UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-------
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For fiscal year ended August 31, 1995.
OR
------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________ to______________.
Commission File Number: 0-15881
MYCOGEN CORPORATION
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3802654
(State or other jurisdiction (I.R.S. Employer
or incorporation or Identification No.)
organization)
5501 Oberlin Drive, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 453-8030
Securities registered pursuant to Section 12(b) of
the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $.001 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____
--------
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of September 30, 1995 was approximately $138,070,000. For the
purposes of this calculation, shares owned by officers, directors, and 5%
stockholders known to the registrant have been deemed to be owned by affiliates.
The number of shares outstanding of the registrant's Common Stock as of
September 30, 1995 was 19,425,421.
Documents Incorporated by Reference
- -----------------------------------
Portions of Registrant's Proxy Statement (the "Proxy Statement") for the
Annual Meeting of Stockholders scheduled to be held on December 14, 1995, are
incorporated by reference in Part III.
PART I
ITEM 1. BUSINESS
Mycogen Corporation (the "Company") is a diversified agricultural
biotechnology company that develops and markets technology-based products and
provides crop protection services to control agricultural pests and improve food
and fiber production. The Company has two business units: Agrigenetics, Inc., a
majority-owned subsidiary doing business as Mycogen Plant Sciences ("Mycogen
Plant Sciences" or "MPS"), and Mycogen Crop Protection, Inc. ("Mycogen Crop
Protection" or "MCP"). MPS produces and markets seeds for major agricultural
crops and uses biotechnology and traditional and marker-assisted breeding
techniques to develop improved crop varieties with genetically enhanced pest-
resistance and other value-added characteristics. MCP develops, manufactures
and markets microbial and fatty acid based biopesticide products and operates
Soilserv, Inc. ("Soilserv"), a wholly-owned subsidiary of the Company that
provides crop protection services to growers of high value crops in California
and Arizona.
Mycogen was incorporated in California in December 1982. In November 1986,
the Company reincorporated in Delaware. In October 1995, it again
reincorporated in California. Mycogen's headquarters are located at 5501
Oberlin Drive, San Diego, California 92121-1718; its telephone number is (619)
453-8030. Unless otherwise indicated by the context, "Mycogen" and the "Company"
refer to Mycogen Corporation and its consolidated subsidiaries.
Mycogen Corporation(R), M(R) and design, CellCap(R), CocciprobeTM,
Control Without Compromise(TM), DeMoss(TM), Mattch(TM), M-One(R), M-Pede(R), M-
Peril(R), M-Press(TM), M-Trak(R), MVP(R), Parashoot(TM), Parasitix(TM),
ParaVet(TM), SaFarm(TM), Scythe(R), Thinex(TM), XCP(TM) and XPO(TM) are
trademarks of Mycogen Corporation.
Agrigenetics(R), Chieftan(R), Field and Future(TM), G&A(R) and design,
Golden Acres(R), GroAgri(R), Growers(R), Jacques(R), Kow Kandy(R),
McCurdy(R), Mycogen(TM), Naturepel(TM), NatureGard(TM), ORO(R), Sigco(R),
Surgro(R), Totally Managed Forages(R) and Totally Managed Feedstuffs(TM) are
trademarks of Agrigenetics, Inc., a majority-owned subsidiary of Mycogen.
Soilserv(R) is a registered trademark of Soilserv, Inc., a wholly-owned
subsidiary of Mycogen. Paradyme(TM) and Safecide(R) are trademarks of
Parasitix Corporation, a wholly-owned subsidiary of Mycogen.
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BUSINESS STRATEGY
The Company's strategy is to continue using biotechnology and other
advanced techniques to develop new and improved products for its seed and crop
protection businesses, and to leverage its technology for strategic transactions
to strengthen and expand those businesses. Mycogen is using its proprietary
Bacillus thuringiensis ("Bt") biotoxin gene technology both to develop
transgenic crop varieties with built-in insect resistance and to expand its
portfolio of biopesticide products. The Company also is using other advanced
plant science technology to develop crop varieties with improved oil,
nutritional, fiber and agronomic characteristics. Mycogen believes that it has a
strong proprietary position for its Bt and plant science technology. As of
August 31, 1995, the Company had 147 U.S. patents and approximately 246 foreign
patents. Approximately 113 additional U.S. patent applications are pending, and
corresponding applications are pending in other agriculturally important
jurisdictions around the world.
Mycogen uses traditional and marker-assisted plant breeding to obtain pest
resistance and other value-added characteristics from native plant sources, and
is breeding those characteristics into elite plant parent lines for its seed
products. Seed products incorporating pest resistance and other value-added
characteristics are being commercialized through MPS.
Mycogen's primary near-term seed product development focus is on corn,
cotton, soybean, sunflower, canola, sorghum and alfalfa, all of which generate
significant seed and/or pesticide sales. In August 1995, the Company received
U.S. Environmental Protection Agency (the "EPA") approval to commercialize corn
hybrids genetically engineered with a Bt gene that causes the plants to produce
a protein that makes them resistant to European corn borer, a major pest in the
U.S., Europe and Argentina.
In 1993, the Company entered into a cross-license agreement and research
collaboration with the Ciba Seeds division of Ciba-Geigy Corporation for
development of corn hybrids with Bt-based insect resistance. In September 1995,
the Company signed a letter of intent for a technology and development
collaboration with Pioneer Hi-Bred International, Inc. ("Pioneer") to develop
multiple transgenic crops with Bt-based pest resistance. The Company also is
pursuing opportunities to use its intellectual property, technology and
expertise to establish collaborative development programs with third parties for
additional crops.
Biopesticide products embodying Mycogen's core technology are sold to crop
protection and, to a lesser extent, certain animal health markets through
Mycogen Crop Protection. Mycogen intends to broaden its participation in the
crop protection industry by continuing to refine and apply its technology to
better meet the needs of the market and by pursuing strategic transactions and
acquisitions.
INDUSTRY BACKGROUND
Agricultural biotechnology is creating differentiated products with value-
added characteristics, including: improved crop production; extended product
shelf life; enhanced protein, starch and other nutritional properties; improved
yield of compounds such as waxes, esters and oils for industrial applications
and reduced production costs and risks. Mycogen believes that biological crop
protection will focus on genetically engineered, pest-resistant crop varieties
for large acreage crops such as corn, cotton, soybean, sunflower, canola and
alfalfa, and on spray-on biopesticide products for smaller acreage crops such as
fruits, vegetables and vines.
Crop varieties with pest resistance incorporated into the planting seed
reduce or eliminate the need for pesticide applications, thereby significantly
reducing production input and labor costs. Mycogen believes that farmers will
use both pest-resistant crop varieties and spray-on pesticides, including
biopesticides, as part of
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integrated pest management programs to control pests and to avoid or delay the
development of pest tolerance to any single pest control mechanism.
The Company estimates that U.S. farmers annually purchase approximately
$3.5 billion of planting seed, including approximately $1.5 billion of hybrid
seed corn, $400 million of soybean seed, $400 million of alfalfa seed, $90
million of cotton seed, $67 million of hybrid sorghum seed and $25 million of
hybrid sunflower seed. In addition to the $3.5 billion they spend each year for
planting seeds, U.S. farmers annually spend over $6 billion on pesticides to
protect their crops. Over $600 million is spent annually on insecticides to
protect corn and cotton crops alone. Despite these pesticide expenditures,
destructive pests cost U.S. farmers billions of dollars each year in lost
yields.
Many chemical pesticides have efficacy, environmental or regulatory
disadvantages. Over 500 insect species have developed tolerance to one or more
classes of chemical insecticides that previously were effective in controlling
them. In addition, chemical pesticides often suppress beneficial insect
populations. As pest populations develop pesticide tolerance, and as beneficial
insect populations are reduced, farmers must use escalating dosages and more
frequent applications of chemical pesticides. This raises environmental and food
and worker safety concerns and ultimately renders the pesticides obsolete.
The Company believes that the use of genetically engineered pest-resistant
crop varieties and biopesticides will continue to increase because they offer
four major advantages over chemical pesticides: 1) they do not contaminate the
environment, soil or ground water; 2) they do not harm beneficial insects that
naturally suppress pest populations; 3) they have unique modes of action that
make them effective against pests that have developed tolerance to chemical
pesticides and 4) they do not leave undesirable residues in food crops.
Concerns over the safety of chemical pesticides and their impact on the
food supply, environment and agricultural workers have led the EPA to prohibit
or restrict the use of many chemical pesticides. This has created opportunities
for replacement products, including pest-resistant plants and biopesticides.
SEED BUSINESS
Mycogen Plant Sciences is the seventh largest producer and marketer of
planting seeds in the U.S. Hybrid seed corn accounts for the majority of MPS's
planting seed sales. Other key seed products include soybean, hybrid sunflower,
hybrid sorghum and alfalfa. Most of the Company's seed is produced by an
established network of contract growers under specified planting conditions.
MPS contracts with these independent growers annually. The seed is dried and
treated at Company-owned production facilities, packaged and sold through an
extensive seed sales organization. In North America and in certain other
regions of the world, the Company markets its seeds under the single brand of
"Mycogen(TM)".
RESEARCH, PRODUCTION AND MARKETING - Mycogen Plant Sciences maintains research
and production facilities in California, Georgia, Indiana, Iowa, Michigan,
Minnesota, Nebraska, Puerto Rico, Texas and Wisconsin. These facilities, along
with contract growing arrangements in the U.S. and Canada, give the Company the
geographic dispersion required to produce and market crop varieties suitable for
virtually all important North American agricultural regions. MPS markets its
seed products in North America through a network of more than 100 sales managers
and approximately 4,000 farmer/sales representatives and professional
agricultural retail outlets. In September 1995, the Company entered into an
agreement through which Cargill Hybrid Seeds will distribute Mycogen's hybrid
seed corn products with Bt-based insect resistance in 1996 under the Mycogen(TM)
label. Outside North America, the Company markets seeds primarily through local
distributors. In France, Italy and Argentina, MPS also produces and markets its
products through wholly-owned seed companies.
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PRODUCT DEVELOPMENT AND APPLIED TECHNOLOGY - The Company's business strategy is
to develop differentiated, value-added seed products to meet the needs of the
agriculture and food industries. Special emphasis will be placed on development
of pest-resistant corn, cotton, soybean, sunflower, canola and alfalfa
varieties. Mycogen believes that by providing seed products with pest-
resistance and other value-added characteristics, it can expand its market
share. The Company also develops oilseed products for the food and chemical
industries for a subsidiary of the Lubrizol Corporation ("Lubrizol").
In addition to extensive plant breeding programs in corn, soybeans, cotton,
sorghum and sunflower to improve yield and other agronomic characteristics, the
Company is pursuing numerous plant product development and applied technology
opportunities as follows:
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PROGRAM COMMERCIAL OPPORTUNITY TARGET CROPS
- ----------------------------------------------------------------------------------------------------
Pest Resistance Via Plant Yield improvement and displacement corn, cotton, soybean,
Transformation of certain chemical pesticides sunflower, alfalfa,
canola, sorghum
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Pest Resistance Via Yield improvement and displacement corn, cotton, alfalfa
Marker Assisted Breeding of certain chemical pesticides
- ----------------------------------------------------------------------------------------------------
Oilseed Program Specialty food and industrial oils program sunflower, corn,
funded by Lubrizol safflower, canola
- ----------------------------------------------------------------------------------------------------
PEST RESISTANCE VIA PLANT TRANSFORMATION - This program uses advanced plant
science and gene technology to transform genetic material from bacteria, plants
and other sources into the genomes of target crops. Mycogen's primary current
focus is on genes isolated from strains of Bt that cause transformed plants to
produce proteins that are toxic to insects. Bt genes that produce proteins
toxic to certain insects, including Lepidoptera (worms and moths) and Coleoptera
(beetles), have been isolated, restructured for efficient plant expression and
inserted into several crop varieties. The first product of this development
effort is hybrid seed corn with Bt-based resistance to European corn borer, a
pest that costs farmers in the U.S., Europe and South America hundreds of
millions of dollars in yield losses each year. MPS has produced an introductory
quantity of these seeds and is introducing them commercially in the U.S. for the
1996 growing season. Mycogen also has isolated and restructured Bt genes that
produce proteins toxic to corn rootworm, another pest that causes substantial
economic loss. The Bt gene sequences that produce these insecticidal proteins
are covered by issued or pending patents.
CORN BORER AND CORN ROOTWORM RESISTANCE VIA MARKER ASSISTED BREEDING - The
Company also is developing and marketing products with pest resistance derived
from native plant sources. Using licensed marker-assisted breeding ("MAB")
technology and DNA mapping and analysis, Mycogen has identified and tracked
separate multigenetic resistance traits for European corn borer and corn
rootworm. The Company has bred the multigenetic trait for European corn borer
into its elite commercial corn parent lines, and resulting resistant corn
hybrids were sold commercially in 1994 and 1995. The genetic trait for corn
rootworm is being bred into the Company's elite commercial parent lines, and
resulting resistant corn hybrids are being field tested. Mycogen also is using
MAB technology to identify certain pest-resistance traits in cotton and alfalfa.
VIRAL RESISTANCE - Plant viruses also cause considerable economic loss each
year. Plant varieties with native resistance to viral diseases that cause
significant economic losses have been identified, but the number of genes
involved often make it difficult to breed these resistance traits into
productive crop varieties. One such case is Maize Dwarf Mosaic Virus ("MDMV"),
a corn virus. Mycogen has completed a research program using MAB technology to
locate genes responsible for resistance to MDMV on the corn chromosome. The
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Company has bred the multigenetic trait for MDMV resistance into its elite
commercial corn parent lines and is field testing the resulting resistant corn
hybrids.
OILSEED PROGRAM - MPS is developing genetically enhanced oilseed crops for a
Lubrizol subsidiary. This research and development activity, relating primarily
to specialty oils from sunflower, rape (canola) and corn, is funded primarily by
Lubrizol. Lubrizol markets the specialty oils and related byproducts resulting
from this program. Mycogen is Lubrizol's exclusive supplier of planting seed
for these crops and manages the production of crops from the seed for Lubrizol.
Lubrizol has agreed to provide funding to support this oilseed program through
1998.
CROP PROTECTION BUSINESS
BIOPESTICIDE PRODUCTS - The Company currently markets eight environmentally
compatible biopesticide products. These products are based on natural agents
such as microorganisms and fatty acid compounds that, in general, have specific
toxic activity on target pests and are not harmful to mammals, fish, birds and
beneficial insects. In addition, because biopesticides have unique modes of
action, they often are effective in controlling pest populations that have
developed tolerance to chemical pesticides.
The Company's Bt-based biopesticides are derived from varietal strains of
Bt that produce proteins that are toxic to specific pests when ingested.
