-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KQDD6dPqNpc+T5g9h53G4ZdFFRZP4bAsmXkZA/Ggy672fKZESXABbMTfDT0AhPO+ BZUwEzKLhmznzwuBH8Qnmw== 0001021408-02-007490.txt : 20020521 0001021408-02-007490.hdr.sgml : 20020521 20020521171420 ACCESSION NUMBER: 0001021408-02-007490 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20020521 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECOGEN INC CENTRAL INDEX KEY: 0000814050 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 222487948 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09579 FILM NUMBER: 02659124 BUSINESS ADDRESS: STREET 1: 2000 CABOT BLVD W #170 CITY: LANGHORNE STATE: PA ZIP: 19047-1811 BUSINESS PHONE: 2157571590 MAIL ADDRESS: STREET 1: 2005 CABOT BLVD W CITY: LANGHORNE STATE: PA ZIP: 19047 10-K 1 d10k.txt FORM 10-K--ECOGEN INC. As filed with the Securities and Exchange Commission on May 21, 2002. - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION CONFORMED WASHINGTON, D.C. 20549 FORM 10-K --------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ________ to __________ COMMISSION FILE NUMBER 1-9579 ECOGEN INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2487948 ---------- (State or other Jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2000 W. CABOT BOULEVARD, #170 19047-1811 LANGHORNE, PENNSYLVANIA (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (215) 757-1590 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. [_] YES [X] NO THE APPROXIMATE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT IS $630,000 AS OF March 19, 2002. (A) 41,423,315 (NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF March 19, 2002) ________ Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / DOCUMENTS INCORPORATED BY REFERENCE NONE (A) Excludes 25,674,567 shares of common stock held of record by directors, officers and stockholders known to the registrant to hold more than five percent of the common stock outstanding as of March 19, 2002. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. 2 PART I ------ ITEM 1. BUSINESS Introduction - ------------ Ecogen Inc. ("Ecogen" or the "Company"), a Delaware corporation incorporated in 1983, is a biotechnology company specializing in the development and marketing of environmentally compatible products for the control of pests in agricultural and related markets. Ecogen's product revenues are generated substantially by sales of biological insecticides derived from the bacterial microorganism Bacillus thuringiensis ("Bt") and biological fungicide products for the control of powdery mildew and post-harvest rot disease. During the second half of fiscal 2000, the Company discontinued the sale of all biofungicide products. In addition, Ecogen has technology associated with insecticidal nematode-based products for the control of insect pests in certain niche markets but has discontinued research in this area. The Company is attempting to sell the its technology associated with these product lines. The Company's fiscal year begins on November 1 and ends on October 31. Unless the context otherwise requires, all references in this document to a particular year shall mean the Company's fiscal year. Since its inception, the Company has not generated positive cash flow from operations. At October 31, 2001, the Company had limited liquid assets. Its term loan, with a balance of $1,500,000 ("Term Loan"), and its promissory notes ("Notes"), with a balance of $1,000,000, are due on June 23, 2002. Subsequent to October 31, 2001, the Company borrowed an additional $405,000 under the Notes. The holders of the Term Loan and Notes are affiliated with the Company's majority stockholder. On May 6, 2002, the Company signed an Asset Purchase Agreement ("The Asset Purchase Agreement") with Certis USA, LLC ("Certis"), an indirect subsidiary of Mitsui & Co., for the sale of certain assets relating to the Company's sprayable Bt bio-pesticide business and the Company's insecticidal nematode business including, but not limited to, the Company's CryMax, Lepinox, Condor, Condor G, Raven, Bti technicals and HB nematode product lines. The transaction excludes the Bt CellCap products acquired from Mycogen Corporation and the Company's agreements with the Monsanto Company relating to the royalty arrangements for transgenic plants as described under Bt technology in this Form 10K. The assets to be sold include all technology and know-how related to the business, including strain libraries for bio-pesticide uses, product registration, trademarks, patents or licenses and certain inventory and fixed assets. Upon the closing of the transaction, the Company will receive net cash proceeds of $4,015,000. The closing of the transaction is subject to certain conditions including obtaining approval of the Company's stockholders. Further, as a condition to the closing of the transaction, the Company is required to pay certain of its liabilities associated with the assets to be sold including the payment of the Term Loan and the Notes to remove liens on such assets and approximately $100,000 in accounts payable and accrued expenses. The balances due under the Term Loan and the Notes, including accrued interest were $3,260,000 as of May 16, 2002. After the payment of the Company's liabilities as described above, the net proceeds from the sale of approximately $655,000 will not be sufficient for the Company to repay its remaining obligations. The Company will need to continue to pursue the raising of additional funds and other strategic initiatives including the sale of all or certain other assets to improve its working capital position. The Company has implemented cost saving measures including significant personnel reductions and related costs and curtailment of manufacturing. The lower expense level has allowed the Company to continue to operate with limited resources while it is pursuing its strategic initiatives. The Company needs to sell other assets or obtain financing to provide the necessary cash resources to repay the outstanding balances under its accounts payable and fund operations. If the Company is not successful in selling other assets or obtaining financing, the Company will be unable to continue as a going concern. At the present time, the Company is 3 not pursuing any long term financing. Further if the Company is unable to continue to obtain short term funding while negotiating any strategic transaction, the Company may be unable to continue as a going concern. Technology - ---------- Many naturally-occurring organisms are either antagonistic to or produce substances toxic to agricultural pests. These include a variety of microorganisms such as bacteria, yeast, fungi, viruses and protozoans that either directly kill or produce compounds that interfere with certain insects, fungal pathogens or plant disease organisms. In addition, more complex organisms such as insecticidal nematodes (microscopic round worms) that attack insect pests have been long recognized as a potential source of pest control. All of these natural agents when isolated and formulated as commercially useful products are commonly called "biopesticides." A glossary of certain terms used in this section is set forth at the end of this section. Ecogen was the first company to sell genetically enhanced biological pesticide products which are registered with the United States Environmental Protection Agency (the "U.S. EPA") for commercial sale. In addition, Ecogen is the only company to have received U.S. EPA approvals to sell Bt insecticides incorporating a recombinant Bt strain. The following is a description of the Company's technology some or all of which may be sold as the Company pursues strategic initiatives to maximize stockholder value. Bacillus thuringiensis ("Bt") Bt is a bacterium found in soil. The insecticidal activity of Bt derives from production of spores and specific proteins in the form of crystals found within the Bt bacteria. These insecticidal agents are produced by the bacterial cells during a fermentation production process. They are then formulated into products that are applied to plants by conventional ground and aircraft spray equipment. When susceptible insects feed on plant foliage sprayed with Bt-based products, the crystals are ingested and generate soluble proteins that attack and destroy the insect's intestinal tract. The proteins produced by various strains of Bt are highly active against specific, targeted insect pests. Many insects are also susceptible to bacterial spores. Bt has no adverse activity against non-target insects, fish, birds or mammals (including humans). The genes for the insecticidal proteins reside on specific non-essential DNA molecules termed plasmids. Bt bacteria in nature generally contain several different genes that endow different insecticidal activities. Plasmids can either be removed ("cured") from cells that harbor them or they can be transferred between different strains by a natural mating process called conjugal transfer that occurs in nature between Bt strains and can be replicated in the laboratory. Ecogen has developed, through genetic modification techniques, novel Bt bioinsecticide products that have higher levels of effectiveness and that can act against a broader array of significant insect pests than Bt products previously in use. Ecogen has developed and characterized approximately 10,000 Bt strains and maintains one of the world's largest collections of Bt strains. The Company uses strains from this collection to screen and test for insecticidal activities. The characterization of the diversity of Bt insecticidal proteins found in Ecogen's strain collection, coupled with the ability to transfer or cure plasmids that contain the genetic code for those proteins, was the basis for Ecogen's early-stage development of new Bt bioinsecticides. Potent insecticidal crystal proteins produced by new Bt strains containing novel and desirable combinations, which are obtained by plasmid curing and conjugal transfer techniques, have been the active ingredients in Ecogen's Bt bioinsecticides. Pursuant to the Asset Purchase Agreement, Certis will acquire the Company's Bt technology including the strain library for use in the development of sprayable biopesticides. These natural genetic approaches to Bt bioinsecticide development can be applied, however, only to those plasmids that can be transferred or cured. Certain insecticidal proteins are encoded by plasmids that are not transferable, and some plasmid combinations are unstable or yield undesired insecticidal activities. Under these circumstances, the development of genetically manipulated strains of Bt 4 having novel activities against specific insects is greatly facilitated by the application of recombinant DNA technology. Ecogen has developed a proprietary Bt-based cloning vector system, its SSR System(TM), that utilizes recombinant DNA technology to develop new Bt strains having either increased potency or activity on a broader array of insect species through protein engineering. Ecogen believes that the use of Bt (as opposed to other microorganisms) as the host microorganism in which new Bt insecticidal gene combinations are constructed facilitates regulatory review in obtaining field trial permission and subsequent registrations for recombinant-derived products. For example, Ecogen has received a generic approval from the U.S. EPA to field test recombinant Bt insecticides using this approach. The Company has received U.S. EPA approval to commercialize CRYMAX(R) Bioinsecticide and Lepinox(R) Bioinsecticide, each of which is a recombinant Bt product based on a Bt strain into which protein genes from different Bt strains were combined. Ecogen's genetically enhanced bioinsecticides contain multiple insecticidal genes and have complex modes of action and therefore, Ecogen believes that pest populations will have difficulty developing resistance to them. Pursuant to the Asset Purchase Agreement, Ecogen's bioinsecticide products will be sold to Certis. In February 2000, the Company completed its acquisition of certain assets of the sprayable Bt biopesticide business of Mycogen Corporation, an affiliate of Dow AgroSciences LLC. ("Dow") The transaction included the purchase of Mycogen's Bt bioinsecticides, trademarks, product inventories and a license to certain proprietary genes and strains for use in sprayable bioinsecticides. The Company issued 1,351,000 shares of common stock valued at $3,041,000 upon the closing of the transaction. Prior to the closing, the Company acquired $391,000 of Mycogen's inventory of sprayable Bt products under a distribution agreement beginning January 1, 2000. Principal CellCap products acquired include: MVP for control of lepidopteran pests in vines and vegetables, MVPII for control of lepidopteran pests in trees, nuts, vines and row crops and Mattch for control of lepidopteran pests in vegetables. In connection with the acquisition of certain assets from Mycogen, the Company entered into a five-year purchase and supply agreement ("Supply Agreement") with Dow. At October 31, 2001, the Company owed Dow $600,000 for purchases of inventory under the Supply Agreement that was past due under the agreement. In January 2002, Dow terminated the Supply Agreement as a result of Ecogen's alleged failure to remedy its breaches under the agreement. As a result of the termination of the Supply Agreement, the Company currently is unable to sell any products acquired from Mycogen. Since Dow owns the manufacturing process, the Company is unable to contract with a third party for the manufacture of these products. Although the Company is in discussions with Dow to resolve the situation, there is no assurance that the Company will be successful. As a result, the Company has recorded an impairment reserve for $1,393,000, the net book value of its intangible assets associated with the Mycogen acquisition. In January 1996, Ecogen and Monsanto Company ("Monsanto") undertook a joint research and development program for the purpose of identifying, enhancing and testing Bt technology for use by Monsanto in transgenic plants. This joint Research and Development Program, which ended in January 1999, has resulted in a number of new Bt genes that are now being considered by Monsanto for incorporation into Monsanto's future transgenic plant products. Monsanto has utilized Ecogen's (1) Cry3Bb Bt toxin gene as the active ingredient for corn rootworm control in Monsanto's Bt corn that was filed for registration with the U.S. EPA in 1999, and (2) Cry2Ab Bt toxin gene as an active ingredient for Monsanto's new insect resistant cotton that was filed with the US EPA in 2000. Ecogen will receive commercialization success fees from any Monsanto products incorporating technology developed under this program. However there are no assurances that Monsanto will be successful in commercializing any of Ecogen technologies. Biofungicide Technologies The Company has decided to discontinue its efforts in the area of biofungicide technology and is pursuing the sale of all or a part of this business. In connection therewith, the Company wrote off biofungicide inventory at October 31, 2000, aggregating $391,000, which was the only significant asset associated with this technology. The following is a summary of biofungicide technology. 5 Biofungicide technologies are based on naturally occurring organisms such as fungi or yeast that can control harmful fungi that reduce crop yields or infect crops after harvesting. Ecogen focuses biofungicide research and development efforts on two biofungicide technologies: hyperparasitic fungi which kill other fungi, such as powdery mildews that infect plant leaves, flowers and fruit; and yeast formulations which protects stored fruit from post-harvest rot pathogens. A fungal hyperparasite, Ampelomyces quisqualis, has been identified that infects most, if not all, types of powdery mildews harmful to agricultural products. Ecogen has obtained an exclusive license to this hyperparasite. Powdery mildew is a significant fungal disease affecting many crops. Special structures of the mildew penetrate the plant epidermal cells and feed on cellular tissue, causing dwarfing of the plant and fruit and cosmetic damage which is particularly undesirable on fresh produce. Plants severely infected with these pathogens have reduced yields. Historically, chemical fungicides have been used for the control of these fungal pathogens, but these pathogens can develop resistance to chemical fungicides over time. In response to this market need, the Company developed its AQ10(R) Biofungicide, which is based on the fungal hyperparasite Ampelomyces quisqualis, for use in an integrated pest management system with other fungicide products to control powdery mildew. AQ10 was the first biofungicide registered by the U.S. EPA to protect crops from powdery mildew. Ecogen's distribution partner in Italy, Intrachem Bio Italia Srl, has been granted approval for the use of Ecogen's AQ10 biofungicide on grapes. As a result, the Company had its first sales of AQ10 in Europe in fiscal 2000. Recently, the Company also received an EU provisional registration for AQ10 in Italy. AQ10 is the first powdery mildew biofungicide to be approved according to the new E.U. directives (91/414). Several non-antibiotic producing strains of yeast have been found to control a number of post-harvest rot pathogens of citrus, pome fruits, grapes and other fruits and vegetables. The Company has incorporated one of these strains, Candida oleophila isolate I-182, into its Aspire(R) Biofungicide. Aspire, which may be applied by processors and packers in a manner consistent with the method of application of standard chemicals, provides control of post-harvest rot pathogens. The Company has another selective fungal antagonist for control of pathogens that cause post-harvest decay. Insecticidal Nematodes The following is a summary of the Company's insecticidal nematode technology, which is to be sold to Certis pursuant to the Asset Purchase Agreement. Insecticidal or entomopathogenic nematodes are microscopic roundworms that attack insect pests in the soil or in plant stems. Insecticidal nematodes are not directly responsible for insect mortality, but rather harbor bacteria that are released into and cause an infection of the insect after nematode entry into the pest. Normally, the insect dies within 48 hours after infection. The natural characteristics of insecticidal nematodes give nematode-based insecticides certain advantages over other insecticides. For example, nematodes attack insect pests in the soil where approximately 90% of insect pests spend at least a portion of their life cycle. In addition, insecticides using nematodes, which cause no adverse effects to humans, animals or plants, are currently exempt from U.S. EPA pesticide regulations and, unlike other insecticides, including other bioinsecticides, are subject to significantly lower levels of regulation or are exempt from registration by state agencies. Nematode product development is dependent on the implementation of production technology developed at a pilot scale, particularly to obtain higher yields at larger commercial scale production and to reduce the costs of production. In addition, current shelf life of the Company's insecticidal nematode products is insufficient for widespread commercialization. Further development efforts are needed to explore methods of formulating and preserving the nematodes to further increase shelf life while maintaining the nematodes' insecticidal capabilities, including the development of formulations that would be stable at various temperatures. 6 Glossary The following glossary of terms may be helpful in understanding the technology described in this document. Ampelomyces quisqualis A parasitic fungus with a host range that includes numerous powdery mildew species. Bacillus thuringiensis Spore-forming bacteria that produces insecticidal crystal proteins during sporulation. Many different varieties of Btexist in nature producing crystal proteins with a wide rangeof insecticidal activity. Conjugal transfer Natural genetic transfer system operating in bacteria that involves the exchange of plasmid DNA. Gene Smallest unit of inheritance occupying a specific site on a DNA molecule (chromosome). Hyperparasite A parasite of a parasitic organism, e.g., a fungus that lives off of a plant parasitic fungus. Insecticidal crystal protein Proteins produced by sporulating Bt bacteria that form crystalline inclusions within the cell. Insecticidal nematodes Microscopic round worms that penetrate, infect and kill insect pests. Plasmid Small, usually circular, DNA molecule that is separate from the bacterial chromosome and is not absolutely required for cell viability. Protein Molecules composed of chains of amino acids. Examples of proteins are enzymes, hormones, and antibodies. Protein engineering Technology of altering specific properties of protein by introducing structural changes in the protein molecule. Changes are introduced by making changes in the DNA encoding the protein using recombinant DNA technology. Recombinant DNA May also be referred to as genetic engineering and involves the in vitro cutting and splicing of DNA molecules. DNA encoding the desired trait is joined to a DNA molecule that is subsequently introduced into the host organism. SSR System Ecogen's proprietary site-specific recombination system for the construction of recombinant Bt strains lacking foreign DNA. Transconjugant Bacterial cell that is produced as a result of the conjugation process. Vector A genetic construct that can transfer genetic material from one host to another. Ecogen Technologies I Incorporated - ---------------------------------- The Company maintains over a 70% ownership interest in Ecogen Technologies I Incorporated ("ETech"). ETech was formed to initiate or accelerate research and development of certain products using technology exclusively licensed or sublicensed by Ecogen to ETech. The licensed rights 7 include the right to develop and commercialize sprayable biopesticide products based on technology for: (i) the control of powdery mildew disease (AQ10 Biofungicide); (ii) the control of post-harvest rot disease on agricultural crops (Aspire Biofungicide); (iii) the control of the European corn borer insect, which affects corn production (Condor(R) G Bioinsecticide); (iv) the control of black vine weevil, citrus weevil, wireworm and black cutworm utilizing insecticidal nematodes; (v) the control of corn rootworm; and (vi) the control of certain insects which cause damage to turf. Ecogen has agreed to commercialize and market products on behalf of ETech pursuant to various Marketing Agreements that provide for Ecogen to receive a fee from ETech based on product sales for Ecogen's commercialization and marketing activities. Ecogen has marketed AQ10 and Aspire under such agreements. Insecticidal nematodes are still in the development stage. The other ETech projects have been terminated. In connection with the Asset Purchase Agreement wth Certis, the Company will sell insecticidal nematode technology and certain Bt technology of Etech for net proceeds of $550,000. Products - -------- The following are Ecogen's current principal products: MVP and MVP II Bioinsecticides - MVP and MVP II are U.S. EPA registered products that utilize the CellCap(R) production system in a liquid formulation. CellCap refers to the expression of Bt insecticidal proteins within a Pseudomonas bacteria which is killed during formulation to form a protective biocapsule. MVP and MVP II are marketed for the control of caterpillar pests primarily on vegetable, tree and vine crops. MVP is sold primarily in international markets. MVP II is sold in international and U.S. markets. Mattch Bioinsecticide - Mattch Bioinsecticide is a U.S. EPA registered product that utilizes the CellCap production system to combine two distinctly different Bt insecticidal proteins in a liquid formulation. Mattch is marketed in the U.S. for control of caterpillar pests on vegetables. AQ10 Biofungicide - AQ10 Biofungicide is the first biofungicide registered by the U.S. EPA to protect crops from powdery mildew. AQ10 was marketed by Ecogen in California and other areas of the western United States for control of powdery mildew on grapes and vegetables. AQ10 also is registered in Italy for use on grapes. Ecogen has discontinued marketing AQ10. Aspire Biofungicide - Aspire Biofungicide is the first biofungicide registered by the U.S. EPA to protect crops from post-harvest rot pathogens. Aspire is labeled for use by fruit packinghouses in the United States. Ecogen has discontinued marketing Aspire. The following are the principal products to be sold to Certis pursuant to the Asset Purchase Agreement: CRYMAX Bioinsecticide - CRYMAX Bioinsecticide is a U.S. EPA registered product that was developed by Ecogen using recombinant DNA and protein engineering techniques. CRYMAX is marketed for the control of caterpillar pests primarily on vegetable crops. Lepinox Bioinsecticide - Lepinox Bioinsecticide is a U.S. EPA registered product that was developed by Ecogen using recombinant DNA and protein engineering techniques for the control of fall armyworm on sweet corn crops. Condor Bioinsecticide - Condor Bioinsecticide is a U.S. EPA registered genetically enhanced Bt product developed by Ecogen for the control of caterpillar pests in cotton, soybean, corn and other row crops, tree and nut crops, and forestry applications. 