UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For fiscal year ended August 31, 1997.
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, 1997, was approximately $180,940,647. 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, 1997, was 31,404,483.
Documents Incorporated by Reference
- -----------------------------------
Portions of the registrant's Proxy Statement (the "Proxy Statement") for the
Annual Meeting of Stockholders scheduled to be held on January 8, 1998, are
incorporated by reference in Part III.
PART I
ITEM 1. BUSINESS
Mycogen Corporation, a California corporation ("Mycogen," the "Company" or the
"Registrant") is a diversified agribusiness and biotechnology company that
develops and markets seed for improved crop varieties and provides crop
protection products and services. The Company is organized into two business
segments, Seed and Crop Protection. The Seed segment produces and markets seed
for major agricultural crops and uses biotechnology and traditional and marker-
assisted breeding to develop crop varieties with genetically enhanced pest and
disease resistance, improved vegetable oil profiles and other value-added
characteristics. The Crop Protection segment manufactures and markets
environmentally compatible spray-on biopesticide products and operates Soilserv,
Inc. ("Soilserv"), which provides crop protection services to growers of high-
value crops. Detailed financial information by segment can be found in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Mycogen was originally 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.
Industry Background
Biotechnology and advanced plant breeding techniques are combining to create
new, genetically enhanced crop varieties that will play a central role in
enabling agriculture to meet the challenge of feeding and clothing a global
population that is projected to double before the middle of the next century.
Dozens of newly available seed products carry special genetic information that
gives crop plants one or more of a variety of desirable characteristics
classified generally as "input" or "output" traits.
Input traits typically reduce or eliminate the need for, or allow for more
efficient use of, separately purchased and applied chemical inputs such as
pesticides and herbicides that growers use to protect crops and increase yields.
U.S. farmers already are planting corn, cotton, soybean and other major crops
with built-in insect and herbicide resistance on more than 10 million acres.
Growers' experience with these products generally has been favorable, with many
reporting reduced labor and chemical input expense and improved pest
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and weed control. Acceptance of these new seed products is, in effect, bringing
about a convergence of previously separate seed and agricultural chemical
industries. Mycogen believes that this represents a significant opportunity for
technology companies that can develop these input traits and seed companies that
can produce and market seed products carrying them.
Output traits typically increase the value of the crop itself. These include
genetic improvements that enhance the quality or quantity of oil, protein,
starch, fiber and other crop outputs. Seeds for corn, sunflower, soybean,
canola and other crops with enhanced vegetable oil profiles for food, feed and
industrial applications already are widely available. The ability to work at
the genetic level to design crops to meet end users' specifications is expected
to bring about a shift from present crop-handling and processing systems in
which grain and oilseed crops generally are, and treated as, undifferentiated
commodities. Mycogen believes that, in the future, an increasing proportion of
grain production will be "identity preserved," with processors or end users
contracting with growers to produce specific crops with specific
characteristics. The Company believes that this shift will create opportunities
along a value chain stretching from technology providers to seed companies,
growers, grain processors and producers of food and industrial products.
Seed products carrying value-added characteristics generally command premium
prices. In some cases, growers also pay additional "technology fees" directly
to technology providers to gain access to desired traits. This ability to share
in the added value their products provide to growers and end users is opening up
large new sources of revenue for seed and technology companies. For example,
industry estimates indicate that, despite annual worldwide expenditures of some
$8 billion for insecticides, insects cause approximately $12 billion in economic
damage each year. Therefore, the economic opportunity for insect resistant seed
products that offer improved insect control could be substantially larger than
the amount that growers currently spend to protect their crops. Mycogen
believes that there will be even greater opportunities to add and capture value
for developers and marketers of seed for crops with enhanced output
characteristics.
The Company estimates that U.S. farmers spend more than $3.5 billion each year
for planting seeds. Based on industry estimates of acreage planted with new
crop varieties carrying value-added input and/or output traits, seed and
technology companies are believed to have generated more than $200 million in
additional revenues from premium pricing and technology fees for those traits
during the 1997 North American planting season. With the application of
currently available value-added traits in additional crops and continuing
technological advances that are expected to create many more genetically
enhanced plant varieties, agricultural biotechnology is expected to become a
multi-billion dollar industry over the next few years.
Business Strategy
Mycogen's primary focus is on expanding and strengthening its global seeds
business through internal growth, acquisitions and alliances. The Company also
is exploring opportunities to leverage its technology and intellectual property
assets to generate additional revenue by developing and marketing value-added
input and output traits in markets not served by the Seed segment. The Crop
Protection segment continues to focus on providing specialized products and
services to high-value niche markets such as vegetables, tree fruit and nuts,
vines and ornamentals.
Alliances
In December 1995, Mycogen entered into a 10-year technology collaboration with
Pioneer Hi-Bred International, Inc. ("Pioneer"), to develop insect resistance
traits for corn, soybean, canola, sunflower, sorghum and wheat using Mycogen's
proprietary Bacillus thuringiensis ("Bt") protein biotoxin and Bt gene synthesis
technology. As part of that agreement, Pioneer made a $30 million equity
investment in Mycogen and agreed to provided an additional $21 million in
research and development funding. Pioneer paid the first $10 million
installment for research and development in December 1995, and is obligated to
pay a second
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installment of $11 million near the end of calendar year 1998. The
collaboration agreement gives Pioneer non-exclusive rights to all Bt crop
protection technology and associated technologies owned or developed by Mycogen
through December 2005. Mycogen and Pioneer will each market their own seed
products resulting from the collaboration, royalty-free, in North America.
Pioneer will pay a royalty to Mycogen for products carrying jointly developed
traits that it markets outside North America. Under the collaboration
agreement, Mycogen has the exclusive right to license jointly developed traits
to third parties. As of September 30, 1997, Pioneer owned 2 million shares of
the Company's common stock.
In February 1996, DowElanco LLC ("DowElanco") purchased 37% of Mycogen's
common stock formerly owned by The Lubrizol Corporation ("Lubrizol"). In a
simultaneous transaction, the Company issued an additional 9% of its common
stock to DowElanco in return for cash and DowElanco's seeds business, United
AgriSeeds, Inc., a Delaware corporation ("UAS"). (DowElanco, which is a wholly-
owned subsidiary of The Dow Chemical Company, will change its name effective
January 1, 1998, to Dow AgroSciences, LLC.) The acquisition of UAS strengthened
Mycogen's platform for commercializing proprietary, genetically-enhanced seed
products. Mycogen and DowElanco also entered into a technology sharing agreement
to develop and commercialize input and output traits for major crops. DowElanco
has continued to purchase additional shares of Mycogen's common stock in the
public market and through private transactions, and, as of September 30, 1997,
it owned approximately 57% of the Company's common stock.
In December 1996, Mycogen exchanged its European seeds business and other
assets for an 18.75% equity interest in Verneuil Holding, S.A. ("Verneuil"), a
seed company based in France, and obtained an option to purchase DowElanco's
16.25% equity interest in Verneuil. Mycogen and Verneuil also entered into an
agreement for the exchange of germplasm and formed two joint ventures. One
joint venture, V.M.O., will license technology and germplasm from Verneuil and
Mycogen to develop and commercialize oilseed products; the other will license
technology and germplasm from Mycogen and Verneuil to develop insect resistant
seed corn. As part of the agreement, Verneuil and the joint venture companies
will have the right to use the Mycogen(R) brand name for seed products.