Mycogen's Bt based biopesticides utilize the Company's proprietary CellCap(R)
technology, which encapsulates Bt toxin crystals inside cells of genetically
engineered bacteria. The Company believes that its CellCap(R) encapsulation
technology offers two important advantages over conventional Bt products: 1) it
prolongs insecticidal activity resulting in superior crop protection and 2) it
allows for development of superior product formulations that facilitate
production and application.
The Company's fatty acid based biopesticides are derived from a wide
variety of generally inexpensive natural sources, such as coconut, palm,
sunflower and tall oil and tallow from animal fats. Fatty acid pesticides
disrupt or destroy membranes of soft-bodied insects, weeds and microbial plant
pathogens.
BIOPESTICIDE MARKETING AND COMMERCIAL DEVELOPMENT - Mycogen Crop Protection's
marketing and commercial development staff is responsible for commercializing
Mycogen's biopesticides in commercial and specialty markets worldwide, and for
cooperative development and marketing efforts in Far East Asia through
collaborations with Kubota Corporation and Japan Tobacco, Inc. Biopesticide
products are sold through established agricultural product distributors in the
U.S. and certain other countries worldwide.
PRODUCT DEVELOPMENT AND APPLIED TECHNOLOGY - Mycogen conducts active discovery
and product development programs for new biopesticides and to improve existing
products. The Company primarily uses two different technologies to develop its
biopesticides.
MICROBIAL BIOPESTICIDE TECHNOLOGY - Mycogen's microbial bioinsecticide products
and technology are based on two key components: 1) discovery, selection and
enhancement of biotoxins that are active against commercially important pests
and 2) the Company's proprietary CellCap/(R)/ encapsulation delivery system.
Certain naturally occurring microorganisms produce biotoxins that are toxic
to specific pests when ingested. The primary current source of such biotoxins is
varietal strains of Bt. Mycogen researchers have found Bt strains with
pesticidal activity against a broad range of pests. Several Bt strains
discovered by Mycogen and others are active ingredients for commercial pesticide
products.
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Bt biotoxins have a different mode of action than chemical pesticides and
are active only when consumed by the target pest. Field experience has
demonstrated that these products are effective in controlling some pest
populations that have developed tolerance to certain chemical pesticides and
extensive toxicology testing has shown that Bt biotoxins are nontoxic to
mammals, wildlife and other non-target species, including certain beneficial
insects.
Biotoxins generally degrade rapidly, leaving little or no residue in food,
ground water or soil. While this makes them environmentally compatible,
historically it has limited their practical use as commercial pesticides. To
prolong biotoxin activity in the field, Mycogen developed technology that uses a
microorganism as a protective delivery system. This patented CellCap(R)
delivery system employs cells that have been killed and stabilized to serve as
microcapsules to protect fragile biotoxin crystals that have been produced by
and accumulated within the cells.
Mycogen has identified Bt strains with pesticidal activity against
caterpillars, beetles, weevils, parasitic plant and animal nematodes, protozoan
pathogens, grubs, mites, liver flukes and adult houseflies. The Company believes
that Bt strains with activity against non-insect pests could extend the use of
Bt-based biopesticides beyond current crop protection markets.
FATTY ACID TECHNOLOGY - Fatty acids disrupt or destroy cellular membranes of
soft-bodied insects, plants and microbial plant pathogens such as fungi. The
pesticidal benefits of fatty acids are based on four key properties: 1) they act
rapidly on contact, 2) they have a unique mode of action, 3) they use naturally
occurring active ingredients and 4) treated areas require limited worker safety
re-entry restrictions. These characteristics make fatty acid pesticides useful
in targeted markets. For example, the contact activity of fatty acids has been
shown to enhance the efficacy of certain synthetic chemical pesticides. By
using tank mixes of fatty acids and other chemicals, growers can reduce
treatment costs, lower the synthetic chemical load on the environment and
prolong the usefulness of their pest control tools by managing resistance.
MICROBIAL BIOPESTICIDE MANUFACTURING - Mycogen's microbial biopesticide products
are manufactured through a large-scale fermentation process. After
fermentation, the mass-produced microorganisms are harvested for product
formulation. These products use virtually the entire fermentation biomass, so
little, if any, purification is required. The concentrated microorganisms are
processed differently, depending on whether a liquid or dry product formulation
is to be produced.
Mycogen develops final product formulations and the related fermentation
manufacturing processes for all its microbial biopesticides at its San Diego
research facility. Once the basic process is developed, it is scaled up in the
Company's pilot plant. This facility has sufficient capacity to produce
quantities of material required for small scale field trials. Once a process is
proven at the pilot plant scale it is available for transfer to Mycogen's
manufacturing facility for commercial scale-up. To implement a high-yield
fermentation process, Mycogen entered into a long-term exclusive manufacturing
agreement with Enzyme Bio-Systems, Ltd. ("EB"), a wholly-owned subsidiary of CPC
International, Inc. Under the manufacturing agreement, EB added dedicated
fermentation capacity and certain equipment at its Beloit, Wisconsin, facility
to support the production, recovery, formulation and packaging of Mycogen's
microbial products. Capital funding of $10.9 million was provided by Mycogen.
EB is responsible for the manufacture of Mycogen's microbial biopesticide
products and Mycogen pays EB the actual costs of manufacturing plus a fee based
on the number of units produced. Manufacturing began at EB in 1995.
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BIOPESTICIDE PRODUCTS REGISTERED BY THE EPA FOR COMMERCIAL USE
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PRODUCT AND BIOTOXIN TARGET PEST MARKET
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MVP (Bt) Leaf-eating caterpillar pests cotton, tree fruits, vines, corn
MVPII (Bt concentrate)/1/
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M-Pede (Fatty acid) Soft-bodied insects Fruits, vegetables, grapes and
Powdery mildew ornamentals
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M-Trak (Bt) Colorado potato beetle Potato, tomato and eggplant
- --------------------------------------------------------------------------------------------------------------------
M-Peril (Bt) European corn borer Corn
(solid granules)
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Mattch (Bt) Leaf-eating caterpillar pests Vegetables and nursery crops
- --------------------------------------------------------------------------------------------------------------------
Scythe Herbicide Broad spectrum of weeds Horticulture and landscape
(fatty acid) management
- --------------------------------------------------------------------------------------------------------------------
DeMoss (Fatty acid) Moss, algae, lichens Roofs, buildings, sidewalks
and greenhouses
- --------------------------------------------------------------------------------------------------------------------
Thinex (fatty acid)/1/ Blossom Thinner Apples, pears, stone fruits
- --------------------------------------------------------------------------------------------------------------------
/1/ EPA registration pending.
FATTY ACID PRODUCT MANUFACTURING - Mycogen manufactures its fatty acid based
biopesticide products under short-term toll manufacturing agreements.
MANUFACTURING CAPACITY - The Company believes that its current manufacturers
have adequate capacity to meet Mycogen's product needs for the foreseeable
future, and that the required raw materials for all its biopesticides are
readily available. The Company does not anticipate shortages of these raw
materials that would materially affect availability or cost.
BIOPESTICIDE PRODUCTS FOR POULTRY AND LIVESTOCK MARKETS - Under a 1994 agreement
between Mycogen and Schering-Plough Animal Health ("SPAH"), a division of
Schering-Plough Corporation, Mycogen is leveraging its Bt and fatty acid
technology by developing biopesticide products for commercialization by SPAH in
the poultry industry. Under the agreement, the Company granted a license to SPAH
to market Mycogen's SafeCide(R) line of boric acid products to poultry operators
in the U.S. and Canada.
SPAH also licensed commercial rights in the U.S. and Canada for additional
poultry pest control products being developed by Mycogen, including a protein
biotoxin product to control filth flies. SPAH is currently marketing a fatty
acid product to control northern fowl mites licensed from Mycogen.
SOILSERV - CROP PROTECTION SERVICES - Soilserv, founded in 1945 and acquired by
Mycogen in 1991, provides customized crop protection services to growers of high
value crops in California and Arizona. Soilserv monitors fields, recommends and
supplies pest control products and applies such products, principally in the
Salinas Valley, California, and Yuma, Arizona, regions.
Soilserv has developed customized spray rigs and other application
equipment for specific vegetable crops, and uses a proprietary database system
to verify that pesticide recommendations made by its licensed pest control
advisors to its grower customers comply with EPA, state and local government
regulations. As a further service to its customers, Soilserv provides
notifications and files documents regarding pesticide applications with state
and local agencies.
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PATENTS AND PROPRIETARY TECHNOLOGY
As of August 31, 1995, Mycogen held approximately 147 U.S. patents and
approximately 246 foreign patents. The Company has filed and is pursuing
approximately 113 additional patent applications in the U.S., with corresponding
applications pending in other countries. In addition to patents, the Company
relies on trade secrets and proprietary information to protect its technology.
PLANT SCIENCE PATENTS - As a result of research conducted by Agrigenetics
Corporation, a Delaware corporation (now Mycogen Plant Sciences) in the 1980s,
the Company has applied for, and in some cases been granted, fundamental patents
in key technical areas. Patents and patent applications include claims to a
number of plant science inventions and discoveries, such as insect-resistant
plants utilizing Bt genes, plant transformation systems and the synthesis of Bt
genes to optimize expression of pesticidal proteins in plants.
In January 1995, Mycogen received a broad U.S. patent covering its method
of modifying Bt gene sequences to make them resemble those of the plants into
which they are to be inserted. Such modifications improve Bt genes' efficiency
in producing pesticidal proteins. In June 1995, the Company received a Notice of
Allowance from the European Patent Office covering Mycogen's method of modifying
Bt genes to resemble plant genes, and to modified genes and transgenic plant
cells developed by using that method. Several major crop plants, including corn,
cotton, canola, potatoes and tomatoes, have been transformed with synthetic Bt
genes by Mycogen and other companies, and seeds for some will be introduced
commercially in 1996.
BIOPESTICIDE PATENTS - A number of the Company's issued U.S. patents relate to
its CellCap(R) encapsulation technology. Mycogen's issued patents and patent
applications also include claims to more than 30 specific protein biotoxins and
associated genes, certain insecticidal and nematicidal microorganisms, plant
colonizing microbial delivery systems and certain bioherbicides and related
technology. The Company has a number of issued patents and patent applications
covering certain pesticidal uses of fatty acids by themselves and in combination
with certain chemical pesticides. The Company has licensed certain rights to
its patents and technology in specific fields to corporate partners. Mycogen
has exclusive licenses to a number of issued patents and patent applications in
the U.S. and other countries, and certain trade secret technology relating to
fatty acid pesticides and their use.
PROPRIETARY SEED PRODUCTS - Mycogen's seed products are either hybrid seeds
resulting from a cross of inbred parent lines or varieties produced from a
single parent line. In the case of hybrids, the Company can maintain a
proprietary position because hybrid seeds progressively lose their agronomic
advantage from generation to generation, and the inbred parent lines from which
hybrids are produced generally are not sold to growers. In the case of crops
that are not produced as hybrids, the Company sells varieties that breed true
from generation to generation. For these crops, the Company relies on Plant
Variety Protection certificates granted by the U.S. government pursuant to the
Plant Variety Protection Act (the "PVPA"), or similar rights granted by foreign
governments. These certificates give the holder certain exclusive rights for a
period of time (18 years under the PVPA) to reproduce the covered variety and
sell it for planting.
Mycogen has filed applications for utility patent protection for certain of
its crop varieties and plant materials to obtain broader utility patent
protection for unique plants that the Company has developed or bioengineered.
UNCERTAINTY OF BIOTECHNOLOGY PATENTS - The status of biotechnology patents is
highly uncertain. A substantial number of patent applications have been filed.
Some issued and pending patents claim basic aspects of genetic engineering
technology related to transformed plants, biopesticides and other areas of
agriculture. Mycogen has royalty-bearing nonexclusive licenses relating to the
use of certain processes employed in
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recombinant DNA technology, plant transformation, microbial biopesticide
production and other aspects of the Company's business. If the broad claims of
existing and future genetic engineering patents are upheld, the holders of such
patents may be in a position to require other companies to obtain licenses.
There can be no assurance that licenses the Company may need for its processes
or products will be available on reasonable terms, if at all.
GOVERNMENTAL REGULATION AND PRODUCT REGISTRATION
Agricultural biotechnology comes under the jurisdiction of three federal
regulatory agencies: the Food and Drug Administration ("FDA"), the EPA, and the
United States Department of Agriculture ("USDA"). Agency jurisdiction generally
is a function of three factors: 1) the particular substances or products
involved (for example, grains), 2) the uses and other purposes of such products
and 3) the commercial activities involved (for example, research, field testing,
production and distribution).
FDA review of biotechnology products focuses on their intended uses, and is
conducted on a case-by-case basis. Unless a food product or food additive is
generally recognized as safe, based on scientific evaluation by qualified
experts, under the conditions of its intended use, FDA must approve a petition
for the product's intended use before it can be introduced into commerce. FDA's
approval generally includes specified conditions under which the product may be
used.
Field testing, production and marketing of pesticide products are regulated
by federal, state, local and foreign governments. The EPA regulates pesticides
in the U.S. under the Federal Insecticide, Fungicide and Rodenticide Act, as
amended ("FIFRA"). Pesticides also are regulated by the states. Field testing of
nonindigenous microbial biopesticides requires approval of both the EPA and the
USDA's Animal and Plant Health Inspection Service.
The Federal Seed Act defines USDA's regulatory authority over importation
and interstate shipment of agricultural and vegetable seeds. In general, seeds
may not be imported or shipped interstate if they are deemed by USDA to be
"noxious weed" seeds or to contain "noxious weed" seeds above levels prescribed
by USDA or individual states. Thus, to the extent that a seed resulting from a
biotechnology process is adulterated with a "noxious weed" seed, it would be
subject to these regulations. In addition, USDA regulates importation and
interstate movement of "plant pests" and plants that may be or contain "plant
pests" under the Plant Quarantine Act and the Federal Plant Pest Act. Shipment
and field release of a plant that is genetically engineered to contain a "plant
pest" is subject to the regulatory oversight of USDA and of individual states.
USDA and various states also regulate production and distribution of crop
seeds under the Federal Seed Act and state seed acts, which require that
commercial seed products meet certain purity and labeling requirements.
Similarly, plant inoculants are subject to regulation under various state acts
that establish labeling and effectiveness standards.
Genetically altered plants that have pesticidal traits, such as the ability
to produce pesticidal proteins, are regulated by the EPA under FIFRA with
respect to their pesticidal properties. The EPA requires completion of certain
tests prior to registration of a pesticidal plant to ensure that such plants
pose no risk to human health or the environment.
