible assets relating to acquired businesses consist
principally of amounts attributable to distribution agreements and other
deferred costs. The amortization for distribution agreements and other assets
is on a straight line basis over five years.
Goodwill, net of accumulated amortization, was $1,710,000 and $1,815,000
at June 30, 1997 and 1996, respectively. The accumulated amortization of
goodwill and other intangible assets totaled $823,000 and $619,000 at June
30, 1997 and 1996, respectively. Amortization of goodwill and other
intangible assets included in the accompanying consolidated statements of
operations was $204,000, $204,000 and $195,000 in 1997, 1996 and 1995,
respectively.
(i) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Payroll related costs...................................... $ 136 $ 107
Professional fees.......................................... 146 152
Accrued warranty costs..................................... 59 --
Accrued inventory purchases................................ 83 202
Customer deposits.......................................... 971 986
Other...................................................... 357 362
-------- ----------
$1,752 $1,809
-------- ----------
-------- ----------
</TABLE>
(j) Revenue Recognition
Product sales revenue is recognized upon shipment or equipment
installation, as applicable. The Company recognizes revenue under research
and development agreements in accordance with the terms of the respective
contracts which typically stipulate as the work is performed and costs are
33
<PAGE>
incurred. The Company recognizes license fees under sales and license
agreements, as certain milestones are achieved and related non-refundable
license fees are received.
(k) Research and Development Expenses
The Company charges research and development expenses to operations as
incurred.
(l) Foreign Currency Translation
Assets and liabilities of the Company's Canadian subsidiary are
translated into U.S. dollars at year end exchange rates. Revenue and expense
items are translated at average rates prevailing during the year. Cumulative
translation adjustments have been immaterial. Transaction gains and losses
are included in the results of operations as incurred.
(m) Earnings Per Share
Net income (loss) per share is calculated based upon the weighted
average number of common shares outstanding during the year plus, in years in
which they have a dilutive effect, the effect of common share equivalents
which arise from the assumed exercise of stock options and warrants.
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share", which makes
certain changes to the manner in which earnings per share is reported. The
Company is required to adopt this standard for the year ending June 30, 1998.
The adoption of this standard will require restatement of prior years'
earnings per share.
If the Company had adopted the new standard in 1997, basic earnings per
common share would have been $0.04, based on 10,137,000 basic weighted
average shares. Diluted earnings per share would have been $0.04, based on
10,224,000 diluted weighted average shares.
(n) Fair Value of Financial Instruments
No class of financial instrument had a material difference between its
carrying value and estimated fair value based on market quotations, projected
cash flows or other estimating methods.
34
<PAGE>
(o) Supplemental Cash Flow Information
The Company made certain cash payments and consummated certain
non-cash investing and financing transactions as summarized below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------
YEARS ENDED JUNE 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash paid for:
Interest................................................................................. $ 196 $ 608 $ 930
Income taxes............................................................................. 15 18 60
Non-cash investing and financing activities:
Disposition of assets under capital lease................................................ 308 2,936 --
Termination of capital lease obligation.................................................. (405) (3,500) --
Termination of operating lease obligation and related reduction of accrued restructuring
costs.................................................................................. -- (2,050) --
Issuance of common stock in exchange for termination of operating lease obligation....... -- 500 --
</TABLE>
(p) Long Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed of" ("SFAS 121"). The
Company was required to adopt this standard as of July 1, 1996. SFAS 121
requires, among other things, that an entity review its long lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. The
implementation of this standard had no impact on the 1997 fiscal year financial
statements.
(q) Stock Based Compensation
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), which encourages, but does not require that an
entity account for employee stock based compensation under a fair value based
method. SFAS 123 allows an entity to continue to measure compensation cost
for employee stock based compensation plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). The Company continues to account for
employee stock based compensation using the intrinsic value based method and
is required to make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting under SFAS 123 had been
applied (See Note 5).
(r) Income Taxes
The Company accounts for income taxes under the provisions of SFAS
109, "Accounting for Income Taxes". SFAS 109 utilizes the liability method,
and deferred taxes are determined based on the estimated future tax effects
of differences between the financial statements and tax basis of assets and
liabilities at currently enacted tax laws and rates.
35
<PAGE>
(s) Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial statements
have been reclassified to conform to the current year presentation.
4. DEBT AND LEASES
(a) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
----------------------
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Revolving line of credit.......................................................................... $ -- $ 1,041
Installment notes................................................................................. 11 21
------ ---------
11 1,062
Less current maturities........................................................................... (10) (1,051)
------ ---------
$ 1 $ 11
------ ---------
------ ---------
</TABLE>
As of June 30, 1997, the future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDING JUNE 30, AMOUNT
-------------------- -----------------
<S> <C>
1998.................................... $ 10
1999.................................... 1
2000.................................... --
2001.................................... --
2002.................................... --
</TABLE>
On April 28, 1997, the Company and its lender entered into a new
revolving line of credit agreement, under which the Company may borrow up to
the lesser of $3,000,000 or the sum of (i) 85% of eligible account
receivables, as defined, and (ii) eligible inventory at stratified rates from
25% to 50% up to a maximum of the lesser of $1,200,000 or 66.67% of the
amount of eligible accounts receivable. Funds borrowed under the new
revolving line of credit bear interest at a rate of prime (8.50% at June 30,
1997) plus 2.0% and are secured by all the assets of the Company and all of
the outstanding common stock of AGRO owned by the Company. Interest on funds
borrowed under the revolving line of credit is payable monthly in arrears and
repayment of principal is due on April 27, 1998, subject to automatic
renewal, as provided. The revolving line of credit imposes a financial
covenant on the Company that requires a minimum tangible net worth of
$750,000, as defined. In addition, the new line of credit eliminates certain
provisions under the old line of credit as follows: (i) the cash collateral
requirement, the balance of which was $749,000 at the time the new line of
credit
36
<PAGE>
went into effect; (ii) the 67% cash collateral coverage requirement on
additional borrowings and (iii) the $1,000,000 minimum cash balance
requirement.