Seed Business
Mycogen has made significant progress toward its goal of building a global
seeds business. Agrigenetics, Inc., d/b/a Mycogen Seeds ("Mycogen Seeds"), a
wholly-owned subsidiary of Mycogen, ranks fourth in the U.S. in sales of seed
corn, which accounts for the majority of its seed revenues, second in hybrid
sunflower seed sales, and among the top five in soybean, sorghum and alfalfa.
In September 1996, Mycogen purchased all of the common stock of Santa Ursula
S.A.A.I.C. e I., which did business as Morgan Seeds ("Morgan Seeds"), the third
largest seed company in Argentina. Mycogen merged Morgan Seeds into one of
Mycogen Seeds' existing wholly-owned subsidiaries, Mycoyen, S.A., which
continues to do business under the name Morgan Seeds. Morgan Seeds ranks second
in Argentina in seed corn sales and third in hybrid sunflower seed sales and is
a major exporter of seed products throughout South America. Through its
alliance with Verneuil, the Company also has established a foothold in the
important European seeds market. Mycogen also maintains cotton breeding and
transformation programs and is evaluating opportunities to enter the cotton seed
business to leverage its strong intellectual property position for insect
resistant cotton.
Sales & Marketing - In North America, Mycogen Seeds markets its products under
the Mycogen(R) brand through a network of more than 150 full-time sales
managers, approximately 6,100 farmer/sales representatives and approximately 370
professional agricultural retail outlets. Outside North America, Mycogen Seeds
markets its products primarily through local distributors. In Argentina and
elsewhere in South America, Morgan Seeds markets its products under the
Morgan(R) brand through local distributors.
Seed Production - Most of Mycogen's seed products are produced under annual
contracts with independent growers. The majority of the seeds are dried and
conditioned at production facilities owned by the Company,
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with the balance being conditioned on a contract basis with third parties. The
dried and conditioned seeds are packaged and stored in warehouses owned by the
Company. To ensure adequate conditioning capacity for current and projected
seed sales, improve production efficiency and enhance product quality, Mycogen
has invested $30.4 million in fiscal years 1996 and 1997, to modernize and
expand its seed conditioning and storage facilities in North and South America.
Mycogen believes that its current and planned production facilities and contract
growing arrangements give the Company sufficient production capacity to meet its
projected needs.
Product Development - Mycogen's seeds business strategy is to develop
differentiated, value-added seed products to meet the needs of the agriculture
and food industries. Development of such products requires breeding expertise
and elite, high-yielding, plant breeding material known as germplasm, genes that
confer desirable input and output traits and biotechnology "tools" and
technology to introduce those genes into plant parent lines.
Mycogen maintains extensive corn and sunflower breeding programs in both North
and South America. Mycogen also maintains breeding programs in cotton, soybean,
and sorghum. The object of these programs is to develop diverse pools of
germplasm that allow the Company to produce seed products with outstanding
agronomic characteristics and wide adaptability that makes such seed products
suitable for planting in various climates and maturity zones. The Company has
entered into licensing agreements to expand access to materials for breeding and
developing new products.
In the area of value-added genes for input traits, Mycogen has discovered and
patented more than 50 unique Bt protein toxin genes, some of which are being
used to develop crop varieties with resistance to insects and other pests. The
Company maintains a program to discover novel genes with insecticidal activity.
The Company also has licensed genetic material to confer disease resistance and
tolerance to herbicides used for weed control.
To develop seed products with value-added output traits, the Company has
developed, acquired or licensed genetic material to produce seed products for
grain and oilseeds with enhanced oil profiles and corn plants with special
animal nutrition characteristics for the silage market.
To introduce this special genetic material into germplasm, Mycogen has
obtained access to various plant transformation systems and believes it has
assembled one of the industry's largest collections of proprietary and licensed
biotechnology tools. These include "selectable markers" used in transgenic
plant development and "promoters" and "terminators" that control expression of
traits in plants. The Company also has a broad, worldwide patent position for
synthesis of Bt genes for plant expression.
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The following is a summary of the Company's key development programs for
value-added crop varieties:
Program Commercial Opportunity Major Crops
- ----------------------------------------------------------------------------------------------------------
Pest Resistance Yield improvement and displacement Corn, cotton, soybean,
of certain chemical pesticides sunflower, alfalfa, sorghum
and canola
- ----------------------------------------------------------------------------------------------------------
Herbicide Tolerance Improved efficiency and weed control Corn, cotton and canola
- ----------------------------------------------------------------------------------------------------------
Disease Resistance Control bacterial and fungal diseases Corn, cotton, peanut and
rice
- ----------------------------------------------------------------------------------------------------------
Improvement of Feedstuffs Value-added products for on-farm silage uses Corn
- ----------------------------------------------------------------------------------------------------------
Specialty Oils Value-added specialty oil and food Sunflower, corn, canola
ingredients and peanut
- ----------------------------------------------------------------------------------------------------------
High Oil Corn Value-added products for on-farm livestock Corn
feeders and poultry producers
Pest Resistance - 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 pests. Bt genes that produce proteins toxic to certain insects and
non-insect pests, including Lepidoptera (worms and moths) and Coleoptera
(beetles), have been isolated, restructured for efficient plant expression and
inserted into several crop varieties.
Mycogen's collaboration with Pioneer to develop Bt-based pest resistance
traits in corn, soybean, canola, sunflower, sorghum and wheat has allowed
Mycogen to accelerate product development programs in those crops. The Bt gene
sequences that produce these pest resistance traits are covered by issued or
pending patents.
The Company also is developing and marketing products with pest resistance
derived from native plant sources. Using marker-assisted breeding technology,
Mycogen has identified and tracked separate multigenetic resistance traits for
European corn borer. The Company has bred the multigenetic trait for European
corn borer into its elite commercial corn parent lines, and resulting resistant
corn hybrids have been sold commercially for the past four years.
Herbicide Tolerance - This program uses advanced plant science and gene
technology to insert genetic material into the genomes of target crops to enable
them to withstand herbicide treatments used to kill weeds that interfere with
production and reduce yield.
Disease Resistance - In November 1997, Mycogen licensed exclusive worldwide
rights to use peptidyl membrane interactive molecules developed by Demeter
Biotechnologies, Limited, both for disease resistance traits for seed products
and in topical spray-on products. Synthetic versions of natural peptides have
demonstrated antibacterial and antifungal activity in vitro and have been
expressed in a number of plants, including tobacco, peanut and potato. The
Company plans to use plant transformation and peptide gene technology to develop
transgenic varieties of major crops with resistance to fungal and bacterial
diseases.
Improvement of Feedstuffs - Mycogen has developed and launched a line of new
hybrid corn developed especially for the silage corn market. Silage corn is
used directly as an animal feedstuff. Prior to the Company's development of
these products, it was necessary for farmers interested in producing corn silage
to utilize grain hybrids poorly adapted for this purpose. These TMF(R) (Totally
Managed Feedstuffs(R)) corn hybrids are characterized by their tall stature,
additional leaf material produced on each stalk and high biomass
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production per acre. Silage produced from these varieties also has superior
nutritional qualities that contribute to increased milk and beef production.