10
SEASONALITY OF BUSINESS
Due to the seasonal nature of its planting seed and crop protection
businesses, Mycogen's operating revenues are higher during the second and third
quarters of the fiscal year, thus causing variations in quarter to quarter
financial results. Working capital needs also are seasonal. Weather conditions
also cause year-to-year fluctuations in operating revenues. For example,
temperature, precipitation and other factors influence pest populations and the
effectiveness of pesticides. Weather also affects seed production yields,
planting decisions by farmers and seed commodity prices.
BACKLOG
Mycogen's distribution and marketing practices do not require an
extraordinary amount of working capital. The Company maintains inventory to meet
customer requirements. Mycogen Crop Protection does not manufacture biopesticide
products against a backlog of firm orders; inventory levels are geared primarily
to projections of future demand. Except with respect to planting seed produced
under an exclusive arrangement with a subsidiary of Lubrizol, Mycogen Plant
Sciences does not produce planting seed against a backlog of firm orders;
inventory levels are geared primarily to projections of future demand. The
Company generally is not dependent upon one customer or a group of customers and
has no material contracts with the U.S. government or with any state, local or
foreign government.
RESEARCH AND DEVELOPMENT
Mycogen's product development programs involve a significant level of
research and development activity. Company sponsored research and development
expenses totaled $18.2 million for Mycogen's fiscal year ended August 31, 1995.
For the two comparable fiscal years ended August 31, the Company-sponsored
research and development expenses were $13.5 million in 1994, and $16.1 million
in 1993. Lubrizol is obligated by contract to provide a minimum of $4.6 million
of funding to the Company through 1998 to support development of planting seeds
for crops yielding special oils. In exchange, Lubrizol has exclusive rights to
planting seeds for plants that produce certain special oils. Under a separate
agreement, the Company is the exclusive supplier of such planting seeds to a
subsidiary of Lubrizol.
COMPETITION
The Company faces intense competition. Competition in planting seeds is
based primarily on price, crop yields, other crop performance characteristics
including crop resistance to disease and pests, and customer service.
Competition in biopesticides is based primarily on efficacy, price, ease of
application and safety.
COMPETITION IN SEEDS - Mycogen believes that it has three categories of
competitors in planting seeds: large, multinational seed companies, smaller
regional seed companies and agricultural biotechnology companies engaged in the
development of new, genetically engineered crop varieties.
The planting seed industry is dominated by large multinational companies
located in the U.S. and Europe. These include Pioneer, the world's largest seed
company, DeKalb Genetics Corporation, Sandoz Holding AG, Ciba-Geigy Corporation,
Cargill, Inc., Limagrain and others. These firms generally operate throughout
the world and have substantial financial and marketing resources, as well as
extensive research, plant breeding and production facilities and expertise.
Some of these companies and a number of others have significant plant
biotechnology research programs to develop new crop varieties that are
genetically enhanced for increase yield, pest- or disease-resistance and other
value-added characteristics.
11
COMPETITION IN BIOPESTICIDES - Mycogen believes that it has three categories of
competitors in biopesticides: large chemical pesticide companies, established
companies with biopesticide product lines and other companies developing new
biopesticide products. The pesticide industry is dominated by large chemical
companies located in the U.S. and Europe. These firms generally operate
throughout the world and have extensive financial and marketing resources as
well as extensive product registration experience and highly efficient
manufacturing capabilities. Some chemical pesticide companies have added
biopesticide products to their product lines. These include Abbott Laboratories,
Sandoz A.G. and Ciba-Geigy Corporation all of which are large multinational
firms with substantial financial resources and, in certain cases, large-scale
fermentation manufacturing capabilities and extensive experience in formulating
biopesticide products.
HUMAN RESOURCES
As of August 31, 1995, the Company had approximately 757 employees. The
Company's management believes that it maintains positive relations with its
employees.
ITEM 2. PROPERTIES
The Company owns its principal executive and administrative facilities
located in San Diego, California. In addition, Mycogen owns its principal
biopesticide research and development facilities located in San Diego, and
leases greenhouse space near its headquarters. The Company also owns office,
warehouse and formulation facilities located in Salinas, California, as well as
several smaller satellite facilities in the Salinas area, that are used by
Soilserv.
Mycogen's seed production, conditioning and storage facilities are located
in the U.S., Argentina, France and Italy. The Company maintains seed research,
production, warehouse, distribution or administrative space at the following
principal locations: Lincoln, Illinois; Lynnville, Schaller and Vinton, Iowa;
Breckenridge and Hastings, Minnesota; York, Nebraska; Dumas and Tulia, Texas and
Prescott, Wisconsin. The Company also has a plant research facility in Madison,
Wisconsin. All of the foregoing facilities are owned by the Company. In
addition, Mycogen leases field plant research and storage facilities in
Woodland, California; Griffin, Georgia; Huxley, Iowa; Leland, Mississippi;
Plainview, Texas and DeForest, Wisconsin. The Company believes that its present
facilities are adequate to maintain its businesses.
ITEM 3. LEGAL PROCEEDINGS
MPS filed suit against Monsanto Company ("Monsanto") for patent
infringement on May 19, 1995, in Federal District Court in San Diego,
California. The patent infringement action claims that Monsanto's use of
synthetic Bt genes to develop and sell plants and seeds for insect-resistant
crops infringes Mycogen's patent covering the process used to synthesize Bt
genes. The suit also contains state law claims relating to Monsanto's published
statements disparaging Mycogen's patents and technology. The patent infringement
claim seeks an injunction to halt Monsanto's development and commercialization
of plants and seeds using the process covered by Mycogen's patent. The state law
claims seek unspecified damages. This litigation is not expected to have a
material adverse effect on the Company's business or consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of fiscal year 1995.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of Mycogen Corporation trades on The Nasdaq Stock Market
under the symbol "MYCO." Following are high and low trade prices for Mycogen
Corporation Common Stock, as reported by Nasdaq.
Year ended August 31, 1995 High Low
4th Quarter..................... 11 1/4 7 3/4
3rd Quarter..................... 10 3/4 8
2nd Quarter..................... 12 7 7/8
1st Quarter..................... 10 1/2 9 1/4
Year ended August 31, 1994 High Low
4th Quarter..................... 12 9 1/2
3rd Quarter..................... 11 3/4 9 1/4
2nd Quarter..................... 12 9 1/2
1st Quarter..................... 13 1/2 9 3/4
At September 30, 1995, there are approximately 3,300 holders of record of
the Company's Common Stock. No dividends have been declared or paid on the
Common Stock. The Company has no intention of paying dividends on Common Stock
in the foreseeable future.
13
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SELECTED FINANCIAL DATA
(In thousands except per share data)
EIGHT
MONTHS
ENDED YEARS ENDED
YEARS ENDED AUGUST 31,/1/ AUGUST 31, DECEMBER 31,
------------------------------------------------------ ------------------------------------------
1995 1994/2/ 1993/2/ 1992/2/ 1991/2/ 1990/2/
---- ------ ------ ------- ------- ------
(unaudited)
Net Operating Revenues $106,169 $104,383 $12,583 $ 23,427 $13,218 $2,512
Total Revenue 113,218 112,760 118,011 24,630 18,312 10,724
Net Loss Applicable to (15,946) (33,234)/3/ (27,514)/4/ (3,030)/5/ (3,305) (4,492)/6/
Common Shares
Net Loss Per Common Share (.83) (1.81)/3/ (1.69)/4/ (.21)/5/ (.27) (.44)/6/
Cash, Cash Equivalents and
Securities Available-for-Sale 17,600 37,887 66,314 66,456 75,835 8,578
Total Assets 159,608 165,726 201,533 112,714 114,540 79,747
Long-term Liabilities 3,291 1,207 1,141 1,256 1,041 ---
Redeemable Preferred Stock --- --- 40,897 --- --- ---
Stockholders' Equity 113,703 125,406 107,885 105,207 107,011 76,750
/1/ In May 1995, Mycogen Corporation changed its fiscal year end from December
31 to August 31 and has elected to report the three years ended August 31,
1995.
/2/ The acquisitions of MPS in 1993 and 1994 and Soilserv, Inc. in 1991 affect
the comparability of the Selected Financial Data.
/3/ Net loss in 1994 includes charges of $26.6 million for the write-off of
acquired in-process technology and $9.8 million for restructuring.
/4/ Net loss in 1993 includes charges of $21.6 million for the write-off of
acquired in-process technology and $2.1 million for restructuring.
/5/ Net loss in 1992 includes charges of $2.1 million for a patent litigation
settlement.
/6/ Net loss in 1990 includes a charge of $2.6 million for the write-down of an
investment.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SUMMARY
Mycogen develops and markets value-added planting seeds for major
agricultural crops and environmentally compatible biopesticide products and
provides crop protection services to control pests and improve food and fiber
production. The Company is organized into two business units, Seed and Crop
Protection.
Mycogen's Seed business, MPS, the seventh largest seed company in the U.S.,
markets a complete line of planting seeds for corn, soybean, sunflower, sorghum
and other crops. Using both traditional breeding and advanced biotechnology
techniques, the Company is moving rapidly to augment and improve the genetic
makeup of major crops to produce seed products that give growers value-added
performance characteristics.
Mycogen's Crop Protection business, Mycogen Crop Protection, develops,
manufactures and markets biopesticide products and provides crop protection
services to growers of high value crops in California and Arizona.
In May 1995, the Company decided to change its fiscal year-end from
December 31 to August 31 to better match financial reporting with the Company's
business cycle.
The Company's businesses are highly seasonal. Seed operating revenues are
concentrated mainly in the second and third fiscal quarters which end in
February and May and Crop Protection operating revenues are concentrated mainly
in the third and fourth quarters which end in May and August. However, varying
climatic conditions can shift revenues between quarters. Operating revenues and
seed costs are impacted by weather. Weather can influence pest populations, the
effectiveness of pesticides and seeds, seed production yields, commodity prices,
growers' planting decisions and other factors affecting revenues and costs.
Operating revenues also depend on a number of other factors, including market
acceptance of products, competition and U.S. and foreign government policies
that affect crop acreage and farm income. Planted acreage is a key factor in
determining volumes of seed, crop protection services and biopesticide products
purchased by growers.
In December 1982, Mycogen was formed to use genetic engineering to develop
environmentally compatible biological alternatives to chemical pesticides. In
January 1990, the Company acquired a line of fatty acid based pesticides to
complement its line of microbial products. In August 1991, it acquired
Soilserv, a provider of crop protection services to growers in California and
Arizona, to establish a revenue base and to gain experience in crop protection
practices. During this time, Mycogen continued to develop a library of Bt gene
sequences that code for production of protein biotoxins with pesticidal
activity.
In December 1992, Mycogen acquired 51% of the Agrigenetics division of
Lubrizol, which currently is doing business as Mycogen Plant Sciences. The
acquisition was driven by the opportunity to pool Mycogen's and Lubrizol's
respective plant science and Bt gene technology patent estates and technological
expertise to develop pest resistant crops. Such crops are developed by
inserting synthetic Bt genes into plant tissue, causing plants to produce
proteins that protect them from damage by certain pests. Once fixed in plant
parent lines, this pest-resistance trait is carried in planting seeds that are
produced and marketed as value-added products.
15
In December 1993, the Company acquired an additional 29.5% of MPS and
agreed to purchase Lubrizol's remaining 19.5% ownership over time. As a result
of these transactions, Mycogen expensed, as special charges, certain acquired
in-process technologies which totaled $26.6 million and $21.6 million for the
fiscal years ended August 1994 and 1993, respectively.
In August 1993, the Company decided to combine certain biopesticide
discovery and plant science research programs to accelerate development of pest-
resistant crops. The Company also decided to completely restructure MPS. When
Mycogen acquired Agrigenetics, Agrigenetics consisted of four independent seed
companies selling products under ten different brand names. In some areas,
these companies competed against each other with the same products. Their
businesses were based mainly on marketing seed products developed from publicly
available parent lines as lower priced alternatives to premium priced seed
products sold by other companies. Volumes and margins had declined each year
and inventory was increasing and aging. Mycogen decided to consolidate these
separate companies into one, MPS. The Company consolidated administration,
production, sales, marketing and general management at the headquarters of the
largest of the four companies in Prescott, Wisconsin. Mycogen also decided to
eliminate all of the existing brand names and commercialize all seed products
under the Mycogen(TM) brand, to eliminate overlapping sales territories and to
replace older, lower value generic products with new, proprietary, value-added
products. These changes resulted in restructuring charges totaling $9.8 million
and $2.1 million for the fiscal years ended August 1994 and 1993, respectively.
This consolidation has improved efficiency and reduced expenses. The number
of separate seed corn products has been reduced from 270 to approximately 90,
and the number of farmer/dealers has been reduced from more than 5,000 to
approximately 2,600. However, the elimination of familiar brands, heavy turnover
in the sales force and repositioning of MPS from a discounter to a marketer of
proprietary, value-added products under a new brand name has created significant
disruption in the business, and seed volumes and market share have declined.
Additionally, MPS' 1995 sales performance was adversely affected by a reduction
in planted acres in many key territories and crops. All of these negative
factors contributed to lower sales in 1995.
Despite these disappointing 1995 results, the Company believes that its
progress in commercializing new, proprietary, value-added corn hybrids and other
products will enable it to reverse declining volumes and margins in 1996. MPS'
new NatureGard(TM) seed corn with genetically enhanced insect-resistance and
Totally Managed Feedstuffs(TM) silage hybrids were well received by growers.
Limited quantities of these products virtually sold out, accounting for 20% of
total seed corn volumes for 1995, and the Company has produced significantly
larger quantities of both for 1996 planting.
Additionally, Mycogen Crop Protection brought on-line a new microbial
biopesticide production and packaging facility and implemented a higher-yielding
fermentation process that has reduced variable production costs and assures
future production capacity. The Company intends to take advantage of this
improved biopesticide cost position and production capacity to rapidly increase
sales of its microbial based biopesticide products.
However, as noted earlier, weather, competition, regulation and other
external factors may affect Mycogen's ability to increase operating revenues and
achieve profitability. The Company also must continue to invest in
commercializing existing products and in discovery and development of new
products, so the trend in losses from operations may continue if revenues do not
increase. The Company will continue to pursue an aggressive acquisition and
joint venture strategy to complement existing technologies and to expand
distribution.