8 Cutlass Bioinsecticide - Cutlass Bioinsecticide is a U.S. EPA registered genetically enhanced Bt product developed by Ecogen for the control of caterpillar pests that damage vegetable, tree, nut and vine crops. Cutlass is sold primarily in international markets. During fiscal 2001, the foregoing products represented approximately 94% of Ecogen's net product sales. Net product sales represented approximately 93% of the Company's total revenues in fiscal 2001. Bt products and biofungicide products represented approximately 93% and 6%, respectively, of Ecogen's total net product sales in fiscal 2001. Marketing - --------- Agricultural pesticides and related products are sold in the United States primarily through traditional agricultural chemical distribution channels consisting of large wholesale distributors and dealers that serve extensive farm areas. Ecogen makes use of these traditional channels for the domestic distribution of its current products. To coordinate these distribution activities and generate grower interest in its products, the Company employed a marketing staff including domestic sales representatives who were located in key agricultural chemical distribution locations, primarily in the southern and western areas of the United States. As of January 31, 2002, the Company has no marketing staff. Ecogen's domestic product sales for fiscal 2001, 2000, and 1999 totaled $1.3 million, $4.3 million, and $4.5 million, respectively. For international distribution of its products, Ecogen has entered into several collaborations with companies that have a significant presence in the markets covered by their respective agreements. In 1991, the Company and Hoechst Schering AgrEvo, S.A. ("AgrEvo") entered into a distribution and product supply agreement that grants to AgrEvo exclusive distribution rights to certain of the Company's Bt products in Europe (except Germany and in Spain, Portugal and Italy, where rights are co-exclusive), Africa, the People's Republic of China, Australia, the Middle East and Latin America (except Mexico). In addition to its agreement with AgrEvo, Ecogen has international distribution agreements for certain of its products with a number of other companies including: Zeneca (for Mexico), Nissan Chemical (for Japan), Intrachem (International) S.A. (for Italy, Spain and Portugal), and Jia Non Enterprises (for Taiwan). In September 1998, FMC Corporation agreed to distribute Lepinox in Mexico and Central and South America. In March 1999, Lances Link S.A. agreed to distribute certain of the Company's products in parts of Western Europe, all of Eastern Europe, Egypt, Turkey and all Arab speaking countries of the Near East. In February 2000, the Company agreed to grant Dow AgroSciences exclusive distribution rights for certain products in Mexico, New Zealand and Australia. International product sales totaled $1.7 million in fiscal 2001, $2.0 million in 2000, and $2.1 million for fiscal 1999. Production - ---------- The manufacturing process for Ecogen's Bt-based bioinsecticide and biofungicide products involves fermentation of the desired microorganism. Upon completion of this fermentation process, the pesticidal agent is recovered using standard techniques, such as centrifugation, and is formulated into commercial products. For commercial production of its products, Ecogen generally engages third-party contract manufacturers to perform one or more steps in the manufacturing process for the Company's products. During fiscal 2001 and 2000, in order to conserve cash and reduce inventory levels, the Company significantly curtailed inventory production. The Company has ceased all manufacturing operations. Ecogen believes that adequate fermentation, formulation and other services are available from a number of third-party contract manufacturers. Should the Company desire to renew manufacturing operations, the engagement of any contract manufacturers may cause delays in obtaining product for sale. 9 Ecogen operated a fermentation and formulation pilot plant to support some product requirements for field trials and to facilitate the transition of products from laboratory to large-scale manufacturing. Due to limited cash resources, the fermentation and formulation pilot plant was shut down in early fiscal 2001. As a result a special charge was recorded in the fourth quarter of fiscal 2000 to write down long-lived assets associated with the plant facilities to their estimated fair value. Also, certain manufacturing equipment designed specifically for the biofungicide and nematode technology was written down to its estimated fair value. The aggregate amount of the write-downs included in special charges in fiscal 2000 was $1,050,000. The most important raw materials needed by Ecogen to conduct its product manufacturing and research and development activities include (1) fermentation media components and formulation chemicals, which are readily available from a variety of independent sources, and (2) microbial strains that are either proprietary to Ecogen or are licensed from outside parties. Ecogen does not anticipate any shortages of these or other raw materials that would materially affect product availability or cost. Research and Product Development - -------------------------------- As a result of cost saving measures by the Company, research and development efforts have been suspended. The Company's operating expenses to date have included costs associated with the research and development of products for future commercialization. Costs incurred under Ecogen-funded research and development programs aggregated $570,000, $2,070,000, and $2,318,000, for fiscal 2001, 2000, and 1999, respectively. Costs incurred by Ecogen under third-party funded research and development programs aggregated none for fiscal 2001 and 2000 and $318,000 for fiscal 1999. During fiscal 2001, 2000, and 1999, the Company derived approximately 7%, 1%, and 9%, respectively, of its revenues from research and development contracts. Bacillus thuringiensis Products The following is a summary of the Company's research and development programs prior to suspending its research and development efforts in the second half of fiscal 2001. The Company worked on improving, through recombinant DNA and other technologies, the efficacy of its bioinsecticides already in the market, adapting such products for application to additional uses, and developing new bioinsecticides. In addition, Ecogen attempted to improve its fermentation and formulation processes in order to increase product yield and reduce the costs of product manufacturing. Biofungicide and Insecticidal Nematodes The Company's development efforts with respect to biofungicides and insecticidal nematodes were suspended in fiscal 2000 due to the Company's limited resources. Geographic Segment Data - ----------------------- Information regarding geographic segment data is provided in note 14 of notes to consolidated financial statements. Patent and Trade Secrets - ------------------------ Ecogen pursues a policy of seeking patent protection, both in the United States and abroad, to protect its novel technologies, compositions of matter and processes and has obtained patents covering certain of its technologies. In addition, with respect to the Company's two biofungicide products, AQ10 Biofungicide and Aspire Biofungicide, and with respect to certain of its Bt technology, the Company holds licenses to patents covering the base technologies. 10 There can be no assurance that patents or license rights under patents for all of the Company's products and processes will be obtained, or that issued patents will provide substantial protection or be of commercial benefit to the Company. The issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate without infringing the patent rights of others. A patent could be challenged by litigation and, if the outcome of such litigation were adverse to the patent holder, competitors could be free to use the subject matter covered by the patent or the patent holder could be required to license the technology to others. Because of the uncertainty concerning patent protection, the Company relies, in certain cases, upon trade secret protection and continuing technological innovation to maintain its competitive position. All Ecogen employees and consultants sign confidentiality agreements under which they agree not to use or disclose the Company's confidential information as long as that information remains proprietary or, in other cases, for fixed time periods. There can be no assurance, however, that such proprietary technology will not be independently developed or that secrecy will not be breached. The Company's research, development and commercialization partners, as well as its biopesticide production subcontractors are provided access to know-how under confidentiality agreements. To the extent that such entities use this technological information, disputes may arise as to the proprietary and patent rights to such technological information and related developments. The Company is aware that substantial research efforts in biotechnology are taking place at universities, government laboratories and other corporations around the world and that numerous patent applications have been filed, and patents have been issued, relating to fundamental technologies and to specific biological pesticide products and processes. The Company may have to obtain licenses under certain of these patents. No assurance can be given concerning the terms on which such licenses would be available, if at all. Governmental Regulation - ----------------------- Regulation by governmental authorities in the United States and other countries is a significant factor affecting the success of products resulting from biotechnological research. The pesticide industry is heavily regulated in the United States. The U.S. EPA regulates pesticide products under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"). Pesticides also are regulated by various state agencies. Some states, such as California, Florida and New York have their own extensive registration requirements. To develop and commercialize a pesticide product, detailed and complex procedures must be followed and federal approvals must be obtained under FIFRA. Small-scale field testing usually may be conducted prior to product registration to evaluate product efficacy. To conduct large-scale tests, a company must obtain an Experimental Use Permit ("EUP"), which generally requires satisfactory completion of certain toxicology and environmental studies. Synthetic chemical pesticides require additional extensive toxicology and environmental testing that typically is not required of biopesticides to substantiate product safety prior to obtaining a product registration. Commercial sale of a pesticide requires a registration for each pest and crop for which the product is used. Registration requirements include submission and U.S. EPA approval of the text of a label, which must be included on every pesticide product. The United States Congress has mandated under the Food Quality Protection Act of 1996 that all U.S. EPA tolerances be reassessed using new standards within 10 years. All tolerances will now be based on a "reasonable certainty of no harm" and there will be a specific determination of risk to infants and children. The U.S. EPA has recognized that biochemical and microbial pesticides are distinguished from standard chemical pesticides and has established different data requirements as part of its registration regulations. These data requirements are set out in Subdivision M of the U.S. EPA's Pesticide Assessment Guidelines. Biopesticides currently are subject to a three-tier toxicology testing procedure and a four-tier 11 environmental testing procedure. A biopesticide product which satisfactorily completes both the Tier I toxicology and environmental tests is not required to go through the tests specified in subsequent tiers. This has been the case for product registration applications filed by the Company to date. However, should questions arise during any tier of testing, additional tests may be required. For a biopesticide product required to complete Tier I testing only, approximately one year of laboratory testing is required. Subsequent U.S. EPA registration generally takes approximately 12-18 months. Although the process for obtaining regulatory approval to test and market biopesticides that are genetically modified is designed to be less complex and time-consuming than the regulatory approval process for synthetic chemical pesticides, there can be no assurance that approvals will be granted on a timely basis, if at all. Certain of Ecogen's products under development utilize recombinant DNA technology. The Federal government regulates certain recombinant DNA research activity through the National Institute of Health's Guidelines for Research Involving Recombinant DNA Molecules ("NIH Guidelines"). The NIH Guidelines, among other things, set laboratory procedures and establish levels of biological and physical containment and other standards for recombinant DNA molecules that must be met for various types of research. Ecogen believes that it is in compliance with the NIH Guidelines. In August 1992, Ecogen received blanket permission from the U.S. EPA to conduct small-scale field trials of its recombinant Bt strains without prior notice (generally required for small-scale field testing of microbial pesticides). Insecticidal nematodes are currently exempt from registration under U.S. EPA pesticide regulations and, unlike other insecticides, including other bioinsecticides, are subject to significantly lower levels of regulation or are exempt from registration by state agencies. Ecogen's activities, including prior operation of its laboratories and pilot-scale manufacturing facilities, are, or may be, subject to regulation (i) under various other state and federal laws and regulations, including the Occupational Safety and Health Act, the Toxic Substances Control Act, the Federal Food, Drug and Cosmetic Act, the Solid Waste Disposal Act, the Resource Conservation and Recovery Act, the Emergency Planning and Community Right-to-Know Act, the Clean Air Act, the Clean Water Act, and other state and federal laws regulating environmental quality, and the implementation of regulations for all such laws; and (ii) by other state and federal agencies, including the U.S. Department of Agriculture and the U.S. Food and Drug Administration. In addition, the actions of federal agencies in reviewing applications by Ecogen or issuing permits or other authorizations may be subject to the National Environmental Policy Act, and state or local agencies may be required to comply with similar state laws. Historically, the cost of compliance with such laws and regulations has not had a material impact on Ecogen's business. From time to time, governmental authorities review the need for additional laws and regulations for biotechnology products and for pesticide products that could, if adopted, apply to the business of Ecogen. Ecogen is unable to predict whether any such new regulations will be adopted or whether, if adopted, such regulations will adversely affect its business. Historically, the cost to Ecogen of compliance with federal, state and local provisions enacted for the protection of the environment has not been material. Toxicology testing, field development trials and related costs for U.S. EPA registrations incurred to date by Ecogen have averaged under $500,000 for each product registration, while state registration and related costs per product have been nominal. This does not mean that such costs are unlikely to increase in the future, particularly if more restrictive approval requirements are adopted by federal, state or local authorities. Also, delays in obtaining necessary product registrations can have a significant impact upon Ecogen's revenues and competitive position in the way of delayed product sales and lost market opportunities. The regulation of field development and testing, as well as the commercial sale, of Ecogen's biopesticides varies widely outside of the United States. Some countries permit the field development testing and sale of biopesticide products registered for commercial sale in the United States upon the filing of certain notifications or other non-extensive documentation. In other countries the regulation of biopesticides is not as well defined as in the United States and in such countries, biopesticides are regulated 12 like chemical pesticides. These countries require significantly more toxicity and ecotoxicity studies than are required in the United States for biopesticides, as well as a minimum of two years of field efficacy studies, for registration for commercial sales. Due to the variety of regulatory structures in countries other than the United States and the evolving nature of such regulatory schemes, the impact of government regulation of biopesticides on Ecogen's international business cannot be assessed at this time. Competition - ----------- Competition in the pesticide market is intense. Competition is based principally on price and efficacy, but safety and ease of application are also factors. Competitors of Ecogen include manufacturers and marketers of synthetic chemical pesticides and biopesticides, including large chemical companies such as Syngenta, DuPont and Sumitomo, as well as specialized biotechnology firms. Many of these companies have considerably greater financial and marketing resources than has Ecogen. Competitors with respect to research and development activities also include universities and public and private research organizations. In addition, Ecogen's bioinsecticide products compete with certain transgenic seed and plant products that have insecticidal capabilities. Ecogen believes that its ability to compete in the pesticide market may be enhanced by heightened concerns about the effects of chemical pesticides upon the environment and, in some cases, by the increasing resistance of plant pests to synthetic pesticides. However, Ecogen expects competition in the agricultural pesticide industry to intensify as technical advances in the fields of pesticides and pest-resistant plants are made. There can be no assurance that developments by others will not render the Company's products or technology obsolete or noncompetitive. Seasonality - ----------- The bulk of the Company's current products are marketed for agricultural applications in the northern hemisphere, where the growing season generally runs from spring until fall. Commercial introduction of the Company's new products is contingent upon, among other factors, completion of field testing and receipt of required regulatory approvals. Unusual weather conditions during field tests or failure to receive regulatory approvals prior to the growing season may require additional field tests in subsequent growing seasons, with resulting delays in product development and commercialization. In addition, because of the seasonal nature of its business, the Company's product revenues are likely to be concentrated in the fiscal quarters prior to and during a particular growing season and may result in substantial variations in quarter-to-quarter financial results. Unusual weather conditions, such as droughts or floods and the level of insect infestation in grower areas also affect product sales from year to year. Employees - --------- As of March 31, 2002, Ecogen and its subsidiaries have 2 full-time employees. Employees of the Company are required to enter into confidentiality agreements with Ecogen. Pursuant to these agreements, the employees have agreed not to disclose Ecogen's proprietary information and to assign to Ecogen all rights to any inventions made during their employment or relating to Ecogen's activities, and not to engage in activities similar to their activities at Ecogen for any other person or entity during the term of their employment and for one year thereafter. 13 EXECUTIVE OFFICERS The executive officers of the Company and their respective ages and positions with the Company are as follows: Name Age Position - ---- --- -------- James P. Reilly, Jr. 56 Chairman, President, Chief Executive Officer, Acting Chief Financial Officer and Director All executive officers are elected by the Board of Directors. There is no family relationship among any of the officers or directors. Business Experience - ------------------- Mr. Reilly has served as Chairman since November 1, 1995 and as a director of the Company since June 1992. Since January 1994, he has been the Chief Executive Officer of the Company and since June 1992, he has been the Company's President. From June 1992 to January 1994, Mr. Reilly served as Chief Operating Officer of the Company. From 1976 until he joined the Company, Mr. Reilly was employed in various management capacities at Rhone-Poulenc, Inc., most recently, from April 1991 to May 1992, as Vice President and General Manager of the Fine Chemicals Division. He received a B.S. in Business Administration from Boston College. ITEM 2. PROPERTIES Ecogen currently occupies approximately 21,000 square feet of space for its administrative offices and research and development operations in a building located in the Bucks County Business Park, Langhorne, Pennsylvania. The lease for this facility expires in March 2005. Approximately 15,000 square feet of this space is devoted to research and development facilities, including laboratories, an insectary and a fermentation and formulation pilot plant. As a result of cost containment efforts the research and development facilities, insectary and the fermentation and formulation pilot plant have been shut down. As a result, the Company has recorded a charge during the fourth quarter of fiscal 2001 of $386,000 representing the estimated net future lease costs associated with the underutilized space at the Langhorne facility at October 31, 2001. ITEM 3. LEGAL PROCEEDINGS The Company currently is party to various lawsuits for nonpayment of amounts past due to various vendors aggregating approximately $200,000. Amounts are included in accounts payable and accrued expenses in the Company's October 31, 2001 consolidated balance sheet, except for any interest claims. These actions have been brought in State or County Court. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 14 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Until September 8, 2000, the Common Stock of the Company was traded on the NASDAQ National Market under the symbol "EECN." From September 11, 2000 until March 19, 2002, the common stock of the Company traded in the over-the-counter market and was quoted on the OTC Bulletin Board under the symbol "EECN.OB". Since March 19, 2002, the Company's common stock trades in the OTC "Pink Sheets." Set forth below are the high and low closing prices, as reported by the National Quotation Bureau, for the interim periods through September 8, 2000, and the high and low bid quotations for the period from September 11. 2000 through October 31, 2001 as reported by the OTC Bulletin Board. Bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. High Low ---- --- 2001 First Quarter $ 0.44 $ 0.13 Second Quarter 0.38 0.13 Third Quarter 0.25 0.13 Fourth Quarter 0.17 0.06 2000 First Quarter $ 2.44 $ 1.13 Second Quarter 5.03 1.63 Third Quarter 2.50 .95 Fourth Quarter (through 9/8/00) 1.06 .47 Fourth Quarter (9/11/00 through 10/31/00) 0.88 0.31 A. Holders On February 1, 2002, there were approximately 699 stockholders of record. B. Dividends No cash dividends have ever been paid on the Company's common stock, and the Company does not intend to pay cash dividends on its common stock in the foreseeable future. The Company is precluded from paying cash dividends on its common stock under its loan agreement. 15 ITEM 6. SELECTED FINANCIAL DATA Years ended October 31, 2001, 2000, 1999, 1998, and 1997 (all amounts in thousands, except per share data) CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
2001/(4)/ 2000/(2)(3)/ 1999 1998/(1)/ 1997 --------- ------------ -------- --------- -------- Revenues: Product sales $ 2,998 $ 6,341 $ 6,566 $ 10,472 $ 8,783 Other revenues 223 50 676 5,266 2,939 Gross margins/(3)/ 166 341 590 1,871 2,491 Expenses: Research and development 570 2,070 2,637 3,616 5,042 Selling, general and administrative 3,138 5,500 6,833 6,824 8,661 Special charges 1,778 1,050 - - 1,626 Net loss (5,169) (8,977) (8,611) (2,997) (9,810) Dividends on preferred stock, including incremental yield 475 1,071 1,142 116 2 Net loss allocable to common Stockholders ($5,644) ($10,048) ($9,753) ($3,113) ($9,812) Basic and diluted net loss per common share ($0.39) ($0.84) ($1.05) ($0.39) ($1.23) Weighted average common shares outstanding 14,299 11,907 9,248 8,059 7,958
CONSOLIDATED BALANCE SHEET DATA:
October 31, Pro Forma Actual 2001/(5)/ 2001 2000 1999 1998 1997 --------- ------------ -------- --------- -------- -------- Cash and cash equivalents $ 1,193 $ 8 $ 216 $ - $ 2,823 $ 2,374 Total assets 2,110 1,801 6,500 10,462 14,677 17,558 Long-term debt - - 9 250 1,328 3,916 Stockholders' (deficit) equity (6,112) (9,251) (3,615) 1,023 6,925 4,870