In connection with the acquisition of American Machinery Corporation
("AMC") in May 1994, the Company issued a promissory note in the principal
amount of $430,000 to the shareholder of AMC. In February 1996, the Company
settled the remaining balance of the promissory note and other acquisition
related liabilities totaling $501,000 for $251,000, excluding $9,000 of
related transaction expenses, which resulted in an extraordinary gain on the
early extinguishment of debt of $241,000 or $0.03 per share with no related
income tax effect. As part of this settlement, the Company also issued a
warrant to purchase 50,000 shares of its common stock at $2.00 per share to
the shareholder of AMC.
(b) Leases
On January 11, 1996, the Company and its landlord entered into a lease
termination agreement with respect to certain space at its former corporate
headquarters and research and development facility in Worcester,
Massachusetts, under which the Company paid the landlord $125,000 on January
18, 1996 and issued 500,000 shares of the Company's common stock with a
market value of $500,000 on January 22, 1996 in exchange for an immediate
termination of the lease. Additionally, the Company incurred approximately
$25,000 for expenses related to the completion of the transaction. See Note 9
for a discussion of these transactions and their impact on restructuring
accounting in fiscal 1996.
In May 1993, the Company entered into a 15 year capital lease agreement
for a manufacturing facility in Northborough, Massachusetts. The present
value of the minimum lease payments under this capital lease obligation was
$3,525,000 at September 29, 1995. On September 29, 1995, the Company and the
lessor entered into a lease termination agreement under which the Company
paid the lessor on October 31, 1995 approximately $195,000; released to the
lessor approximately $305,000 held in an escrow account; and agreed to make
an advance lease payment for the period October 1995 through December 1995 to
the lessor in exchange for an early termination and release from the
remaining lease obligations effective December 31, 1995. The effect of this
lease termination on the consolidated financial statements during fiscal 1996
was to reduce assets under capital leases by $2,936,000 and capital lease
obligations by $3,500,000, and to increase accrued restructuring costs by
$73,000.
On June 30, 1994, the Company sold certain manufacturing equipment and
leasehold improvements with an original cost of approximately $3,800,000 to a
financing company. The Company, in turn, leased the equipment and
improvements back from the financing company. The lease was accounted for as
a capital lease obligation. On October 11, 1995, the Company and the
financing company entered into an agreement which modified the lease pursuant
to which the financing company waived a payment default which occurred in
September 1995, in exchange for the Company's advance payment of
approximately $1,135,000, which resulted in a decrease to accrued
restructuring costs of $45,000 in fiscal 1996. This payment satisfied the
total amount of the obligation outstanding under rental schedule No. 2 to the
lease. In addition, the Company issued to the financing company a warrant to
purchase 100,000 shares of common stock for $3.00 per share pursuant to the
terms of this agreement. The Company continued to make the remaining monthly
payments under rental schedule No. 1 to the lease until the remaining
obligation was fully satisfied on September 27, 1996, with the proceeds from
an equity offering. Pursuant to a lease settlement agreement dated August 8,
1996, between the Company and the financing company, the Company
37
<PAGE>
paid $880,000 and returned certain leased equipment with a net book value of
$308,000 to the financing company as satisfaction of its remaining capital
lease obligation under rental schedule No. 1 of approximately $1,248,000 of
principal and $17,000 of accrued interest on September 27, 1996, which
resulted in a reversal of a restructuring charge of $77,000. Accordingly, the
Company reclassified $880,000 from "long-term debt and capital leases" to
"current maturities of noncurrent liabilities" in the consolidated balance
sheet to reflect the impact of this agreement as of June 30, 1996.
Future minimum lease payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDING JUNE 30, AMOUNT
- ----------------------------------------- ---------------
<S> <C>
1998...................................... $ 485
1999...................................... 377
2000...................................... 95
2001...................................... 56
2002...................................... 9
Thereafter................................ --
---------
Total minimum lease payments.............. $1,022
---------
---------
</TABLE>
Rental expense included in the accompanying consolidated statements of
operations was $392,000, $833,000, and $1,064,000 for 1997, 1996 and 1995,
respectively. Sublease rental income was ($33,000), (346,000) and ($302,000)
for 1997, 1996 and 1995, respectively.
5. STOCKHOLDERS' INVESTMENT
(a) Private Placement
In September 1996, the Company sold 1,040,000 unregistered shares of
common stock in a private placement. Net proceeds realized from the equity
offering totaled $1,139,000 after fees and expenses totaling $161,000. In
connection with the offering, the Company also issued a warrant to purchase
156,000 shares of its common stock at $2.00 per share to the placement agent.
The Company agreed to register the shares of the offering and warrant within
nine months under the Securities Act of 1933. The registration was declared
effective in April 1997.
38
<PAGE>
(b) Common Stock Purchase Warrants
The Company has issued warrants to purchase shares of its common stock to
certain stockholders, directors and consultants of the Company. Outstanding
warrants expire through 2002. The following table summarizes warrant activity
for the three years ended June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER WEIGHTED AVERAGE
WARRANTS SHARE RANGE EXERCISE PRICE
----------- --------------- -----------------
<S> <C> <C> <C>
Outstanding at June 30, 1994...................................... 360,047 $ 0.38--$11.00 $ 6.60
Granted......................................................... -- -- --
--------- --------------- ---------
Outstanding at June 30, 1995...................................... 360,047 0.38--11.00 6.60
Granted......................................................... 250,000 1.38-- 3.00 2.15
Canceled........................................................ (151,087) 0.38-- 9.55 4.07
--------- --------------- ---------
Outstanding at June 30, 1996...................................... 458,960 1.38--11.00 5.01
Granted......................................................... 281,554 1.00-- 3.75 2.30
Canceled........................................................ (78,960) 6.00--11.00 10.22
--------- --------------- ---------
Outstanding at June 30, 1997...................................... 661,554 $ 1.00--$9.75 $ 3.24
--------- --------------- ---------
--------- --------------- ---------
Exercisable at June 30, 1997...................................... 631,024 $ 1.00--$9.75 $ 3.33
--------- --------------- ---------
--------- --------------- ---------
</TABLE>
(c) Stock Option Plans
In May 1991, the Board of Directors approved a stock option plan (the
"1991 Plan") to grant options to acquire up to 1,300,000 shares of common
stock to employees and consultants. Options granted under the 1991 Plan vest
over various periods and expire no later than 10 years from the date of
grant. Options have been granted at the fair value of the Company's common
stock on the date of grant.