16
SEGMENT OPERATING REVENUES AND OPERATING LOSS
Years ended August 31,
(In thousands) 1995 1994 1993
------------ ------------- -------------
Operating Revenues
Seed
Corn $ 28,537 $ 32,020 $ 36,764
Soybean 8,794 10,386 11,364
Sunflower 10,376 9,888 8,920
Other 7,548 9,494 11,906
International 10,074 8,541 10,911
------------ ------------ -----------
65,329 70,329 79,865
------------ ------------ -----------
Crop Protection
Soilserv 32,887 29,139 29,310
Biopesticides 7,953 4,915 3,408
------------ ------------ -----------
40,840 34,054 32,718
------------ ------------ -----------
Total Operating Revenues $ 106,169 $ 104,383 $ 112,583
============ ============ ===========
Operating Loss
Seed (11,922) (45,052)* (19,266)*
Crop Protection (2,336) (859) (6,268)
Corporate (1,259) (2,894) (2,461)
------------ ------------- ------------
Total Operating Loss $ (15,517) $ (48,805) $ (27,995)
============ ============= ============
*The net operating loss for the Seed segment includes special charges of
$36.4 million and $23.7 million in 1994 and 1993, respectively. The net
operating loss for 1993 for the Seed segment includes only nine months of
operating expenses incurred from the date of acquisition in December 1992 and
affects the comparability of the net operating losses.
SEED SEGMENT
FISCAL YEAR ENDED AUGUST 1995 COMPARED TO 1994
OPERATING REVENUES: Seed operating revenues for the fiscal year ended August
1995 were $65.3 million compared to $70.3 million for the fiscal year ended
August 1994. The net $5.0 million decrease in revenues is attributable mainly
to lower volumes:
. Corn acres planted industry-wide decreased 10% from last year due to a
cool, wet spring which caused growers to either not plant or to shift to
other crops. However, the Company's corn volumes decreased 12%. Although
soybean acres industry-wide are estimated to have been flat from 1994 to
1995, the Company's soybean volumes were down 15%. Corn and soybeans were
the seed products most impacted by the reduction in hybrids, trade names
and farmer/dealers.
. Sunflower revenues increased a net 5%, or $.5 million. Higher sales of
confection sunflower and hi-oleic sunflower to a related party more than
offset a 13% decline in oil
17
sunflower volume. This decline in oil sunflower was due to disease and
government programs which caused acres in certain territories where the
Company has a strong market share to be shifted to wheat and canola.
. Other seed sales, comprised mainly of sorghum and alfalfa, also had lower
sales volumes. Sorghum acreages continue to decline and shift to other
crops, such as cotton. The Company believes that, as a result of the
relatively mild winter, an unusual amount of pasture survived the normal
winter kill, which resulted in lower alfalfa sales.
. International revenues increased 18%, or $1.5 million, due to higher corn
and sunflower sales, mainly in France.
OPERATING LOSS: Seed operating loss for the fiscal year ended August 1995 was
$11.9 million compared to $8.7 million (excluding special charges of $36.4
million) for the fiscal year ended August 1994. Gross profit is $4.3 million
lower due mainly to lower sales volumes and higher cost of operating revenues as
a percent of sales. Cost of operating revenues are higher due mainly to
obsolescence as a result of repositioning corn inventory from non-proprietary
hybrids to new value-added hybrids. Lower sales volumes are also responsible for
increasing unit fixed costs and costs incurred to dispose of excess and poor
quality inventory. Expenses were slightly lower. Higher research and development
expenses were partially offset by lower selling, marketing, general and
administrative expenses resulting from the completion of the company-wide
restructuring and lower provisions for doubtful accounts.
FISCAL YEAR ENDED AUGUST 1994 COMPARED TO 1993
OPERATING REVENUES: Seed operating revenues for the fiscal year ended August
1994 which totaled $70.3 million were $9.5 million less than the fiscal year
ended August 1993. North American sales of planting seeds decreased $7.2
million. Although acreage was higher in 1994 than in 1993 industry-wide, sales
volume of certain of the Company's products declined due to the consolidation of
separate seed divisions and a number of overlapping sales territories in
addition to the elimination of certain brand names and hybrids. These volume
declines were partially offset by $1.3 million in price gains due to a favorable
product mix and fewer discounts. International sales declined $2.4 million due
mainly to the one-time sale of sunflower oil in 1993.
OPERATING INCOME AND LOSS: Excluding special charges of $36.4 million and $23.7
million in 1994 and 1993, respectively, Seed operating income of $4.4 million
for the fiscal year ended August 1993 decreased $13.1 million to a $8.7 million
loss for the fiscal year ended August 1994. This decrease is due to the
inclusion of MPS for a full year in 1994 as compared to nine months in 1993
which resulted in higher operating expenses of $6.7 million. Also contributing
to the decrease were higher provisions for doubtful accounts of $1.3 million and
lower margins of $7.7 million resulting mainly from provisions for excess and
obsolete seed. These decreases were offset by higher contract revenues of $2.0
million.
CROP PROTECTION SEGMENT
FISCAL YEAR ENDED AUGUST 1995 COMPARED TO 1994
OPERATING REVENUES: Crop Protection operating revenues for the fiscal year ended
August 1995 were $40.8 million compared to $34.1 million for the fiscal year
ended August 1994.
. Soilserv operating revenues were $3.7 million higher than last year due to
the flooding in California's Salinas Valley during the second quarter of
this year which created higher insect and disease pressure that increased
the demand for Soilserv's air applications of pesticides.
18
. Biopesticide operating revenues were up 62%, or $3.0 million, due to the
introduction of Scythe(R) herbicide and increases in MVP(R) for control
of heliothis in cotton and M-Peril(R) for control of European corn borer
in corn. International sales of biopesticides were ahead of last year due
to expanded sales of MVP(R) liquid in Asia and MVP(R) powder to Kubota
Corporation.
OPERATING LOSS: Crop Protection recorded operating losses for the fiscal year
ended August 1995 of $2.3 million compared to an operating loss of $.9 million
for the fiscal year ended August 1994. The decline is due mainly to a $1.6
million write-down of crop protection technology resulting from the
discontinuation of a certain product development program. Contract and other
revenues declined $1.5 million. These decreases were partially offset by higher
margins. Soilserv margins improved in total and as a percent of sales due to
higher volumes.
FISCAL YEAR ENDED AUGUST 1994 COMPARED TO 1993
OPERATING REVENUES: Crop Protection operating revenues increased by $1.3 million
from 1993 to 1994 due mainly to the introduction of M-Peril(R) for the control
of European corn borer in corn and MVP(R) for control of heliothis in cotton.
However, this increase was less than anticipated due to lower insect pressures
in these markets, and was partially offset by the discontinuance of certain
other products. International operating revenues increased due to introductory
sales of MVP(R) liquid to Europe and Asia. Soilserv operating revenues
remained relatively flat during the fiscal year ended 1994 compared to the same
period in 1993.
OPERATING LOSS: Crop Protection operating loss improved $5.4 million during
fiscal year 1994 due primarily to lower operating expenses of $4.3 million
resulting mainly from the consolidation of certain research and administrative
functions with the Seed segment. Contract and other revenues increased $1.0
million due to the receipt of $2.6 million in one-time license fees for certain
herbicide technology and products for control of pests in poultry markets offset
by revenues under other arrangements that declined in 1994 as existing funding
requirements concluded and a one-time license fee received in 1993.
CORPORATE
FISCAL YEAR ENDED AUGUST 1995 COMPARED TO 1994
The reduction of $1.6 million in the Corporate operating loss from $2.9
million in 1994 to $1.3 million in 1995 is due to lower general and
administrative expenses resulting from the consolidation and allocation of
Corporate general and administrative resources to the Seed business during the
1993 restructuring of MPS' operations.
FISCAL YEAR ENDED AUGUST 1994 COMPARED TO 1993
Corporate operating loss increased $.4 million from $2.5 million in 1993 to
$2.9 million in 1994. The higher general and administrative expenses reflect the
full year effect of MPS' operations in fiscal year 1994 and increased efforts
required at the Corporate level.
NON-OPERATING ITEMS
INTEREST INCOME AND EXPENSE, NET
Interest income and expense, net, decreased $1.4 million to $.9 million in
1995. The decrease is due mainly to less cash available for investment and
higher levels of borrowing under the Company's line of credit during the year.
Interest income and expense, net, decreased $.8 million to $2.3 million in 1994
due primarily to lower cash balances available for investment.
19
MINORITY INTEREST
Effective December 31, 1993, the Company agreed to purchase the remaining
19.46% ownership interest in MPS from Lubrizol. Lubrizol's minority interest in
MPS is recorded at the minimum agreed upon purchase price and the earnings from
MPS have been recognized as if the Company owned 100% of MPS. Therefore, no
minority interest has been recognized for periods after December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and securities available-for-sale
decreased by $20.3 million to $17.6 million during the fiscal year ended August
31, 1995. This decrease was due primarily to prepaid contract manufacturing
costs of $8.8 million, the purchase of land and buildings for $2.5 million,
other capital expenditures which totaled $4.1 million, patent expenditures of
$1.8 million and cash used in operations of $6.5 million. Cash used in
operations resulted primarily from higher trade accounts receivable and
inventory balances. These cash outflows were offset by cash proceeds of $2.5
million from a seven-year note payable to a bank to fund the purchase of the
land and buildings.
In September 1995, the Company signed a letter of intent for a technology
and development collaboration with Pioneer. Under the agreement, Pioneer will
purchase three million shares of the Company's common stock for $30 million and
provide $21 million in research and development funding over the next five
years. The transaction is subject to completion of definitive agreements.
Dividends on the Series A preferred stock are cumulative and are payable
quarterly to Lubrizol in additional shares of preferred stock. Starting in
December 1997 and thereafter, the dividends are payable in cash. Also, the
Company has agreed to purchase the remaining ownership interest of MPS from
Lubrizol for additional Common Stock or, after November 2000, for cash at a
price between $21.4 million and $26.3 million. The Company plans to pursue an
acquisition strategy to complement existing technologies. It is anticipated that
any acquisitions would be financed with existing cash, stock or debt. The
Company has a $25 million bank line of credit facility which expires November
30, 1995, to fund portions of its seasonal working capital needs, all of which
was unused at August 31, 1995.
The Company anticipates that its current cash position, and revenue from
operations and contract and other revenues will be sufficient to finance working
capital and capital requirements for the immediate future. However, the
Company's capital requirements may vary as a result of competitive and
technological developments, the timing of regulatory approval for new products
and the terms and conditions of any future strategic transactions. If such
requirements change, the Company may need to raise additional capital.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements appearing after the signature page of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
20
PART III
Certain information required by Part III is omitted from this report in
that the Company will file the Proxy Statement pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report, and
certain information included therein is incorporated herein by reference. Only
those sections of the Proxy Statement which specifically address the items set
forth herein are incorporated by reference. Such incorporation does not include
the Compensation Committee Report or the Performance Graph included in the Proxy
Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information under the caption
"Election of Directors," appearing in the Proxy Statement, is incorporated
herein by reference.
(b) Identification of Executive Officers. The information under the
headings "Executive Officers" and "Responsibilities and Business Experience of
Executive Officers," appearing in the Proxy Statement, is incorporated herein by
reference.
(c) Compliance with Section 16(a) of the Exchange Act. Based solely upon a
review of Forms 3, 4 and 5 and amendments thereto furnished to the Registrant
and upon written representations of all individuals required to file forms
pursuant to Section 16(a), the Registrant knows of no such individual that
failed to file Forms 3, 4 and 5 on a timely basis during the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information under the heading "Executive Compensation" appearing in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the headings "Principal Stockholders" and "Executive
Compensation-Security Ownership of Directors and Management as of September 30,
1995," appearing in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the headings "Election of Directors," "Executive
Compensation" and "Certain Relationships and Related Transactions" appearing in
the Proxy Statement is incorporated herein by reference.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Report of Ernst and Young LLP, Independent
Auditors. See Index to Financial Statements at page 31 of this Form 10-K.
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this report on Form 10-K.
(c) Exhibits:
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
3.1 Certificate of Incorporation of the Company. Incorporated by --
reference from Exhibit 3.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-13846, filed on
April 29, 1987.
3.2 Certificate of Amendment of Certificate of Incorporation of --
the Company. Incorporated by reference from Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Registration No.
33-13846, filed on April 29, 1987.
3.3 Certificate of Retirement. Incorporated by reference from --
Exhibit 3.3 to the Company's Form 10-K for the fiscal year
ended September 30, 1988, filed on December 23, 1988.
3.4 Certificate of Amendment. Incorporated by reference from --
Exhibit 3.4 to the Company's Form 10-K for the fiscal year
ended December 31, 1991, filed on March 19, 1992.
3.5 Amended Certificate of Designation, Powers, Preferences and --
Rights of the Senior Redeemable convertible Preferred Stock,
Series A. Incorporated by reference from Exhibit 3.5 to the
Company's Form 8-K, filed on January 13, 1994.
3.6 Bylaws of the Company. Incorporated by reference from Exhibit --
3.3 to the Company's Registration Statement on Form S-1,
Registration No. 33-13846, filed on April 29, 1987.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 --
above.
4.2 Specimen Common Stock Certificate, $0.001 par value. --
Incorporated by reference from Exhibit 4.2 to the Company's
Registration Statement on Form S-1, Registration No. 33-13846,
filed on April 29, 1987.
4.3 Rights Agreement. Incorporated by reference from Exhibit 1 to --
the Company's Form 8-K, filed on February 21, 1992.
22
4.4 Amendment to the Rights Agreement. Incorporated by reference --
from Exhibit 4.5 to the Company's form 8-K, filed on January
13, 1994.
4.5 Amendment to the Rights Agreement. Incorporated by reference --
from Exhibit 4.5 to the Company's Form 10-K for the year ended
December 31, 1994, filed on March 3, 1995.
10.1 Registration Rights Agreement under Stock Purchase Agreement --
dated March 6, 1989. Incorporated by reference from Exhibit
10.2 to the Company's Form 10-K for the year ended September
30, 1989, filed on December 28, 1989.
10.2 Bioherbicide/Biotoxin Research and Development Agreement, --
dated March 6, 1989, between JT Biotech USA Inc. ("JT") and
Mycogen Corporation (with certain confidential portions
omitted). Incorporated by reference from Exhibit 10.3 to the
Company's Form 10-K for the year ended September 30, 1989,
filed on December 28, 1989.
10.3 Bioherbicide Commercialization License Agreement (Japan). --
Incorporated by reference from Exhibit 10.4 to the Company's
Form 10-K for the year ended September 30, 1989, filed on
December 28, 1989.
10.4 Mycogen Version - Technology License Agreement BH/BT between --
Mycogen and MJT BH/BT Partnership, L.P. (with certain
confidential portions omitted). Incorporated by reference from
Exhibit 10.5 to the Company's Form 10-K for the year ended
September 30, 1989, filed on December 28, 1989.