- -------------------------------------------------------------------------------- No cash dividends have ever been paid on the Company's common stock, and the Company does not intend to pay cash dividends on its common stock in the foreseeable future. The Company is precluded from paying cash dividends on its common stock under its loan agreements. /(1)/ During fiscal 1998, the Company disposed of its pheromone product line. /(2)/ In February 2000, the Company acquired certain sprayable Bt biopesticides from Mycogen Corporation, an affiliate of Dow AgroSciences Inc. (see note 8 of notes to consolidated financial statements.) /(3)/ Fiscal 2000 gross margins include a special charge of $391,000 for the write down of biofungicide inventory (see note 16 of notes to consolidated financial statements.) /(4)/ Fiscal 2001 includes a special charge of $1,393,000 for the write down of intangibles assets associated with the Mycogen acquisition (see note 16 of notes to consolidated financial statements) and a charge of $386,000 representing estimated net future lease costs associated with currently underutilized space at the Company's Langhorne facility (see note 19 of notes to consolidated financial statements.) /(5)/ Adjusted on a pro forma basis for the sale of assets to Certis (see note 20 of notes to consolidated financial statements.) 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company is an agricultural biotechnology company specializing in the development and marketing of quality biorational products for the control of pests in agricultural and related markets. Results of Operations - Year Ended October 31, 2001 Compared to Year Ended - -------------------------------------------------------------------------- October 31, 2000 - ---------------- Revenues - -------- Net product sales decreased $3,343,000 or 53% in fiscal 2001 from $6,341,000 to $2,998,000, primarily due to volume. Sales of the Company's Bt product line, representing 93% of total sales, decreased 50%. The decrease in sales was due principally to the Company's lack of financial resources including its inability to fund production and secure additional finished goods from Dow Agrosciences LLC. In January 2002, Dow terminated the Supply Agreement as a result of Ecogen's alleged failure to remedy its breaches under the agreement. As a result of the termination of the Supply Agreement, the Company currently is unable to sell any products acquired from Mycogen. Since Dow owns the manufacturing process, the Company is unable to contract with a third party for the manufacture of these products. Although the Company is in discussions with Dow to resolve the situation, there is no assurance that the Company will be successful. Due to the termination of the Dow supply agreement, the pending sale of assets to Certis and the Company's lack of liquidity, Bt sales are expected to continue to decline. The Company's current source of product sales is dependent upon its limited amount of inventory on hand. Biofungicide sales, representing 6% of total sales, decreased 61%. Biofungicide and other product sales were substantially discontinued during the second quarter of fiscal 2001 Contract research revenues increased $173,000 in the current fiscal year due to grants earned in fiscal 2001. Cost and Expenses - ----------------- Cost of products sold was $2,831,000 in fiscal 2001 compared to $6,341,000 in fiscal 2000. In fiscal 2000, cost of products sold included a special charge of $391,000 for the write off of biofungicide inventory. Gross margins on product sales, exclusive of the special charge in fiscal 2000, were 6% and 11%, respectively, in fiscal 2001 and 2000. The decrease in gross margins on product sales is due to the fact that fixed charges represented a higher percentage of sales due to the 53% reduction in sales. Total operating expenses, exclusive of special charges, consisting of research and development and selling, general and administrative expenses, decreased $3,861,000 or 51% in fiscal 2001 when compared to fiscal 2000. Research and development costs decreased $1,500,000 or 72% in fiscal 2001 primarily as a result of reduced personnel levels and contract services due to the Company's decision to suspend all research and development to conserve cash. Selling, general and administrative expenses decreased $2,361,000 or 42% in fiscal 2001 as a result of cost containment measures implemented to conserve cash including reduced personnel costs and outside services. Fiscal 2001 operating expenses included special charges aggregating $1,778,000 associated with an impairment reserve against intangible assets associated with the Mycogen acquisition and a reserve for estimated future net lease costs for underutilized space at the Company's Langhorne facility. Fiscal 2000 operating expenses included a special charge of $1,050,000 associated with the shut down of the Company's fermentation and formulation pilot plant and the decision to discontinue the sale of its biofungicide products. Operating costs are expected to continue to decrease in fiscal 2002. Net interest expense was $491,000 in fiscal 2001 compared to $840,000 in fiscal 2000. The lower interest expense in fiscal 2001 was primarily due to the paydown of the Company's line of credit that expired in fiscal 2001. Such line carried a higher effective interest rate 17 Other income, net, increased $327,000 in fiscal 2001 compared to the same period in fiscal 2000 due primarily to gains on the sale of fixed assets. Net loss allocable to common stockholders for fiscal 2001 was ($5,644,000) or ($0.39) per basic and diluted share, compared with a net loss of ($10,048,000) or ($0.84) per basic and diluted share in the same period in fiscal 2000. Fiscal 2000 included an assumed incremental yield on preferred stock of $612,000. Weighted average shares were 14,299,000 in fiscal 2001 compared to 11,907,000 in fiscal 2000. Net loss allocable to common stockholders exclusive of special charges was ($3,866,000) or ($0.27) per basic and diluted share in fiscal 2001. Results of Operations - Year Ended October 31, 2000 Compared to Year Ended - -------------------------------------------------------------------------- October 31, 1999 - ---------------- Revenues - --------- Net product sales decreased $225,000 or 5% in fiscal 2000 from $6,566,000 in fiscal 1999 to $6,341,000, principally due to volume. Sales of the Company's Bt product line, representing 88% of total sales, decreased 6% due principally to lower volume of sales. Included in the Company's Bt sales in fiscal 2000 are approximately $2,500,000 of acquired Mycogen products principally Mattch and MVP for caterpillar control. Sales of Ecogen's Bt products, exclusive of the acquired Mycogen products, decreased approximately $2,800,000 for the year ended October 31, 2000 primarily due to lower sales of Lepinox and Condor, two of the Company's Bt bioinsecticides for control of caterpillars. The net result is an approximate $300,000 decline in Bt product sales. Biofungicide sales, representing 8% of total sales, increased 94% due to initial sales of AQ10 in Europe. Other product sales represented 4% and 6% of total sales in fiscal 2000 and 1999, respectively. Contract research revenues decreased $626,000 in the current fiscal year, due to the expiration in January 1999 of the Monsanto research and development contract that had contributed more than $10 million in contract research revenue over its three-year term. Costs and Expenses - ------------------ Cost of products sold was $6,000,000 in fiscal 2000 compared to $5,976,000 in 1999. In fiscal 2000, cost of products sold includes a special charge of $391,000 for the write off of biofungicide inventory. Gross margins on product sales, exclusive of the special charge in fiscal 2000 were 11% in fiscal 2000, up slightly from 9% in fiscal 1999, primarily as a result of lower fixed charges in fiscal 2000. Total operating expenses, exclusive of special charges, consisting of research and development expenses and selling, general and administrative expenses, decreased $1,899,000 or 20% in fiscal 2000 when compared to fiscal 1999. Research and development costs decreased $567,000 or 22% in fiscal 2000 compared to the year-ago period as a result of lower personnel and related costs due to the wind-down of the Monsanto Research Program and lower basic research. Selling, general and administrative expenses decreased $1,332,000 or 19% in fiscal 2000 as a result of cost containment measures implemented to conserve cash including personnel costs and outside services. Fiscal 2000 operating expenses included a special charge of $1,050,000 associated with the shut down of the Company's fermentation and formulation pilot plant and the decision to discontinue the sale of its biofungicide products. Net interest expense was $841,000 in fiscal 2000 compared to 523,000 in fiscal 1999. The higher interest expense in fiscal 2000 was due to higher rates charged on the Company's line of credit facility and increased borrowings under its long-term note. Net loss allocable to common stockholders for fiscal 2000 was ($10,049,000), or ($0.84) per basic and diluted share, compared with a net loss of ($9,753,000) or ($1.05) per basic and diluted 18 share in the same period in fiscal 1999. Fiscal 2000 and 1999 included an assumed incremental yield on preferred stock of $612,000 and $786,000, respectively. Weighted average shares were 11,907,000 in fiscal 2000 compared to 9,248,000 in fiscal 1999. Net loss allocable to common stockholders exclusive of special charges was ($8,608,000) or ($0.72) per basic and diluted share. During the second quarter of fiscal 2000, the Company acquired certain assets of the sprayable Bt bioinsecticide business of Mycogen Corporation for $3,386,000 including cash and $3,041,000 of the Company's common stock. On an unaudited pro forma basis, assuming the acquisition had taken place at the start of fiscal 1999, the Company's net loss allocable to common stockholders for fiscal 2000 would have been ($10,155,000), or ($0.83) per basic and diluted share, compared with ($9,592,000), or ($0.91) per basic and diluted share for the year-ago period. Seasonality - ----------- The bulk of the Company's current products are presently marketed for agricultural applications in the northern hemisphere, where the growing season generally runs from spring until fall. Commercial introduction of the Company's new products is contingent upon, among other factors, completion of field-testing and receipt of required regulatory approvals. Unusual weather conditions during field tests or failure to receive regulatory approvals prior to the growing season may require additional field tests in subsequent growing seasons, with resulting delays in product development and commercialization. In addition, because of the seasonal nature of the Company's business, product revenues are likely to be concentrated in the fiscal quarters prior to and during a particular growing season and may result in substantial variations in quarter-to-quarter financial results. Unusual weather conditions, such as droughts and the level of insect infestation in grower areas also affect product sales from year to year. Inflation - --------- To date and for the foreseeable future, inflation has not had, nor is it anticipated to have, a significant impact on revenues or costs and expenses of the Company. Assets, Liabilities and Stockholders' Equity - -------------------------------------------- Inventory decreased $1,751,000 at October 31, 2001 when compared to October 31, 2000 principally as a result of a curtailment in production to conserve cash. Accounts receivable decreased $306,000 compared to the balance at October 31, 2000 due to lower sales in fiscal 2001. At October 31, 2001, accounts payable and accrued expenses increased $171,000 when compared to October 31, 2000 principally as a result of the current portion of the provision for future lease costs disclosed above. Debt due within one year increased $377,000 at October 31, 2001 compared to the end of the prior fiscal year due to new borrowings, net of repayment of the Company's line of credit. Amounts outstanding under the Company's expired line of credit decreased $623,000 at October 31, 2001 when compared to October 31, 2000 as a result of payments made in fiscal 2001. New borrowings of $1,000,000 under the Notes offset this decrease in fiscal 2001. Liquidity and Capital Resources - ------------------------------- Since its inception, the Company financed its working capital needs primarily through private and public offerings of equity and debt securities, revenues from research and development alliances and product sales. At October 31, 2001, the Company had limited cash resources. At October 31, 2001, current liabilities were $7,506,000 and current assets were $993,000 resulting in a working capital deficit of $6,513,000. Current liabilities increased $548,000 due primarily to an increase in debt. At October 31, 2001, the Company had $3,004,000 in accounts payable. Certain of these creditors have initiated legal and 19 other action for collection of amounts overdue. Included in current liabilities at October 31, 2001 are net borrowings under debt facilities of $2,500,000. During the fiscal year ended October 31, 2001, the Company used cash of $916,000 for operations. During fiscal 2001, the Company funded these cash outlays from available cash balances of $216,000, net borrowings of $163,000 and proceeds from the sale of assets of $546,000. During fiscal 2000, the Company obtained a $1,500,000 Term Loan with a financial institution controlled by the principal stockholder of the Company's majority stockholder. During fiscal 2001, a corporation affiliated with the Company's majority stockholder loaned the Company $1,000,000 pursuant to the Notes which are due June 23, 2002 and bear interest at 12%. Subsequent to October 31, 2001, the Company borrowed an additional $405,000 under the Notes. Under the Term Loan and the Notes, the holders may elect to require prepayment of amounts due under certain circumstances. In November 2001, 11,500 shares of the Series 1998 C preferred stock were converted into 25,000,000 shares of the Company's common stock in accordance with the terms of the preferred stock. As a result of the conversion, the holder of the preferred stock owns 62% of the Company's outstanding common shares. After the conversion, 20,854 shares of the Series 1998 C Convertible Preferred Stock remain outstanding. During fiscal 2001, the Company issued 888,151 shares of its common stock in exchange for 1,022 shares of the Company's Series 2000-A 7% Convertible Preferred Stock issued in February 2000. The Company also issued 52,136 shares of its common stock in payment of cumulative dividends at the time of conversion. Subsequent to October 31, 2001, the Company issued 2,183,313 shares of its common stock in exchange for 725 shares of the Company's Series 2000-A 7% Convertible Preferred Stock. The Company also issued 163,975 shares of its common stock in payment of cumulative dividends at the time of conversion. On February 15, 2000, the Company completed its acquisition of certain sprayable Bt biopesticides from Mycogen for aggregate consideration, including out-of-pocket expenses, of approximately $3,400,000 including shares of common stock with a market value of $3,041,000. In connection with the Mycogen Transaction, the Company entered into a five-year purchase and supply agreement ("Supply Agreement") with Dow. At October 31, 2001, the Company owed Dow approximately $600,000 for the purchase of inventory under the Supply Agreement that was past due under the agreement. In January 2002, Dow terminated the Supply Agreement as a result of Ecogen's alleged failure to remedy its breaches under the agreement. As a result of the termination of the Supply Agreement, the Company currently is unable to sell any products acquired from Mycogen. Since Dow owns the manufacturing process, the Company is unable to contract with a third party for the manufacture of these products. Although the Company is in discussions with Dow to resolve the situation, there is no assurance that the Company will be successful. As a result, the Company has recorded an impairment reserve for $1,393,000, representing the net book value of its intangible assets associated with the Mycogen acquisition. On September 11, 2000, the Company's common stock was delisted from the Nasdaq National Market ("NNM") as a result of the Company's failure to meet the NNM's net tangible assets listing requirement. As a result, dividends on the Company's Series 2000-A and Series 1998-C Convertible Preferred Stock are payable in cash, beginning with the quarterly dividend payment date of September 30, 2000 and the semiannual dividend payment date of December 31, 2000, respectively. The Company no longer has the option to pay such dividends in stock. Under Delaware Law, the Company is precluded from paying cash dividends due to its deficit in stockholders' equity and therefore is in default of its preferred stock (see notes 6 and 10 of notes to consolidated financial statements.) The Company's continued operations will depend on its ability to raise additional funds. To date, the Company has not generated positive cash flow from operations. Since its inception, the Company financed its working capital needs primarily through private and public offerings of equity and debt securities, revenues from research and development alliances and product sales. The Company had secured 20 borrowings under a working capital line of credit, which expired on June 29, 2001. The balance under the line of credit was repaid in fiscal 2001. The Company also secured the Term Loan and Notes referred to above that are due on June 23, 2002. On May 6, 2002, the Company signed an Asset Purchase Agreement with Certis, an indirect subsidiary of Mitsui & Co., for the sale of certain assets relating to the Company's sprayable Bt bio-pesticide business and the Company's insecticidal nematode business including, but not limited to, the Company's CryMax , Lepinox, Condor, Condor G, Raven, Bti technicals and HB nematode product lines. The transaction excludes the Bt CellCap products acquired from Mycogen Corporation and the Company's agreements with the Monsanto Company relating to the royalty arrangements for transgenic plants as described under Bt technology in this Form 10K. The assets sold include all technology and know-how related to the business, including strain libraries for bio-pesticide uses, product registration, trademarks, patents or licenses and certain inventory and fixed assets. Upon the closing of the transaction, the Company will receive cash proceeds of $4,015,000. The closing of the transaction is subject to certain conditions including obtaining approval of the Company's stockholders. Further, as a condition to the closing of the transaction, the Company is required to pay certain of its liabilities associated with the assets to be sold including the payment of the Term Loan and the Notes to remove liens on such assets and approximately $100,000 in accounts payable and accrued expenses. The balances due under the Term Loan and the Notes, including accrued interest, were $3,260,000 as of May 16, 2002. After the payments of the Company's liabilities as described above, the net proceeds from the sale of approximately $655,000 will not be sufficient for the Company to pay its existing liabilities. The Company will need to continue to pursue the raising of additional funds and other strategic initiatives including the sale of all or certain other assets to improve its working capital position. The Company also has taken a number of steps to conserve cash, including significant personnel reductions and related costs and the curtailment of all manufacturing until it is able to sell assets. The Company needs to sell other assets or obtain financing to provide the necessary cash resources to repay the outstanding balances under it's accounts payable and fund operations. At the present time, the Company is not pursuing any long-term financing. Further the Company needs to continue to obtain short-term funding while it negotiates potential sales. At this time the Company is unable to predict whether it will be successful in its efforts. If the Company is not successful in obtaining additional funding or selling assets, the Company will not be able to continue as a going concern. Over the long-term, the Company's liquidity is dependent on market acceptance of its products and technology, including products, if any, commercialized by the Monsanto Company utilizing the Company's technology. The report of our independent auditors on the Company's consolidated financial statements for the years ended October 31, 2001 and 2000 included an explanatory paragraph which stated that the recurring losses from operations, working capital deficiency, net capital deficiency and limited liquid resources raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. At October 31, 2001, the Company had no material commitments for capital expenditures. Through October 31, 2001, the Company had available for Federal income tax purposes net operating loss carryforwards of approximately $93.4 million, which expire at various times from 2002 through 2016. In addition, the Company had research and experimentation tax credits of approximately $2.1 million, which credits expire at various times from 2002 through 2013 As a result of certain equity transactions, the Company experienced ownership changes as defined by rules enacted with the Tax Reform Act of 1986 (the "Act"). Accordingly, the Company's ability to use its net operating loss and research and experimentation credit carryforwards is subject to certain limitations as defined by the Act. The Company believes that such limitations should not have a significant impact in 2002 since anticipated taxable profits, if any, will not exceed the amount of the limitation. In addition, to the extent that the Company recognizes gains, if any, on the disposition of assets held on the date of the ownership change, the annual limitation is increased by the amount of the "built-in" gains 21 attributable to those assets. The built-in gain on a particular asset is the excess of its fair market value over its cost basis on the date of the ownership change. Critical Accounting Policies - ---------------------------- The accompanying discussion and analysis of the Company's consolidated financial condition and results of operations are based on the Company's consolidated financial statements that have been prepared in accordance with principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgements that effect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities at the date of the financial statement at for the reporting period. On an ongoing basis the Company evaluates its estimates, including those related to revenue recognition, inventory reserves, fair value of long-lived assets including plant and equipment and intangibles and commitments and contingencies. The Company bases its estimate on historical results and other assumptions that are believed to be reasonable under the circumstances, the results of which form a basis for making judgements about the carrying value of assets and the future recoverable of the value of such assets. Actual results may differ from the estimates made by management with respect to these and other items that require management's estimate. The Company believes that there are several accounting policies that are critical to the understanding of the Company's historical and future performance, as these policies and reported amounts of revenue and the more significant areas involving management's estimates and judgements. These significant accounting policies relate to revenue recognition, inventory reserves and impairment of long-lived assets. These policies are detailed below and in note 1 and note 2 to notes to consolidated financial statements. From time to time, the Company has activities pursuant to research and development activities. The Company's policy is to recognize revenue from research and development contracts is in accordance with the terms of the respective contracts. Revenue from time and materials contracts is recognized in the period in which the related services have been rendered and the Company has incurred costs. Revenue from achievement of milestone events is recognized when all parties concur that the scientific results and/or milestones stipulated in the agreement have been met. Revenue from other contracts is recognized on a pro rata basis over the life of the contract. Contract costs of such contracts are generally incurred ratably over the contract term. Revenue recognized in the accompanying consolidated statements of operations under these contracts is not subject to repayment. Revenue received that is related to future performance under such contracts is deferred and recognized as revenue when earned. Revenues from product sales are recognized upon shipment and passage of title to the customer. Long-lived assets, consisting of plant and equipment and identifiable intangibles are accounted for in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company reviews long-lived assets for impairment whenever events or changes in business circumstances occur that indicate that the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of long-lived assets held and to be used and assets to be sold based on fair value. An impairment charge is recorded based on facts and circumstances at the time. The Company also assesses the carrying value of inventory and when changes in business circumstances occur, such as the decision to discontinue a product line or curtail manufacturing, appropriate reserves are recorded. See note 16 of notes to consolidated financial statements. All statements contained in this management's discussion and analysis of financial condition and results of operations other than statements of historical information, are forward-looking statements. Forward-looking statements include statements containing plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than historical facts. Although the Company believes that its expectations are based on reasonable assumptions, the Company operates in a high technology, emerging market environment that involves significant risks and uncertainties, which may cause actual results to vary from such forward-looking statements and to vary significantly from reporting period to reporting period. These risks include among others, those listed in "Factors That May Affect Future Results", in this Annual Report on Form 10K, and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. The Company does not undertake to update the results discussed herein as a result of changes in risks or operating results. Recently Issued Accounting Standards - ------------------------------------ In June 1998, the Financial Accounting Standard Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" (FAS 133"). FAS 133 was required to be adopted for the fiscal year beginning November 1, 2000. However, because it does not use derivatives, the adoption of FAS 133 did not effect the results of operations or the financial position of the Company. In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 requires the Company to follow its guidance no later than its fiscal year beginning November 1, 2000 through a cumulative effect of a change in accounting principle. The adoption of this standard did not have a material impact on our financial statements. In April 2000, the Financial Accounting Standard Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation-An Interpretation of APB Opinion No. 25" ("FIN 44") was issued. Fin 44 clarifies the application of APB No. 25 for certain issues. Among other issues, FIN 44 clarifies the definition of employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as non-compensatory plan, the accounting consequences of various modifications to the term of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. Fin 44 became effective July 1, 2000. The adoption of FIN 44 did not have a significant effect on the Company's financial position or results of operations. In June 2001, the Financial Accounting Standards Board issued Statement No. 141, "Accounting for Business Combinations (FAS 141) and Statement No. 142, Accounting for Goodwill and Intangible Assets (FAS 142). FAS 141 and 142 change the method of accounting for mergers and acquisitions. Under FAS 141 pooling-of-interest accounting may no longer be used. Under FAS 142 purchased goodwill will be subject to impairment reviews rather then amortizing goodwill over a specific period. The effective date for FAS 141 is for transactions entered into after June 30, 2001. FAS 142 will be effective for fiscal years beginning after December 31, 2001. Earlier application is permitted, however FAS 142 must be adopted at the beginning of a fiscal year. Adoption of FAS 142 is not expected to have a material impact on the Company's consolidated financial statements. 