On December 13, 1994, the Compensation Committee of the Board of
Directors authorized the Company to offer an exchange with each holder (who
was then an employee but not an executive officer or director of the Company)
of stock options granted under the 1991 Plan, a new stock option for a number
of shares equal to the number of shares remaining unexercised under the then
existing stock option at the time of exchange subject to certain conditions.
The option price of each new stock option granted under this offer was equal
to the fair market value ($2.125 per share) of the Company's common stock on
the date of authorization. A total of 169,483 stock options were exchanged
under this offer during 1995.
In November 1996, the Board of Directors approved an amendment to the
Company's 1991 Stock Option Plan. The amendment provides for the number of
shares of the Company's common stock which may be granted under the 1991
Stock Option Plan shall be increased from 1,300,000 to 1,800,000 shares. The
Board authorized this increase to ensure a sufficient number of option shares
would be available for future grants. This amendment is being submitted to
stockholders for ratification at the Company's next annual meeting.
39
<PAGE>
Option activity for the three years ended June 30, 1997, is summarized as
follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER WEIGHTED AVERAGE
OPTIONS SHARE RANGE EXERCISE PRICE
----------- --------------- -----------------
<S> <C> <C> <C>
Outstanding at June 30, 1994.............................. 855,847 $ 0.38 - $11.38 $ 6.30
Granted................................................. 18,250 1.84 - 4.88 3.09
Exercised............................................... (6,082) 0.45 0.45
Canceled................................................ (406,982) 0.45 - 11.38 8.30
----------- --------------- -----
Outstanding at June 30, 1995.............................. 461,033 0.38 - 11.38 4.48
Granted................................................. 550,500 0.56 - 1.63 0.97
Exercised............................................... (1,666) 0.45 0.45
Canceled................................................ (173,851) 0.60 - 11.38 0.43
----------- --------------- -----
Outstanding at June 30, 1996.............................. 836,016 0.38 - 11.38 2.17
Granted................................................. 340,178 0.94 - 2.50 1.21
Exercised............................................... (19,000) 0.88 0.88
Canceled................................................ (271,816) 0.38 - 11.38 3.99
----------- --------------- -----
Outstanding at June 30, 1997.............................. 885,378 $ 0.56 - 7.00 $ 1.27
----------- --------------- -----
----------- --------------- -----
Exercisable at June 30, 1997.............................. 428,003 $ 0.56 - 7.00 $ 1.38
----------- --------------- -----
----------- --------------- -----
</TABLE>
All stock options and warrants granted by the Company were granted at
exercise prices not less than the fair market value of the Company's common
stock on the date of grant.
The Company accounts for its common stock purchase warrants and options
plans based upon the "intrinsic value" method set forth in APB 25. Had
compensation costs for the Company's stock option plans been determined
consistent with SFAS 123, the Company's pro-forma net income (loss) and net
income (loss) per share for 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Net loss....................................................................................... ($ 106) ($ 738)
---------- ----------
---------- ----------
Net loss per share............................................................................. ($ 0.01) ($ 0.08)
---------- ----------
---------- ----------
</TABLE>
Because SFAS 123 has not been applied to warrants and options granted
prior to July 1, 1995, the resulting pro-forma compensation cost may not be
representative of that to be expected in future periods.
Under SFAS 123, the fair value of each stock option grant is estimated on
the date of grant using the Black-Shoals option pricing model with the
weighted average assumptions in 1997 and 1996, respectively as follows: (i)
risk free interest rate of 6% for both years; (ii) expected life of
approximately eight years for both years; and (iii) expected volatility of
70% for both years. The weighted average fair value of the options granted
during 1997 and 1996 was $0.86 and $0.69, respectively.
40
<PAGE>
6. INCOME TAXES
As of June 30, 1997, the Company had available net operating loss
carryforwards of approximately $44,000,000 and research and development tax
credit carryforwards of approximately $900,000 to reduce future federal
income taxes, if any. These carryforwards expire through 2010 and are subject
to review and possible adjustment by the Internal Revenue Service. The Tax
Reform Act of 1986 limits a Company's ability to utilize certain net
operating loss and tax credit carryforwards in the event of a cumulative
change in ownership in excess of 50%, as defined. The Company has completed
numerous financings which may have resulted in a change in ownership in
excess of 50%, as defined. Therefore, utilization of net operating loss and
tax credit carryforwards may be limited due to ownership changes.
The components of the net deferred tax amount recognized in the accompanying
consolidated balance sheets are set forth below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Deferred tax assets......................................................................... $ 16,000 $ 16,500
Valuation allowance......................................................................... (16,000) (16,500)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>
The approximate tax effect of each type of temporary difference and
carryforward before allocation of the valuation allowance is summarized as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Net operating losses........................................................................ $ 15,000 $ 15,600
Other temporary differences................................................................. 100 --
Research and development credits............................................................ 900 900
--------- ---------
$ 16,000 $ 16,500
--------- ---------
--------- ---------
</TABLE>
Due to the uncertainty surrounding the timing of realizing the potential
benefits of its favorable tax attributes in future income tax returns, the
Company has placed a valuation allowance against its otherwise recognizable
deferred tax assets.