Specialty Oils - Mycogen Seeds has developed sunflower, rape (canola), corn and
peanut seeds with genetically enhanced oil properties. In 1996, the Company
acquired rights to oilseed technology for those crops which it had developed
jointly with SVO Specialty Products ("SVO"), a subsidiary of Lubrizol. In
addition to producing and marketing seeds for these crops, Mycogen has forward-
integrated into production of crude high oleic sunflower oil for AC Humko, the
largest marketer of edible oils in the U.S. Also in 1996, Mycogen entered into
a collaborative program with DowElanco Canada, Inc., a wholly owned subsidiary
of DowElanco, to conduct a joint breeding program and investigate and develop
value-added traits in canola. The Company has targeted other specialty oil
opportunities that would be of interest to food ingredient suppliers and
purchasers. These projects, currently in a research phase, address
opportunities for reduced or no saturate vegetable oils, new feedstocks for all
natural hard butters where chemical modification (such as hydrogenation) of the
fats can be reduced or eliminated, and fats tailored for use by the confection
industry as substitutes for cocoa butter.
High Oil Corn - High oil grains provide a cost-effective alternative to
separately purchased fat supplements for livestock and poultry rations. Through
third party license agreements, Mycogen will introduce, for the 1998 planting
season, a limited quantity of seed for corn that produces up to twice as much
oil as traditional grain corn.
Crop Protection Business
Biopesticide products are sold to crop protection markets through Mycogen's
wholly-owned subsidiary, Mycogen Crop Protection, Inc. ("Mycogen Crop
Protection").
Biopesticide Products - The Company currently has registered eight
environmentally compatible biopesticide products. These products are based on
natural agents such as proteins 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 pests that have
developed tolerance to chemical pesticides.
The Company's Bt-based biopesticides are derived from strains of Bt that
produce proteins that are toxic to specific pests. Mycogen's Bt-based
biopesticides utilize the Company's proprietary CellCap(R) technology, which
encapsulates Bt toxin proteins 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 yields superior
product formulations that facilitate production and application.
The Company's fatty acid based biopesticides are derived from 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 worldwide, and for cooperative development and marketing
efforts in Japan through a collaboration with Kubota Corporation ("Kubota").
Biopesticide products are sold through established agricultural product
distributors in the U.S. and many other countries.
Product Development and Applied Technology - The Company has used two distinct
technologies to develop its biopesticides: microbial biopesticide technology
and fatty acid technology.
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Microbial Biopesticide Technology - Mycogen's microbial bioinsecticide products
and technology are based on two key components: 1) biotoxins that are active
against commercially important pests and 2) the Company's proprietary CellCap(R)
encapsulation delivery system.
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, including, but not limited to, caterpillars, beetles,
weevils, parasitic plant and animal nematodes, protozoan pathogens, grubs,
mites, liver flukes and adult houseflies.
Unlike chemical pesticides, Bt biotoxins are active only when consumed by the
target pest. Field experience has demonstrated that these products are
effective in controlling some pests that have developed tolerance to certain
chemical pesticides, and extensive toxicology testing has shown that Bt
biotoxins are virtually 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 short duration of activity makes them
environmentally compatible, historically it has limited their practical use as
commercial pesticides. To prolong biotoxin activity in the field, Mycogen
utilizes its CellCap(R) delivery system, which 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.
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) the treated areas require limited
worker safety re-entry restrictions. These characteristics make fatty acid
pesticides useful in certain targeted markets. For example, the contact
activity of fatty acids has been shown to enhance the efficacy of certain
synthetic chemical pesticides. By mixing 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 killed and harvested for
product formulation. These products use virtually the entire fermentation
biomass; very little, if any, purification is required. The concentrated
microorganisms can be processed in either a liquid or dry product formulation.
Mycogen has 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.
Mycogen pays EB the actual costs of manufacturing, plus a fee based on the
number of units produced. See "Other Charges - Impairment of facilities and
exit costs" in Item 7 for more discussion regarding this facility.
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 of its biopesticides are
readily available. Shortages of these raw materials that might materially
affect availability or cost are not anticipated.
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The following is a table listing the Company's biopesticide products
registered by the Environmental Protection Agency ("EPA") for commercial use.
Product and Biotoxin Target Pest Market
- -----------------------------------------------------------------------------------------------------------
M-C(R) (Bt) Army worm, diamond back moth, common Various, including vegetables
cut worm and cotton and cotton
leafworm
- -----------------------------------------------------------------------------------------------------------
MVP(R) (Bt) Leaf-eating caterpillar pests Cotton, tree fruits and vines
MVP(R) II (Bt concentrate)
- -----------------------------------------------------------------------------------------------------------
M-Peril(R) (Bt) European corn borer Corn
(solid granules)
- -----------------------------------------------------------------------------------------------------------
Mattch(R) (Bt) Leaf-eating caterpillar pests Vegetables and nursery crops
- -----------------------------------------------------------------------------------------------------------
M-Pede(R) (fatty acid) Soft-bodied insects and Fruits, vegetables, grapes and
powdery mildew ornamentals
- -----------------------------------------------------------------------------------------------------------
M-Press(TM) (Bt)* Fall army worm Sweet corn
- -----------------------------------------------------------------------------------------------------------
Scythe(R) Herbicide Broad spectrum of weeds Horticulture and landscape
(fatty acid) management
- -----------------------------------------------------------------------------------------------------------
Thinex(R) (fatty acid) Blossom thinner Apples, pears and stone fruits
- -----------------------------------------------------------------------------------------------------------
*Experimental use permit only.
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, and provides
notifications and files documents regarding pesticide applications as required
by state and local agencies.
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.
Patents, Proprietary Technology and Trademarks
As of August 31, 1997, Mycogen held 156 U.S. patents and more than 278 foreign
patents not including patents that have been reassigned or abandoned. The
Company has filed and is pursuing 85 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. Mycogen has a substantial number of trademarks and
trademark registrations in the U.S. and in other countries.
Plant Science Patents - As a result of research conducted by Agrigenetics
Corporation (now Mycogen Seeds) in the 1980s, the Company has applied for, and
in some cases been granted, fundamental patents in key technical areas.
Mycogen's 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 December 1995, the Company received European
patents covering Mycogen's method of modifying Bt genes to resemble plant genes
and to modified genes and transgenic plant cells developed by using such a
method. On October 22, 1996, Mycogen received two additional patents related to
synthetic Bt genes technology. The patents include "composition of matter"
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claims to modified Bt genes, plant cells transformed with such genes and
transgenic plants and resulting planting seeds containing the modified genes.
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 50 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 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.
Although the Company considers, that in the aggregate, its patents and
trademarks constitute valuable assets, it does not regard its business as being
materially dependent upon any single patent or trademark.
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
10
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 individual 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.
Seasonality of Business
Information regarding the seasonality of Mycogen's business can be found in
the Summary section of Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Backlog
The Company maintains inventory to meet customer requirements. Mycogen Crop
Protection and Mycogen Seeds do not manufacture biopesticide and seed products
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 $20.8 million in 1997, $19.2 million in 1996 and $18.2 million in 1995.
11
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 seeds industry is dominated by large multinational companies
located in the U.S. and Europe. These include Pioneer, the world's largest seed
company; Monsanto Company ("Monsanto") and its affiliate, DeKalb Genetics
Corporation ("DeKalb"); Novartis; 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 increased yield, pest or disease resistance
and other value-added characteristics.
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.
Human Resources
As of August 31, 1997, the Company had 966 employees as compared to 887
employees at the end of fiscal year 1996 and 756 at the end of fiscal year 1995.