22 Factors That May Affect Future Results - -------------------------------------- Strategic Risk Factor - --------------------- WE NEED TO ENTER INTO TRANSACTIONS TO RAISE CAPITAL AND SELL ASSETS IN THE FUTURE TO GENERATE CASH AND THESE TRANSACTIONS MAY NOT OCCUR. We have never generated positive cash flow from operations. Since our inception, we have financed our working capital needs primarily through sales of equity and debt securities, revenues from research and development agreements and product sales. Recently, we have been unable to obtain additional equity funding and we have secured borrowings under a Term Loan and Notes, which are due on June 23, 2002. At October 31, 2001, we had limited cash resources. Due to our current inability to make principal payments, on our Term loan and the Notes, the lenders extended the due date of such principal repayment from June 30, 2001, to June 23, 2002. If we are unable to make the principal payments or obtain an additional extension, we will be in default of the terms of the-Term Loan and the Notes. In that case, both lenders may liquidate the collateral in accordance with the terms of our agreements. We expect that the Term Loan and the Notes will be repaid with the proceeds from the sale to Certis pursuant to the Asset Purchase Agreement. Additionally, on September 11, 2000, our common stock was delisted from the Nasdaq National Market ("NNM") as a result of our failure to meet the NNM's net tangible assets listing requirement. As a result, dividends on our preferred stock are payable in cash. The Company no longer has the option to pay such dividends in stock. Under Delaware Corporate Law, as a result of the Company's net capital deficiency, the Company is unable to pay dividends on the preferred stock and, accordingly, is in default under its preferred stock agreements. The holders of the preferred stock have, under certain circumstances, all of which is in the control of the Company, the ability to force the Company to redeem their preferred shares for 130% of the par value of the preferred stock in cash. In order to repay our accounts payable, we are pursuing certain strategic transactions including the sale of assets. Although we have signed the Assets Purchase Agreement with Certis, we need to continue to pursue the sale of other assets to pay our liabilities. There are no assurances that we will be successful. Further, we need to obtain short term funding while we continue to negotiate strategic transactions. These strategic transactions may require stockholder approval and there can be no assurances that we will be able to receive such stockholder approval on a timely basis or at all. We are unable to predict whether we will be successful in these efforts. If we are not successful, we will be unable to continue as a going concern. Operational Risk Factors - ------------------------ The Company has substantially curtailed all operations due to lack of funding. If the Company is successful in completing strategic transactions such as the sale of assets to raise funds to repay its liabilities, the Company cannot predict what remaining product lines it may have. With respect to the remaining product lines, the following risk factors would affect the Company's future results. WE ARE NOT PROFITABLE; WE MUST INCREASE SALES OF OUR PRODUCTS TO BE PROFITABLE We have incurred net losses since our inception. To date, we have not generated profits or positive cash flow from operations. There can be no assurance that we will achieve operating profits or generate a positive cash flow. Our ability to become profitable will depend, in part, on an increase in the sales volumes and margins of our line of biological insect control products and realization of commercialization fees. No assurance exists that we will be able to market these products at prices and in quantities that will enable us to achieve profitability. 23 WE ARE NOT ABLE TO PREDICT FUTURE COMMERCIAL ACCEPTANCE. Currently, our primary products include a line of biological insect control products and products based on naturally occurring organisms. There can be no assurance that our existing or future products will be commercially accepted. Additionally, two genes, which are products of our collaboration with the Monsanto Company ("Monsanto") are being utilized by Monsanto as an active ingredient in two of their products. Upon government approval and commercialization by Monsanto, revenue generated by Monsanto from these products using the genes would be subject to commercialization fees due to us under an agreement between the two companies. There can be no assurance that any of these products will be approved or commercialized by Monsanto or commercially accepted. WE COMPETE AGAINST LARGER, MORE ESTABLISHED ENTITIES. The markets in which we operate are highly competitive. Our competition is based principally on price and efficacy, but safety and ease of application are also factors. Our competitors include: (1) manufacturers and marketers of synthetic chemical pesticides and biopesticides including large chemical companies, such as Syngenta, DuPont and Sumitomo; (2) specialized biotechnology firms; (3) universities and public and private research organizations; and (4) in the case of our biological insecticide products, certain genetically altered, also known as "transgenic", seed and plant products that have insecticidal capabilities. Most of these organizations have considerably greater financial and marketing resources. The agricultural pesticide industry is undergoing, and is expected to continue to undergo, rapid and significant technological change. We expect competition to intensify as technical advances in the field are made and become more widely known. As a result, there can be no assurances that such competitive pressures and technological advances will not result in a reduction in prices of our products which could adversely affect our profitability or render our products or technology obsolete or noncompetitive. WE RELY UPON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS; WE MUST BE ABLE TO MASS PRODUCE NEW PRODUCTS. A key to achieving our product sales objectives is our ability to mass produce our products in a timely and cost-effective manner. In order for our product sales to be profitable, we must be able to increase our production to meet anticipated needs. There can be no assurance that we will be able to scale-up our production of new products on commercially reasonable terms or at all. Our production plans rely upon third parties for most of our product manufacturing, formulation and packaging requirements. Although we believe that such third parties have sufficient operating capacity to satisfy our product manufacturing needs, the failure of any such party to provide products to us under our product manufacturing arrangements could have a material and adverse effect on our ability to meet the demand for our products. WE DEPEND ON KEY QUALIFIED TECHNICAL STAFF AND MUST RECRUIT QUALIFIED INDIVIDUALS IF WE ARE TO BE COMPETITIVE. We have implemented staff reductions to conserve cash. We currently have only 2 full time employees. Our future success is dependent upon the efforts and abilities of qualified technical employees. Our future success will depend on our ability to replace employees with personnel of comparable scientific and management capability. 24 WE RELY ON PROPRIETARY TECHNOLOGY AND TRADE SECRETS, THE LOSS OF ANY OF WHICH WOULD NEGATIVELY AFFECT OUR BUSINESS. Although we have issued and pending patents with respect to certain of our technologies, there can be no assurance that any additional patents will be issued or that any issued patents will provide adequate protection for our products or processes. Although we pursue a policy of seeking patent protection, in the United States and abroad, for our novel compositions of matter and processes, the issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate without infringing the patent rights of others. A patent could be challenged by litigation and, if the outcome of such litigation were adverse to the patent holder, competitors could be free to use the subject matter covered by the patent, or the patent holder could be required to license the technology to others. Because of the uncertainty concerning patent protection, we also rely upon unpatented proprietary technology and trade secrets. All of our employees and consultants sign confidentiality agreements under which they agree not to use or disclose our confidential information as long as that information remains proprietary or, in some cases, for fixed time periods. There can be no assurance that others have not developed or will not independently develop such proprietary technology or substantially equivalent information and techniques or that secrecy will not be breached. Our ability to compete will depend, in part, on maintaining the proprietary nature of our technology. We are aware that substantial research efforts in biotechnology are taking place at universities, government laboratories and public corporations around the world and that numerous patent applications have been filed, and that patents have been issued, relating to fundamental technologies and to specific biological pesticide products and processes. The costs associated with the enforcement of our patents and with obtaining licenses, if required, under patents held by third parties can be significant and thus could materially and adversely affect our business. There can be no assurance that we could obtain licenses with respect to such patents on favorable terms, if at all. If it were alleged that we infringed on the rights of others, we may be required to expend large amounts on litigation costs to protect our technology. If the outcome were adverse to us, we may have to pay license fees or be required to cease using our technology. OUR PRODUCT USE AND DEVELOPMENT IS SEASONAL. The bulk of our products are marketed for agricultural applications in the northern hemisphere, where the growing season generally runs from spring until fall. Because of the seasonal nature of our business, product revenues are likely to be concentrated in the fiscal quarters prior to and during a particular growing season and may result in substantial variations in quarter-to-quarter financial results. Droughts, floods, other unusual weather conditions and the level of insect infestation in grower areas will also affect product sales from year-to-year. In addition, commercial introduction of our new products is contingent on, among other factors, completion of field testing and receipt of required regulatory approvals. Field testing, regulatory approval and commercial introduction of our products that are not yet registered with the EPA must occur at certain times before or during the growing season. Unusual weather conditions during field tests or the failure to receive regulatory approval prior to the growing season may require additional field tests to be conducted in subsequent growing seasons, with resulting delays in new product development and commercialization. WE MUST COMPLY WITH STRICT GOVERNMENTAL REGULATION. Pesticides are subject to rigorous testing and approval processes by the EPA and similar regulatory authorities in certain states and in other countries. The process of obtaining these approvals can be time-consuming and costly. There can be no assurance that such approvals will be granted on a timely basis, if at all. Delays in obtaining necessary product registrations could have a significant impact upon our 25 revenues and competitive position by delaying product sales and causing lost market opportunities. Additionally, while the EPA has in place a registration procedure for biopesticides that is less burdensome in comparison to the registration procedures for synthetic chemical pesticides, there can be no assurance that additional requirements will not be added by the EPA which could make the procedure more time-consuming and costly. Additionally, there is no assurance that a particular product developed in the future will qualify for registration as a biopesticide. Furthermore, there is no assurance that any registrations that have been granted will not be revoked or that, if we apply for any additional registrations or approvals, they will be issued. WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS AND WE MAY NOT HAVE SUFFICIENT PRODUCT LIABILITY INSURANCE. Our business exposes us to potential product liability claims based upon our technology or products. We currently maintain product liability insurance in an amount we believe is adequate for our needs, taking into account the risks involved and the cost of coverage. There can be no assurance that our insurance coverage is sufficient to cover potential liabilities, or that we will have sufficient resources to satisfy any product liability claims. A successful product liability claim in excess of our insurance coverage could have a material adverse effect on our financial condition. OUR STOCK PRICE IS HIGHLY VOLATILE AND INVESTING IN OUR STOCK INVOLVES A HIGH DEGREE OF RISK. The market price for shares of our common stock, like the price of common stock and other securities of biotechnology companies generally, fluctuates and may be extremely volatile in the future. Factors that may effect the market price of our common stock include: (1) our ability to continue our existence; (2) announcements of adverse results, technical innovations and new commercial products by us or potential competitors; (3) adverse results in our product sales; (4) adverse litigation, including actions by creditors and investors; (5) adverse legislation; (6) developments or disputes concerning patent or our other proprietary rights; and (7) general market conditions. In addition, the future sale of a substantial number of shares of common stock by existing stockholders or by us may have an adverse impact on the market price of the shares of common stock offered hereby. There can be no assurance that the price of our common stock will remain at or near its current level. Because our stock price is so volatile, investing in our common stock is highly risky and a potential investor must be able to withstand the loss of his entire investment in our common stock. OPTIONS AND CONVERTIBLE SECURITIES WE HAVE PREVIOUSLY ISSUED OR MAY ISSUE IN THE FUTURE MAY DILUTE OUR COMMON STOCK. We have granted options to purchase common stock under employee benefit plans and agreements with our management and directors. Warrants, options, convertible securities (including shares of our 7% Series 2000-A Preferred Stock and 8% Series 1998-C Preferred Stock) and other rights to purchase common stock are also outstanding under financing arrangements and other transactions and may convert into common stock at a discount to the then-prevailing market price of our common stock and cause significant dilution. We may examine opportunities to expand our technology base and product line, through means such as licenses and joint ventures, and may issue securities in connection with such transactions. We may issue additional stock, warrants and/or options or other convertible securities in order to raise funds or for other purposes in the future and may also issue additional securities in connection with our employee benefit plans. During the terms of any such options, warrants and other convertible securities (including shares of our 7% Series 2000-A Preferred Stock and 8% Series 1998-C Preferred Stock), the holders thereof have an opportunity to profit from a future rise, if any, in the market price of the common stock. 26 The exercise of any outstanding options, warrants and other convertible securities or issuance of further shares will dilute our common stock and may lower the price of our common stock. If you invest in our common stock, your interest will be diluted to the extent of the differences between the price per share you pay for the common stock and the pro forma as adjusted net tangible book value per share of our common stock at the time of sale. We calculate net tangible book value per share by calculating the total assets less intangible assets and total liabilities, and dividing it by the number of outstanding shares of common stock. WE DO NOT PAY DIVIDENDS. We have never paid a dividend on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. We are precluded from paying dividends on our common stock under our Term Loan agreement. We currently intend to retain earnings, if any, for use in our business. There can be no assurance that we will ever pay dividends on our common stock. NASDAQ DELISTING; REGULATION AS A PENNY STOCK. We were notified by The Nasdaq Stock Market that our Common Stock was delisted from The Nasdaq National Market effective with the opening of business on September 11, 2000. The delisting was as a result of the Company's failure to meet Nasdaq's net tangible asset requirement for continued listing. The Company does not plan to further appeal the delisting on the Nasdaq National Market and is not currently eligible for listing on The Nasdaq SmallCap Market, The New York Stock Exchange or the American Stock Exchange. Trading in our common stock was conducted on the National Association of Securities Dealers' OTC Bulletin Board ("OTCBB") until March 2002. On March 19, 2002, our common stock began trading in the OTC "Pink Sheet" due to our inability to file current reports with the SEC. As a consequence, it is expected that our stockholders will find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the common stock. In addition, such delisting will make our common stock substantially less attractive as collateral for margin and purpose loans, for investment by financial institutions under their internal policies or state legal investment laws, or as consideration in future capital raising transactions. Because our common stock has a market price of less then $5.00 and it is not traded on Nasdaq or a national securities exchange, transactions in our common stock may be subject to regulation as a "penny stock" under SEC Rules 15g-1 through Rule 15g-9 under the Exchange Act. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the penny stock rules may restrict the ability of broker-dealers to sell our securities and may affect the ability of holders to sell our securities in the secondary market and the price at which such holders can sell any such securities. Rule 15g-9 under the Exchange Act imposes additional sales practice requirements on broker-dealers who sell such securities except in transactions exempted from such rule. Such exempt transactions include those meeting the requirements of Rule 505 or 506 of Regulation D promulgated under the Securities Act and transactions in which the purchaser is an institutional accredited investor or an established customer of the broker-dealer. 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14 for an Index to Financial Statements and Financial Statement Schedules. Such Financial Statements and Schedules are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III - -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 1. Directors Philippe D. Katz, 40, has served as a director of the Company since February 1998. Since 1996, Mr. Katz has been a partner at the investment firm of United Equities (Commodities) Company. From 1992 to 1996, Mr. Katz was associated with United Equities (Commodities) Company. From 1989 to 1992, Mr. Katz was associated with the law firm of Weil, Gotshal & Manges. Mr. Katz is a member of the Audit Committee and the Nominating Committee. Dr. Lowell N. Lewis, 70, has served as a director of the Company since February 1989. Since February, 1992, Dr. Lewis has been an International Research Management Consultant. From January 1988 through his retirement from the University of California in April, 1991, Dr. Lewis was employed at the University of California as Associate Vice President for Programs, Agriculture and Natural Resources; Associate Director of the California Agricultural Experiment Station; and Associate Director of Cooperative Extension. Dr. Lewis is a member of the Audit Committee and the Compensation Committee. James P. Reilly, Jr., 56, has served as Chairman of the Board of Directors of the Company since November 1, 1995 and as a director of the Company since June 1992. Since January 1994, Mr. Reilly has been the Chief Executive Officer of the Company and since June 1992, he has been the Company's President. From June 1992 to January 1994, Mr. Reilly served as Chief Operating Officer of the Company. From 1976 until he joined the Company, Mr. Reilly was employed in various management capacities at Rhone-Poulenc, Inc., most recently, from April 1991 to May 1992, as Vice President and General Manager of the Fine Chemicals Division. Mr. Reilly is a member of the Nominating Committee. John R. Sutley, 59, has served as a director of the Company since March 1996. From 1994 to 1999, he was President and Chief Executive Officer of Nalco/Exxon Energy Chemicals, L.P., a specialty chemicals company. From 1968 to 1994, Mr. Sutley was employed in various management capacities at Nalco Chemical Co., most recently, from 1991 to 1994, as Group Vice President of Nalco Chemical Co. and President of Nalco Europe. Mr. Sutley is a member of the Audit Committee and the Compensation Committee. 2. Information concerning the Company's Executive Officers is set forth in Part I of this Form 10-K. 28 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation for services rendered to the Company during the last three fiscal years by the Chief Executive Officer and each other executive officer of the Company whose aggregate annual salary exceeded $100,000 during the fiscal year ended October 31, 2001: SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation (Awards/Payouts) ------------------- ---------------------------------------- Restricted All Other Name and Salary Options Stock Awards Compensation(1) Principal Position Year ($) (#) ($) ($) - ------------------ ---- ------ ------------ ------ ---------------- James P. Reilly, Jr., 2001 300,000 - - 10,020 Chairman and Chief 2000 300,000 - - 10,020 Executive Officer 1999 300,000 - - 149,945 (2)
(1) Reflects the Company's contribution on behalf of such executive officer to the Company's 401(k) Profit Sharing Plan. (2) Includes $139,871 reimbursed to Mr. Reilly for the payment of income taxes in connection with the accelerated vesting of a stock award granted to Mr. Reilly in 1998. The Company does not have a defined benefit or actuarial pension plan and the Company does not have a long-term incentive plan. The Company maintains a severance compensation agreement with Mr. Reilly that provides that in the event Mr. Reilly's employment with the Company is terminated (as defined in the agreement) under certain circumstances the Company is obligated to continue to pay Mr. Reilly his salary and benefits for a period of two years. OPTION GRANTS FOR LAST FISCAL YEAR There were no options granted during the last fiscal year. OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUE TABLE Aggregated Option Exercises in Last Fiscal Year and Full Year-End Option Value ------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised Options at Fiscal In-the-Money Options at Year-End (#) Fiscal Year End ($) ---------------------------- --------------------------- Shares Value Acquired on Realized Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable ---- ------------- ---------- ----------- ------------- ----------- ------------- J.P. Reilly, Jr. None N/A 608,000 - none none
29 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL STOCKHOLDERS The following table sets forth information as of February 28, 2002, with respect to the beneficial ownership of the Common Stock by all persons known by the Company to be the beneficial owners of more than 5% of its outstanding Common Stock, by each director and nominee for director, by each named executive officer, and by all current executive officers and directors as a group. Except as indicated in the footnotes to the table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them.