7. TRANSACTIONS WITH AFFILIATES
The Company sold product to an affiliated group of companies ("Affiliates")
in the amount of $2,893,000 or 14% of product sales in 1997 and $556,000 or 4%
of product sales in 1996. An officer of the Company is also an officer of the
Affiliates. Net amount due from the Affiliates was $348,000 and $89,000 at June
30, 1997 and 1996, respectively. The Affiliates also pay a monthly fee to the
Company for facilities and other costs amounting to $39,000 and $55,000 for 1997
and
41
<PAGE>
1996, respectively. Management believes that prices and fees charged to the
Affiliates are reasonable.
8. SALES, LICENSE AND DEVELOPMENT AGREEMENTS
AGRO has a distribution agreement with an unrelated company for a term
of five years ending in December 1997, with automatic one-year extensions
unless either party elects to terminate the agreement. Its extension is being
actively negotiated. The agreement grants AGRO the exclusive right to sell
the unrelated company's product in the United States and Canada. The
agreement requires AGRO to maintain minimum annual sales which, if not met,
would allow the unrelated company to modify the exclusivity of the agreement.
The sale of products under this agreement accounted for 42%, 45% and 43% of
the Company's total product sales for the years ended June 30, 1997, 1996 and
1995, respectively. Although there are a limited number of sources of the
particular growing medium products that are sold under this distribution
agreement, the Company's management believes that other suppliers could
provide similar products on comparable terms. A change in suppliers, however,
could cause a delay in filling orders as well as a possible loss of sales,
which would affect operating results adversely.
In August 1995, AGRO entered into a distribution agreement with an
unrelated company for an initial term of three years for the fruit, vegetable
and flower markets in the United States and Canada ending in September 1998,
and in the fruit, vegetable and flower markets in the Caribbean and Mexico
ending in August 1997, which has been extended to August 1998. These
agreements will be automatically extended for each of the respective terms
set forth above unless either party elects to terminate the agreement upon
ninety days prior written notice. The agreement grants AGRO the exclusive
right to sell the unrelated company's sorting, grading and packing products
and equipment in the United States, Canada, Mexico and the Caribbean. The
agreement requires AGRO to secure annually certain minimum market share
percentage of the market for sorting, grading and packing machines. The sale
of products under this agreement accounted for 26% and 20% of total product
sales for the fiscal years ended June 30, 1997 and 1996, respectively.
Although there are a limited number of sorting, grading and packing equipment
manufacturers in the world, the Company's management believes that other
suppliers could provide similar equipment on comparable terms. A change in
supplier, however, could cause a delay in filling orders, as well as a
possible loss of sales, which would affect operating results adversely.
In September 1995, AGRO entered into a distribution agreement with an
unrelated company for a term commencing on July 1, 1995 and ending on June
30, 1997, with automatic one year extensions unless either party elects to
terminate the agreement with three months advanced notice in writing. The
agreement has been extended to June 30, 1998. The agreement grants AGRO the
exclusive right to sell the unrelated company's environment control products
and accessories in the United States, Canada and Mexico.
In June 1992, the Company entered into a Product Development and License
Agreement with Terminix (the "Terminix Agreement") for collaboration on the
development and marketing of termite control products. Under the Terminix
Agreement, Terminix provided funding to the Company for the development of
biological termite control products and received exclusive rights to use and
distribute any resulting products in the United States and Canada. The
Company has retained all rights elsewhere. The Company managed product
development, manufactures and sells products to Terminix at an agreed markup
over the Company's manufacturing cost. The Company will also share any profit
realized by Terminix over specified levels. The Terminix Agreement extends
until expiration of the
42
<PAGE>
last to expire of any patents which may issue covering the Company's
biological termite control technology, subject to Terminix's right to
terminate the agreement at any time.
In June 1993, the Company entered into a Sales and License Agreement (the
"Maruwa Agreement") with Maruwa BioChemical Co., Ltd. to license certain
biopesticide technology for control of cockroaches. Under the agreement,
Maruwa Biochemical will pursue at its own expense the registration and
commercialization of the Company's cockroach and termite control products in
Japan. At this time emphasis has shifted to the Bio-Blast product and the
Company anticipates entering into a formal agreement with Maruwa for the
Bio-Blast product. The Company will retain manufacturing rights and will
receive royalties on sales of Bio-Blast.
In June 1993, the Company entered into an agreement to sub-license
certain technology and patents for the manufacture and sale of vegetable and
fruit coating products under the name Nature Seal. Under this sub-license,
the Company agreed to pay a royalty or, in certain circumstances, a
percentage of profits on sales of products incorporating the Nature Seal
technology, and certain minimum annual licensing fees payable to the USDA.
While the sub-license agreement extends until expiration of the last to
expire patents covering the Nature Seal technology, the Company has elected
to no longer pursue this technology.
9. ASSET VALUATION AND RESTRUCTURING CHARGES
The Company's consolidated statement of operations for 1995 included a
$6,000,000 or $0.68 per share charge to write down the value of certain
assets and to provide for the costs associated with the closure of the
Company's facilities located in Worcester, Northborough, and Shrewsbury,
Massachusetts, and for reductions in the Massachusetts based work force. The
write-down of assets in 1995 included a $1,946,000 non-cash charge against
the Company's investment in manufacturing, laboratory, and office property
and equipment located in Massachusetts and approximately a $354,000 non-cash
charge for certain other assets to their respective net realizable values. As
of June 30, 1996 and 1995, these assets had a net book value of approximately
$328,000 and $3,835,000, respectively, and were intended to be disposed of in
fiscal 1997 and 1996, respectively. The remaining $3,700,000 consisted of
accrued charges for the costs of facility lease settlements ($2,000,000),
manufacturing plant shut-down ($497,000), severance benefits for 33 employees
primarily in the research and development and manufacturing areas
($1,035,000), and other contractual obligations, including the termination of
certain inventory supply and distribution agreements ($168,000) related to
the restructuring program adopted in fiscal 1995. The Company completed all
of the employee terminations related to a 1994 restructuring program in the
first half of 1995 and a portion of the facility consolidation activities in
1995. The Company completed a major portion of its 1995 restructuring program
activities in fiscal 1996 and 1997 and the remaining restructuring program
initiatives are expected to be completed in fiscal 1998 and thereafter.
