FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1995 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ____________________ Commission file number: 0-15881 ------- MYCOGEN CORPORATION ------------------------------------------------------------------ (Exact name of registrant as specified in its charter) California 95-3802654 - ---------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5501 Oberlin Drive, San Diego, California 92121 - ------------------------------------------ ---------------- (Address of principal executive offices) (Zip Code) (619) 453-8030 -------------- (Registrant's telephone number, including area code) 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 ----- ----- 22,525,767 shares of Common Stock were outstanding as of January 9, 1996. 1 PART 1. - FINANCIAL INFORMATION - ------------------------------- Item 1. Financial Statements MYCOGEN CORPORATION INTERIM CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) THREE MONTHS ENDED NOVEMBER 30, 1995 1994 ------- -------- (UNAUDITED) Net operating revenues.................................. $12,049 $ 9,509 Contract and other revenues: Unrelated parties..................................... 896 1,054 Related party......................................... 675 842 ------- -------- Total revenues...................................... 13,620 11,405 ------- -------- Costs and expenses: Cost of operating revenues............................ 7,823 6,245 Selling, general and administrative................... 8,181 7,015 Research and development.............................. 4,579 5,196 Amortization of intangible assets..................... 604 493 ------- -------- Total costs and expenses............................ 21,187 18,949 ------- -------- Operating loss.......................................... (7,567) (7,544) Interest income and expense, net...................... 148 564 Exchange gain (loss).................................. 7 (35) ------- -------- Net loss................................................ (7,412) (7,015) Dividends on preferred stock............................ (384) (369) ------- -------- Net loss applicable to common shares.................... $(7,796) $(7,384) ======= ======== Net loss per common share............................... $ (.40) $ (.39) ======= ======== Weighted average number of shares....................... 19,447 19,099 ======= ======== See accompanying Notes to Interim Consolidated Condensed Financial Statements. 2 MYCOGEN CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands, except par value data) NOVEMBER 30, AUGUST 31, 1995 1995 ASSETS (UNAUDITED) (NOTE) ------------ ---------- Current assets: Cash and cash equivalents............................. $ 14,636 $ 5,687 Securities available-for-sale......................... 8,706 11,913 Accounts and notes receivable, net of allowances...... 13,125 27,402 Inventories........................................... 46,967 33,633 Prepaid expenses...................................... 1,762 1,267 ------------ ---------- Total current assets................................ 85,196 79,902 Net property, plant and equipment....................... 49,332 49,646 Net intangible assets................................... 17,570 17,759 Other assets............................................ 11,879 12,301 ------------ ---------- Total assets............................................ $ 163,977 $ 159,608 ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings................................. $ 6,000 $ - Accounts payable...................................... 11,269 6,760 Accrued compensation and related taxes................ 3,792 3,553 Deferred revenues..................................... 7,125 5,670 Other current liabilities............................. 3,565 5,225 ------------ ---------- Total current liabilities........................... 31,751 21,208 Long-term liabilities................................... 3,486 3,291 Minority interest....................................... 21,406 21,406 Stockholders' equity: Senior convertible cumulative preferred stock: Series A preferred stock, $.001 par value, 3,940 shares authorized; 3,139 and 3,100 shares issued to a related party and outstanding at November 30, 1995 and August 31, 1995, respectively; aggregate liquidation preference, $31,390 and $31,004, respectively........................................ - - Common stock, $.001 par value, 40,000,000 shares authorized; 19,476,958 and 19,400,764 shares issued and outstanding at November 30, 1995 and August 31, 1995, respectively.................................. 19 19 Additional paid in capital............................ 217,479 216,436 Deficit............................................... (110,164) (102,752) ------------ ---------- Total stockholders' equity.......................... 107,334 113,703 ------------ ---------- Total liabilities and stockholders' equity.............. $ 163,977 $ 159,608 ============ ========== Note: The balance sheet at August 31, 1995 has been derived from the audited financial statements at that date. See accompanying Notes to Interim Consolidated Condensed Financial Statements. 3 MYCOGEN CORPORATION INTERIM CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) THREE MONTHS ENDED NOVEMBER 30, 1995 1994 -------- -------- (UNAUDITED) Operating activities: Net loss................................................... $ (7,412) $ (7,015) Items which did not use cash: Depreciation............................................. 1,144 1,298 Amortization of intangible assets........................ 587 493 Other expense not requiring cash......................... 455 209 Changes in operating assets and liabilities: Accounts and notes receivable............................ 14,378 10,999 Inventories.............................................. (13,334) (16,558) Prepaid expenses......................................... (495) (354) Accounts payable......................................... 4,509 10,588 Deferred revenues........................................ 1,455 2,047 Other current liabilities................................ (1,073) (2,079) -------- -------- Cash provided by (used in) operating activities........ 