10.5 JT Version - Technology License Agreement BH/BT between JT and --
MJT BH/BT Partnership, L.P. (with certain confidential
portions omitted). Incorporated by reference from Exhibit 10.6
to the Company's Form 10-K for the year ended September 30,
1989, filed on December 28, 1989.
10.6 Guarantee and Undertakings of Japan Tobacco Inc. --
(Bioherbicide/Biotoxin), including Technology License
Agreement (BH/BT), delivered pursuant to Section 8(j) of the
Research and Development Agreement (with certain confidential
portions omitted). Incorporated by reference from Exhibit 10.7
to the Company's Form 10-K for the year ended September 30,
1989, filed on December 28, 1989.
23
10.7 Guarantee and Undertakings of Mycogen Corporation --
(Bioherbicide/Biotoxin), delivered pursuant to Section 8(j) of
the Research and Development Agreement (with certain
confidential portions omitted). Incorporated by reference from
Exhibit 10.8 to the Company's Form 10-K for the year ended
September 30, 1989, filed on December 28, 1989.
10.8 Limited Partnership Agreement of MJT BH/BT Partnership, L.P., --
dated March 6, 1989, between Mycosub/BH, Inc. and JT Biotech
USA, Inc. (with certain confidential portions omitted).
Incorporated by reference from Exhibit 10.9 to the Company's
Form 10-K for the year ended September 30, 1989, filed on
December 28, 1989.
10.9 Bioadjuvant Research and Development Agreement, dated March 6, --
1989, between Mycogen Corporation and JT Biotech USA Inc.
(with certain confidential portions omitted). Incorporated by
reference from Exhibit 10.10 to the Company's Form 10-K for
the year ended September 30, 1989, filed on December 28, 1989.
10.10 Mycogen Version - Technology Licensing Agreement (BA) between --
Mycogen and MJT BA Partnership, L.P. (with certain
confidential portions omitted). Incorporated by reference from
Exhibit 10.11 to the Company's Form 10-K for the year ended
September 30, 1989, filed on December 28, 1989.
10.11 JT Version - Technology Licensing Agreement (BA) between JT --
and MJT BA Partnership, L.P. (with certain confidential
portions omitted). Incorporated by reference from Exhibit
10.12 to the Company's Form 10-K for the year ended September
30, 1989, filed on December 28, 1989.
10.12 Guarantee and Undertakings of Japan Tobacco (Bioadjuvant), --
including Technology License Agreement (BA), delivered
pursuant to Section 8 (i) of the Research and Development
Agreement (with certain confidential portions omitted).
Incorporated by reference from Exhibit 10.13 to the Company's
Form 10-K for the year ended September 30, 1989, filed on
December 28, 1989.
10.13 Guarantee and Undertakings of Mycogen Corporation, delivered --
pursuant to Section 9(i) of the Research and Development
Agreement. Incorporated by reference from Exhibit 10.14 to the
Company's Form 10-K for the year ended September 30, 1989,
filed on December 28, 1989.
10.14 Limited Partnership Agreement of MJT BA Partnership, L.P., --
dated March 6, 1989, between Mycosub/BA, Inc. and JT Biotech
USA Inc. (with certain confidential portions omitted).
Incorporated by reference from Exhibit 10.15 to the Company's
Form 10-K for the year ended September 30, 1989, filed on
December 28, 1989.
24
10.15 Registrant's 1988 Stock Purchase Plan. Incorporated by --
reference from Exhibit 10.19 to the Company's Form 10-K for
the fiscal year ended December 31, 1991, filed on March 19,
1992.
10.16 Registrant's 401(k) Plan. Incorporated by reference from --
Exhibit 10.4 to the Company's form 10-K for the fiscal year
ended September 30, 1988, filed on December 23, 1988.
10.17 Amendment No. 1 to Registrant's 401(k) Plan. Incorporated by --
reference from Exhibit 10.21 to the Company's Form 10-K for
the year ended December 31, 1990, filed on March 29, 1991.
10.18 Amendment to Registrant's 401(k) Plan dated January 1, 1994. --
Incorporated by reference from Exhibit 10.18 to the Company's
Form 10-K for the year ended December 31, 1994, filed on March
3, 1995.
10.19 Registrant's Restricted Stock Issuance Plan. Incorporated by --
reference from Exhibit 28.1 to the Company's Registration
Statement on Form S-8, Registration No. 33-40349, filed on May
3, 1991.
10.20 Form of Agreements pertaining to Restricted Stock Issuance --
Plan. Incorporated by reference from exhibit 28.2 to the
Company's Registration Statement on form S-8, Registration No.
33-40349, filed on May 3, 1991.
10.21 Form of Indemnity Agreement between the Company and each of --
its directors. Incorporated by reference from Exhibit 10.28 to
the Company's Form 10-K for the year ended December 31, 1991,
filed on March 19, 1992.
10.22 Manufacturing Agreement dated September 15, 1988 between the --
Company and International Bio-Synthetics Inc. (with certain
confidential portions omitted). Incorporated by reference from
Exhibit 10.19 to the Company's Form 10-K for the year ended
September 30, 1988, filed on December 23, 1988.
10.23 Agreement for Purchase and Sale of Assets by and between --
Mycogen Corporation, Safer, Inc. and Safer Ltd., dated January
4, 1990. Incorporated by reference from Exhibit 10.30 to the
Company's Registration Statement on Form S-1, Registration No.
33-34591, filed on April 27, 1990.
10.24 Commercial License Agreement by and between Mycogen --
Corporation and Safer, Inc., dated January 4, 1990.
Incorporated by reference from Exhibit 10.32 to the Company's
Registration Statement on Form S-1, Registration No. 33-34591,
filed on April 27, 1990.
25
10.25 Stock Purchase Agreement, dated as of July 31, 1991, among the --
Company, Griffin Corporation of Valdosta, Georgia, Kocide
Chemical Corporation, A.J. Larronde and D.J. Sites,
individually and under power of attorney for other
shareholders of Soilserv, Inc. Incorporated by reference from
Exhibit 2.1 to the Company's Form 8-K, filed on August 14,
1991.
10.26 Covenant Not to Compete dated as of August 1, 1991, among the --
Company, Griffin Corporation of Valdosta, Georgia, Kocide
Chemical Corporation. Incorporated by reference from exhibit
28.1 to the Company's Form 8-K, filed on August 14, 1991.
10.27 Representations, Warranties and Indemnification Agreement --
dated August 25, 1992, among Registrant, Lubrizol Corporation
("Lubrizol") and Agrigenetics L.P. Incorporated by reference
from Exhibit 10.44 to the Company's Form 8-K, filed on
December 14, 1992.
10.28 Stock Exchange Agreement dated August 25, 1992, between --
Registrant and Lubrizol. Incorporated by reference from
Exhibit 10.45 to the Company's Form 8-K, filed on December 14,
1992.
10.29 Agreement of Limited Partnership dated August 25, 1992, among --
Registrant, AGC Holdings, Inc. (a wholly owned subsidiary of
Lubrizol) and Lubrizol Genetics, Inc. (subsequently renamed
Mycogen Plant Science, Inc.). Incorporated by reference from
Exhibit 10.47 to the Company's Form 8-K, filed on December 14,
1992.
10.30 License Agreement dated December 1, 1992, between Registrant --
and Agrigenetics L.P. Incorporated by reference from Exhibit
10.48 to the Company's Form 8-K, filed on December 14, 1992.
10.31 Mycogen 1992 Stock Option Plan. Incorporated by reference from --
Exhibit 28.1 to the Company's Registration Statement on Form
S-8, Registration Statement No. 33-55508, filed on December 9,
1992.
10.32 Form of Agreements pertaining to 1992 Stock Option Plan. --
Incorporated by reference from Exhibits 28.2, 28.3, 28.4 and
28.5 to the Company's Registration Statement on Form S-8,
Registration No. 33-55508, filed on December 9, 1992.
10.33 Technology and Development Agreement dated December 1, 1991, --
between SVO Specialty Products, Inc. (a wholly owned
subsidiary of Lubrizol) and Agrigenetics, L.P. Incorporated by
reference from Exhibit 28.1 to the Company's Form 8-K, filed
on December 14, 1992.
26
10.34 Revolving Credit Note of Mycogen Corporation to Harris Trust --
and Savings Bank ("Harris Bank") dated August 5, 1994.
Incorporated by reference from Exhibit 10.34 to the Company's
Form 10-K for the year ended December 31, 1994, filed on March
3, 1995.
10.35 Revolving Credit Agreement between Mycogen Corporation and --
Harris Bank dated August 5, 1994. Incorporated by reference
from Exhibit 10.35 to the Company's Form 10-K for the year
ended December 31, 1994, filed on March 3, 1995.
10.36 Guaranty Agreement from the Company to Harris Bank dated --
August 5, 1994. Incorporated by reference from Exhibit 10.36
to the Company's Form 10-K for the year ended December 31,
1994, filed on March 3, 1995.
10.37 Form of Employment/Severance Agreement between the Company and --
certain executive officers of the Company. Incorporated by
reference from Exhibit 10.55 to the Company's Form 10-K for
the year ended December 31, 1992, filed on March 20, 1993.
10.38 Partnership Interest Purchase Agreement dated December 31, --
1993, between Registrant and Lubrizol. Incorporated by
reference from Exhibit 10.59 to the Company's Form 8-K, filed
on January 13, 1994.
10.39 Contribution Agreement dated December 31, 1993, between the --
Registrant and Mycogen Plant Science, Inc. Incorporated by
reference from Exhibit 10.60 to the Company's Form 8-K, filed
on January 13, 1994.
10.40 Contribution and Liquidation Agreement dated December 31, --
1993, among Agrigenetics, L.P., Mycogen Plant Science, Inc.,
Lubrizol and Agrigenetics, Inc. Incorporated by reference from
Exhibit 10.61 to the Company's Form 8-K, filed on January 13,
1994.
10.41 Termination Agreement dated December 31, 1993, between Mycogen --
and Lubrizol. Incorporated by reference from Exhibit 10.62 to
the Company's Form 8-K, filed on January 13, 1994.
10.42 Amended and Restated Equity Investment Agreement dated --
December 31, 1993, among Registrant, Mycogen Plant Science,
Inc., Agrigenetics, Inc. and Lubrizol. Incorporated by
reference from Exhibit 10.63 to the Company's Form 8-K, filed
on January 13, 1994.
10.43 Amended and Restated Registration Rights Agreement dated --
December 31, 1993, between the Registrant and Lubrizol.
Incorporated by reference from Exhibit 10.64 to the Company's
Form 8-K, filed on January 13, 1994.
27
10.44 Manufacturing Agreement dated December 1, 1993, between the --
Registrant and Enzyme Bio Systems. Confidential treatment has
been requested regarding certain portions of the agreement.
Incorporated by reference from Exhibit 10.44 to the Company's
Form 10-K for the year ended December 31, 1994, filed on March
3, 1995.
10.45 Agreement for Exchange of Insect Control Technology and Patent --
Rights dated July 14, 1993, between the Registrant and Ciba
Seeds. Confidential treatment has been requested regarding
certain portions of the agreement. Incorporated by reference
from Exhibit 10.45 to the Company's Form 10-K for the year
ended December 31, 1994, filed on March 3, 1995.
10.46 Commercial Promissory Note dated January 31, 1995, between the --
Company and Union Bank. Incorporated by reference from Exhibit
10.48 to the Company's Form 10-K for the year ended December
31, 1994, filed on March 3, 1995.
10.47 Term Loan Agreement dated January 31, 1995 between the Company --
and Union Bank. Incorporated by reference from Exhibit 10.49
to the Company's Form 10-K for the year ended December 31,
1994, filed on March 3, 1995.
21.1 Mycosub BH/BT, a Delaware corporation. Incorporated by --
reference from Exhibit 22.1 to the Company's Form 10-K for the
year ended September 30, 1989, filed on December 28, 1989.
21.2 Mycosub BA, a Delaware corporation. Incorporated by reference --
from Exhibit 22.2 to the Company's Form 10-K for the year
ended September 30, 1989, filed on December 28, 1989.
21.3 Soilserv, Inc., a California corporation. Incorporated by --
reference from Exhibit 22.3 to the Company's Form 10-K for the
year ended December 31, 1991, filed on March 19, 1992.
21.4 Parasitix Corporation, a California corporation. Incorporated --
by reference from Exhibit 22.4 to the Company's Form 10-K for
the year ended December 31, 1991, filed on March 19, 1992.
21.5 Mycogen Plant Science, Inc., a Delaware corporation. --
Incorporated by reference from Exhibit 10.55 to the Company's
Form 10-K filed on March 20, 1993.
21.6 Agrigenetics, Inc. (d/b/a/ Mycogen Plant Sciences), a Delaware --
corporation. Incorporated by reference from Exhibit 22.6 to
the Company's Form 10-K for the year ended December 31, 1993,
filed on March 4, 1994.
28
21.7 Mycogen Far East Asia, a California corporation. Incorporated --
by reference from Exhibit 22.7 to the Company's Form 10-K for
the year ended December 31, 1994, filed on March 3, 1995.
21.8 Mycogen Crop Protection, Inc., a California corporation. 54
21.9 Mycogen California, Inc., a California corporation 75
* The Company's Notice of Annual Meeting and Proxy Statement --
dated on or about November 15, 1995.
23.1 Consent of Ernst & Young LLP, Independent Auditors. 113
24.1 Power of Attorney. 114
99.1 Purchase Agreement dated February 15, --1995, among --
Registrant, Agrigenetics, Inc. and Delta and Pine Land
Company. Incorporated by reference from Exhibit 99.1 to the
Company's Form 8-K, filed on April 20, 1995.
* Supplemental Information: Copies of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders and copies of the form of proxy to be used at
such Annual Meeting will be furnished to the Securities and Exchange Commission
prior to the time they are distributed to the stockholders.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MYCOGEN CORPORATION
Date: November 3, 1995 By: /s/ JERRY CAULDER
-------------------------------
Jerry Caulder
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
/s/ JERRY CAULDER Chairman, Chief November 3, 1995
- ---------------------------------------- Executive Officer and Director
(Jerry Caulder) (Principal Executive Officer)
/s/ THOMAS J. CABLE Director November 3, 1995
- ----------------------------------------
(Thomas J. Cable*)
/s/ GEORGE R. HILL Director November 3, 1995
- ----------------------------------------
(George R. Hill*)
/s/ KENNETH H. HOPPING Director November 3, 1995
- ----------------------------------------
(Kenneth H. Hopping*)
/s/ DAVID H. RAMMLER Director November 3, 1995
- ----------------------------------------
(David H. Rammler*)
/s/ A. JOHN SPEZIALE Director November 3, 1995
- ----------------------------------------
(A. John Speziale*)
/s/ JAMES A. BAUMKER Vice President and Chief November 3, 1995
- ---------------------------------------- Financial Officer
(James A. Baumker) (Principal Financial and
Accounting Officer)
*By James A. Baumker under power of attorney.