At the close of fiscal 1995, the Company began the implementation of the
restructuring program which was designed to shift the corporate focus from
research and development to commercial operations, in an effort to reduce
operating losses and conserve cash resources. As part of the restructuring
program, the Company eliminated substantially all of its Massachusetts based
work force (33 positions) in the first quarter of fiscal 1996. In addition,
during fiscal 1995 certain functions were moved to the Company's
manufacturing facility in Northborough, Massachusetts, and the Company's
space at its corporate headquarters and research and development facility
located in Worcester, Massachusetts, was decreased from approximately 41,000
square feet to approximately 13,000 square feet. In the first quarter of
fiscal 1996, the Company closed the
43
<PAGE>
Worcester facility and all remaining functions were moved to the Northborough
facility. During the second quarter of fiscal 1996, the Company relocated its
Massachusetts based operations including corporate headquarters to AGRO's
East Brunswick, New Jersey facility.
On January 11, 1996, the Company and its landlord for its Worcester corporate
headquarters and research and development facility entered into a lease
termination agreement, under which the Company paid the landlord $125,000 on
January 18, 1996 and issued 500,000 shares of the Company's common stock with
a market value of $500,000 on January 22, 1996, in exchange for an immediate
termination of the lease. Additionally, the Company incurred approximately
$25,000 for expenses related to the completion of the transaction. After
accounting for these settlement provisions which totaled $650,000, the
Company reversed $1,550,000 of accrued restructuring costs in the third
quarter of fiscal 1996 that related to accrued restructuring costs which were
originally recorded in fiscal 1995 ($2,000,000) and the remaining accrued
restructuring costs which were originally recorded in fiscal 1994 ($200,000).
During fiscal 1997, the Company paid and charged $273,000 of restructuring
related costs of which $157,000 related to employee severance benefits, and
$116,000 related to other contracted liabilities. As of June 30, 1997,
accrued restructuring costs of $457,000 (total current and noncurrent
portions) consisted of $250,000 for facility consolidations and lease
settlements, $137,000 for employee severance benefits and $70,000 for other
contractual liabilities.
10. GEOGRAPHIC SEGMENT INFORMATION
Financial information segregated by major geographic area is summarized
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED JUNE 30,
--------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
United States................................................................. $ 15,210 $ 9,730 $ 8,771
Canada........................................................................ 5,643 4,421 3,564
--------- --------- ----------
Consolidated............................................................... $ 20,853 $ 14,151 $ 12,335
--------- --------- ----------
--------- --------- ----------
Net income (loss):
United States................................................................. $ 309 ($ 587) ($ 15,122)
Canada........................................................................ 76 -- 28
--------- --------- ----------
Consolidated............................................................... $ 385 ($ 587) ($ 15,094)
--------- --------- ----------
--------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Identifiable assets:
United States................................................................... $ 7,829 $ 9,316 $ 18,143
Canada.......................................................................... 1,226 1,412 1,364
Intercompany eliminations....................................................... (180) (617) (738)
--------- --------- ---------
Consolidated................................................................. $ 8,875 $ 10,111 $ 18,769
--------- --------- ---------
--------- --------- ---------
</TABLE>
44
<PAGE>
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is an analysis of certain items in the consolidated
statements of operations by quarter for 1997 and 1996:
Consolidated Statements of
Operations Data:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................................................................... $ 4,508 $ 7,753 $ 3,633 $ 4,959
Cost of goods sold......................................................... 3,405 6,049 2,608 3,640
----------- ----------- ----------- -----------
Gross profit............................................................... 1,103 1,704 1,025 1,319
Research and development................................................... 128 153 128 99
Asset valuation and restructuring reversal................................. (77) -- -- (300)
Selling, general, administrative and other................................. 1,173 1,180 1,208 1,074
----------- ----------- ----------- -----------
Net income (loss).......................................................... ($ 121) $ 371 ($ 311) $ 446
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per common share......................................... ($ 0.01) $ 0.04 ($ 0.03) $ 0.04
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.................................................................. $ 4,095 $ 4,262 $ 3,097 $ 2,697
Cost of goods sold........................................................ 3,147 2,933 2,097 2,217
----------- ----------- ----------- ---------
Gross profit.............................................................. 948 1,329 1,000 480
Research and development.................................................. 312 274 197 235
Asset valuation and restructuring reversal................................ -- -- (1,550) --
Selling, general, administrative and other................................ 1,252 1,330 1,243 1,292
----------- ----------- ----------- ---------
Income (loss) before extraordinary gain................................... (616) (275) 1,110 (1,047)
Extraordinary gain on early extinguishment of debt........................ -- -- 241 --
----------- ----------- ----------- ---------
Net income (loss)......................................................... ($ 616) ($ 275) $ 1,351 ($ 1,047)
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
Net income (loss) per share:
Income (loss) before extraordinary gain................................. ($ 0.07) ($ 0.03) $ 0.12 ($ 0.11)
Extraordinary gain...................................................... -- -- 0.03 --
----------- ----------- ----------- ---------
Net income (loss)....................................................... ($ 0.07) ($ 0.03) $ 0.15 ($ 0.11)
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
</TABLE>
45
<PAGE>
ARTHUR ANDERSEN, LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
of EcoScience Corporation:
We have audited the accompanying consolidated balance sheets of EcoScience
Corporation (a Delaware corporation) and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
investment and cash flows for each of the three years in the period ended June
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of EcoScience Corporation and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
September 3, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
46
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item, in addition to that set forth above
in Part I under the caption "Executive Officers of the Registrant" is set forth
in the section entitled "Election of Directors" contained in the Company's