214 (372) -------- -------- Investing activities: Proceeds from sales of available-for-sale securities....... 2,993 - Proceeds from maturities of available-for-sale securities.. 291 2,000 Capital expenditures....................................... (812) (1,032) Prepaid contract manufacturing............................. - (3,588) Change in intangibles and other assets..................... (472) (335) -------- -------- Cash provided by (used in) investing activities........ 2,000 (2,955) -------- -------- Financing activities: Net change in short-term borrowings........................ 6,000 - Payments on long-term borrowings........................... (110) (4) Proceeds from sale of common stock......................... 782 82 -------- -------- Cash provided by financing activities.................. 6,672 78 -------- -------- Effect of exchange rate changes on cash and cash equivalents. 63 35 -------- -------- Increase (decrease) in cash and cash equivalents............. 8,949 (3,214) Cash and cash equivalents at beginning of period............. 5,687 8,681 -------- -------- Cash and cash equivalents at end of period................... $ 14,636 $ 5,467 ======== ======== See accompanying Notes to Interim Consolidated Condensed Financial Statements. 4 PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements (continued). Mycogen Corporation ------------------- Notes to Interim Consolidated Condensed Financial Statements General - ------- The accompanying financial statements include the accounts of Mycogen Corporation, its wholly-owned subsidiaries and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim financial statements have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (which include only normal recurring adjustments) necessary to state fairly the financial position, results of operations and cash flows as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Annual Report and Form 10-K of the Company for the fiscal year ended August 31, 1995. The Company's business is highly seasonal. Operating revenues are expected to be concentrated principally in the quarters ending in February and May as a result of the North American agricultural growing season. Consequently, operating revenues and results of operations for the three months ended November 30, 1995 are not indicative of operating revenues and results to be expected for a full fiscal year. Supplemental Schedule of Non-Cash Investing and Financing Activities - -------------------------------------------------------------------- Non-cash investing and financing activities are as follows: Three months ended November 30, ------------------ (In thousands) 1995 1994 ------- ------- Dividends on preferred stock $ 384 $ 369 ======= ======= 5 Inventories - ----------- Inventories are comprised of: November 30, August 31, (In thousands) 1995 1995 ------------ ---------- Raw materials and supplies $ 4,789 $ 5,895 Work in process 7,920 3,578 Finished goods 34,258 24,160 ------------ ---------- Total $46,967 $33,633 ============ ========== Accumulated Depreciation and Amortization - ----------------------------------------- Accumulated depreciation of property, plant and equipment was $18.3 million and $16.7 million at November 30, 1995 and August 31, 1995, respectively. Accumulated amortization of intangible assets was $7.4 and $6.8 million at November 30, 1995 and August 31, 1995, respectively. Income Taxes - ------------ No provision for income tax is recognized for the three months ended November 30, 1995 since the Company anticipates that the effective tax rate for the year ending August 31, 1996 will be zero due to the available net operating loss carryforwards. Net Loss Per Common Share - ------------------------- Net loss per common share for the three months ended November 30, 1995 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 respective period. The dilutive effect of common shares issuable under stock options was less than 3% and was not included in the computation of primary earnings per share. Subsequent Event - ---------------- In December 1995, the Company entered into an agreement with Pioneer to develop transgenic crops with built-in resistance. Under the agreement, Pioneer purchased three million shares of the Company's common stock for $30 million and provided $10 million in research and development funding. Pioneer will provide an additional $11 million in funding near the end of 1998. Pioneer will receive non-exclusive rights to all Bt crop protection technology and associated technologies codeveloped by the Company and Pioneer during the next 10 years. The Company and Pioneer are 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 technology that it markets through seed products outside of North America. The Company has exclusive world wide rights to license jointly developed technology to third parties. No proprietary seed lines will be shared by the companies. 6 PART I - FINANCIAL INFORMATION - ------------------------------ Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS SEASONALITY The Company's businesses are highly seasonal as described in each segment summary. Revenues, expenses and losses for the three months ended November 30 are not indicative of the revenues, expenses and income or loss to be expected for a full fiscal year. 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. 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. 