Name and Address (1) Number of Shares (2) Percentage of Class (3) - ---------------- ---------------- ------------------- United Equities (Commodities) Company 110,213,833 87% Moses Marx, Philippe D. Katz 160 Broadway New York, NY 10038 (4)(5)(6) James P. Reilly, Jr. (7) 766,594 2% Philippe D. Katz (8) 27,000 * Lowell N. Lewis (9) 17,540 * John R. Sutley (10) 33,000 * All current executive officers and directors as a group (four persons) (4), (5), (6), (7), (8), (9), (10), and (11) 111,057,967 88%
* Indicates amount is less than 1%. (1) The addresses of all officers and directors of the Company listed above are in care of the Company. The Company's corporate headquarters are located at 2000 Cabot Boulevard West, Suite 170, Langhorne, Pennsylvania 19047. For purposes of calculating beneficial ownership, the Company relied upon reports filed with the Securities and Exchange Commission and upon its actual knowledge. (2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within sixty (60) days are deemed outstanding for purposes of computing the percentage ownership of the person holding such securities, but are not deemed outstanding for computing the ownership percentage of any other person. Except as indicated and subject to community property laws where applicable, the Company believes that the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (3) The "Percentage Owned" calculations are based on the outstanding shares of Common Stock as of February 28, 2002. (4) Includes a five-year warrant to purchase up to 200,000 shares of Common Stock at $1.25 per share granted to the Momar Corporation. Mr. Marx is the President and a control person of Momar Corporation. 30 (5) Pursuant to Amendment No. 5 to Schedule 13D filed by Moses Marx and United Equities (Commodities) Company ("United Equities") on December 3, 2001, securities reported as being beneficially owned by United Equities include 25,509,833 shares of Common Stock. Includes 84,504,000 shares which United Equities has the right to acquire upon conversion of the Company's 8% Series 1998-C convertible Preferred Stock including accrued dividends using a conversion price as if the stock was converted at February 28, 2002. Moses Marx has a 99% equity interest in United Equities, and has sole investment and voting power over, and is deemed to beneficially own the shares of Common Stock held by United Equities. Philippe Katz, a director of the Company, has a 0.5% equity interest in United Equities and may be deemed to beneficially own the shares of Common Stock held by United Equities. (6) Includes outstanding shares of Common Stock as of February 28, 2002, shares which United Equities has the right to acquire upon conversion of the Company's 8% Series 1998-C Convertible Preferred Stock and shares which Momar Corporation has the right to acquire upon conversion of a warrant. (7) Includes 608,000 shares which Mr. Reilly has the right to acquire upon exercise of stock options which are exercisable on or within 60 days following February 28, 2002. (8) Includes 22,000 shares which Mr. Katz has the right to acquire upon the exercise of stock options which are exercisable on or within 60 days following February 28, 2002. Does not include shares owned by United Equities of which Mr. Katz has a .5% equity interest. See Footnote 2 above. (9) Includes16,400 shares which Dr. Lewis has the right to acquire upon the exercise of stock options which are exercisable on or within 60 days following February 28, 2002. (10) Includes 33,000 shares which Mr. Sutley has the right to acquire upon exercise of stock options which are exercisable on or within 60 days following February 28, 2002. (11) Gives full effect to stock options and warrants, which are presently exercisable, held by current executive officers and directors (12) Does not Includes (i) 13,417,355 shares of our common stock issuable upon conversion of 3,738 shares of 7% Series 2000-A Preferred Stock held by Aspen International Ltd. and the payment of dividends thereon at an assumed conversion price of $.032 per share at February 28, 2001 and shares of common stock issuable upon exercise of the warrant to purchase an aggregate of 66,667 shares of common stock, (ii) ) 2,235,916 shares of our common stock issuable upon conversion of 697 shares of 7% Series 2000-A Preferred Stock held by Markam Holding and the payment of dividends thereon at an assumed conversion price of $.032 per share at February 28, 2001 and shares of common stock issuable upon exercise of the warrant to purchase an aggregate of 26,666 shares of common stock and (iii) 5,564,136 shares of our common stock issuable upon conversion of 1,528 shares of 7% Series 2000-A Preferred Stock held by AMRO International, S.A. and the payment of dividends thereon at an assumed conversion price of $.032 per share at February 28, 2001 and shares of common stock issuable upon exercise of the warrant to purchase an aggregate of 106,667 shares of common stock. Pursuant to the Certificate of Designations, Preferences and Rights of Series 2000-A Convertible Preferred Stock, no holder may convert Series 2000-A Preferred Stock or receive shares of our common stock as payment of dividends thereon to the extent that the number of shares of our common stock held by it and its affiliates after such conversion or receipt of dividends would exceed 4.999% of the then issued and outstanding shares of common stock following such conversion or receipt of dividends. The holder of the preferred stock may waive this provision upon not less than 75 days notice. 31 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN TRANSACTIONS In December 1999, the Company borrowed $1,500,000 from The Berkshire Bank ("Berkshire"), a subsidiary of Berkshire Bancorp Inc. The Term Loan was guaranteed by Momar Corporation in exchange for a five-year warrant to purchase up to 200,000 shares of Common Stock at $1.25 per share. Mr. Marx, a general partner in United Equities Company and United Equities (Commodities) Company ("United"), is a director of the Berkshire Bank and President of Momar Corporation. Due to the Company's current inability to make a principal payment on our long-term note, Berkshire extended the due date of such principal repayment, originally due in June 2000, to June 23, 2002. If we are unable to make the principal payment or obtain an additional extension, we will be in default of the terms of the Term Loan. In that case, Berkshire may liquidate the collateral in accordance with the terms of our agreements. During fiscal 2001, the Company borrowed $1,000,000 from a corporation affiliated with Mr. Marx pursuant to the Notes. Subsequent to October 31, 2001, the Company borrowed an additional $405,000 under the Notes. These Notes have been extended to June 23, 2002. The Notes bear interest at 12% and are secured by the Company's assets and an interest in any commercialization success fees received under its agreement with Monsanto Company. It is expected that the Term Loan and the Notes will be repaid concurrent with the closing of the Asset Purchase Agreement with Certis in order to remove the lien on the assets to be sold. In August 1998, the Company exchanged an 8% convertible secured note due in October 2002 in the amount of $3,235,400 for 32,354 shares of newly issued 8% Series 1998 C convertible preferred stock with a stated value of $100 per share. Under the terms of the preferred stock, once the per share value of the Company's Common Stock was less than $1.00 for thirty consecutive trading days, the Series 1998-C Preferred Stock the dividends increased to 15% per annum. Also under the agreement, in the event that the cumulative amount of dividends exceeds $37,500 for a period of thirty days after any dividend payment date, than the Company will promptly appoint two designees of United to the Company's Board of Directors and use its reasonable best efforts to cause the election of such designees to the Company's Board of Directors. At October 31, 2001, cumulative cash dividends exceed $37,500, however, the Company has not appointed any additional designees of United. In November 2001, 11,500 shares of the Series 1998 C preferred stock were converted into 25,000,000 shares of the Company's common stock in accordance with the terms of the preferred stock. As a result of the conversion, the holder of the preferred stock owns 62% of the Company's outstanding common shares. After the conversion, 20,854 shares of the Series 1998 C Convertible Preferred Stock remain outstanding. The Company believes that all of the foregoing transactions were entered into upon terms comparable to those which could have been obtained at that time from a third party in an arms' length transaction and furthermore have significantly contributed to the Company. 32 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2) Financial Statements and Financial Statement Schedules ------------------------------------------------------ The following consolidated financial statements of Ecogen Inc. and subsidiaries are included in Item 8:
Page in Form 10-K --------- Independent Auditors' Report F-1 Consolidated Balance Sheets - Unaudited Pro Forma October 31, 2001 and Actual October 31, 2001 and 2000 F-3 Consolidated Statements of Operations - Years Ended October 31, 2001, 2000 and 1999 F-4 Consolidated Statements of Stockholders' (Deficit) Equity - Years Ended October 31, 2001, 2000 and 1999 F-5 Consolidated Statements of Cash Flows - Years Ended October 31, 2001, 2000 and 1999 F-6 Notes to Consolidated Financial Statements - October 31, 2001, 2000 and 1999 F-8 Financial Statement Schedule: Valuation and Qualifying Accounts F-22
All other schedules are omitted for the reasons that they are not applicable or that equivalent information has been included in the consolidated financial statements and notes thereto, or elsewhere herein. 33 (a)(3) Exhibits Exhibit No. Description - ---------- ----------- 3.1 Restated Certificate of Incorporation of Ecogen Inc.(Form 10-K for fiscal quarter ended January 31, 1996)* 3.2 Bylaws of Ecogen Inc., as amended. (Form S-1 Registration Statement)* 3.3 Certificate of Designations, Preferences and Rights of Series 1998-A Convertible Preferred Stock (Form 10-Q for fiscal quarter ended April 30, 1998) * 3.4 Certificate of Designations, Preferences and Rights of Series 1998-C Convertible Preferred Stock (Form 8-K dated September 2, 1998) * 3.5 Corrected Certificate of Designations, Preferences and Rights of Series 1999-A Convertible Preferred Stock (Form 10-Q for fiscal quarter ended April 30, 1999)* 3.6 Certificate of Designations, Preferences and Rights of Series 2000-A Convertible Preferred Stock (Form 10Q for the quarter ended January 31, 2000)* 4.3 Ecogen Inc. Stock Option Plan, as amended. (Form 10K for fiscal year ended October 31, 1999) * 4.4 Ecogen Inc. 1998 Stock Option Plan, as amended. (Form 10K for fiscal year ended October 31, 1999) * 4.5 Ecogen Inc. 1999 Stock option Plan, as amended. (Form 10K for fiscal year ended October 31, 1999) * 10.14 Form of Confidentiality Agreement between Ecogen Inc. and all Ecogen Inc. employees. (Form S-1 Registration Statement)* 10.30 Lease Agreement, dated June 4, 1985, between Linpro Bucks County II, Limited and Ecogen Inc.(Form S-1 Registration Statement)* 10.67 Bt Gene License Agreement, dated April 11, 1991, between Ecogen Inc. and Pioneer Hi-Bred International, Inc. (Form S-1 Registration Statement filed on May 1, 1991, as amended)* 10.88 Form of Technology License Agreement between Ecogen-Bio Inc. and certain Program Subsidiaries.(Form 10-K for fiscal year ended December 31, 1992)* ___________________ * These items are hereby incorporated by reference from the exhibits of the filing or report indicated (except where noted, Commission File No. 1-9579, File No. 33-14119 in the case of the Form S-1 Registration Statement and File No. 33-40319 in the case of the Form S-1 Registration Statement filed on May 1, 1991, as amended) and are made part of this Report. 34 10.89 Form of Research and Development Agreement between Ecogen Inc. and certain Program Subsidiaries. (Form 10-K for fiscal year ended December 31, 1992)* 10.90 Form of Marketing Option Agreement between Ecogen Inc. and certain Program Subsidiaries. (Form 10-K for fiscal year ended December 31, 1992)* 10.119 Form of Incentive Stock Option Agreement, as amended. (Form 10-K for fiscal year ended October 31, 1994)* 10.122 Investment Agreement, dated as of January 24, 1996, between the Company and Monsanto Company. (Form 10-Q for fiscal quarter ended January 31, 1996)* 10.123 Technology Assignment Agreement, dated as of January 24, 1996, between the Company, Ecogen-Bio Inc. and Monsanto Company. (Form 10-Q for fiscal quarter ended January 31, 1996)* 10.125 Form of Indemnification Agreement for Directors and Officers (Form 10-Q for fiscal quarter ended January 31, 1997)* 10.127 Amendment No. 1 to Technology Assignment by and between Monsanto Company and Ecogen Inc. dated September 15, 1997. (Form 10-K for fiscal year ended October 31, 1997)* 10.128 Convertible Note Purchase Agreement by and among Ecogen Inc., Ecogen Investment Inc., Ecogen-Bio Inc. and United Equities (Commodities) Company dated October 31, 1997. (Form 10-K for fiscal year ended October 31, 1997)* 10.129 8% Convertible Note due October 31, 2002 issued to United Equities (Commodities) Company dated October 31, 1997. (Form 10-K for fiscal year ended October 31, 1997)* 10.130 Security Agreement by and among Ecogen Inc., Ecogen Investment Inc., Ecogen-Bio Inc. and United Equities (Commodities) Company dated October 31, 1997. (Form 10-K for fiscal year ended October 31, 1997)* 10.132 Amended and Restated Research and Development Agreement dated January 30, 1998 by and between Monsanto Company and Ecogen Inc. (Form 10-Q for fiscal quarter ended January 31, 1998)* 10.134 Convertible Preferred Stock Purchase Agreement between United Equities (Commodities) Company and Ecogen Inc. dated August 20, 1998. (Form 8-K filed on September 2, 1998)*Loan and Security Agreement between Congress Financial Corporation and Ecogen Inc., dated August 20, 1998. (Form 8-K filed on September 2, 1998)* 10.135 Registration Rights Agreement between United Equities (Commodities) Company and Ecogen Inc., dated August 20, 1998. (Form 8-K filed on September 2, 1998)*
___________________ * These items are hereby incorporated by reference from the exhibits of the filing or report indicated (except where noted, Commission File No. 1-9579, File No. 33-14119 in the case of the Form S-1 Registration Statement and File No. 33-40319 in the case of the Form S-1 Registration Statement filed on May 1, 1991, as amended) and are made part of this Report. 35 10.136 Guarantee by Ecogen Investments Inc., Ecogen Technologies I Incorporated, Ecogen-Bio Inc., Ecoresearch Mildew I Inc., Ecoresearch Harvest Rot II Inc., Ecoresearch Corn Borer III Inc., Ecoresearch Nematodes IV Inc., Ecoresearch Rootworm V Inc. and Ecoresearch Turf VI Inc. to Congress Financial Corporation, dated August 20, 1998. (Form 8-K filed on September 2, 1998)* 10.140 Amended and Restated Convertible Preferred Stock Purchase Agreement between Ecogen Inc. and KA Investments LDC dated as of June 5, 1998. (Form S-3 Registration Statement filed on September 14, 1998)* 10.141 Warrant Agreement between Ecogen Inc. and KA Investments LDC dated June 5, 1998. (Form S-3 Registration Statement filed on September 14, 1998)* 10.142 Amended and Restated Registration Rights Agreement between Ecogen Inc. and KA Investments LDC dated as of June 5, 1998. (Form S-3 Registration Statement filed on September 14, 1998)* 10.143 Stock Award Agreement between Ecogen Inc. and James P. Reilly, Jr. dated September 23, 1998* (Form 10K for fiscal year ended Ocotber 31, 1999* 10.145 Amended and Restated Stock Award Agreement between Ecogen Inc. and James P. Reilly, Jr. dated as of April 9, 1999 (Form 10-Q for fiscal quarter ended April 30, 1999)* 10.146 Warrant Agreement between Ecogen Inc. and KA Investments LDC dated May 12, 1999 (Form 10-Q for fiscal quarter ended April 30, 1999)* 10.147 Convertible Preferred Stock Purchase Agreement between Ecogen Inc. and KA Investments LDC dated May 12, 1999 (Form 10-Q for fiscal quarter ended April 30, 1999)* 10.148 Registration Rights Agreement between Ecogen Inc. and KA Investments LDC dated May 12, 1999 (Form 10-Q for fiscal quarter ended April 30, 1999)* 10.149 Restated Severance Compensation Agreement dated December 9, 1999, between Ecogen Inc, a Delaware corporation and James P. Reilly, Jr. (Form 10K for the fiscal year ended October 31, 2000)*
_____________________ * These items are hereby incorporated by reference from the exhibits of the filing or report indicated (except where noted, Commission File No. 1-9579, File No. 33-14119 in the case of the Form S-1 Registration Statement and File No. 33-40319 in the case of the Form S-1 Registration Statement filed on May 1, 1991, as amended) and are made part of this Report. 36 10.150 Term Loan and Security Agreement, dated as of December 23, 1999, between Ecogen Inc. and The Berkshire Bank (Form 10K for the fiscal year ended October 31, 2000)* 10.151 Warrant Agreement between Ecogen Inc. and Momar Corporation dated December 23, 1999 (Form 10K for the fiscal year ended October 31, 2000)* 10.152 Amendment No. 2 to Lease Agreement, dated December 17, 1999 by and between Brandywine Realty and Ecogen Inc. (Form 10K for the fiscal year ended October 31, 2000)* 10.153 Asset Purchase and License Agreement between Ecogen Inc and Mycogen Corporation dated as of February 15, 2000 (Current Report on Form 8-K dated March 1, 2000)* 10.154 Stockholders Agreement between Ecogen Inc. and Mycogen Corporation dated as of February 15, 2000 (Current Report on Form 8-K dated March 1, 2000)* 10.155 Purchase and Sale Agreement between Ecogen Inc. and Dow AgroSciences LLC dated as of February 15, 2000 (Current Report on Form 8-K dated March 1, 2000)* 10.156 Convertible Preferred Stock Agreement between Ecogen Inc. and Amro International, S.A., Aspen International, Ltd. and Markam Holdings Limited dated as of February 14,2000 (Form 10-Q for the fiscal quarter ended January 31, 2000)* 10.157 Registration Rights Agreement between Ecogen Inc. and Amro International, S.A., Aspen International, Ltd. and Markam Holdings Limited dated as of February 14,2000 (Form 10-Q for the fiscal quarter ended January 31, 2000)* 10.158 Warrant Agreement between Ecogen Inc. and Amro International, S.A. dated as of February 14, 2000 (Form 10-Q for the fiscal quarter ended January 31, 2000)* 10.159 Warrant Agreement between Ecogen Inc. and Aspen International, Ltd. dated as of February 14, 2000 (Form 10-Q for the fiscal quarter ended January 31, 2000)* 10.160 Warrant Agreement between Ecogen Inc. and Markam Holdings Limited dated as of February 14, 2000 (Form 10-Q for the fiscal quarter ended January 31, 2000)* 10.161 Form of Demand Promissory Note to Momar Corporation (Form 10K for the fiscal year ended October 31, 2000)* 10.162 Letter Agreement between Ecogen Inc. and Momar Corporation dated May 16, 2002) _______________________ * These items are hereby incorporated by reference from the exhibits of the filing or report indicated (except where noted, Commission File No. 1-9579, File No. 33-14119 in the case of the Form S-1 Registration Statement and File No. 33-40319 in the case of the Form S-1 Registration Statement filed on May 1, 1991, as amended) and are made part of this Report. 37 21. List of Subsidiaries 24.1 Consent of KPMG LLP 24.2 Consent of The Hermes Group 25. Powers of attorney executed by certain officers of the Company and the individual members of the Board of Directors authorizing certain officers of the Company to file amendments to the Company's annual report on Form 10-K are located on the signature page to such Form 10-K. (b) Reports on Form 8-K. None 38 Independent Auditors' Report The Board of Directors and Stockholders Ecogen Inc.: We have audited the accompanying consolidated balance sheet of Ecogen Inc. and its subsidiaries as of October 31, 2001 and the related consolidated statement of operations, stockholders' (deficit) and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ecogen Inc. and subsidiaries as of October 31, 2001, the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a working capital deficiency, a net capital deficiency and limited liquid resources, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 2. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commissions rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly present in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. The Hermes Group LLP Princeton, New Jersey March 28, 2002, except as to notes 2 and 20 which are as of May 16, 2002 F-1 Independent Auditors' Report The Board of Directors and Stockholders Ecogen Inc.: We have audited the accompanying consolidated balance sheet of Ecogen Inc. and subsidiaries as of October 31, 2000 and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for the years ended October 31, 2000 and 1999. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule for the years ended October 31, 2000 and 1999. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ecogen Inc. and subsidiaries as of October 31, 2000, and the results of their operations and their cash flows for the years ended October 31, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein for 2000 and 1999. The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a working capital deficiency, a net capital deficiency and limited liquid resources, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 2. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty. KPMG LLP Short Hills, New Jersey February 15, 2001 F-2 ECOGEN INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Unaudited Assets Pro Forma Actual ------ October 31, October 31, 2001 2001 2000 ------------- ------------- ------------- Current assets: Cash and cash equivalents $ 1,192,773 $ 8,054 $ 215,777 Trade receivables, less allowances of $82,483 and $98,393 in 2001 and 2000, respectively 311,024 311,024 616,741 Inventory, net 236,368 236,368 2,051,184 Prepaid expenses and other current assets 308,962 308,962 284,673 Assets held for sale 0 128,954 - ------------- ------------- ------------- Total current assets 2,049,127 993,362 3,168,375 ------------- ------------- ------------- Plant and equipment, net 29,554 29,554 677,831 Intangibles and other assets, net 31,424 31,424 2,653,571 Assets held for sale - 746,669 - ------------- ------------- ------------- $ 2,110,105 $ 1,801,009 $ 6,499,777 ============= ============= ============= Liabilities and Stockholders' Deficit ------------------------------------- Current liabilities: Debt due within one year - 2,500,500 2,123,972 Accounts payable and accrued expenses 4,676,029 5,005,810 4,834,499 ------------- ------------- ------------- Total current liabilities 4,676,029 7,506,310 6,958,471 Long-term debt - - 9,306 Long-term accrued expenses 231,505 231,505 - Long-term deferred revenue 1,780,928 1,780,928 1,612,928 Minority interest 1,533,854 1,533,854 1,533,854 ------------- ------------- ------------- Total liabilities 8,222,316 11,052,597 10,114,559 ------------- ------------- ------------- Stockholders' deficit: Preferred stock, par value $.01 per share; authorized 7,500,000 shares: Series 2000 A convertible preferred stock; 30,000 shares authorized; 5,963, 6,598 and 7000 shares outstanding in pro forma 2001, actual 2001 and 2000, respectively (liquidation value $600,000) 60 66 76 Series 1998 C convertible preferred stock; 50,000 shares authorized; 20,854, 32,354 and 32,354 shares outstanding in pro forma 2001, actual 2001 and 2000, respectively (liquidation value $2,085,000) 209 324 324 Common stock, par value $.01 per share; authorized 42,000,000 shares: issued and outstanding 41,423,315, 14,442,807 and 13,492,520 shares in pro forma and actual 2001 and 2000, respectively 414,233 144,327 134,925 Additional paid-in capital 129,047,327 129,317,112 129,319,027 Accumulated deficit (135,574,040) (138,713,417) (133,069,134) ------------- ------------- ------------- Total stockholders' deficit (6,112,211) (9,251,588) (3,614,782) ------------- ------------- ------------- $ 2,110,105 $ 1,801,009 $ 6,499,777 ============= ============= =============
See accompanying notes to consolidated financial statements. F-3 ECOGEN INC. AND SUBSIDIARIES Consolidated Statements of Operations