definitive proxy statement filed with the Securities and Exchange Commission
pursuant to Regulation 14A (the "Proxy Statement") in connection with the
Company's 1997 Special Meeting in lieu of the Annual Meeting of Stockholders to
be held on November 25, 1997, and such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Remuneration of directors and officers and information related thereto is
included in the section entitled "Executive Compensation" contained in the Proxy
Statement and such information is incorporated herein by reference, except for
information contained under the captions "Report of the Compensation Committee"
and "Performance Graph", which shall not be deemed incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of management and certain beneficial owners and
information related thereto is included in Notes to the Consolidated
Financial Statements contained in Item 8 above, as it pertains to certain
transactions and in the section entitled "Security Ownership of Beneficial
Owners and Management" contained in the Proxy Statement and such information
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with management and related parties and information related
thereto is included for certain transactions in Notes to the Consolidated
Financial Statements contained in Item 8, above, and certain other information
is included in the section entitled "Certain Transactions" contained in the
Proxy Statement and such information is incorporated herein by reference.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1) The following consolidated financial statements of the Company and its subsidiaries for the
years ended June 30, 1997, 1996 and 1995, are included at the pages indicated below:
PAGE
----
Consolidated Balance Sheets.................................................... 26
-As of June 30, 1997 and 1996
Consolidated Statements of Operations.......................................... 27
-For the Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Investment................. 28
-For the Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows.......................................... 29
-For the Years Ended June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements..................................... 30
Report of Independent Public Accountants....................................... 46
(a)(2) There are no consolidated financial statement schedules required to be presented herein:
All other schedules for which provision is made in the applicable accounting regulations of
the Securities and Exchange Commission are not required under the related instructions or
are not applicable, and therefore have been omitted.
(a)(3) The following Exhibits are included in this Annual Report on Form 10-K:
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
<S> <C>
- --------- ----------------------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Registrant dated June 29, 1988 [incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1992].
3.2 By-Laws of the Registrant [incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, Registration Statement No. 33-44664].
4.1 Specimen Common Stock Certificate of the Registrant [incorporated by reference to Exhibit 4.1 to
the Registrant's Registration Statement on Form S-1, Registration Statement No. 33-44664].
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
<S> <C>
- --------- ----------------------------------------------------------------------------------------------------
10.1* Registrant's 1991 Stock Option Plan, As Amended [incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1, Registration Statement No. 33-44664].
10.2* Registrant's 1988 Stock Option Plan [incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, Registration Statement No. 33-44664].
10.3* Form of Non-Statutory Stock Option Agreement [incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1, Registration Statement No. 33-44664].
10.4 Common Stock Purchase Warrant between the Registrant and Copley Partners 2, L.P., dated December 6,
1989, as amended [incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993].
10.5 8% Convertible Preferred Stock Purchase Agreement between the Registrant and the other parties named
therein, dated June 29, 1988, amended and restated on December 6, 1989, and amended June 7, 1991 and
July 30, 1991 [incorporated by reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1, Registration Statement No. 33-44664].
10.6 Preferred Stock Purchase Agreement between the Registrant and the other parties named therein, dated
June 7, 1991, and amended as of July 30, 1991 [incorporated by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1, Registration Statement No. 33-44664].
10.7 Series B Preferred Stock Purchase Agreement between the Registrant and the other parties named therein,
dated July 30, 1991, and amended on October 31, 1991 [incorporated by reference to Exhibit 10.7
to the Registrant's Registration Statement on Form S-1, Registration Statement No. 33-44664].
10.8 Common Stock Warrant between the Registrant and E. Andrews Grinstead III, dated May 22, 1991, as amended
[incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1993].
10.10 Common Stock Purchase Warrant between the Registrant and E. Andrews Grinstead, III, dated June 7, 1991,
as amended [incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1993].
</TABLE>
* Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c) of Form 10-K.
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
<S> <C>
- --------- ----------------------------------------------------------------------------------------------------
10.14 Letter Agreement between the Registrant and Dr. and Mrs. Meir Broza, dated November 4, 1991
[incorporated by reference to Exhibit 10.19 to the Registrant's Registration Statement on Form
S-1, Registration Statement No. 33-44664].
10.15 Assignment of Patent Rights, dated November 7, 1991 [incorporated by reference to Exhibit 10.20
to the Registrant's Registration Statement on Form S-1, Registration Statement No. 33-44664].
10.16 Option to Purchase Common Stock between the Registrant and Dr. Meir Broza, dated November 4, 1991
[incorporated by reference to Exhibit 10.21 to the Registrant's Registration Statement on Form
S-1, Registration Statement No. 33-44664].
10.20 Cooperative Research and Development Agreement between the Registrant and the United States Department
of Agriculture, dated July 10, 1990 [incorporated by reference to Exhibit 10.26 to the
Registrant's Registration Statement on Form S-1, Registration Statement No. 33-44664].
10.21 Product Development and License Agreement between the Registrant and The Terminix International Company,
L.P., dated as of June 3, 1992, with certain confidential material omitted [incorporated by
reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1992].
10.22 Agreement and Plan of Reorganization dated as of November 18, 1992, among the Registrant, Agro Dynamics,
Inc., Eco Acquisition Corporation and the Stockholders named therein [incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3, Registration Statement No.
33-58540].
10.23 Sublicense Agreement between the Registrant, J.R. Brooks & Sons., Inc. and Seald-Sweet Growers, Inc.,
dated as of June 23, 1993, with certain confidential material omitted [incorporated by reference
to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1993].
10.24 Agreement between Agro Dynamics, Inc. and Grodania A/S with certain confidential material omitted
[incorporated by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993].