The increase in employees is attributable to the acquisitions of UAS and Morgan
Seeds. The Company's management believes that it maintains positive relations
with its employees.
ITEM 2. PROPERTIES
The Company owns its principal corporate facility located in San Diego,
California. In addition, Mycogen owns its biopesticide research and development
facility located in San Diego, California, that is used by Mycogen Crop
Protection. 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.
The Company owns and maintains seed research, production, warehouse,
distribution or administrative space in the U.S. at the following locations
which are used primarily by Mycogen Seeds: Marshalltown and Schaller, Iowa;
Breckenridge, Hastings and Olivia, Minnesota; Leland, Mississippi; York and
Gothenburg, Nebraska; and Plainview and Dumas, Texas. Mycogen owns its
executive and administrative facility for Mycogen Seeds in Eagan, Minnesota. In
addition, Mycogen Seeds leases field plant research and/or storage facilities in
Woodland, California; Griffin, Georgia; Savoy, Illinois; Indianapolis, Indiana;
Huxley and Davenport, Iowa; and Arlington, DeForest and Prescott, Wisconsin.
Mycogen Seeds also operates facilities for seed research, production,
warehouse, distribution or administrative space at the following foreign
locations: Chatham, Ontario, and Saskatoon, Saskatchewan, Canada; and Santa
Isabel, Puerto Rico. Morgan Seeds operates facilities for seed research,
production, warehouse, distribution or administrative space at the following
Argentina locations: Colon, Laguna Blanca, San Carlos, San Isidro, San Juan and
Venado Tuerto.
12
The Company believes that its present facilities are adequate to maintain its
businesses.
ITEM 3. LEGAL PROCEEDINGS
On February 28, 1994, the U.S. Patent Office notified Mycogen's subsidiary,
Mycogen Plant Science, Inc. ("MPSI"), that an interference had been declared
with MPSI's broad application (USSN: 06/535,354) on Bt insect-resistant plants
and Monsanto's narrow application on Bt insect resistant tomatoes.
On May 19, 1995, MPSI filed suit in Federal District Court in San Diego,
California, claiming that Monsanto's use of synthetic Bt genes to develop and
sell seeds for insect resistant plants infringes Mycogen's U.S. patent covering
the process used to synthesize Bt genes. Certain claims within that suit were
dismissed by the court in 1995, and others still are pending.
On October 31, 1995, Plant Genetic Systems NV ("PGS") filed suit in the
Central District of North Carolina, claiming that Bt seed corn products
developed by Mycogen and Ciba Seeds infringe PGS's U.S. patent covering plants
containing truncated Bt genes. On August 13, 1996, PGS amended its lawsuit
against Mycogen by adding newly issued patent 5,545,565 relating to the
truncated Bt(2) gene sequence.
On March 19, 1996, Monsanto filed suit in Federal District Court in
Wilmington, Delaware, claiming that Mycogen's and Ciba Seeds' Bt corn products
infringe Monsanto's U.S. patent covering a modified Bt DNA sequence used to make
insect resistant plants.
On April 3, 1996, the California Court of Appeal, Fourth Appellate District,
reversed a San Diego County Superior Court ruling in a case brought by MPSI
against Monsanto in December 1993, and affirmed that MPSI is entitled to
exercise options to license certain herbicide tolerance and insect resistance
technology for plants from Monsanto. On May 8, 1996, Mycogen filed suit in
Superior Court in San Diego, seeking actual and punitive damages for breach of
contract and interference with Mycogen's seeds business as a result of
Monsanto's refusal to honor a contract to license certain herbicide tolerance
and insect resistance technology to MPSI. The trial is scheduled for December
1, 1997.
On April 30, 1996, DeKalb filed suit in Federal District Court in Rockford,
Illinois, claiming that Mycogen's and Ciba Seeds' Bt seed corn products infringe
DeKalb's patents covering Bt insect resistance and glufosinate herbicide
tolerance in corn. On July 23, 1996, DeKalb filed a second suit in Rockford,
Illinois, against Mycogen and Ciba Seeds for infringement of U.S. patents
5,538,877 and 5,538,880 relating to insect resistant and herbicide resistant
corn. On August 27, 1996, DeKalb amended its July 23, 1996, lawsuit to add
newly issued U.S. patent 5,550,318.
On August 15, 1996, MPSI filed in Federal District Court in Wilmington,
Delaware, an action to reverse a ruling of the Board of Patent Appeals and
Interferences that a Monsanto truncated Bt gene patent application does not have
claims covering the same invention as a truncated Bt gene patent application
filed by MPSI.
On October 22, 1996, Mycogen filed suit in Federal District Court in
Wilmington, Delaware, claiming that insect resistant seed products developed and
marketed by Monsanto, DeKalb and Delta & Pine Land Company ("DPL") infringe new
U.S. patents issued to Mycogen that cover modification of Bt genes for plant
expression, introduction of modified Bt genes into plant cells, and to plants
and seeds produced from cells transformed with modified Bt genes. The suit
seeks an injunction to bar development or sale of Bt seed products as well as
damages arising out of sales of those companies' Bt seed products. The trial is
scheduled for January 12, 1998.
On January 21, 1997, Mycogen filed suit against Ecogen, Inc. in Federal
District Court in Wilmington, Delaware, for patent infringement of Mycogen's
U.S. patents 5,188,960 and 5,126,133 relating to Cry1F Bt toxins. This
technology relates to Mycogen Crop Protection's biopesticide products. On June
11, 1997, the
13
patent office declared an interference between Mycogen's U.S. patent 5,188,960
and an application filed by Ecogen, Inc.
It is impossible to predict the outcome of each of the above described legal
actions. Management's analysis of the effect of these legal proceedings is
discussed in the Segment Operating Revenues and Income and (Loss) section of
Item 7.
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 1997.
14
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
("Nasdaq") under the symbol "MYCO." Following are high and low trade prices for
Mycogen Corporation common stock, as reported by Nasdaq for fiscal years 1997
and 1996.
Year ended August 31, 1997 High Low
4th Quarter............................ 25 18 3/4
3rd Quarter............................ 28 1/2 17 1/2
2nd Quarter............................ 29 1/4 16 3/4
1st Quarter............................ 17 1/8 13 3/4
Year ended August 31, 1996 High Low
4th Quarter............................ 18 1/2 13
3rd Quarter............................ 20 15
2nd Quarter............................ 19 1/2 11 3/4
1st Quarter............................ 14 1/4 9 1/2
At October 14, 1997, there were 4,694 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.
15
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SELECTED FINANCIAL DATA
(In thousands, except per share data)
Years ended August 31,
-------------------------------------------------------------------------------------
1997/1/ 1996/1/ 1995 1994/1/ 1993/1/
-------------- --------------- -------------- --------------- ---------------
Net Operating Revenues $ 202,407 $ 146,800 $ 106,169 $ 104,383 $ 112,583
Total Revenue 210,973 155,589 113,218 112,760 118,011
Net Loss Applicable to Common
Shares (37,683)/2/ (47,636)/2/ (15,946) (33,234)/2/ (27,514)/2/
Net Loss Per Common Share (1.22)/2/ (1.81)/2/ (.83) (1.81)/2/ (1.69)/2/
Cash, Cash Equivalents and
Securities Available-for-Sale 2,211 68,038 17,600 37,887 66,314
Total Assets 239,687 227,469 159,608 165,726 201,533
Long-term Liabilities 15,544 5,228 3,291 1,207 1,141
Redeemable Preferred Stock -- -- -- -- 40,897
Stockholders' Equity 157,214 181,194 113,703 125,406 107,885
1 The acquisitions of Morgan Seeds in 1997, UAS in 1996, and Mycogen Seeds in
1993, 1994 and 1996 affect the comparability of the Selected Financial Data.