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. SEGMENT OPERATING REVENUES AND OPERATING LOSS Three months ended November 30, (In thousands) 1995 1994 -------------- --------------- Operating Revenues Seed $ 1,126 $ 596 Crop Protection 10,923 8,913 -------------- --------------- Total Operating Revenues $12,049 $ 9,509 ============== =============== Operating Income (Loss) Seed $(7,635) $(6,691) Crop Protection 336 (516) Corporate (268) (337) -------------- --------------- Total Operating Loss $(7,567) $(7,544) ============== =============== SEED SEGMENT OPERATING REVENUES: First quarter Seed operating revenues are not significant and consist mainly of late season alfalfa sales and international shipments. The majority of Seed operating revenues are recorded during the second and third fiscal quarters. Second and third quarter operating revenues also 7 include estimates of seed product returns and the fourth quarter includes adjustments to reconcile those earlier estimates. OPERATING LOSS: First quarter Seed operating loss increased from $6.7 million for the quarter ended November 30, 1994 to $7.6 million for the same quarter in 1995, due mainly to higher sales and promotion efforts for the coming growing season which accounted for $.8 million of the increase. CROP PROTECTION SEGMENT OPERATING REVENUES: First quarter Crop Protection operating revenues increased $2.0 million to $10.9 million for the three months ended November 30, 1995 compared to the same period last year. Soilserv accounted for $1.4 million of the increase as a result of higher penetration this year into the winter crop protection markets in Arizona. Biopesticides sales of new products, Mattch(TM) and Scythe(R), and higher shipments of MVP(R) powder to Kubota accounted for the remainder of the increase. The majority of Crop Protection revenues are recorded during the third and fourth fiscal quarters. Second quarter operating revenues are not significant. OPERATING INCOME (LOSS): The Crop Protection segment recognized operating income of $.3 million for the quarter ended November 30, 1995 compared to an operating loss of $.5 million for the same period in 1994. This improvement in operating results is due mainly to higher sales volume, which contributed an additional $.6 million in gross profit, and lower research and development expenses of $.7 million resulting primarily from headcount and expense reductions. NON-OPERATING ITEMS Non-operating income items decreased $.4 million due mainly to lower net interest income as a result of less cash available for investment. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and securities available-for-sale increased by $5.7 million to $23.3 million during the three months ended November 30, 1995. This increase was due primarily to proceeds of $6.0 million from the Company's bank line of credit facility. The Company has a $25 million bank line of credit facility, which expires November 30, 1996, to fund portions of its seasonal working capital needs, of which $19.0 million was unused at November 30, 1995. In December 1995, the Company signed a definitive agreement for technology collaboration with Pioneer. Under the agreement, Pioneer purchased three million shares of the Company's common stock for $30 million and has provided $10 million in research and development funding. Pioneer will provide an additional $11 million in funding near the end of 1998. The Company expects capital expenditures for fiscal 1996 to total approximately $5.4 million. However, as part of the Seed unit's strategy to transition from a seller of low-cost generic products to proprietary, value- added seed products, the Company has decided to undertake an analysis of its production facilities to determine alternatives for improving quality. The conclusion of this analysis may result in higher than expected capital expenditures and/or write-downs. The biopesticide fermentation facility funded under the Company's long-term manufacturing agreement with Enzyme Bio-Systems, Ltd. ("EB"), is completed and fully operational. The Company does not anticipate any significant funding for capital under the EB agreement for the remainder of fiscal 1996. The Company is involved 8 in various actions related to its patent positions and plans to continue to spend resources as required to defend its intellectual property rights. The Company will continue to pursue an aggressive acquisition and joint venture strategy for both the Seed and Crop Protection business units. 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 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. 9 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. a) The annual meeting of stockholders was held on December 14, 1995. b) See c below. c) The following members of the Board of Directors were elected to serve until the next Annual Meeting and until their successors are elected and qualified: Number of Votes Cast Affirmative Negative ----------- -------- Thomas J. Cable 17,801,392 169,152 Jerry D. Caulder 17,712,136 258,908 George R. Hill 17,702,452 268,592 Kenneth H. Hopping 17,700,857 270,187 David H. Rammler 17,708,118 262,926 A. John Speziale 17,804,153 166,891 The proposal to approve the implementation of the 1995 Employee Stock Purchase Plan, pursuant to which 250,000 shares of Common Stock will be reserved for issuance, was approved by 15,663,825 affirmative votes vs. 2,029,260 negative votes vs. 99,543 abstentions vs. 178,416 broker non-votes. The proposal to ratify the non-statutory stock option grants for 20,000 shares of Common Stock under the Company's Automatic Grant Program to each of three non-employees Board members was approved by 16,498,948 affirmative votes vs. 1,166,962 negative votes vs. 126,718 abstentions vs. 178,416 broker non-votes. The proposal to ratify the appointment of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending August 31, 1996 was approved by 17,887,617 affirmative votes vs. 44,659 negative votes vs. 38,768 abstentions. d) Not applicable. Item 6. Exhibits and Reports on Form 8-K. a) Exhibits Exhibit 10.1 - Amendment to the 1992 Stock Option Plan. See Exhibit 10.1 attached hereto. Exhibit 10.2 - Amendment to the Restricted Stock Issuance Plan. See Exhibit 10.2 attached hereto. Exhibit 10.3 - 1995 Employee Stock Purchase Plan. See Exhibit 10.3 attached hereto. Exhibit 27 - Financial Data Schedule. See Exhibit 27 attached hereto. 10 b) Reports on Form 8-K A current report on Form 8-K was filed on November 28, 1995 to report the Company's reincorporation from the state of Delaware to the state of California on October 26, 1995 and to provide quarterly operating revenues by segment for fiscal year 1995. SIGNATURES ---------- Pursuant to the requirements 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 ------------------- (Registrant) Date: January 11, 1996 /s/ JAMES A. BAUMKER ------------------ ----------------------- James A. Baumker Vice President and Chief Financial Officer 11