10.25 Lease between the Registrant and Worcester Business Development Corporation, dated as of May 28, 1993
[incorporated by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993].
10.26 Form of Warrant issued to Directors of the Registrant [incorporated by reference to Exhibit 10.38
to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993].
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
<S> <C>
- --------- ----------------------------------------------------------------------------------------------------
10.28 Asset Purchase Agreement, dated as of March 2, 1994, by and among the Registrant, American Machinery
Corporation and Aeroglide Corporation [incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-3, Registration Statement No. 33-83184].
10.29 Master Equipment Lease Agreement, dated as of June 7, 1994, between the Registrant and Financing For
Science International, Inc. [incorporated by reference to Exhibit 10.34 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994].
10.30 Loan Agreement dated as of October 28, 1994 by and among the Registrant, Agro Dynamics, Inc., Agro
Dynamics Canada Inc. and Silicon Valley Bank [incorporated by reference to Exhibit 10.35 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994].
10.31 Sublease Agreement dated as of November 1, 1994, between the Registrant and Hybridon, Inc.
[incorporated by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K/A-2
for the fiscal year ended June 30, 1995].
10.32 Marketing and Distribution Agreement dated as of May 15, 1995 between Registrant and Rhone-Poulenc
Agrichimie. [incorporated by reference to Exhibit 10.33 to the Registrant's Annual Report on Form
10-K/A-2 for the fiscal year ended June 30, 1995].
10.33 Distribution Agreement dated as of August 1, 1995, by and among Agro Dynamics, Inc., Aweta, BV and
Autoline. [incorporated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form
10-K/A-2 for the fiscal year ended June 30, 1995].
10.34 Distributorship Agreement dated as of September 25, 1995, between Agro Dynamics, Inc. and H. Hoogendoorn
Automation B.V. [incorporated by reference to Exhibit 10.35 to the Registrant's Annual Report on
Form 10-K/A-2 for the fiscal year ended June 30, 1995].
10.35 Partial Lease Termination Agreement for Massachusetts Biotechnology Research Park Space dated as of
September 19, 1995, between the Registrant and Worcester Business Development Corporation.
[incorporated by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-K/A-2
for the fiscal year ended June 30, 1995].
10.36 Lease Termination Agreement dated as of September 29, 1995, between the Registrant and Worcester
Business Development Corporation. [incorporated by reference to Exhibit 10.37 to the Registrant's
Annual Report on Form 10-K/A-2 for the fiscal year ended June 30, 1995].
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
<S> <C>
- --------- ----------------------------------------------------------------------------------------------------
10.37 Amendment of Sublease dated as of October 11, 1995, between the Registrant and Hybridon, Inc.
[incorporated by reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K/A-2
for the fiscal year ended June 30, 1995].
10.38 Loan Modification Agreement dated as of October 5, 1995, by and among the Registrant, Agro Dynamics,
Inc., Agro Dynamics Canada Inc., and Silicon Valley Bank. [incorporated by reference to Exhibit
10.39 to the Registrant's Annual Report on Form 10-K/A-2 for the fiscal year ended June 30,
1995].
10.39 Agreement dated as of October 11, 1995 modifying the Master Equipment Lease between the Registrant and
Financing For Science International, Inc. [incorporated by reference to Exhibit 10.40 to the
Registrant's Annual Report on Form 10-K/A-2 for the fiscal year ended June 30, 1995].
10.40 Lease Termination Agreement dated as of January 11, 1996 between the Registrant and Worcester Business
Development Corporation [incorporated by reference to Exhibit 10.41 to the Registrant's Current
Report on Form 8-K dated January 16, 1996].
10.41 Debt Settlement Agreement dated as of February 20, 1996, by and among the Registrant, EcoScience Produce
Systems Corp., Aeroglide Corporation of Florida and Aeroglide Corporation [incorporated by
reference to Exhibit 10.42 to the Registrant's Current Report on Form 8-K dated March 20, 1996].
10.42 Loan Modification Agreement dated as of July 5, 1996, by and among the Registrant, Agro Dynamics, Inc.,
Agro Dynamics Canada Inc., and Silicon Valley Bank [Incorporated by reference to Exhibit 10.42 to
Registrant's Annual Report on Form 10-K for fiscal year ended June 30, 1996].
10.43 Loan Modification Agreement dated as of September 5, 1996, by and among the Registrant, Agro Dynamics,
Inc., Agro Dynamics Canada Inc., and Silicon Valley Bank [Incorporated by reference to Exhibit
10.43 to Registrant's Annual Report on Form 10-K for fiscal year ended June 30, 1996].
10.44 Loan Modification Agreement dated as of October 5, 1996, by and among the Registrant, Agro Dynamics,
Inc., Agro Dynamics Canada Inc., and Silicon Valley Bank [Incorporated by reference to Exhibit
10.44 to Registrant's Annual Report on Form 10-K for fiscal year ended June 30, 1996].
10.45 Private Placement Memorandum dated September 20, 1996 for Offering of Registrant's Common Stock
[Incorporated by reference to Exhibit 10.45 to Registrant's Annual Report on Form 10-K for fiscal
year ended June 30, 1996].
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
<S> <C>
- --------- ----------------------------------------------------------------------------------------------------
10.47 Master Equipment Lease Settlement Agreement dated as of August 8, 1996, between the Registrant and
Financing For Science International, Inc. [Incorporated by reference to Exhibit 10.47 to
Registrant's Annual Report on Form 10-K for fiscal year ended June 30, 1996].
10.48 Common Stock Warrant between the Registrant and Aeroglide Corporation [Incorporated by reference
to Exhibit 10.48 to Registrant's Annual Report on Form 10-K for fiscal year ended June 30, 1996].
10.49 Form of Stock Purchase Agreement dated September 25, 1996, by and among EcoScience Corporation, Taglich
Brothers, D'Amadeo, Wagner & Company, Incorporated, and other entities [Incorporated by reference
to Exhibit 10.49 to Registrant's Annual Report on Form 10-K for fiscal year ended June 30, 1996].