30
MYCOGEN CORPORATION
INDEX TO FINANCIAL STATEMENTS
Consolidated Statements of Operations for the years ended
August 31, 1995, 1994 and 1993......................................................32
Consolidated Balance Sheets as of August 31, 1995, 1994 and 1993.......................33
Consolidated Statements of Stockholders' Equity for the years ended
August 31, 1995, 1994 and 1993......................................................34
Consolidated Statements of Cash Flows for the years ended
August 31, 1995, 1994 and 1993......................................................35
Notes to Consolidated Financial Statements.............................................36
Schedule II - Valuation and Qualifying Accounts for the years ended
August 31, 1995 and 1994............................................................49
Report of Ernst & Young LLP, Independent Auditors......................................50
Exhibit 27 - Financial Data Schedule for the year ended August 31, 1995................51
Quarterly Financial Data for the year ended August 31, 1995............................52
All other schedules required by this item have been omitted due to full
disclosure in the Financial Statements or related footnotes or due to
inapplicability of the item.
31
MYCOGEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
YEARS ENDED AUGUST 31,
-------------------------------------------------
1995 1994 1993
----------- ----------- ----------
Net operating revenues:
Unrelated parties..................... $ 103,701 $ 102,449 $ 108,039
Related party......................... 2,468 1,934 4,544
Contract and other revenues:
Unrelated parties..................... 4,334 4,888 2,345
Related parties....................... 2,715 3,489 3,083
------------ ----------- ----------
Total revenues...................... 113,218 112,760 118,011
------------ ----------- ----------
Costs and expenses:
Cost of operating revenues............ 70,985 66,809 67,555
Selling and marketing................. 18,502 20,360 16,885
General and administrative............ 14,213 17,675 16,203
Research and development.............. 21,181 18,171 19,645
Amortization of intangible assets..... 3,854 2,172 2,042
Special charges....................... --- 36,378 23,676
------------ ----------- ----------
Total costs and expenses............ 128,735 161,565 146,006
------------ ----------- ----------
Operating loss.......................... (15,517) (48,805) (27,995)
Interest income and expense, net...... 914 2,328 3,175
Exchange gain (loss).................. 160 215 (471)
Minority interest..................... --- 14,632 (726)
------------ ----------- ----------
Net loss................................ (14,443) (31,630) (26,017)
Dividends on preferred stock............ (1,503) (1,604) (1,497)
------------ ----------- ----------
Net loss applicable to common shares.... $ (15,946) $ (33,234) $ (27,514)
============ =========== ==========
Net loss per common share............... $ (.83) $ (1.81) $ (1.69)
============ =========== ==========
Weighted average number of shares....... 19,225 18,377 16,318
============ =========== ==========
See accompanying Notes to Consolidated Financial Statements.
32
MYCOGEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value data)
AUGUST 31,
ASSETS 1995 1994
------------ ------------
Current assets:
Cash and cash equivalents............................................. $ 5,687 $ 8,681
Securities available-for-sale......................................... 11,913 29,206
Accounts and notes receivable, net of allowances...................... 27,402 24,402
Inventories........................................................... 33,633 31,714
Prepaid expenses...................................................... 1,267 1,121
------------ ------------
Total current assets................................................ 79,902 95,124
Net property, plant and equipment....................................... 49,646 48,537
Net intangible assets................................................... 17,759 18,091
Other assets............................................................ 12,301 3,974
------------ ------------
Total assets............................................................ $ 159,608 $ 165,726
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 6,760 $ 3,746
Accrued compensation and related taxes................................ 3,553 3,355
Deferred revenues..................................................... 5,670 4,681
Other current liabilities............................................. 5,225 5,925
------------ ------------
Total current liabilities........................................... 21,208 17,707
Long-term liabilities................................................... 3,291 1,207
Minority interest....................................................... 21,406 21,406
Commitments
Stockholders' equity:
Senior convertible cumulative preferred stock:
Series A preferred stock, $.001 par value, 3,940 shares authorized;
3,100 and 2,950 shares issued to a related party and outstanding at
August 31, 1995 and 1994, respectively; aggregate liquidation
preference, $31,004 and $29,501, respectively........................ ---
Common stock, $.001 par value, 40,000,000 shares authorized;
19,400,764 and 19,098,891 shares issued and outstanding at 19 19
August 31, 1995 and 1994 respectively.................................
Additional paid in capital............................................. 216,436 213,696
Deficit................................................................ (102,752) (88,309)
------------ ------------
Total stockholders' equity.......................................... 113,703 125,406
------------ ------------
Total liabilities and stockholders' equity.............................. $ 159,608 $ 165,726
============ ============
See accompanying Notes to Consolidated Financial Statements.
33
MYCOGEN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
SHARES OF COMMON STOCK
----------------
SERIES A NUMBER ADDITIONAL TOTAL
PREFERRED OF PAID IN STOCKHOLDERS'
STOCK SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- -------- ------ ---------- ----------- ---------------
Balance at August 31, 1992 --- 14,456 $ 14 $135,848 $ (30,662) $105,200
Issuance of common stock under:
Employee stock plans................. --- 253 1 1,703 --- 1,704
Formation of partnership............. --- 2,295 2 28,107 --- 28,109
Receipt of stock to satisfy note
receivable........................... --- (9) --- (129) --- (129)
Compensation related to employee
stock plans.......................... --- --- --- 521 --- 521
Preferred stock dividend accrual........ --- --- --- (1,497) --- (1,497)
Net loss................................ --- --- --- --- (26,017) (26,017)
Cumulative translation adjustment....... --- --- --- (6) --- (6)
--------- -------- ------ ---------- ----------- ---------------
Balance at August 31, 1993 --- 16,995 17 164,547 (56,679) 107,885
Issuance of common stock under:
Employee stock plans................. --- 104 --- 939 --- 939
Additional interest acquired in MPS. --- 2,000 2 20,498 --- 20,500
Compensation related to employee
stock plans.......................... --- --- --- 396 --- 396
Preferred stock dividend accrual........ --- --- --- (642) --- (642)
Reclassification of preferred stock..... 3 --- --- 28,539 --- 28,539
Cumulative effect of change in
accounting for investments in
debt and equity securities........... --- --- --- 559 --- 559
Change in unrealized gains and
losses on available-for-sale
securities........................... --- --- --- (1,174) --- (1,174)
Net loss................................ --- --- --- --- (31,630) (31,630)
Cumulative translation adjustment....... --- --- --- 34 --- 34
--------- -------- ------ ---------- ----------- ---------------
Balance at August 31, 1994 3 19,099 19 213,696 (88,309) 125,406
Issuance of common stock under
employee stock plans................ --- 148 --- 436 --- 436
Compensation related to employee
stock plans......................... --- --- --- 148 --- 148
Issuance of common stock for
business acquisition................ --- 154 --- 1,350 --- 1,350
Change in unrealized gains and
losses on available-for-sale
securities.......................... --- --- --- 478 --- 478
Net loss............................... --- --- --- --- (14,443) (14,443)
Cumulative translation adjustment...... --- --- --- 328 --- 328
--------- -------- ------ ---------- ----------- ---------------
Balance at August 31, 1995 3 19,401 $ 19 $216,436 $(102,752) $113,703
========= ======== ====== ========== =========== ===============
See accompanying Notes to Consolidated Financial Statements.
34
MYCOGEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED AUGUST 31,
-----------------------------------
1995 1994 1993
----------- ----------- -----------
OPERATING ACTIVITIES:
Net loss.............................. $(14,443) $(31,630) $(26,017)
Items which did not use cash:
Depreciation........................ 4,851 4,329 3,750
Amortization of intangible assets... 3,854 2,172 2,042
Amortization of prepaid contract
manufacturing...................... 284 -- --
Compensation related to employee
stock plans........................ 148 396 521
Special charges..................... -- 26,636 23,676
Minority interest................... -- (14,632) 726
Provision for doubtful accounts..... 292 3,179 --
Loss on disposal of assets.......... 693 344 659
Changes in operating assets and
liabilities:
Accounts and notes receivable....... (3,293) (2,180) (11,103)
Inventories......................... (1,834) 6,368 17,805
Prepaid expenses.................... (346) 430 (210)
Accounts payable.................... 3,014 (1,366) (13,126)
Deferred revenues................... 989 2,298 (1,390)
Other liabilities................... (669) (310) (573)
----------- ----------- -----------
Cash used in operating
activities....................... (6,460) (3,966) (3,240)
----------- ----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of
available-for-sale securities....... 8,972 33,258 25,190
Proceeds from maturities of
available-for-sale securities....... 21,049 29,483 59,394
Purchases of available-for-sale
securities.......................... (12,250) (34,753) (87,175)
Capital expenditures................. (6,566) (4,259) (4,827)
Payment from related party in
conjunction with the
formation of MPS.................... -- -- 5,719
Net cash acquired from (paid for)
business combinations............... -- (7,000) 1,711
Prepaid contract manufacturing....... (8,825) (2,079) --
Change in intangibles and other
assets.............................. (1,842) (2,578) (1,002)
----------- ----------- -----------
Cash provided by (used in)
investing activities............. 538 12,072 (990)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt......... 2,500 -- --
Payments on long-term debt........... (248) (10) (201)
Redemption of preferred stock........ -- (10,000) --
Proceeds from sale of common stock... 435 939 1,703
----------- ----------- -----------
Cash provided by (used in)
financing activities............. 2,687 (9,071) 1,502
----------- ----------- -----------
Effect of exchange rate changes
on cash and cash equivalents........ 241 96 (6)
----------- ----------- -----------
Decrease in cash and cash
equivalents......................... (2,994) (869) (2,734)
Cash and cash equivalents at
beginning of year................... 8,681 9,550 12,284
----------- ----------- -----------
Cash and cash equivalents at end
of year............................. $ 5,687 $ 8,681 $ 9,550
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
35
MYCOGEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are contained in brakets in
the following Notes to Consolidated Financial Statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and 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.
BASIS OF CONSOLIDATION
[The accompanying financial statements include the accounts of Mycogen
Corporation and its wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.]
CHANGE IN FISCAL YEAR-END AND RECLASSIFICATIONS
The Company changed its fiscal year-end from December 31 to August 31 and
has restated the results for the three years ended August 31, 1995. Certain
amounts in the 1994 and 1993 consolidated financial statements have been
reclassified to conform to the 1995 presentation.
FORMATION OF MPS
The initial formation of MPS in December 1992, which resulted in a 51%
ownership by the Company and a 49% ownership by Lubrizol, a related party,
involved (i) the exchange of $39.4 million in the Company's Series A preferred
stock and 156,981 shares of the Company's common stock for certain assets of
Agrigenetics Company; (ii) the exchange of 2,137,609 shares of the Company's
common stock for substantially all of the shares of capital stock of Lubrizol
Genetics, Inc., which was renamed Mycogen Plant Science, Inc. and (iii)
contributions by the Company, Lubrizol, and Mycogen Plant Science, Inc., of the
assets of Agrigenetics Company to MPS. On December 31, 1993 the Company
exchanged $7.0 million in cash and 2.0 million shares of the Company's common
stock for an additional 29.5% ownership of MPS and Lubrizol agreed to eliminate
the mandatory redemption provision of the Series A preferred stock. Also, as of
December 31, 1993, the partnership was reorganized as a corporation. As of
August 31, 1995, MPS is owned 80.54% by the Company and 19.46% by Lubrizol. The
consolidated financial statements of the Company include the operations of MPS
from December 1, 1992.
The Company has agreed to purchase Lubrizol's remaining 19.46% ownership in
MPS over time for additional Mycogen common stock or, after November 30, 2000,
for cash. Lubrizol's minority interest in MPS is recorded at the minimum agreed
upon purchase price. Lubrizol has agreed not to acquire additional shares of
the Company's common stock except (i) upon conversion of Series A preferred
stock, (ii) in exchange for Lubrizol's remaining interest in MPS, (iii) upon
approval by the Company's board of directors or (iv) in an amount so as to
enable Lubrizol to maintain ownership of at least 20% of the Company's
outstanding common stock.
The principal seed products of MPS are corn, soybean, sorghum, sunflower,
alfalfa and rape. [The acquisition of MPS was accounted for as a purchase.]
The following consolidated, pro forma, unaudited
36
summary of operations data assumes that the exchange for an additional ownership
interest in MPS occurred on September 1, 1993 and 1992 and that the formation of
MPS occurred on September 1, 1992.
Years ended August 31,
---------------------------
(In thousands except for share data) 1994 1993
-------------------------------------- ---------- ----------
Total revenues $ 112,760 $ 119,411
Net loss applicable to common shares $ (18,567) $ (8,350)
Net loss per common share $ (.97) $ (.44)
These pro forma results may not be indicative of the results of operations
that would have been reported if the transactions had occurred on the date
indicated, or which may be reported in the future. These results do not include
the nonrecurring special charges of $26.6 million in 1994 and $21.6 million in
1993 related to write-off amounts assigned to acquire MPS in-process technology.
SUPPLEMENTAL CASH FLOW INFORMATION
In conjunction with an acquisition in 1995, the exchange for an additional
ownership interest in MPS in 1994, adjustments to the 1993 purchase price of MPS
in 1994 and the formation of MPS in 1993, cash and noncash investing and
financing activities were allocated as follows:
Years ended August 31,
--------------------------------------
(In thousands) 1995 1994 1993
---------------------------------------- --------- ---------- ----------
Business acquisitions:
Fair value of assets acquired, other
than cash $ 1,350 $ 26,188 $ 124,055
Liabilities assumed -- -- (23,383)
Acquisition related costs -- -- (1,148)
Note payable issued -- -- (100)
Minority interest -- (1,688) (33,626)
Common stock issued (1,350) (20,500) (28,109)
Preferred stock returned (issued) -- 3,000 (39,400)
Net cash paid for (acquired from)
--------- ---------- ----------
acquisitions $ -- $ 7,000 $ (1,711)
========= ========== ==========
Other cash and noncash investing and financing activities were as follows:
Years ended August 31,
----------------------------------
(In thousands) 1995 1994 1993
----------------------------------- --------- --------- ---------
Dividends on preferred stock $ 1,503 $ 1,604 $ 1,497
========= ========= =========
Cash payments for interest $ 389 $ 254 $ 217
========= ========= =========
INDUSTRY SEGMENTS AND FOREIGN OPERATIONS
The Company has reorganized its five operating units into two major
segments, Seed and Crop Protection. This change is a result of management's
intention to develop separate strategies to maximize the assets and technologies
in these two business segments. For comparative purposes, the Company has
presented segment and disclosures for the years ended August 31, 1995, 1994 and
1993.