2 Net loss in 1997, 1996, 1994 and 1993 includes other charges of $31.7
million, $27.6 million, $36.4 million and $23.7 million, respectively, as
discussed in further detail in the Notes to Consolidated Financial
Statements.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from
projections in forward-looking statements as a result of many factors. Varying
climatic conditions can shift revenues between quarters. Weather also can
affect operating revenues, seed costs, pest populations, the effectiveness of
seeds and pesticides, seed production yields, commodity prices and growers'
planting decisions. 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. These and other 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.
SEGMENT OPERATING REVENUES AND INCOME AND (LOSS)
Years ended August 31,
1996
----------------------------
(In thousands) 1997 Actual Pro forma/1/ 1995
- -------------- ---------- ---------- ------------- ----------
Seed
North America
Corn $ 64,292 $ 52,855 $ 65,424 $ 28,537
Soybean 21,091 16,136 18,358 8,794
Sunflower 6,493 6,576 6,694 10,376
Sorghum 6,831 8,950 8,984 4,042
Other 6,725 5,634 7,547 3,506
Argentina 31,042 1,770 29,441 945
Specialty Oil 22,790 -- -- --
Europe/Other International 3,022 10,114 10,114 9,129
---------- ---------- ------------- ----------
162,286 102,035 146,562 65,329
---------- ---------- ------------- ----------
Crop Protection
SoilServ 31,627 36,019 36,019 32,887
Biopesticides 8,904 9,867 9,867 7,953
---------- ---------- ------------- ----------
40,531 45,886 45,886 40,840
---------- ---------- ------------- ----------
Intersegment Elimination (410) (1,121) (1,121) --
---------- ---------- ------------- ----------
Total Operating Revenues $ 202,407 $ 146,800 $ 191,327 $ 106,169
========== ========== ============= ==========
/1/ Assumes the acquisitions of Morgan Seeds and UAS occurred on September 1,
1995.
17
Years ended August 31,
--------------------------------------------------------
(In thousands) 1997 1996 1995
-------------- -------------- --------------
Income (Loss)
Seed $ 694 $ (20,227) $ (11,922)
Crop Protection 2,147 316 (2,336)
Intersegment 27 (120) --
-------------- -------------- --------------
Total Operations 2,868 (20,031) (14,258)
Corporate (5,685) (2,527) (1,259)
Other Charges:
Impairment of assets
and exit costs (11,277) (14,905) --
Severance Agreement (9,050) -- --
Acquired in-process
technology -- (10,313) --
Patent litigation fees (9,777) (2,373) --
Equity in loss of
investees (1,626) -- --
Net interest and other (1,602) 3,091 1,074
-------------- -------------- --------------
Net loss before income
taxes (36,149) (47,058) (14,443)
Provision for income taxes (1,534) -- --
-------------- -------------- --------------
Net Loss $ (37,683) $ (47,058) $ (14,443)
============== ============== ==============
The acquisitions of Morgan Seeds and UAS affect the comparability of the
Consolidated Condensed Financial Statements.
SEED SEGMENT
Fiscal Year Ended August 1997 Compared to 1996
Operating Revenues: Seed operating revenues increased by $60.3 million from
1996 to 1997. The acquisition of Morgan Seeds in September 1997, and the full
year effect of the February 1996 acquisition of UAS accounted for the majority
of the increase. The 1996 pro forma revenues listed in the previous table
assumes that the acquisitions of Morgan Seeds and UAS occurred on September 1,
1995. The increase in revenues of $15.7 million on a pro forma basis is
attributable to a combination of the following factors:
. North American corn volumes were down approximately 59,000 units. The
majority of this decline occurred in the Southern regions of the U.S. and was
primarily due to acreage shifts to soybeans and poor distributor support for
the corn products acquired from DPL. Furthermore, in the Southern regions of
the U.S., where Mycogen does not distribute seeds through its farmer/dealer
network and instead relies on national and regional distributors, total corn
revenues were down over $2 million. In the Northern regions of the U.S.,
Mycogen, for the most part, held volumes despite the brand consolidation of
Mycogen, Lynks and Keltgen Seeds. This significant accomplishment was due to
close coordination with the farmer/dealer network and an improved sales mix
of value-added products consisting of NatureGard(R) hybrids and TMF(R)
hybrids.
18
. North American soybean revenues increased $2.7 million primarily as a result
of commodity price increases which allowed the Company to increase soybean
prices. Additionally, soybean volumes were 61,000 units higher than last
year.
. North American grain sorghum revenues decreased $1.8 million from last year's
record levels mainly due to a decrease in acres planted throughout the U.S.
and a reduction in available planting seeds. Total sorghum volumes were down
71,000 units.
. Argentine revenues were higher due mainly to higher sales of Morgan Seeds'
new disease resistant single cross hybrids, which produce higher yields.
. Specialty oil revenues of $22.8 million were comprised primarily of high
oleic sunflower oil sales to AC Humko. In fiscal year 1997, the Company
entered into a long-term supply contract with AC Humko. The agreement
initially calls for Mycogen to sell planting seeds at a normal seeds margin
and oil at cost, with AC Humko absorbing oil production risk. The agreement
contemplates a transition to fixed pricing, allowing Mycogen to earn a margin
on oil.
. Europe and other international revenues declined $7.1 million primarily due
to the exchange of Mycogen's European subsidiaries in 1997 for an investment
in Verneuil.
The majority of North American seed operating revenues are recorded during the
second and third fiscal quarters. Second and third quarter operating revenues
also include estimates of seed product returns and the fourth quarter includes
adjustments to reconcile those earlier estimates. Similarly, the majority of
South American seed operating revenues are recorded during the first and fourth
fiscal quarters, including estimates of seed product returns which are adjusted
in the second fiscal quarter.
Operating Results: Seed operating results improved $20.9 million compared to
1996. This improvement is largely due to the acquisition and integration of UAS
into Mycogen's North American seed operations, the acquisition of Morgan Seeds
in Argentina and the exchange of the Company's two European subsidiaries, which
previously had incurred operating losses, for an investment in Verneuil.
Compared to 1996, North American corn margins improved to 50% from 39% and total
seed margins, excluding specialty oil sales, have improved to 44% from 36%.
This improvement is largely due to the combination of decreased discards and
obsolescence ("D&O") and higher corn prices offset by lower soybean gross
margins attributable to higher commodity prices.
Fiscal Year Ended August 1996 Compared to 1995
Operating Revenues: Seed operating revenues for the fiscal year ended August
1996, were $102 million, compared to $65.3 million for fiscal 1995. The
acquisition of UAS accounted for $23.6 million of the increase, primarily in
corn and soybean seed sales. The remaining increase of $13.1 million or 20% is
attributable mainly to higher volumes, as follows:
. Higher planted corn acreage in 1996 and increased sales of NatureGard(R) corn
hybrids with Bt or native corn borer resistance and Totally Managed
Feedstuffs(R) silage corn accounted for the majority of a $7.6 million, or
20%, increase in seed corn revenue.