10.50 Loan and Security Agreement dated as of April 28, 1997 by and among the Registrant, Agro Dynamics, Inc.,
Agro Dynamics Canada Inc. and EcoScience Produce Systems Corp. and Silicon Valley Bank.
[incorporated by reference to Exhibit 10.50 to the Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 1997].
10.51 Schedule to Loan and Security Agreement dated as of April 28, 1997 by among the Registrant, Agro
Dynamics, Inc., Agro Dynamics Canada Inc. and EcoScience Produce Systems Corp. and Silicon Valley Bank.
[incorporated by reference to Exhibit 10.51 to the Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 1997].
10.52 Continuing Guaranty by each of the Registrant, EcoScience Produce Systems Corp. and Agro Dynamics, Inc.
guaranteeing the obligations of the Registrant, EcoScience Produce Systems Corp., Agro Dynamics, Inc.
and Agro Dynamics Canada Inc. in favor of Silicon Valley Bank. [incorporated by reference to
Exhibit 10.52 to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended March 31,
1997].
10.53 Continuing Guarantee by Agro Dynamics Canada Inc. guaranteeing the obligations of the Registrant in
favor of Silicon Valley Bank. [incorporated by reference to Exhibit 10.53 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1997].
10.54 Collateral Assignment, Patent Mortgage and Security Agreement by and between EcoScience Corporation
(Assignor) and Silicon Valley Bank (Assignee). [incorporated by reference to Exhibit 10.54 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1997].
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
<S> <C>
- --------- ----------------------------------------------------------------------------------------------------
10.55 Collateral Assignment, Patent Mortgage and Security Agreement by and between EcoScience Produce Systems
Corp. (Assignor) and Silicon Valley Bank (Assignee). [incorporated by reference to Exhibit 10.55
to the Registrant's Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1997].
10.56 Collateral Assignment, Patent Mortgage and Security Agreement by and between Agro Dynamics, Inc.
(Assignor) and Silicon Valley Bank (Assignee). [incorporated by reference to Exhibit 10.56 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended March 31, 1997].
21 Subsidiaries of the Registrant [filed herewith].
23 Consent of Arthur Andersen LLP [filed herewith].
24 Powers of Attorney of officers and directors of the Company [included in the signature page filed
on October 1, 1997].
27 Financial Data Schedule for the Fiscal Year Ended June 30, 1997 [filed herewith]
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fourth quarter of the fiscal year ended June 30, 1997.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
East Brunswick, the State of New Jersey, on September 30, 1997.
ECOSCIENCE CORPORATION
BY: /s/ Michael A. DeGiglio
-----------------------------------------
Michael A. DeGiglio
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below on this report hereby constitutes and appoints Michael A.
DeGiglio and Kenneth S. Boger, and each of them with full power to act
without the other, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to this
report, and to file the same, with all exhibits hereto, and other documents
in connection herewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing, ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their
or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Michael A. DeGiglio President, Chief Executive September 30, 1997
- ------------------------------- Officer and Director
Michael A. DeGiglio
/s/ Harold A. Joannidi Treasurer, Secretary and September 30, 1997
- ------------------------------- Corporate Controller
Harold A. Joannidi
/s/ Kenneth S. Boger
- -------------------------------
Kenneth S. Boger Director September 30, 1997
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ E. Andrews Grinstead III
- -------------------------------
E. Andrews Grinstead III Director September 30, 1997
/s/ Larry M. Nouvel
- -------------------------------
Larry M. Nouvel Director September 30, 1997
/s/ David J. Ryan
- -------------------------------
David J. Ryan Chairman of the Board September 30, 1997
/s/ Heinz K. Wehner
- -------------------------------
Heinz K. Wehner Director September 30, 1997
</TABLE>
56
<PAGE>
ECOSCIENCE CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ------------ ---------------------- --------
<C> <S> <C>
21 Subsidiaries of the Registrant as of June 30, 1997 58
23 Consent of Independent Public Accountants 59
27 Financial Data Schedule as of and for the Year Ended June 30, 1997 60
</TABLE>
57
<PAGE>
ECOSCIENCE CORPORATION
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
JUNE 30, 1997
<TABLE>
<CAPTION>
STATE / PROVINCE OF
LEGAL NAME OF SUBSIDIARY SUBSIDIARY OF INCORPORATION
- --------------------------------------------- --------------------------------------------- -------------------
<S> <C> <C>
Agro Dynamics, Inc. EcoScience Corporation Delaware
Agro Dynamics Canada Inc. Agro Dynamics, Inc. Ontario, Canada
EcoScience Produce Systems Corp. EcoScience Corporation Delaware
</TABLE>
<PAGE>
ECOSCIENCE CORPORATION
EXHIBIT 23
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated September 3, 1997 included in this Form 10-K into
EcoScience Corporation's previously filed Registration Statements File
Numbers 33-55206, 33-83184, 33-31144 and 333-25341.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
September 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,247
<SECURITIES> 528
<RECEIVABLES> 1,788
<ALLOWANCES> 150
<INVENTORY> 1,940
<CURRENT-ASSETS> 6,345
<PP&E> 1,053
<DEPRECIATION> 491
<TOTAL-ASSETS> 8,875
<CURRENT-LIABILITIES> 4,710
<BONDS> 1
0
0
<COMMON> 104
<OTHER-SE> 3,910
<TOTAL-LIABILITY-AND-EQUITY> 8,875
<SALES> 20,853
<TOTAL-REVENUES> 20,853
<CGS> 15,702
<TOTAL-COSTS> 15,702
<OTHER-EXPENSES> (377)
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 177
<INCOME-PRETAX> 385
<INCOME-TAX> 0
<INCOME-CONTINUING> 385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 385
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