Seed segment revenues are derived mainly from sales of planting seeds in
North America and Europe. The five principal product lines are corn, soybean,
sunflower, other and international. Crop Protection
37
segment revenues are derived from customized crop protection services provided
by Soilserv in California and Arizona and sales of biopesticide products mainly
in North America and Far East Asia. Operating revenues and seed costs are
impacted by weather. Weather can influence pest populations, the effectiveness
of pesticides and seeds, seed production yields, commodity prices, growers'
planting decisions and other factors impacting revenues and costs. Operating
revenues are also dependent on a number of other factors, including the degree
of market acceptance of products, the strength of competition in the marketplace
and U.S. and foreign government policies which can affect crop acreage and
farmer income. Acres planted determine quantities of planting seed, crop
protection services and biopesticide products purchased by growers.
Financial information by segment is as follows:
Years ended August 31,
-----------------------------------
(In thousands) 1995 1994 1993
------------------------------- --------- --------- ---------
Operating Revenues
Seed $ 65,329 $ 70,329 $ 79,865
Crop Protection 40,840 34,054 32,718
--------- --------- ---------
Total $ 106,169 $ 104,383 $ 112,583
========= ========= =========
Contract and Other Revenues
Seed $ 5,606 $ 5,486 $ 3,458
Crop Protection 1,363 2,891 1,970
Corporate 80 -- --
--------- --------- ---------
Total $ 7,049 $ 8,377 $ 5,428
========= ========= =========
Research and Development Expenses
Seed $ 14,827 $ 12,156 $ 11,953
Crop Protection 6,354 6,015 7,692
--------- --------- ---------
Total $ 21,181 $ 18,171 $ 19,645
========= ========= =========
Operating Loss
Seed $ (11,922) $ (45,052) $ (19,266)
Crop Protection (2,336) (859) (6,268)
Corporate (1,259) (2,894) (2,461)
--------- --------- ---------
Total $ (15,517) $ (48,805) $ (27,995)
========= ========= =========
Identifiable Assets
Seed $ 87,238 $ 79,439 $ 90,615
Crop Protection 41,994 38,202 33,006
Corporate 30,376 48,085 77,912
--------- --------- ---------
Total $ 159,608 $ 165,726 $ 201,533
========= ========= =========
38
(In thousands) Years ended August 31,
------------------------------- ------------------------------
1995 1994 1993
-------- -------- --------
Depreciation and Amortization
Seed $ 4,199 $ 3,789 $ 2,257
Crop Protection 3,381 1,815 2,625
Corporate 1,125 897 910
-------- -------- --------
Total $ 8,705 $ 6,501 $ 5,792
======== ======== ========
Capital Expenditures
Seed $ 3,263 $ 2,776 $ 2,658
Crop Protection 213 955 1,292
Corporate 3,090 528 877
-------- -------- --------
Total $ 6,566 $ 4,259 $ 4,827
======== ======== ========
[Operating revenues, net of estimated returns, are recognized when the
product is shipped to the customer or the service is provided.]
[The assets and liabilities of non-U.S. subsidiaries are translated into
U.S. dollars at exchange rates in effect at the balance sheet date. Operating
results are translated at weighted average exchange rates in effect during the
period. Net unrealized translation adjustments are recorded as a separate
component of stockholders' equity. Foreign currency exchange gains and losses
are included in the determination of net loss.] Foreign operations and export
sales were not significant for the years ended August 31, 1995, 1994 and 1993.
CASH, CASH EQUIVALENTS AND SECURITIES AVAILABLE-FOR-SALE
The Company invests its excess cash in U.S. Government securities,
certificates of deposit and debt instruments of financial institutions and
corporations with strong credit ratings. The Company has established guidelines
that maintain safety and liquidity and match maturities to anticipated cash
requirements. These guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates.
[All debt securities are classified as available-for-sale and are carried
at fair value, with unrealized gains and losses reported in a separate component
of stockholders' equity. The cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. The
amortization, along with realized gains and losses, interest and dividends are
included in interest income. The cost of securities sold is based on the
specific identification method.]
Gross realized gains on sales of available-for-sale securities totaled
$10,000 and $162,000 and gross realized losses totaled $110,000 and $15,000 for
the years ended August 31, 1995 and 1994, respectively. Available-for-sale
securities are summarized as follows:
August 31, 1995
----------------------------------------------------------------
Gross Gross
unrealized unrealized Estimated
(In thousands) Cost gains losses fair value
------------------------------ ---------- ------------- -------------- --------------
Securities of the U.S.
government and its
agencies $ 11,046 $ -- $ (128) $ 10,918
Corporate debt securities 1,004 -- (9) 995
---------- ------------- -------------- --------------
Total $ 12,050 $ -- $ (137) $ 11,913
========== ============= ============== ==============
39
August 31, 1994
----------------------------------------------------------------
Gross Gross
unrealized unrealized Estimated
(In thousands) Cost gains losses fair value
------------------------------ ---------- ------------- -------------- --------------
Securities of the U.S.
government and its
agencies $ 23,659 $ 5 $ (581) $ 23,083
Corporate debt securities 6,162 -- (39) 6,123
---------- ------------- -------------- --------------
Total $ 29,821 $ 5 $ (620) $ 29,206
========== ============= ============== ==============
There were no available-for-sale securities with original maturities of three
months or less that were classified as cash equivalents at August 31, 1995 or
1994. The amortized cost and estimated fair value of available-for-sale
securities, by contractual maturity, are as follows:
August 31, 1995
-------------------------
Estimated
(In thousands) Cost fair value
---------------------------- ---------- ------------
Due in one year or less $ 3,004 $ 2,987
Due after one year through
five years 4,013 3,981
Mortgage-backed securities 5,033 4,945
---------- ------------
Total $ 12,050 $ 11,913
========== ============
Based upon management's intention to hold these securities as available for
sale at any time for use in operations, all available-for-sale securities are
classified as current even though the actual maturity may extend beyond one
year.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable at August 31 are comprised of:
(In thousands) 1995 1994
---------------------------------- -------- --------
Trade accounts receivable $ 27,902 $ 26,854
Notes and other receivables 2,085 1,275
Receivables from related parties -- 188
-------- --------
29,987 28,317
Allowance for doubtful accounts (2,585) (3,915)
-------- --------
$ 27,402 $ 24,402
======== ========
At August 31, 1995, the significant concentration of the Company's trade
receivables were from farmers located in the United States and various foreign
countries whose ability to pay is dependent upon the agribusiness economics
prevailing in that specific area of the world. As a result, no significant
geographic concentration of credit risk exists.
INVENTORIES
[Seed inventories, which comprise 86% and 79% of total inventories at
August 31, 1995 and 1994, respectively, are stated at the lower of average cost
or market. All other inventories are stated at the lower of first-in first-out
cost, or market.]
40
Inventories at August 31 are comprised of:
(In thousands) 1995 1994
-------------------------------- -------- --------
Raw materials and supplies $ 5,895 $ 6,564
Work in process 3,578 3,908
Finished goods 24,160 21,242
-------- --------
$ 33,633 $ 31,714
======== ========
Planting seed is produced by independent growers who contract specific
acreage for the production of seed for the Company. The compensation of the
independent growers is determined based on yield, contracted acreage and
commodity prices. The commitment for grower compensation is accrued as seed is
delivered to the Company. The Company's growers select market prices throughout
the year to establish selling prices for seed crops grown for the Company. The
Company follows a policy, common in the industry, of hedging certain of these
seed inventory purchase commitments to minimize risk due to market price
fluctuations. [Gains and losses on these contracts are recorded as adjustments
to inventory cost when the contracts are closed.] At August 31, 1995, the
Company had short-term futures contracts totaling $5.3 million for the purchase
of commodities (principally soybean and corn) at various dates during 1996. The
fair value of these contracts at August 31, 1995 is $5.7 million.
Production of hybrid seed involves various environmental risks. The
parental inbred lines which are used in production are more sensitive to adverse
conditions than are commercial hybrids grown by farmers. Weather is the most
significant variable. Unfavorable weather can adversely affect seed supplies
and unit costs. To protect against these risks, the Seed segment maintains
multiple production locations spread geographically in addition to maintaining
certain levels of inventory that are available for sale during the subsequent
planting season. While the Company believes that its inventory values are
realizable, risks exist that may render portions of the Company's inventory
obsolete or excess. The risk factors include weather and poor planting
conditions that may delay, prevent or change the planting of certain crops, U.S.
and foreign government policies which can affect crop acreage and farmer income
and the introduction of hybrids by competitors that may render the Company's
hybrids obsolete.
PROPERTY, PLANT AND EQUIPMENT
[Property, plant and equipment is recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful lives, ranging
from 15 to 30 years for buildings and improvements and 3 to 15 years for
machinery and equipment. Amortization of leasehold improvements is provided
using the straight-line method over the shorter of the life of the respective
lease or estimated useful life of the asset.] Property, plant and equipment at
August 31 is comprised of:
(In thousands) 1995 1994
------------------------------ ---------- ----------
Land and improvements $ 5,173 $ 5,334
Buildings and improvements 24,385 21,422
Machinery and equipment 33,627 30,632
Leasehold improvements 646 606
Construction in progress 2,519 2,578
---------- ----------
66,350 60,572
Accumulated depreciation and
amortization (16,704) (12,035)
---------- ----------
$ 49,646 $ 48,537
========== ==========
41
INTANGIBLE ASSETS
Intangible assets are amortized [using the straight-line method over each
asset's estimated useful life ranging from three to twenty-five years.]
Intangible assets at August 31 are comprised of:
Useful 1995
----------------------------------------
Life Accumulated
(In thousands) in years Cost Amortization Net Value
--------------------------------- -------- -------------- -----------
Goodwill 25 $ 10,342 $ (1,638) $ 8,704
Purchased technology 3-15 5,584 (2,832) 2,752
Patents 10 5,909 (649) 5,260
Non-compete agreement 5-7 2,732 (1,689) 1,043
-------- -------------- -----------
$ 24,567 $ (6,808) $ 17,759
======== ============== ===========
Useful 1994
----------------------------------------
Life Accumulated
(In thousands) in years Cost Amortization Net Value
--------------------------------- -------- -------------- -----------
Goodwill 25 $ 9,769 $ (1,221) $ 8,548
Purchased technology 15 7,315 (2,334) 4,981
Patents 10 4,101 (342) 3,759
Non-compete agreement 5 2,050 (1,247) 803
-------- -------------- -----------
$ 23,235 $ (5,144) $ 18,091
======== ============== ===========
Effective in 1995, the Company elected the early adoption of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." In accordance with the Statement,
prior period financial statements have not been restated to reflect the change
in accounting principle. An impairment loss of $1.6 million was recognized by
the Crop Protection segment during 1995, reducing the carrying amount of a paid-
up, royalty-free, non-exclusive license included in purchased technology to its
fair value as a result of the discontinuation of a certain product development
program. The fair value was determined using discounted cash flow projections
for this product. The impairment loss is included in amortization expense in
the Statement of Operations.
[The carrying value of intangible assets are reviewed upon a change in
market conditions or business strategy. If the projected net cash flows from
product revenues, royalty or license income at that time are less than the
carrying value of the intangible asset, a charge for impairment is recognized to
reduce the carrying value of the intangible asset to its fair value.]
OTHER ASSETS
The Company has an exclusive manufacturing agreement through 2010 for
certain of its biopesticide products. Under the terms of the agreement, the
Company will pay for the actual cost of manufacturing, excluding depreciation,
plus a fee based on the actual number of units produced. Additionally, the
Company has paid $10.9 million to the manufacturer to fund the construction of a
manufacturing facility. This payment has been classified as an other asset which
is being amortized over the life of the agreement. Accumulated amortization at
August 31, 1995 and amortization expense in 1995 both totaled $284,000.
42
LINE OF CREDIT
The Company has available a $25 million unsecured revolving bank line of
credit, of which no amounts were outstanding at August 31, 1995 and 1994. This
line, which expires November 30, 1995, provides for short-term borrowings in
U.S. dollars at the bank's prime rate (8.75% at August 31, 1995) plus .5% or in
Eurodollars at an adjusted Eurodollar rate (5.875% at August 31, 1995) plus 2%.
On an annual basis, the Company is required to pay a fee of .1% of the total
commitment and a commitment fee of .25% on the unused portion. The credit
agreement contains certain covenants which include the maintenance of a minimum
consolidated net worth, maintenance of certain financial ratios, certain
limitations on the incurrence of indebtedness or liens on the Company's assets
and maintenance of a minimum cash, cash equivalent and securities available-for-
sale balance of $10 million.
LONG-TERM LIABILITIES
Long-term liabilities (amounts due after one year) at August 31 are as
follows:
(In thousands) 1995 1994
---------------------------------------- -------- --------
Unsecured note payable to bank,
variable interest at bank's daily
reference rate (8.75% at August 31,
1995), due in monthly installments
through 2001 $ 2,262 $ --
Pension and other liabilities 1,767 2,547
-------- --------
4,029 2,547
Less current portion included in other (738) (1,340)
current liabilities -------- --------
Total long-term liabilities $ 3,291 $ 1,207
======== ========
The note payable matures $357,000 per year through 2001. The note contains
covenants which include certain limitations on the incurrence of indebtedness or
liens on the Company's assets and the maintenance of a minimum consolidated net
worth, cash flow and profitability. The Company is also required to maintain a
minimum cash, cash equivalents and securities available-for-sale balance of $10
million.
RETIREMENT PLANS
The Company has a tax deferred retirement and savings plan under Section
401(k) of the Internal Revenue Code whereby eligible employees may defer up to
20% of their gross pay through payroll deductions and contribute it to the plan.
The Company has the option to match a portion of the savings contributions as
prescribed in the plan not to exceed 3% of gross pay. The Company's Board of
Directors has authorized matching contributions through December 1995 not to
exceed 3% of gross pay. Matching contributions during the years ended August
31, 1995 and 1994 totaled $531,000 and $489,000, respectively. No matching
contributions were made during the year ended August 31, 1993. Effective
January 1, 1994, MPS' 401(k) plan was combined with the Company's 401(k) plan.
During 1993 the Company's matching contributions to the MPS plan totaled
$267,000.
COMMITMENTS
At August 31, 1995, the Company had operating lease commitments on certain
premises, machinery and office equipment which expire at various dates through
2010. Minimum future commitments under non-cancelable lease agreements having
terms in excess of one year total: 1996, $428,000; 1997, $345,000; 1998,
$242,000; 1999, $228,000; 2000, $203,000 and thereafter, $640,000. The Company
also leases equipment and other facilities on a month-to-month basis. Rent
expense under operating leases totaled $2.0 million, $1.8 million, and $1.4
million for years ended 1995, 1994 and 1993, respectively.