. Sorghum volumes increased over 80%, generating $4.6 million in increased
revenue. This increase is largely attributable to droughts in Texas, Kansas
and North Dakota that damaged winter wheat crops, causing wheat acreage to be
replanted with sorghum.
19
. Soybean revenues increased $1.8 million, largely due to a more aggressive
sales and marketing focus in 1996 and cooler, wetter weather in certain
areas, which caused some farmers to plant soybean instead of corn.
. Offsetting these increases were lower domestic sunflower sales of $3.9
million due to lower acreage planted in 1996 as a result of heavy disease
pressure in North Dakota and higher wheat and corn prices.
. International operating revenues increased $1.8 million, or 18%, mainly due
to higher sales of sunflower seeds in Argentina and seed corn in Europe.
Operating Results: Seed operating losses for the fiscal year ended August 1996
increased $8.3 million compared to fiscal 1995. Excluding the partial year
impact of the acquisition of UAS, the deterioration was attributable primarily
to a $5.2 million increase in sales and promotional expenses associated with the
increase in sales volumes and lower gross margins of $1.8 million. Higher gross
margins from higher sales volumes were reduced by higher seed costs and higher
product D&O. Seed corn costs were $3 per unit higher due to low production
yields. D&O increased by $5.8 million due to higher quantities of seeds that
did not pass quality standards and higher quantities of excess and obsolete seed
inventory.
CROP PROTECTION SEGMENT
Fiscal Year Ended August 1997 Compared to 1996
Operating Revenues: Crop Protection operating revenues decreased by $5.4
million from 1996 to 1997, as follows:
. Soilserv operating revenues were $4.4 million below last year's record levels
due to pricing pressures from fresh vegetable growers.
. Lower sales of MVP(R) powder to Kubota, M-Peril(R) to the Seed segment and
MVP(R) accounted for a $2.1 million decline in biopesticide operating
revenue. This decline was partially offset by higher sales of Mattch(R)
bioinsecticide attributable to higher insect pressure in Texas.
Operating Results: Operating results improved $1.8 million over 1996. This
improvement is attributable to lower expenses which have more than offset the
impact of lower revenues.
Fiscal Year Ended August 1996 Compared to 1995
Operating Revenues: Crop Protection operating revenues increased by $5.0
million from 1995 to 1996, as follows:
. Soilserv operating revenues were $3.1 million higher due to heavy insect
pressure in Salinas Valley that increased sales of aerial applications and
higher penetration of crop protection markets in Arizona.
. Biopesticide operating revenues were up $1.9 million, due to sales of new
products, Mattch(TM) bioinsecticide and Scythe bioherbicide, higher
international sales of MVP bioinsecticide and higher sales of MVP(R)
concentrate to Kubota. Lower sales of M-Pede(R) and M-Trak(R) bioinsecticides
in North America, attributable to the introduction of new products by
competitors, partially offset those increases.
20
Operating Results: 1996 operating results improved $2.7 million due to improved
gross margins of $3.8 million attributable to higher sales volumes coupled with
lower biopesticide manufacturing costs. Higher operating expenses reduced
operating income by $.8 million.
CORPORATE
Fiscal Year Ended August 1997 Compared to 1996
Corporate expenses increased $3.2 million mainly due to certain administrative
and research resources which have been reallocated to pursue acquisitions of
biotechnology assets and develop strategic alliances.
Fiscal Year Ended August 1996 Compared to 1995
The increase of $1.3 million in the Corporate operating loss was due to higher
compensation and bonuses and expenses related to general research and
development activities.
OTHER CHARGES
Impairment of facilities and exit costs: The Crop Protection segment recorded
$10.6 million of charges in fiscal 1997 related to the restructuring of the
biopesticide unit. The charges primarily related to the write-off of Mycogen's
costs associated with the underutilized biopesticide plant. The Seed segment
recorded $.6 million and $14.4 million in 1997 and 1996, respectively, of
impairment losses and exit costs related to the disposal and sale of certain
corn production plant assets and a research facility.
Severance Agreement: Corporate recognized expenses of $9.1 million during 1997
related to the resignation of the Company's chief executive officer. Those
charges include non-cash stock compensation of $7.3 million and severance and
other benefits of $1.8 million.
Patent litigation fees: Currently, the Company is a party to numerous separate
actions arising out of disputes over patent and license rights for insect
resistance and herbicide tolerance technology in plants. The Seed segment
incurred related legal costs of $9.8 million and $2.4 million in 1997 and 1996,
respectively, to enforce the Company's patent position. The Company will
continue to assert and defend its positions in these matters, and therefore,
will continue to incur significant legal expenses.
Acquired in-process technology: In 1996, the Seed segment recorded write-offs
of acquired in-process technology totaling $10.3 million, including $7.2 million
for oilseed technology rights acquired from Lubrizol and $3.1 million related to
the acquisition of UAS. The Company is still evaluating programs related to
that oilseed technology and has not yet committed significant funding. The
Company expects that it will need to spend approximately $2.5 million over the
next three to five years to commercialize the UAS technology. The estimated
funding and related efforts are within the normal course of research efforts
typically required by UAS' breeding and development programs.
Equity in loss of investees: The Seed segment recorded equity losses of $1.6
million, including $1.3 million of expenses incurred by the Company's European
subsidiaries during fiscal year 1997 through the date that they were transferred
to Verneuil and $.3 million of losses incurred by V.M.O., the Company's oilseed
joint venture with Verneuil.
21
NON-OPERATING ITEMS
Interest Income and Expense, Net: In fiscal 1997, interest income and expense,
net, decreased $4.0 million due to cash utilized for business acquisitions and
higher working capital needs as a result of acquisitions and capital
expenditures. Interest income and expense, net, increased $1.5 million to $2.4
million in fiscal 1996 due to higher interest income as a result of more cash
available for investment during the year.
Other Income: Other income of $.7 million was recognized in 1996 upon receipt
of a litigation settlement.
Provision for Income Taxes: The provision for income taxes of $1.5 million in
1997 relates to income reported by Morgan Seeds.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and securities available-for-sale
decreased by $65.8 million to $2.2 million during the fiscal year ended August
1997. The acquisitions of Morgan Seeds and SVO's high oleic assets and the
investment in Verneuil accounted for $37.1 million of this decrease. Cash used
for operating activities of $22.8 million and capital expenditures of $35.7
million also contributed to the decrease. Proceeds of $15 million from long-
term borrowings, $6.9 million from short-term borrowings, $5.6 million from the
sale of common stock and $2.4 million from the sale of production facilities
offset a portion of the decrease. The Company has two bank lines of credit of
$40 million and $10 million, which expire November 1997 and February 1998,
respectively, to fund portions of its seasonal working capital needs, all of
which were unused as of August 31, 1997. Additionally, the Company may borrow
funds of up to $50 million (increased to $75 million as of November 14, 1997)
from DowElanco. Any advances from DowElanco are due September 30, 1998.
During 1997, the Company invested $21.7 million to upgrade seed production
facilities and to add seed production capacity and expects to invest another
$7.0 million during 1998. The Company invested $.7 million in 1997 for a new
business system and expects to invest another $6 million and $2 million in 1998
and 1999, respectively. During 1997, the Company spent $3.8 million for
completion of Mycogen Seeds' new headquarters. Other capital expenditures
totaled $9.5 million for 1997, and are expected to total $12 million during
1998.