Year Ended October 31, 2001 2000 1999 ---- ---- ---- Revenues: Product sales, net $2,997,775 $ 6,341,488 $6,566,022 Research contract revenue 222,813 50,000 676,277 ----------- ------------ ----------- Total revenues 3,220,588 6,391,488 7,242,299 ----------- ------------ ----------- Costs and expenses, including related party amounts of none, none, and $155,879 in 2001, 2000 and 1999, respectively: Cost of products sold 2,831,301 6,000,395 5,975,954 Research and development: Funded by third parties - - 318,559 Self funded 570,043 2,069,500 2,318,334 Selling, general and administrative 3,138,545 5,500,676 6,832,761 Special charges 1,778,183 1,049,870 - ----------- ------------ ----------- Total costs and expenses 8,318,072 14,620,441 15,445,608 ----------- ------------ ----------- Operating loss (5,097,484) (8,228,953) (8,203,309) ----------- ------------ ----------- Other income (expense) Net interest expense, including $228,819 and $144,167 to related parties in 2001 and 2000, respectively (491,147) (840,736) (522,894) Other income, net 419,693 93,079 114,932 ----------- ------------ ----------- Total other income (expense), net (71,454) (747,657) (407,962) ----------- ------------ ----------- Net loss (5,168,938) (8,976,610) (8,611,271) Dividends on preferred stock, including assumed incremental yield of $611,622 and $786,444 for 2000 and 1999, respectively (including related party amounts of $432,833, $302,887 and $258,832 in 2001, 2000, and 1999, respectively 475,345 1,071,976 1,142,180 ------------ --------- ----------- Net loss allocable to common stockholders ($5,644,283) ($10,048,586) ($9,753,451) =========== ============ =========== Basic and diluted net loss per common share ($0.39) ($0.84) ($1.05) =========== ============ =========== Weighted average common shares outstanding 14,299,000 11,907,000 9,248,000 =========== ============ ===========
See accompanying notes to consolidated financial statements. F-4 ECOGEN INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' (Deficit) Equity Years ended October 31, 2001, 2000, and 1999
Convertible Additional Preferred Stock Common Stock Paid-in Capital --------------- ------------ --------------- Balance, November 1, 1998 $ 519 82,426 $122,162,964 Issuance of 1,738 shares of common stock and transfer of 5,037 shares of treasury stock for employee benefits - 17 (52,527) Private placement of 500,000 shares of common stock, net of issuance costs - 5,000 1,530,208 Private placement of 15,000 shares of convertible preferred stock, net of issuance costs, including 20,000 shares of common stock 150 200 1,356,650 Conversion of 19,500 shares of Series 1999 A convertible preferred stock to 1,155,975 shares of common stock including the transfer of 15,175 shares out of treasury stock (195) 11,408 (600,908) Issuance of 17,221 shares of common stock in connection with consulting agreement - 172 49,828 Dividends on preferred stock - 636 108,662 Net reduction in unrealized gain on securities - - - Net loss - - - --------------- ------------- --------------- Balance, October 31, 1999 474 99,859 124,554,877 Issuance of 1,351,351 shares of common stock for the acquisition of certain assets - 13,514 3,024,231 Conversion of 15,000 shares of Series 1999 A convertible preferred stock to 984,732 shares of common stock (150) 9,847 (9,697) Private placement of 15,000 shares of convertible preferred stock, net of issuance costs, including 20,000 shares of common stock 150 200 1,399,150 Conversion of 7,380 shares of Series 2000 A convertible preferred stock to 1,044,225 shares of common stock (74) 10,442 9,999 Dividends on preferred stock - 908 87,115 Issuance of 200,000 warrants in connection with a loan agreement - - 183,556 Issuance of 15,544 shares of common stock for employee benefits - 155 39,676 Stock options granted under a consulting agreement - - 30,120 Net loss - - - --------------- ------------- --------------- Balance, October 31, 2000 400 134,925 129,319,027 Conversion of 1,022 shares of Series 2000 A convertible preferred stock to 888,151 shares of common stock (10) 8,881 (8,871) Dividends on preferred stock - 521 6,956 Net loss - - - --------------- ------------- --------------- Balance, October 31, 2001 $ 390 $ 144,327 $129,317,112 =============== ============= =============== Accumulated Equity Treasury Deficit Adjustments Stock at Cost Total ----------- ----------- ------------- ----- Balance, November 1, 1998 ($114,665,164) $ 3,912 ($659,390) $ 6,925,267 Issuance of 1,738 shares of common stock and transfer of 5,037 shares of treasury stock for employee benefits - - 69,695 17,185 Private placement of 500,000 shares of common stock, net of issuance costs - - - 1,535,208 Private placement of 15,000 shares of convertible preferred stock, net of issuance costs, including 20,000 shares of common stock - - - 1,357,000 Conversion of 19,500 shares of Series 1999 A convertible preferred stock to 1,155,975 shares of common stock including the transfer of 15,175 shares out of treasury stock - - 589,695 - Issuance of 17,221 shares of common stock in connection with consulting agreement - - - 50,000 Dividends on preferred stock (355,736) - - (246,438) Net reduction in unrealized gain on securities - (3,912) - (3,912) Net loss (8,611,271) - - (8,611,271) --------------- ----------- ------------- -------------- Balance, October 31, 1999 (123,632,171) - - 1,023,039 Issuance of 1,351,351 shares of common stock for the acquisition of certain assets - - - 3,037,745 Conversion of 15,000 shares of Series 1999 A convertible preferred stock to 984,732 shares of common stock - - - - Private placement of 15,000 shares of convertible preferred stock, net of issuance costs, including 20,000 shares of common stock - - - 1,399,500 Conversion of 7,380 shares of Series 2000 A convertible preferred stock to 1,044,225 shares of common stock - - - 20,367 Dividends on preferred stock (460,353) - - (372,330) Issuance of 200,000 warrants in connection with a loan agreement - - 183,556 Issuance of 15,544 shares of common stock for employee benefits - - - 39,831 Stock options granted under a consulting agreement - - - 30,120 Net loss (8,976,610) (8,976,610) --------------- ----------- ------------- -------------- Balance, October 31, 2000 (133,069,134) - - (3,614,782) Conversion of 1,022 shares of Series 2000 A convertible preferred stock to 888,151 shares of common stock - - - - Dividends on preferred stock (475,345) - - (467,868) Net loss (5,168,938) - - (5,168,938) --------------- ----------- ------------- -------------- Balance, October 31, 2001 ($138,713,417) $ - $ - ($ 9,251,588) =============== =========== ============= ==============
See accompanying notes to consolidated financial statements. F-5 ECOGEN INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
Year Ended October 31, 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net loss ($5,168,938) ($8,976,610) ($8,611,271) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 517,458 1,827,304 702,399 (Gain) loss on sale or disposition of assets (415,093) - 101,000 Noncash interest and other expense 2,302,590 367,905 351,861 Changes in operating assets and liabilities, net of effects from acquisitions: Decrease (increase) in inventory 1,750,862 4,229,578 (1,059,643) Decrease in trade receivables, net 305,717 1,069,209 1,652,947 Decrease in prepaid expenses and other current assets 160,711 102,370 237,028 (Decrease) increase in accounts payable and accrued expenses (475,355) 568,077 619,053 Decrease in deferred revenue - - (485,853) Other 105,518 229,267 90,404 ------------ ------------ ------------ Net cash used in operating activities (916,530) (582,900) (6,402,075) ------------ ------------ ------------ Cash flows from investing activities: Proceeds from maturities of temporary investments - - 813,150 Proceeds from sale of assets 545,729 - - Purchase of plant and equipment - (45,601) (101,796) ------------ ------------ ------------ Net cash provided by (used in) investing activities 545,729 (45,601) 711,354 ------------ ------------ ------------ Cash flows from financing activities: Net proceeds from sale of common and convertible preferred stock, net of issuance costs - 1,399,500 2,892,208 Net proceeds from issuance of common shares under stock option plan - 39,831 4,449 Repayment of capital lease obligation (213,450) (241,880) (297,304) Net (repayments) proceeds from line of credit (623,972) (1,568,173) 1,081,931 Proceeds from term loan 1,000,500 1,500,000 - ------------ ------------ ------------ Net cash provided by financing activities 163,078 1,129,278 3,681,284 ------------ ------------ ------------
(Continued) F-6 ECOGEN INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued
Year Ended October 31, 2001 2000 1999 ---- ---- ---- Net increase (decrease) in cash and cash equivalents (207,723) 215,777 (2,009,437) Cash and cash equivalents, beginning of year 215,777 - 2,009,437 ---------- -------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,054 $215,777 $ - ========== ======== =========== - -------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 114,004 $328,175 $ 211,226 Income taxes - - -
NONCASH INVESTING AND FINANCING ACTIVITIES: During fiscal 2001, the Company transferred ownership of certain fixed assets to a contract manufacturer in exchange for $250,000 in credits to be applied toward future costs of production at that facility. In fiscal 2001, 2000 and 1999, the Company issued 888,151, 2,028.957, and 1,155,975 shares, respectively of common stock upon conversions of the Company's convertible preferred stock, of which 46,924 shares were transferred, from treasury stock in fiscal 1999. Noncash dividends on preferred shares settled through the issuance of 52,136, 90,737, and 63,506 shares of common stock amounted to $7,478, $107,482, and $109,298 in fiscal 2001, 2000 and 1999, respectively. In fiscal 2000, the Company issued 1,351,351 shares of its common stock in connection with an acquisition. In fiscal 2000, the Company issued 20,000 shares of its common stock as a fee in connection with the issuance of preferred stock and issued warrants to purchase 200,000 shares of common stock in connection with a loan agreement. In fiscal 2000, the Company issued 15,544 common shares pursuant to employee benefits plans. In 1999, the Company transferred 5,037 shares of treasury stock to outstanding shares pursuant to certain employee benefit plans. Also in 1999, the Company issued 1,738 shares of common stock pursuant to certain employee benefit plans. In fiscal 1999, the Company issued 17,221 shares of common stock pursuant to a consulting agreement. In fiscal 1999, the Company incurred debt totaling $304,810 for the acquisition of equipment. See accompanying notes to consolidated financial statements. F-7 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 2001, 2000 and 1999 (1) Basis of Presentation and Summary of Significant Accounting Policies Organization and business activities: The consolidated financial statements include the accounts of Ecogen Inc. ("Ecogen" or the "Company") and its wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Included in other long-term obligations is $1,534,000, which represents cash received from the minority stockholders of the Company's research and development subsidiary. Such amounts were recorded as other long-term obligations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 68, "Research and Development Arrangements." The Company is a biotechnology company specializing in the development and marketing of environmentally compatible products for the control of pests in agricultural and related markets. The Company has not yet achieved profitable operations and there is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. Further, the Company's future operations are dependent on, among other things, the success of the Company's commercialization efforts and market acceptance of the Company's products. Cash and cash equivalents: For purposes of the consolidated statements of cash flows, the Company considers all highly liquid temporary investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of money market accounts and are carried at cost, which approximates market value. Fair value of financial instruments: The fair value of the Company's debt approximates its carrying value due to the fact that the interest rate approximates current market rates. For all other financial instruments, their carrying value approximates fair value due to the short maturity of those instruments. Inventory: Inventory is stated at the lower of cost, as determined by the average cost method, or net realizable value. Research and development: All research and development costs are charged to operations as incurred. Revenue recognition: Revenue from research and development contracts is recognized in accordance with the terms of the respective contracts. Revenue from time and materials contracts is recognized in the period in which the related services have been rendered and the Company has incurred costs. Revenue from achievement of milestone events is recognized when all parties concur that the scientific results and/or milestones stipulated in the agreement have been met. Revenue from other contracts is recognized on a pro rata basis over the life of the contract. Contract costs of such contracts are generally incurred ratably over the contract term. Revenue recognized in the accompanying consolidated statements of operations under these contracts is not subject to repayment. Revenue received that is related to future performance under such contracts is deferred and recognized as revenue when earned. Revenues from product sales are recognized upon shipment and passage of title to the customer. Concentration of credit risk: The Company's product sales are made primarily to distributors of agricultural products. The Company does not generally require collateral or other security to ensure collection of trade receivables, except for certain international sales, where letters of credit are obtained. F-8 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Basis of Presentation and Summary of Significant Accounting Policies, cont'd Long-Lived Assets: Long-lived assets consist of plant and equipment and identifiable intangibles. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company reviews long-lived assets for impairment whenever events or changes in business circumstances occur that indicate that the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of long-lived assets held and to be used and assets to be sold based on fair value. In fiscal 2001 and 2000, an impairment charge of $1,393,000 and $1,050,000, respectively was recorded as a special charge (see note 16.) Plant and equipment are recorded at cost. Depreciation is computed by utilizing an accelerated method over the estimated useful lives of the related assets, which range from three to ten years. Amortization of leasehold improvements is computed using the straight-line method over the lesser of the estimated useful lives of the improvements or the remaining lease term. Identifiable intangible assets, principally product rights acquired from Mycogen were being amortized using the straight-line method primarily over seven years, their estimated useful life. During the fourth quarter of fiscal 2001, the Company recorded an impairment charge of $1,393,000 for the net book value of the intangibles assets (see note 8 and note 16.) Other assets: Other long-term assets include prepaid royalties that are charged to expense in relation to sales. Net loss per common share: Basic income (loss) per share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is based on net income (loss) for the relevant period divided by common shares outstanding and other potential common shares if they are dilutive. Because the Company reported a net loss per share, there is no difference between the Company's basic and diluted net loss per share calculations, since all potential common shares were anti-dilutive. Income Taxes: The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and the benefits arising from the realization of operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of the tax rate change. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-9 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (1) Basis of Presentation and Summary of Significant Accounting Policies, cont'd Stock-Based Compensation: SFAS No. 123, "Accounting for Stock-Based Compensation," presents companies with the alternative of retaining the current accounting for stock-based compensation or adopting a new accounting method based on the estimated fair value of equity instruments granted to employees during the year. The Company elected to adopt the disclosure provisions as required by SFAS No. 123 (see note 13). (2) Liquidity The Company has reported net loses allocable to common stockholders of ($5,644,000), ($10,049,000), and ($9,754,000) for the fiscal years ended October 31, 2001, 2000, and 1999. The loss from inception in 1983 to October 31, 2001 amounts to ($138,713,000). Further, the Company has a working capital deficit, a stockholders' deficit and limited liquid resources. These factors raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amount or classification of liabilities, which might result from the outcome of this uncertainty. The Company's continued operations will depend on its ability to raise additional funds. To date, the Company has not generated positive cash flow from operations. Since its inception, the Company financed its working capital needs primarily through private and public offerings of equity and debt securities, revenues from research and development alliances and product sales. The Company had secured borrowings under a working capital line of credit, which expired on June 29, 2001. The balance under the line of credit was repaid in fiscal 2001. At October 31, 2001, the Company also secured a $1,500,000 term loan from a bank that is controlled by a principal stockholder of the Company's majority stockholder ("Term Loan") and $1,000,000 of promissory notes from a corporation affiliated with the majority stockholder ("Notes") that are due on June 23, 2002. Subsequent to October 31, 2001, the Company borrowed an additional $405,000 under its Notes with a corporation affiliated with the Company's majority stockholder. On May 6, 2002, the Company signed an Asset Purchase Agreement with Certis USA, LLC ("Certis"), an indirect subsidiary of Mitsui & Co., for the sale of certain assets relating to the Company's sprayable Bt bio-pesticide business and the Company's insecticidal nematode business including, but not limited to, the Company's CryMax , Lepinox, Condor, Condor G, Raven, Bti technicals and HB nematode product lines. The transaction excludes the Bt CellCap products acquired from Mycogen Corporation and the Company's agreements with the Monsanto Company relating to the royalty arrangements for transgenic plants as described in note 9. The assets to be sold include all technology and know-how related to the business, including strain libraries for bio-pesticide uses, product registration, trademarks, patents or licenses and certain inventory and fixed assets. Upon the closing of the transaction, the Company will receive net cash proceeds of $4,015,000. The closing of the transaction is subject to certain conditions including obtaining approval of the Company's stockholders. Further, as a condition to the closing of the transaction, the Company is required to pay certain of its liabilities associated with the assets to be sold including the payment of the Term Loan and the Notes to remove liens on the assets and approximately $100,000 of accounts payable and accrued expenses. The balances due under the Term Loan and the Notes, including accrued interest were $3,260,000 as of May 16, 2002. After the payments of the Company's liabilities as described above, the net proceeds from the sale of approximately $655,000 will not be sufficient for the Company to pay its existing liabilities. The Company will need to continue to pursue the raising of additional funds and other strategic initiatives including the sale of all or certain other assets to improve its working capital position. The Company also has taken a number of steps to conserve cash, including significant personnel reductions and related costs and the curtailment of all manufacturing until it is able to sell assets. The Company needs to sell other assets or obtain financing to F-10 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2) Liquidity, (con't) provide the necessary cash resources to repay the outstanding balances under it's accounts payable and fund operations. At the present time, the Company is not pursuing any long-term financing. Further the Company needs to continue to obtain short-term funding while it negotiates potential sales. At this time the Company is unable to predict whether it will be successful in its efforts. If the Company is not successful in obtaining additional funding or selling assets, the Company will not be able to continue as a going concern. Over the long-term, the Company's liquidity is dependent on market acceptance of its products and technology, including products, if any, commercialized by the Monsanto Company utilizing the Company's technology (see note 9.) (3) Inventory Inventory consists of the following components as of October 31, 2001 and 2000: 2001 2000 ---- ---- Raw materials and packaging supplies $ - $ 438,000 Work in process - 213,357 Finished goods 300,322 1,399,827 -------- ---------- $300,322 $2,051,184 ======== ========== (4) Plant and Equipment Plant and equipment consists of the following components as of October 31, 2001 and 2000: 2001 2000 ---- ---- Manufacturing and laboratory equipment $ 1,162,398 $ 3,341,294 Office furniture and sales equipment 203,286 704,113 Leasehold improvements 2,593,328 3,015,923 ----------- ----------- 3,959,012 7,061,330 Less accumulated depreciation and amortization (3,929,458) (6,383,499) ----------- ----------- $ 29,554 $ 677,831 =========== =========== A $1,050,000 impairment reserve was recorded in fiscal 2000 principally related to the Company's shut down of its fermentation and formulation pilot plant (see note 16). During fiscal 2001, the Company transferred ownership in certain fixed assets, with a net book value of $279,000, to a contract manufacturer of the Company in exchange for $250,000 in credits to be used for future costs of production at that facility. Such amount was recorded as prepaid expense. If at the end of two years, the Company has not utilized the full amount of the credits for production, the balance due will be paid to the Company in cash. During fiscal 2001, no credits were recorded against the prepaid expense due to no production at that facility. The Company does not anticipate any further production with this contract manufacturer. (5) Intangible and Other Assets At October 31, 2001 and 2000, intangible and other assets, net consisted of the following: 2001 2000 ---- ---- Product registrations $ - $1,464,000 Trademarks - 182,000 Prepaid royalties 747,275 769,121 Other 30,818 238,450 ---------- ---------- $ 778,093 $2,653,571 ========== ========== F-11 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (5) Intangible and Other Assets, con't The product registration, trademarks and certain of the prepaid royalties were a result of the Mycogen acquisition in fiscal 2000. Amortization of intangibles and other assets aggregated $250,000 and $167,000 for the year ended October 31, 2001 and 2000, respectively. As a result of the termination by Dow AgroScience LLC, ("Dow") of the purchase and supply agreement as disclosed in note 8, effective October 31, 2001 the Company recorded an adjustment of $1,393,000 to write off the net book value of the intangibles associated with the acquired Mycogen products. (6) Accrued Expenses Included in accounts payable and accrued expenses on the accompanying consolidated balance sheet are accrued expenses that consists of the following components as of October 31, 2001 and 2000:
2001 2000 ---- ---- Current portion of capital lease obligations $ 4,415 $208,558 Dividends 1,181,517 693,132 Accrued lease costs 154,023 - Consumer rebates 159,603 295,160 Royalties 125,567 130,208 Other 376,187 632,046 ---------- -------- $2,001,312 $1,959,104 ========== ==========
(7) Long-term Debt During 1998, the Company obtained a secured, revolving working capital line of credit for up to $5.0 million with a financial institution. The working capital line of credit expired in August 2000 (but was extended to June 2001)., The line bore interest at prime plus 3.25 % based on certain events of default in fiscal 2000 (previously prime plus 1.25%) and was fully collateralized by the Company's assets other than certain of its intellectual property rights. During fiscal 2001, the Company repaid the balance due under this line and the agreement has expired. On December 24, 1999, the Company obtained a secured loan ("Term Loan") for $1,500,000 with a financial institution that is controlled by a principal of the Company's majority stockholder. The Term Loan required a $500,000 principal payment in June 2000 (which was extended to June 30, 2001) with the balance due in June 2001. During fiscal 2001, the Term Loan was extended until June 23, 2002. The Term Loan bears interest at prime plus 2%. The Company's assets collateralize the Term Loan. A corporation affiliated with the Company's majority stockholder has guaranteed the Term Loan. In connection with the guarantee, the corporation was issued a five-year warrant to purchase 200,000 shares of the Company's common stock at $1.25 per share. Such warrants have a value of approximately $200,000, which has been recorded as deferred debt expense. This amount is being amortized as interest expense over the life of the loan. During fiscal 2001, the corporation affiliated with the Company's majority stockholder loaned the Company $1,000,000 pursuant to promissory notes ("Notes") bearing interest at 12% and secured by an interest in any success fees received under its agreement with Monsanto Company (see note 10). The due date for the Notes was extended to June 23, 2002. Subsequent to October 31, 2001, such corporation loaned the Company an aggregate of $405,000 under the same terms as the aforementioned Notes. At the time of entering into the additional loans, the corporation was granted a security interest in all of the Company's assets. The agreement with Certis as described in note 20 requires that the term loan and the promissory notes be repaid concurrent with the closing in order to remove the lien against the assets to be sold. F-12 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (8) Acquisition On February 15, 2000, the Company completed its acquisition of certain assets of the sprayable Bt bioinsecticide business of Mycogen Corporation, an affiliate of Dow AgroSciences LLC ("Dow"). The Company issued 1,351,351 shares of the Company's common stock valued at $3,386,000 upon the closing of the transaction. Prior to the closing, the Company acquired approximately $400,000 of Mycogen's inventory of sprayable Bt products, under a distribution agreement effective January 1, 2000. Under the terms of the agreement, Mycogen has agreed to hold the shares for a three-year period, except in the event of certain change in control transactions. Mycogen was granted certain demand and piggyback registration rights with respect to the shares. In addition, Mycogen has the right of first refusal to purchase securities of the Company so as to maintain its ownership percentage in the Company. Mycogen also has been granted certain market price protection rights at the time that Mycogen sells the shares, which may result in the issuance of additional shares, which may not exceed 20% of the Company's outstanding shares without stockholder approval. The Company and Dow also entered into a five-year supply agreement and a distribution agreement granting exclusive rights to Dow to sell the acquired products in Mexico, New Zealand and Australia. In January 2002, Dow terminated the supply agreement as a result of Ecogen's alleged failure to remedy its breaches under the agreement. As a result of the termination of the supply agreement, the Company currently is unable to sell any products acquired from Mycogen. Since Dow owns the manufacturing process, the Company is unable to contract with a third party for the manufacture of these products. Although the Company is in discussions with Dow to resolve the situation, there is no assurance that the Company will be successful. As a result effective October 31, 2001, the Company has recorded an impairment reserve for $1,393,000, the net book value of its intangible assets associated with the Mycogen acquisition. The acquisition was accounted for as a purchase and, accordingly, the total purchase price for the assets of $3,386,000, including out of pocket expenses, was allocated based upon their fair value at the date of acquisition. The assets acquired included inventory of $991,000 and certain identifiable intangible assets of $1,766,000, including a license to certain genes and strains and product registration and data citation rights. Included in the purchase price is inventory acquired by the Company prior to the final closing under a distribution agreement. The agreement also provides that the Company has no obligation for past or future royalties under a 1998 settlement agreement with Mycogen on a patent infringement dispute. Under purchase accounting, part of the purchase price ($565,000) has been allocated to other assets for the fully, paid-up royalty and any amounts previously accrued under the settlement agreement have been eliminated in purchase accounting. (9) Research, Development and License Agreements In January 1996, the Company entered into an agreement with Monsanto Company ("Monsanto") for an equity investment, purchase of technology and joint research and development arrangement relating to the Company's proprietary Bacillus thuringiensis ("Bt") technology for in-plant applications (collectively, the "Monsanto Transaction"). The transaction included (i) the acquisition by Monsanto of certain rights to the Company's Bt technology for an aggregate nonrefundable purchase price of $5,000,000 in cash, which was recorded as license and other income in the first quarter of fiscal 1996, (ii) the sale by the Company to Monsanto of common stock for an aggregate purchase price of $10,000,000, and (iii) a research and development ("R&D") collaboration arrangement with Monsanto, which, by amendment, expired in January 1999, for the further development of the Company's Bt gene library for a minimum of $10,000,000. Under this agreement, the Company recognized as research contract revenue approximately none, none, and $500,000 in fiscal 2001, 2000 and 1999, respectively. Also under this agreement, the Company is entitled to receive commercialization success fees from any products incorporating the Company's technology that are commercialized by Monsanto. Monsanto advanced approximately $1,200,000 of F-13 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) Research, Development and License Agreements, (con't) commercialization success fees. These payments, plus related interest, are recorded as deferred revenue in long-term liabilities and will be recognized as revenue when earned as Monsanto commercializes products with technology developed by Ecogen. However there are no assurances that Monsanto will be successful in commercializing any of the Company's technologies. (10) Preferred Stock Series 1998 A Convertible Preferred Stock: In June 1998, the Company sold 20,000 shares of Series 1998 A 8% convertible preferred stock, stated value $100 per share, to an institutional investor for net proceeds of $1,795,000. The holder of the preferred stock was also issued five-year warrants to purchase 180,000 shares of common stock at $3.525 per share. Included in the fee paid to the placement agent in connection with the transaction were 24,000 shares of the Company's common stock. During fiscal 1999, the Company issued 1,155,975 shares of its common stock in exchange for 19,500 shares of the Company's Series 1998A convertible preferred stock. The Company also issued 63,506 shares of its common stock in payment of cumulative dividends at the time of conversion. Series 1998 B Convertible Preferred Stock: During 1998, the Board of Directors authorized 10,000 shares of 8% Series 1998 B convertible preferred stock, par value $.01 per share. No shares of Series 1998 B have been issued. The preferred stock shall have respective rights, preferences and privileges identical to the Series 1998 A preferred stock and ranks pari passu with the 1998 Series A preferred stock, except that the conversion price shall be determined by the Company's Board of Directors when issued. Series 1998 C Convertible Preferred Stock: In August 1998, the Company exchanged an 8% convertible secured note due in October 2002 in the amount of $3,235,000 for 32,354 shares of newly issued 8% Series 1998 C convertible preferred stock with a stated value of $100 per share. Dividends on the preferred stock are payable semi-annually in cash or shares of preferred stock at the option of the Company (as set forth below effective September 2000, dividends may no longer be paid in shares of the Company's common stock.). The preferred stock has no voting rights except with respect to certain matters affecting the preferred stock. At the election of the holder, the preferred stock may be converted into common stock of the Company at any time and from time-to-time beginning in August 1999 at a conversion price equal to the lesser of $2.125 per share (subject to adjustment under certain circumstances) and the average market price, as defined in the agreement, over a five-day period at the time of conversion. The Company, at its option, may require conversion of the preferred stock if the average market value of the Company's common stock is greater than $4.00 per share over a ten-day period. The Company, at its option, may redeem the preferred stock at 125% of the stated value. Furthermore, in certain circumstances, all of which are in the control of the Company, the Company may be required to redeem the preferred stock at various premiums over stated value. If the Company is unable to issue sufficient shares of common stock within a specified period of time after the holder has requested conversion or the common stock has a market value of less than $1.00 per share for 30 consecutive days, the dividend rate may increase and the Company could be required to pay such dividends in cash. In September 2000, the dividend rate was increased to 15% per year as a result of the Company's shares trading below $1.00. Such dividends are now required to be paid in cash. The Company is in violation of the agreement because it is unable to pay such cash dividends under Delaware Corporate Law as a result of its deficit in capital. As a result of the inability to pay dividends, the Company is required to appoint two designees of the holders of a majority of the outstanding preferred stock to the Company's Board of Directors. F-14 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Preferred Stock, (con't) Series 1998 C Convertible Preferred Stock, con't: In November 2001, 11,500 shares of the Series 1998 C preferred stock were converted into 25,000,000 shares of the Company's common stock in accordance with the terms of the preferred stock. As a result of the conversion, the holder of the preferred stock owns 62% of the Company's outstanding common shares. After the conversion, 20,854 shares of the Series 1998 C Convertible Preferred Stock remain outstanding. Series 1999 A Convertible Preferred Stock: In May 1999, the Company sold 15,000 shares of 7% Series 1999 A convertible preferred stock, stated value $100 per share, to an institutional investor for net proceeds of $1,357,000. The holder of the preferred stock was issued five-year warrants to purchase 120,000 shares of common stock at $3.98 per share. Included in the fee paid to the placement agent in connection with the transaction were 20,000 shares of the Company's common stock. In accordance with the terms of the Series 1999 A preferred stock, the Company is required to recognize an assumed incremental yield of $786,000 (calculated at the date of issuance based on the conversion formula in the agreement). Such amounts were amortized as preferred stock dividends over a seven-month period beginning with the date of issuance. During fiscal 2000, the holder of the preferred converted 15,000 shares of preferred stock into 984,732 shares of the Company's common stock. At the time of conversion, the Company issued 52,356 shares of its common stock in payment of cumulative dividends on the preferred stock. Series 2000 A Convertible Preferred Stock On February 14, 2000, the Company sold 15,000 shares of Series 2000 A 7% convertible preferred stock, stated value $100 per share, to institutional investors for net proceeds of $1,399,000. The liquidation value of the preferred stock is $1,00 per share. The holders of the preferred stock were issued five-year warrants to purchase up to 200,000 shares of common stock at $2.66 per share. Dividends were payable quarterly in cash or stock at the option of the Company. As a result of the Company's common stock being delisted from the Nasdaq National Market, effective with the September 30, 2000 dividend payment date, such dividends are payable in cash. The Company is in violation of its preferred stock agreement because under Delaware Corporate Law the Company cannot pay cash dividends because of its deficit in its capital accounts. The preferred stock has no voting rights except with respect to certain matters affecting the Company's preferred stock. At the election of the holders, the preferred stock may be converted at various dates to shares of the Company's common stock at the lesser of $2.73 per share or 95% of the average market price, as defined in the agreement, over a twenty-day period at the time of conversion. If the Company is unable to issue sufficient shares of common stock within a specified period of time after the holder has requested conversion, the dividend rate may increase and the Company may be required to issue additional warrants. Further, in certain circumstances, all of which are in the control of the Company, the Company may be required to redeem the shares at various premiums over stated value. Included in the fee paid to the placement agent in connection with the transaction were 20,000 shares of the Company's common stock. In accordance with the terms of the Series 2000 A preferred stock the Company was required to recognize an assumed incremental yield of $612,000 (calculated at the date of issuance based on the conversion formula in the agreement). Such amount was amortized as preferred stock dividends over a seven-month period beginning with the date of issuance through the date the preferred stock is first convertible. During. fiscal 2001 and 2000, the Company issued 888,151 and 1,044,225, respectively, shares of its common stock in exchange for 1,100 and 7,380 shares of the preferred stock. At the time of the conversion, the Company also issued 52,136 and 38,381shares, respectively, of common stock in payment of cumulative dividends. F-15 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Preferred Stock, (con't) Series 2000 A Convertible Preferred Stock, con't Subsequent to October 31, 2001, the Company issued 1,874,353 shares of its common stock in exchange for 635 shares of the Company's Series 2000-A 7% Convertible Preferred Stock issued in February 2000. The Company also issued 163,935 shares of its common stock in payment of cumulative dividends at the time of conversion. On September 11, 2000, the Company's common stock was delisted from the Nasdaq National Market ("NNM") as a result of the Company's failure to meet the NNM's net tangible assets listing requirement. As a result, dividends on the Company's Series 2000-A and Series 1998-C Convertible Preferred Stock are payable in cash, effective with the quarterly dividend payment date of September 30, 2000 and the semiannual dividend payment date of December 31, 2000. The Company is in default of the preferred stock agreement for the failure to pay cash dividends. (11) Common Stock In July 1999, the Company sold 500,000 shares of common stock to an institutional investor in a private placement for $3.09 per share for net proceeds of $1,535,000. Certain shareholders have been granted demand and piggyback registration rights with respect to their shares, and one stockholder has the right of first refusal to purchase securities of the Company so as to maintain its ownership percentage in the Company. (12) Warrants and Other Options As of October 31, 2001, the Company had the following warrants and options outstanding and exercisable into shares of the Company's common stock (excluding stock options issued under the Company's stock option plan - see note 13 of notes to the consolidated financial statements) as follows: Shares of Price Range Per Expiration Common Stock Share/Unit Dates ------------ ---------- ----- Warrants 700,001 $ 1.25 - $ 3.53 2003 - 2005 Other Options 37,085 $44.22 - $57.94 2002 - 2003 (13) Stock Option Plan and Other Matters During 1999, the Company's stockholders approved the 1999 stock option plan ("1999 Option Plan") under which 1,500,000 shares of common stock may be issued. The Option Plan permits the granting of both incentive stock options and non-statutory stock options. The option price of the shares for incentive stock options may not be less than the fair market value of such stock at the grant date as determined under the 1999 Option Plan. Options are exercisable over a period determined by the Board of Directors, but not longer than ten years after grant date. During 1998, the Company's Board of Directors approved the 1998 Stock Option Plan (the "Plan"), under which 1,500,000 shares of common stock may be issued. The Plan permits the granting of nonstatutory stock options. The option price may not be less than the fair market value of the common stock at the grant date as determined under the Plan. Options are exercisable over a period determined by the Board of Directors, but not longer than ten years after the grant date. Upon the approval of the 1999 Option Plan, 825,000 options available for grant under the 1998 Stock Option Plan were cancelled. As permitted by the SFAS No. 123, the Company has elected to continue following the guidance of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. In accordance with APB No. 25, no compensation cost has been recognized for grants to employees under the Company's option plans. F-16 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (13) Stock Option Plan and Other Matters, cont'd Had the determination of compensation cost for these plans been based on fair value at the grant dates for awards under these plans, consistent with the method under SFAS No. 123, the Company's net loss allocable to common stockholders and basic and diluted net loss per share would have been increased to the pro forma amounts indicated below (in thousands, except per share amounts):