43
The Company maintains an unsecured irrevocable standby letter of credit
which secures the Company's workers compensation self insurance retention. At
August 31, 1995 the outstanding obligation was $281,000.
NET LOSS PER COMMON SHARE
[Net loss per common share is determined by deducting dividends on
preferred stock from net loss and dividing the net result by the weighted
average number of common shares outstanding during the year. Common shares
issuable under common stock equivalents and convertible preferred stock are not
included in the computation of net loss per common share because their effect
was not dilutive.]
STOCK INCENTIVE PLANS
Directors and key employees have been issued Mycogen stock options under
the Company's 1992 and 1983 Stock Option Plans, as amended. Information about
the status of the plans is presented below:
Shares Average Price
----------------------------
Balance at August 31, 1992 1,837,729 $ 11.47
Granted 1,254,500 $ 12.04
Exercised (163,397) $ 7.52
Canceled (60,012) $ 13.76
--------------
Balance at August 31, 1993 2,868,820 $ 11.90
Granted 158,500 $ 10.66
Exercised (51,037) $ 9.28
Canceled (175,164) $ 12.95
--------------
Balance at August 31, 1994 2,801,119 $ 11.81
Granted 3,208,103 $ 8.63
Exercised (14,193) $ 7.92
Canceled (2,687,843) $ 12.00
--------------
Balance at August 31, 1995 3,307,186 $ 8.59
==============
In December 1994 the Company, at the election of the option holder,
repriced 2,209,603 outstanding options through cancellation of options with an
average exercise price of $12.62 and a regrant of new options at an exercise
price of $8.50. The new options vest in equal monthly installments over a new
36-month period measured from December 1994. Of the 3,307,186 outstanding
options, 876,710 were exercisable at August 31, 1995. As of August 31, 1995, a
total of 4,413,441 shares of common stock were reserved for future issuance
under the plans and 1,106,255 shares of common stock were available for future
grants.
Pursuant to the Company's 1990 Restricted Stock Issuance Plan, officers
were awarded a total of 96,500 and 35,000 shares of restricted stock in 1995 and
1993, respectively. As of August 31, 1995, a total of 123,500 shares of common
stock were reserved for future issuance under the plan. Compensation expense
related to these stock plans was $148,000, $396,000 and $521,000 in 1995, 1994
and 1993, respectively. Unamortized deferred compensation expense with respect
to restricted stock issued aggregated $837,000 and $143,000 at August 31, 1995
and 1994, respectively.
Pursuant to the Company's 1988 Employee Stock Purchase Plan, employees
purchased 42,334 shares at an average price of $7.65 per share, 53,264 shares at
an average price of $8.74 per share and 44,220 shares at an average price of
$10.75 per share in 1995, 1994 and 1993, respectively. As of August 31, 1995,
there were 187,761 shares of common stock reserved for future issuance under the
Plan.
44
STOCKHOLDER RIGHTS PLAN
In February 1992, the Company adopted a Stockholder Rights Plan, which has
been amended since 1992. The Plan provides for the distribution of a preferred
stock purchase right (a "Right") as a dividend for each share of the Company's
common stock held of record immediately prior to a third party tendering to
purchase 25% or more of the Company's common stock. Under certain conditions
involving an acquisition by any person or group of 25% or more of the Company's
common stock, the Rights permit the holders (other than the 25% holder) to
purchase the Company's common stock at a 50% discount upon payment of an
exercise price per Right. In addition, in the event of certain business
combinations, the Rights permit the purchase of the common stock of an acquirer
at a 50% discount. Special provisions permit Lubrizol to maintain its equity
interest in the Company and to convert the shares of Series A preferred stock
and Lubrizol's remaining interest in MPS into the Company's common stock without
triggering the Rights. Under certain conditions, the Rights may be redeemed by
the Board of Directors at a price of $.01 per Right. The Rights have no voting
privileges and are attached to and automatically trade with the Company's common
stock. Unless extended, the Rights will expire on March 6, 2002.
SENIOR CONVERTIBLE CUMULATIVE PREFERRED STOCK, SERIES A
In connection with the formation of MPS in 1992, the Company issued shares
of Series A preferred stock with a par value of $.001 per share to Lubrizol. At
August 31, 1995 Lubrizol owned 3,100 shares of Series A preferred stock. The
Series A preferred stock has a liquidation preference over the Company's common
stock of $10,000 per share plus all accrued but unpaid dividends. Dividends are
cumulative and are payable quarterly at the rate of 5% through November 1996,
8.5% from November 1996 through November 2000 and the higher of 10% or prime
plus 3% per annum thereafter. The dividends are payable in additional shares of
Series A preferred stock through November 1997 and, thereafter, in cash. Each
share of preferred stock is convertible into the Company's common stock at the
lower of $17.96 per share (or approximately 557 shares) or 25% over the average
closing price of the Company's common stock for the 60 days prior to conversion.
The Company has reserved up to 1,998,301 shares of common stock, which
represents the maximum number of shares that could be issued upon conversion.
The Series A preferred stock does not have voting privileges.
During 1994 the Company redeemed $10 million of the Series A preferred
stock under a mandatory redemption feature. Effective December 31, 1993 all
future mandatory redemptions have been eliminated and the preferred stock was
reclassified and reported as a component of Stockholders' Equity. The Company
is required to maintain certain leverage and liquidity ratios. The changes in
the number of shares of preferred stock issued and the aggregate liquidation
preference are as follows:
Aggregate
Number of Liquidation
(In thousands except share data) Shares Preference
----------------------------------- ------------- -----------------
Balance at August 31, 1993 4,089 $ 40,897
Preferred stock dividend accrual 161 1,604
Redemption (1,000) (10,000)
Preferred stock returned (300) (3,000)
------------- -----------------
Balance at August 31, 1994 2,950 29,501
Preferred stock dividend accrual 150 1,503
------------- -----------------
Balance at August 31, 1995 3,100 $ 31,004
============= =================
45
CONTRACT AND OTHER REVENUES
[Research and other contract revenues are recorded as earned based on the
percentage of completion basis or on the performance requirements of the
contracts. Payments in excess of amounts earned are deferred. Research costs
are expensed as incurred.] Costs and expenses related to research contracts
totaled $3.0 million, $4.7 million and $3.5 million in 1995, 1994 and 1993,
respectively.
RELATED PARTY TRANSACTIONS
At August 31, 1995, Lubrizol owned 6,134,067 shares, or 31.6%, of the
Company's outstanding common stock, as well as shares of preferred stock which,
at August 31, 1995 were convertible into 1,726,295 shares of the Company's
common stock. In December 1992, MPS entered into a Technology and Development
Agreement, as amended and restated, with Lubrizol pursuant to which Lubrizol
will provide to MPS a minimum of $4.6 million of funding from September 1995
through December 1998 for research and development projects related to planting
seeds that yield plants capable of producing oils with special characteristics.
In exchange, MPS has granted to Lubrizol an exclusive, perpetual, worldwide,
royalty-free license to such planting seeds developed or acquired by MPS.
Lubrizol is free to commercialize such plants and byproducts for any purpose
other than as pesticides and human and animal pharmaceuticals, which restriction
will remain in place for a period of ten years after Lubrizol ceases to provide
at least $1 million of annual funding to MPS. Related party research revenues
under these agreements totaled $2.6 million, $3.3 million and $2.8 million in
1995, 1994 and 1993, respectively. MPS is the exclusive supplier of specified
planting seed to a division of Lubrizol and manages the production of crops from
such planting seed. Related party operating revenues recognized under this
arrangement totaled $2.5 million, $1.9 million and $4.5 million in 1995, 1994
and 1993, respectively.
SPECIAL CHARGES
In connection with the acquisitions of ownership interests in MPS in 1994
and 1993, $26.6 million and $21.6 million, respectively, of the purchase price
was allocated to certain technologies not yet completed and, therefore, was
written-off as in-process technology as of the respective acquisition dates.
In August 1993, the Company restructured certain functional areas. Four
separate seed divisions were merged, consolidating a number of overlapping sales
territories. Also, biopesticide development and plant science and breeding
programs were combined to focus on new, technology-based products. This
restructuring resulted in charges totaling $2.1 million during 1993 which
principally related to severance and relocation. In December 1993, the Company
also decided to consolidate certain manufacturing locations and eliminate
certain brand names and hybrids. This resulted in additional restructuring
charges during 1994 of $9.8 million for excess and obsolete inventories, plant
shut-down and the termination of MPS's pension plan.
INCOME TAXES
The Company accounts for income taxes under the liability method required
by FASB Statement No. 109, "Accounting for Income Taxes." For federal and state
income tax purposes, the Company changed its year-end from December 31 to August
31 to conform with the consolidated financial statements. Certain 1994 and 1993
tax amounts have been restated to conform with the 1995 presentation.
At August 31, 1995, the Company has a federal tax net operating loss
carryforward of approximately $51 million and a California net operating loss
carryforward of approximately $13 million. The Company has federal and state
research tax credit carryforwards totaling approximately $2.9 million and $.5
million, respectively. The federal tax loss and credit carryforwards will expire
in years 1997 through 2011 unless previously utilized. California tax loss and
credit carryforwards, if not utilized, will expire in years 1997 through 2000.
46
Foreign taxable income has been eliminated through the use of net operating
losses in the countries where the income was generated.
The Company incurred a change in ownership, as defined by Internal Revenue
Code Section 382, during 1992. Such change of ownership could limit the use in
any one year of the full amount of the net operating loss and tax credit
carryforwards previously described. However, the Company believes that the
limitation will not have a material impact upon the utilization of its
carryforwards. The Company's use of its net operating loss and tax credit
carryforwards could be further limited in the event of future cumulative changes
in stock ownership.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of August 31 are as
follows:
(In thousands) 1995 1994
---------------------------------------- --------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 18,761 $ 10,933
Research credit carryforwards 3,418 3,408
Tax basis of inventory greater than 2,787 3,026
book
Capitalized research expenditures 2,571 4,031
Tax basis of receivables greater than 1,177 1,320
book
Other items with tax basis greater 2,382 1,769
than book
--------- ---------
Total deferred tax assets 31,096 24,487
Less: Valuation allowance (30,499) (23,641)
--------- ---------
Net deferred tax assets 597 846
Net deferred tax liabilities (597) (846)
--------- ---------
Net deferred taxes $ -- $ --
========= =========
Due to the uncertainty surrounding the future realization of the deferred
tax assets, a valuation allowance of $30.5 million was recorded at August 31,
1995 against deferred tax assets.
For financial reporting purposes, net income (loss) before dividends on
preferred stock for the years ended August 31 includes the following components:
(In thousands) 1995 1994 1993
----------------------- --------- --------- ---------
Pretax income (loss):
United States $ (17,785) $ (29,474) $ (25,549)
Foreign 3,342 (2,156) (468)
--------- --------- ---------
$ (14,443) $ (31,630) $ (26,017)
========= ========= =========
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense for the
years ended August 31 is:
1995 1994 1993
---------- ---------- ----------
Tax at U.S. statutory rate 35% 35% 35%
Effect of net operating losses (35%) (35%) (35%)
---------- ---------- ----------
0% 0% 0%
========== ========== ==========
47
SUBSEQUENT EVENT
In September 1995, the Company signed a letter of intent for a technology
and development collaboration with Pioneer to develop transgenic crops with
built-in insect resistance. Under the agreement, Pioneer will provide $30
million to purchase three million shares of the Company's common stock and $21
million in research and development funding over the next five years. Pioneer
will receive non-exclusive rights to all Bt crop protection technology and
associated technologies owned or developed by the Company during the next 10
years. The Company and Pioneer will be able to market their own products
resulting from the collaboration, royalty-free, in North America. Pioneer will
pay a royalty to Mycogen for jointly developed products that it markets outside
of North America. The Company will have exclusive worldwide rights to license
jointly developed technology to third parties. No proprietary seed lines will be
shared by the companies. The transaction is subject to completion of definitive
agreements.
48
MYCOGEN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 1995 AND 1994
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
- ----------------------------------------------------------------------------------------------------
Year ended August 31, 1995
- --------------------------
Allowance for doubtful accounts $ 3,915 $ 292 $ -- $ (1,622)/1/ $ 2,585
Inventory allowances $ 2,099 $ 4,602 $ -- $ (2,413)/2/ $ 4,288
Year ended August 31, 1994
- --------------------------
Allowance for doubtful accounts $ 915 $ 3,179 $ -- $ (179)/1/ $ 3,915
Inventory allowances $ 3,108 $14,679 $ -- $(15,688)/2/ $ 2,099
/1/ Amount relates to account receivable written off.
/2/ Amount relates to inventory that was written off.
49
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Mycogen Corporation
We have audited the accompanying consolidated balance sheets of Mycogen
Corporation as of August 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended August 31, 1995. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mycogen
Corporation at August 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth herein.
Ernst & Young LLP
San Diego, California
October 17, 1995
50
COPIES OF FORM 10-K
Shareowners may reach Mycogen's Investor Relations group by calling (800) 745-
7475. To obtain a copy of Mycogen Corporation's Form 10-K filed with the
Securities and Exchange Commission or other company information, please call
between the hours of 7:30 a.m. and 4:30 p.m., PST/PDT, or write:
Investor Relations
Mycogen Corporation
5501 Oberlin Drive
San Diego, CA 92121
or send a telefax message to:
(619) 453-5494
ANNUAL MEETING
The Annual Meeting of Mycogen Corporation will be held at 10 a.m. on December
14, 1995, in the Corn Conference room at the Company's headquarters located at
5501 Oberlin Drive, San Diego, CA. All shareowners are cordially invited to
attend.
53
MYCOGEN CORPORATION
QUARTERLY FINANCIAL DATA
(UNAUDITED)
The Company has elected to report quarterly financial data for fiscal year
1995 as a result of the change in fiscal year end. The new fiscal quarters end
in November, February, May and August.
(In thousands, except per share data) Quarter
-------------------------------------------------------------------------------
First Second Third Fourth
1995:
Net operating revenues $ 9,509 $27,661 $55,869 $ 13,130
Contract and other revenues 1,896 1,715 1,971 1,467
Cost of operating expenses 6,245 16,997 36,529 11,214
Operating expenses 12,704 13,589 14,035 17,422
Operating income (loss) (7,544) (1,210) 7,276 (14,039)
Non-operating income 529 371 63 111
Dividends on preferred stock 369 373 378 383
Net income (loss) (7,384) (1,212) 6,961 (14,311)
Net income (loss) per common share (.39) (.06) .36 (.74)
52