On November 12, 1997, the Company's Board of Directors approved a private sale
of $75 million of newly issued common shares to DowElanco. These shares may be
sold in a single transaction or in a series of transactions totaling $75
million.
In December 1995, the Company signed an agreement for a technology
collaboration with Pioneer. 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 in December 1995. Pioneer will
provide an additional $11 million in funding near the end of calendar year 1998.
In January 1996, Lubrizol converted its entire interest in shares of preferred
stock into 1,815,274 shares of Mycogen's common stock and sold its 19.46%
ownership interest in Mycogen Seeds to the Company for 1,538,008 shares of
common stock. The Company also purchased certain rights in oilseed technology
from a subsidiary of Lubrizol for $8.0 million. The Company made payments of
$2.5 million and $2.0 million in 1997 and 1996, respectively, and will make a
final payment of $3.5 million in 1998.
In September 1996, the Company purchased all of the common stock of Morgan
Seeds for $27 million in cash and acquired Lubrizol's remaining interest in
oilseed technology and certain related assets for $7.6 million
22
in cash. The Company will continue to pursue an aggressive acquisition and
joint venture strategy for the Seed segment.
The Company is involved in various actions related to its patent positions and
plans to continue to spend resources as required to enforce its intellectual
property rights. The Company's success will depend in part on its ability to
obtain U.S. and foreign patent protection for its products. To date, Mycogen
has obtained numerous patents and has filed a large number of patent
applications in the U.S. and foreign jurisdictions relating to the Company's
technology. There can be no assurance that issued patent claims will be
sufficient to protect the Company's technology. The commercial success of the
Company will also depend in part on the Company's ability to avoid infringing
patents issued to competitors. If licenses are required, there can be no
assurance that the Company will be able to obtain such licenses on commercially
favorable terms, if at all. Litigation, which can result in substantial cost to
the Company, is also necessary to enforce the Company's intellectual property
rights or to determine the scope and validity of third-party proprietary rights.
The Company anticipates that its current cash position, revenue from
operations, contract and other revenues, and funds from its existing lines of
credit will be sufficient to finance working capital and capital requirements
for the upcoming fiscal year. 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. However, there can be no assurance that the Company
can raise additional capital under favorable terms, if at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated 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
In fiscal year 1997, there were no reported disagreements on any matters of
accounting principles or procedures or financial disclosures with the Company's
independent auditors.
23
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.
The information under the heading "Compliance with Section 16(a) of the Exchange
Act" appearing in the Proxy Statement, is incorporated herein by reference.
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,
1997" 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.
24
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 30 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.
(c) Exhibits:
Sequentially
Numbered
Description Page
2.1 Agreement and Plan of Merger of Mycogen Corporation, a Delaware --
corporation, and Mycogen California, Inc., a California corporation.
Incorporated by reference from Exhibit 3.4 to the Registrant's Form
8-K, filed on November 28, 1995.
2.2 Stock Acquisition Agreement by and among Agrigenetics, Inc., Mr. --
Jose Alberto Benegas, Ms. Maria Alejandra Rebagliati and Genetic
Resources (Latin America) Corporation dated September 30, 1996.
Incorporated by reference from Exhibit 2.1 to the Registrant's Form
8-K, filed on October 15, 1996.
3.1 Articles of Incorporation of the Registrant. Incorporated by --
reference from Exhibit 2.1 to the Registrant's Form 8-K, filed on
November 28, 1995.
3.2 Bylaws of the Registrant. Incorporated by reference from Exhibit --
3.2 to the Registrant's Form 8-K, filed on November 28, 1995.
4.1 Reference is made to Exhibits 3.1 and 3.2 above. --
4.2 Specimen Common Stock Certificate, $0.001 par value. Incorporated --
by reference from Exhibit 4.1 to the Registrant's Form 8-K, filed on
November 28, 1995.
4.3 Amended and Restated Rights Agreement by and between the Registrant --
and Bank of Boston. Incorporated by reference from Exhibit 4.2 to
the Registrant's Form 8-K, filed on November 28, 1995.
4.4 Amendment to the Rights Agreement. Incorporated by reference from --
Exhibit 4.1 to the Registrant's Form 8-K, filed on March 22, 1996.
10.1 Registration Rights Agreement under Stock Purchase Agreement dated --
March 6, 1989. Incorporated by reference from Exhibit 10.2 to the
Registrant's Form 10-K for the year ended September 30, 1989, filed
on December 28, 1989.
25
10.2 Registrant's 1995 Employee Stock Purchase Plan. Incorporated by --
reference from Exhibit 10.1 to the Registrant's Registration
Statement on Form S-8, Registration No. 333-00901, filed on February
13, 1996.
10.3 Employee Stock Purchase Plan Summary and Prospectus. Incorporated --
by reference from Exhibit 10.2 to the Registrant's Registration
Statement on Form S-8, Registration No. 333-00901, filed on February
13, 1996.
10.4 Registrant's Restricted Stock Issuance Plan. Incorporated by --
reference from Exhibit 28.1 to the Registrant's Registration
Statement on Form S-8, Registration No. 33-40349, filed on May 3,
1991.
10.5 Form of Agreements pertaining to Restricted Stock Issuance Plan. --
Incorporated by reference from exhibit 28.2 to the Registrant's
Registration Statement on form S-8, Registration No. 33-40349, filed
on May 3, 1991.
10.6 Amendment No. 1 to Registrant's Restricted Stock Issuance Plan. --
Incorporated by reference from Exhibit 10.2 to the Registrant's
Registration Statement on Form S-8, Registration No. 333-00899,
filed on February 13, 1996.
10.7 Form of Indemnity Agreement between the Registrant and each of its --
directors. Incorporated by reference from Exhibit 10.1 to the
Registrant's Form 8-K, filed on November 28, 1995.
10.8 Manufacturing Agreement dated September 15, 1988 between the --
Registrant and International Bio-Synthetics, Inc. (with certain
confidential portions omitted). Incorporated by reference from
Exhibit 10.19 to the Registrant's Form 10-K for the year ended
September 30, 1988, filed on December 23, 1988.
10.9 Registrant's 1992 Stock Option Plan (as amended and restated --
effective October 17, 1996). Incorporated by reference from Exhibit
10.1 to the Registrant's Registration Statement on Form S-8,
Registration Statement No. 33-21467, filed on February 10, 1997.
10.10 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 Registrant's Registration Statement on Form S-8, Registration
No. 33-55508, filed on December 9, 1992.
10.11 Supplement to Form of Agreements pertaining to 1992 Stock Option 57
Plan.
26
10.12 Revolving Credit Note of the Registrant to Harris Trust and Savings --
Bank ("Harris Bank") dated August 5, 1994. Incorporated by
reference from Exhibit 10.34 to the Registrant's Form 10-K for the
year ended December 31, 1994, filed on March 3, 1995.
10.13 Revolving Credit Agreement between the Registrant and Harris Bank --
dated August 5, 1994, as amended. Incorporated by reference from
Exhibit 10.35 to the Registrant's Form 10-K for the year ended
December 31, 1994, filed on March 3, 1995.
10.14 Guaranty Agreement from the Registrant to Harris Bank dated August --
5, 1994. Incorporated by reference from Exhibit 10.36 to the
Registrant's Form 10-K for the year ended December 31, 1994, filed
on March 3, 1995.