2001 2000 1999 ---- ---- ---- Net Loss Allocable to Common Stockholders: As Reported ($5,644) ($10,049) ($9,753) Pro Forma (6,243) (10,776) (10,088) Basic and Diluted Net Loss Per Common Share: As Reported (0.39) (0.84) (1.05) Pro Forma (0.44) (0.90) (1.09)
The resulting compensation expense may not be representative of compensation expense to be incurred on a pro forma basis in future years. The fair value of each option grant is estimated on the date of grant by using the Black-Scholes Option Pricing Model. The per share weighted-average fair values on the date of grant for options granted during 2001, 2000 and 1999 were none, $0.82, and $1.51, respectively. The following weighted-average assumptions were used for grants in fiscal 2001, 2000 and 1999: 2001 2000 1999 ---- ---- ---- Expected Dividend Yield 0% 0% 0% Expected Volatility 100% 100% 85% Risk-Free Interest Rate 5.5% 8.5%-9.5% 9.5% Expected Option Lives (years) 3 3 3 A summary of the status of the Option Plans as of October 31, 2001, 2000 and 1999 and changes during the years then ended are as follows:
Options Outstanding ------------------- Shares Weighted-Average Exercise Price ------ ------------------------------- Balance, October 31, 1998 1,150,661 $ 3.08 Granted 968,000 $ 2.47 Exercised (1,738) $ 2.56 Canceled (339,397) $ 2.68 --------- Balance, October 31, 1999 1,777,526 $ 2.82 Granted 280,000 $ 1.22 Exercised (15,544) $ 2.56 Cancelled (318,315) $ 2.51 --------- Balance, October 31, 2000 1,723,667 $ 2.62 Granted - $ - Exercised - $ - Cancelled (359,345) $ 2.51 --------- Balance,October 31, 2001 1,364,322 $ 2.65 =========
F-17 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (13) Stock Option Plan and Other Matters, cont'd The following table summarizes information about fixed stock options outstanding at October 31, 2001:
Options Outstanding Options Exercisable --------------------------------------------------------------- ------------------- Weighted- Number Average Weighted- Number Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise Price at 10/31/01 Contractual Life Exercise Price at 10/31/01 Exercise Price -------------- ----------- ---------------- -------------- ----------- -------------- $0.88-$1.53 755,000 7.45 years $ 1.16 640,000 $ 1.20 2.50 254,000 7.60 years 2.50 87,333 2.50 2.56 19,922 5.17 years 2.56 19,922 2.56 2.63-3.25 161,000 6.41 years 3.07 146,000 3.09 5.88-53.06 174,400 3.01 years 8.94 174,400 8.92 --------- --------- 1.25-53.06 1,364,322 6.77 years 2.62 1,076,655 2.86 ========= =========
(14) Geographic Area and Related Information The Company's operations, which are substantially located in the United States, consist primarily of the research, development and marketing of biopesticide and related products, which constitutes one industry segment. Of the United States revenues from unaffiliated customers, $1.3 million, $2.0 million and $2.1 million were export revenues in fiscal 2001, 2000 and 1999, respectively. Sales derived from one customer aggregated 15% of total revenues in fiscal 2001. Sales derived from three customers aggregated 13%, 18% and 18% of total revenues, respectively, in fiscal 2000. Sales derived from one customer aggregated 22% of total revenues in fiscal 1999. Sales derived from another customer aggregated 13% of total revenues in fiscal 1999. (15) Income Taxes The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities as of October 31, 2001 and 2000 are presented below (in thousands):
2001 2000 ---- ---- Deferred tax assets: Purchased research, development and investment in affiliated companies $ 9,667 $ 9,667 Net operating loss carryforwards 31,858 31,377 Research experimentation credit carryforward 2,057 2,300 Other 1,687 1,687 ------- ------- Total gross deferred tax assets 45,269 45,031 Less valuation allowance 45,157 44,831 ------- ------- Net deferred tax assets 112 200 ------- Deferred tax liabilities: Furniture, equipment, and leasehold improvements, principally due to differences in depreciation (112) (200) ------- ------- Total gross deferred tax liabilities (112) (200) ------- ------- Net deferred taxes $ - $ - ======= =======
F-18 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (15) Income Taxes, (con't) The net change in the total valuation allowance for fiscal 2001 and 2000 was an increase of approximately $330,000 and $3,000,000 respectively. At October 31, 2001, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $93.4 million, expiring from 2002 through 2016, which are available to offset future Federal taxable income, if any. The Company also has research and experimentation tax credit carryforwards for Federal income tax purposes of approximately $2.1 million, which are available to reduce future Federal income taxes, if any, expiring from 2002 through 2012. The Company's ability to use such net operating loss and research and experimental credit carryforwards is subject to certain limitations due to ownership changes, as defined by rules enacted with the Tax Reform Act of 1986 (16) Special Charges and Fourth Quarter Adjustments During the fourth quarter of fiscal 2001, the Company recorded an impairment loss reserve of $1,393,000 as described in note 8 and a provision for lease costs for underutilized lease facilities of $386,000. During the fourth quarter of fiscal 2000, the Company recorded a special charge of $1,050,000 for the write-down of long-lived assets (i.e. plant and equipment) to fair value primarily as a result of the planned shut down of its fermentation and formulation pilot plant in fiscal 2001. Also in the fourth quarter, the Company recorded a special charge in cost of products sold of $391,000 for the write off of inventory associated with the Company's decision to discontinue selling its biofungicide products. During the fourth quarter of fiscal 1999, the Company recorded an addition to the reserve for inventory obsolescence and rework of approximately $400,000. (17) Profit Sharing 401(k) Plan The Company has a 401(k) Profit Sharing Plan (the "401(k) Plan") which covers substantially all full-time U.S. employees. All eligible employees may elect to contribute a portion of their wages to the 401(k) Plan, subject to certain limitations. The Company contributes 75% of the employees' contributions for employees with under five years of service, and 100% for employees with greater than five years of service, subject to a maximum equal to 6% of the employees' compensation. The matching Company contribution vests over a five-year period. Employees may elect to have the Company matching contribution in Ecogen common stock. The Company contributed approximately $40,000, $100,000 and $.100,000 to the 401(k) Plan in fiscal 2001, 2000 and 1999 respectively. (18) Related-party Transactions A director elected during fiscal 1998 is a partner of an investment firm that holds 62% of the Company's outstanding shares and all of the Company's outstanding Series 1998 C preferred stock. The Company recorded dividends on such preferred stock of $433,000, $303,000 and $259,000 during the fiscal years ended October 31, 2001, 2000 and 1999, respectively. During fiscal 2000, the Company also issued warrants to purchase 200,000 shares of the Company's common stock at $1.25 per share to the investment firm in connection with the guarantee of a loan. During fiscal 2001, a corporation affiliated with the Company's majority stockholder loaned the Company an aggregate of $1,000,000 and the Company recorded interest expense on the Notes of approximately $100,000 in fiscal 2001. Also during fiscal 2001 and 2000, the Company recorded interest expense of approximately $200,000 and $100,000, respectively to a bank controlled by a partner in the investment firm. F-19 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (19) Commitments and Contingencies Leases: The Company leases its facilities and certain equipment and automobiles under various noncancelable operating and capital leases. Rental expense charged to operations aggregated approximately $200,000, $200,000, and $300,000 for fiscal 2001, 2000 and 1999 respectively. Further in fiscal 2001, the Company recorded a provision of $386,000 representing estimated future lease costs associated with underutilized facilities. Minimum lease payments under noncancelable long-term leases for the years subsequent to October 31, 2001 are as follows (in thousands): Operating Leases ------ 2002 $ 228 2003 207 2004 222 2005 85 2006 - ------- Total minimum lease payments $ 742 ======= Litigation: The Company currently is party to various lawsuits for nonpayment of amounts past due aggregating approximately $200,000 to various vendors. Amounts due vendors are included in accounts payable and accrued expenses on the accompanying October 31, 2001 balance sheet except for any interest claims. (20) Subsequent Events: Conversions of Preferred Stock In November 2001, 11,500 shares of the Series 1998 C preferred stock were converted into 25,000,000 shares of the Company's common stock in accordance with the terms of the preferred stock. As a result of the conversion, the holder of the preferred stock owns 62% of the Company's outstanding common shares. After the conversion, 20,854 shares of the Series 1998 C Convertible Preferred Stock remain outstanding. Through May 16, 2002, the Company issued 2,183,313 shares of its common stock in exchange for 725 shares of the Company's Series 2000-A 7% Convertible Preferred Stock issued in February 2000. The Company also issued 163,935 shares of its common stock in payment of cumulative dividends at the time of conversion. Assuming the aforementioned conversions of preferred stock had taken place at October 31, 2001, on a pro forma basis the Company's outstanding shares of common stock would have been 41,780,095 and the net loss allocable to common stockholders per share would have been ($0.14). Sale of Assets: On May 6, 2002, the Company signed an Asset Purchase Agreement with Certis, an indirect subsidiary of Mitsui & Co., for the sale of certain assets relating to the Company's sprayable Bt bio-pesticide business and the Company's insecticidal nematode business including, but not limited to, the Company's CryMax, Lepinox, Condor, Condor G, Raven, Bti technicals and HB nematode product lines. The transaction excludes the Bt CellCap products acquired from Mycogen Corporation and the Company's agreements with the Monsanto Company relating to the royalty arrangements for transgenic plants as described in note 9. The assets to be sold include all technology and know-how related to the business, including strain libraries for bio- pesticide uses, product F-20 ECOGEN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (20) Subsequent Events, con't Sale of Assets, con't: registration, trademarks, patents or licenses and certain inventory and fixed assets. Upon the closing of the transaction, the Company will receive net cash proceeds of $4,015,000. The closing of the transaction is subject to certain conditions including obtaining approval of the Company's stockholders. Further, as a condition to the closing of the transaction, the Company is required to pay certain of its liabilities associated with the assets to be sold including the payment of the Term Loan and the Notes to remove liens on such assets and approximately $100,000 of accounts payable and accrued expenses. Subsequent to October 31, 2001, the Company borrowed an additional $405,000 under the Notes. The balances due under the Term Loan and the Notes, including accrued interest were $3,260,000, as of May 16, 2002. A summary of assets to be sold is as follows: Inventory $ 64,000 Other current assets 65,000 Intangibles and other assets 747,000 ---------- 876,000 Net Proceeds 4,015,000 ---------- Gain on sale of assets $3,139,000 ========== (21) Unaudited Pro Forma Consolidated Balance Sheet The unaudited pro forma consolidated balance sheet presented is based upon the Company's historical consolidated balance sheet at October 31, 2001, after giving effect to (i) the sale of the assets described in note 20 and the receipt of $4,015,000 net proceeds from the sale, (ii) the prepayment of $1,634,000 for amounts due under the Term Loan and $1,096,000 under the Notes including accrued interest at October 31, 2001, as described previously in note 3, (iii) the conversion of preferred stock described in note 20 and (iii) the payment of $100,000 in accounts payable and accrued expenses. F-21 Schedule II ECOGEN INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended October 31, 2001, 2000 and 1999
Column A Column B Column C Column D Column E Additions Deductions Balance at Charged to Balance at Beginning Costs and End of of Period Expenses Period 2001: Allowance for doubtful accounts $ 98,393 $ - $ 15,910 $ 82,483 Reserve for inventory obsolescence 1,094,490 395,732 622,233 867,989 2000: Allowance for doubtful accounts $ 129,023 $ 29,410 $ 60,040 $ 98,393 Reserve for inventory obsolescence 700,404 1,012,825 619,739 1,094,490 ========= ========== ========= ========== 1999: Allowance for doubtful accounts $ 80,000 $ 92,928 $ 43,905 $ 129,023 Reserve for inventory obsolescence 401,371 900,000 600,967 700,404 ========= ========== ========= ==========
F-22 SIGNATURE In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ECOGEN INC. By:/s/ James P. Reilly, Jr. ------------------------ James P. Reilly, Jr. Chairman and Chief Executive Officer Date: May 21, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James P. Reilly, Jr., his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated as of May 21, 2002. Signature Title Date - --------- ----- ---- /s/ James P. Reilly, Jr. Chairman, Chief Executive Office, May 21, 2002 - ------------------------ James P. Reilly, Jr. Director and Secretary (Principal Executive Officer and Acting Chief Financial and Accounting Officer) /s/ Philippe D. Katz - -------------------- Philippe D. Katz Director May 21, 2002 /s/ Lowell N. Lewis Director May 21, 2002 - ------------------- Lowell N. Lewis /s/ John R. Sutley Director May 21, 2002 - ------------------ John R. Sutley EX-10.162 3 dex10162.txt AGREEMENT Exhibit 10.162 Momar Corporation 160 Broadway New York, NY 10038 May 16, 2002 Ecogen Inc. 2000 Cabot Boulevard West Langhorne, PA 19047 Attn: James P. Reilly, Jr., President Dear Mr. Reilly: Reference is made to the Demand Promissory Notes made by Ecogen Inc. (the "Borrower") in the following principal amounts on the following dates in favor of Momar Corporation (the "Lender"): (i) $200,000 on December 28, 2000, (ii) $285,000 on February 27, 2001, (iii) $90,500 on March 19, 2001, (iv) $425,000 on April 2, 2001, (v) $15,000 on January 14, 2002, (vi) $200,000 on March 4, 2002 (vii) $40,000 on April 16, 2002, (viii) $50,000 on May 13, 2002, and (ix) $100,000 on May 16, 2002 (collectively the "Notes"). For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Lender agrees not to demand payment under any of the Notes until at least June 23, 2002, provided, however, that the Lender may make demand prior to June 23, 2002 if an Event of Default under the Term Loan and Security Agreement (the "Berkshire Loan Agreement") dated as of December 23, 1999 between the Borrower and the Berkshire Bank shall have occurred prior to such date and provided, further, however, that, upon the occurrence of any Event of Default that results in automatic acceleration of the obligations of the Borrower under the Berkshire Loan Agreement, demand shall be deemed to have been made under the Notes. Nothing contained herein shall be deemed to limit any of the rights and remedies available to the Lender under the Notes or the Security Agreement dated as of May 9, 2002 between Lender and Borrower, or otherwise, all of which shall remain in full force and effect. Sincerely yours, MOMAR CORPORATION By: /s/ Moses Marx ---------------------- Name: Moses Marx Title: President EX-21 4 dex21.txt LIST OF SUBSIDIARY Exhibit 21 LIST OF SUBSIDIARIES* STATE OR OTHER JURISDICTION OF NAME OF SUBSIDIARY INCORPORATION OR ORGANIZATION - ------------------ ----------------------------- Ecogen-Bio Inc. Delaware Ecogen Investments Inc. Delaware Ecogen Technologies I Incorporated Delaware * All of the subsidiaries listed above are wholly-owned subsidiaries with the exception of Ecogen Technologies I Incorporated of which Ecogen Inc. owns approximately 70% of the outstanding common stock. EX-24.1 5 dex241.txt CONSENT Exhibit 24.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Ecogen Inc: We consent to the incorporation by reference in the registration statement (No. 33-23767) on Form S-8/S-3, registration statements (No. 33-39687, No. 33-50478, No. 33-70538 and No. 33-80405) on Form S-8 and registration statements (No. 33-87510, No. 33-45975, No. 33-48020, No. 33-71854 and No. 33-58535) on Form S-3, of Ecogen Inc. of our report dated February 15, 2001, relating to the consolidated balance sheet of Ecogen Inc. and subsidiaries as of October 31, 2000, and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows and related financial statement schedule for the years ended October 31, 2000 and 1999, which report appears in the October 31, 2001 annual report on Form 10-K of Ecogen Inc. Our report dated February 15, 2001 contains an explanatory paragraph that states that the Company has suffered recurring losses from operations and has a working capital deficiency, a net capital deficiency and limited liquid resources, which raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of that uncertainty. KPMG LLP Short Hills, New Jersey May 21, 2002 EX-24.2 6 dex242.txt CONSENT Exhibit 24.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors Ecogen Inc: We consent to the incorporation by reference in the registration statement (No. 33-23767) on Form S-8/S-3, registration statements (No. 33-39687, No. 33-50478, No. 33-70538 and No. 33-80405) on Form S-8 and registration statements (No. 33-87510, No. 33-45975, No. 33-48020, No. 33-71854 and No. 33-58535) on Form S-3, of Ecogen Inc. of our report dated March 28, 2002, except as to notes 2 and 20 which are as of May 16, 2002 relating to the consolidated balance sheet of Ecogen Inc. and subsidiaries as of October 31, 2001, and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows and related financial statement schedule for the year ended October 31, 2001, which report appears in the October 31, 2001 annual report on Form 10-K of Ecogen Inc. Our report March 28, 2002, except as to notes 2 and 20 which are as of May 16, 2002 contains an explanatory paragraph that states that the Company has suffered recurring losses from operations and has a working capital deficiency, a net capital deficiency and limited liquid resources, which raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of that uncertainty. The Hermes Group LLP Princeton, New Jersey May 21, 2002 -----END PRIVACY-ENHANCED MESSAGE-----