10.15 Form of Employment/Severance Agreement between the Registrant and --
certain executive officers of the Registrant. Incorporated by
reference from Exhibit 10.22 to the Registrant's Form 10-K for the
year ended August 31, 1996, filed on November 13, 1996.
10.16 Manufacturing Agreement dated December 1, 1993, between the --
Registrant and EB, with certain confidential portions omitted.
Incorporated by reference from Exhibit 10.44 to the Registrant's
Form 10-K for the year ended December 31, 1994, filed on March 3,
1995.
10.17 Agreement for Exchange of Insect Control Technology and Patent --
Rights dated July 14, 1993, between the Registrant and Ciba Seeds
with certain confidential portions omitted. Incorporated by
reference from Exhibit 10.45 to the Registrant's Form 10-K for the
year ended December 31, 1994, filed on March 3, 1995.
10.18 Collaboration Agreement dated as of December 13, 1995, by and --
between Mycogen Seeds and Pioneer with certain confidential portions
omitted. Incorporated by reference from Exhibit 10.20 to the
Registrant's Form 10-K for the year ended August 31, 1996, filed on
November 13, 1996.
10.19 Mycogen Corporation Common Stock Purchase Agreement dated as of --
December 13, 1995, by and between the Registrant and Pioneer
Overseas Corporation, an Iowa corporation ("Pioneer Overseas").
Incorporated by reference from Exhibit 10.21 to the Registrant's
Form 10-K for the year ended August 31, 1996, filed on November 13,
1996.
10.20 Registration Rights Agreement dated December 13, 1995, by and --
between the Registrant and Pioneer Overseas. Incorporated by
reference from Exhibit 10.22 to the Registrant's Form 10-K for the
year ended August 31, 1996, filed on November 13, 1996.
27
10.21 Exchange and Purchase Agreement dated as of January 15, 1996, by and --
among the Registrant, Mycogen Seeds, DowElanco and UAS.
Incorporated by reference from Exhibit 2.1 to the Registrant's Form
8-K, filed on February 27, 1996.
10.22 Credit Agreement dated as of February 11, 1997, between Registrant 67
and Bank of America Illinois.
10.23 Loan Agreement, as amended, dated as of April 1, 1997, between 125
DowElanco and Registrant.
10.24 Form of Mycogen Corporation Executive Deferred Compensation Plan 131
between the Registrant and certain executive officers of the
Registrant.
21.1 Soilserv, Inc., a California corporation. --
21.2 Mycogen Plant Science, Inc., a Delaware corporation. --
21.3 Agrigenetics, Inc., a Delaware corporation, doing business as --
Mycogen Seeds.
21.4 Mycogen Crop Protection, Inc., a California corporation. --
21.5 Mycoyen, S.A., an Argentina corporation, doing business as Morgan --
Seeds.
* The Company's Notice of Annual Meeting and Proxy Statement dated on --
or about November 24, 1997.
23.1 Consent of Ernst & Young LLP, Independent Auditors. 153
23.2 Consent of Deloitte & Co., Independent Auditors. 155
24 Power of Attorney. 157
27 Financial Data Schedule. 55
99 Purchase Agreement dated February 15, 1995, by and among the --
Registrant, Mycogen Seeds and DPL. Incorporated by reference from
Exhibit 99.1 to the Registrant'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.
28
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 24, 1997 By: /s/ CARLTON J. EIBL
--------------------
Carlton J. Eibl
President
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/ CARLTON J. EIBL President (Principal November 24, 1997
- ------------------------------------- Executive Officer)
(Carlton J. Eibl)
/s/ NICKOLAS D. HEIN Chairman, Director November 24, 1997
- -------------------------------------
(Nickolas D. Hein*)
/s/ THOMAS J. CABLE Director November 24, 1997
- -------------------------------------
(Thomas J. Cable*)
/s/ JERRY D. CAULDER Director November 24, 1997
- -------------------------------------
(Jerry D. Caulder*)
/s/ PERRY J. GEHRING Director November 24, 1997
- -------------------------------------
(Perry J. Gehring*)
/s/ LOUIS W. PRIBILA Director November 24, 1997
- -------------------------------------
(Louis W. Pribila*)
/s/ DAVID H. RAMMLER Director November 24, 1997
- -------------------------------------
(David H. Rammler*)
/s/ WILLIAM C. SCHMIDT Director November 24, 1997
- -------------------------------------
(William C. Schmidt*)
/s/ G. WILLIAM TOLBERT Director November 24, 1997
- -------------------------------------
(G. William Tolbert*)
/s/ W. WAYNE WITHERS Director November 24, 1997
- -------------------------------------
(W. Wayne Withers*)
/s/ JAMES A. BAUMKER Vice President and Chief November 24, 1997
- ------------------------------------- Financial Officer
(James A. Baumker) (Principal Financial and
Accounting Officer)
__________________
*By James A. Baumker under power of attorney.
29
MYCOGEN CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations for the years ended
August 31, 1997, 1996 and 1995............................................................ 31
Consolidated Balance Sheets as of August 31, 1997 and 1996.................................. 32
Consolidated Statements of Stockholders' Equity for the years ended
August 31, 1997, 1996 and 1995............................................................ 33
Consolidated Statements of Cash Flows for the years ended
August 31, 1997, 1996 and 1995............................................................ 34
Notes to Consolidated Financial Statements.................................................. 35
Quarterly Financial Data.................................................................... 51
Schedule II - Valuation and Qualifying Accounts for the years ended August 31, 1997, 1996
and 1995.................................................................................. 52
Report of Ernst & Young LLP, Independent Auditors........................................... 53
Report of Deloitte & Co., Independent Auditors.............................................. 54
All other schedules required by this item have been omitted due to full
disclosure in the Consolidated Financial Statements or related footnotes or due
to inapplicability of the item.
30
MYCOGEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years ended August 31,
----------------------------------------
1997 1996 1995
------------ ----------- -----------
Net operating revenues:
Unrelated parties................... $201,703 $145,401 $103,701
Related parties..................... 704 1,399 2,468
Contract and other revenues:
Unrelated parties................... 2,841 5,160 4,334
Related parties..................... 5,725 3,629 2,715
-------- -------- --------
Total revenues.................. 210,973 155,589 113,218
-------- -------- --------
Costs and expenses:
Cost of operating revenues.......... 126,857 93,508 66,966
Selling and marketing............... 41,834 37,791 23,544
Research and development............ 24,105 23,645 21,181
General and administrative.......... 17,978 19,689 13,190
Amortization of intangible assets... 3,016 3,514 3,854
Other charges....................... 31,730 27,591 -
-------- -------- --------
Total costs and expenses.......... 245,520 205,738 128,735
-------- -------- --------
Operating loss........................ (34,547) (50,149) (15,517)
Interest income and expense, net.... (1,580) 2,435 914
Exchange gain (loss)................ (22) 2 160
Other non-operating income.......... - 654 -
-------- -------- --------
Net loss before taxes................. (36,149) (47,058) (14,443)
Provision for income taxes.......... (1,534) - -
-------- -------- --------
Net loss.............................. (37,683) (47,058) (14,443)
Dividends on preferred stock.......... - (578) (1,503)
-------- -------- --------
Net loss applicable to common shares.. $(37,683) $(47,636) $(15,946)
======== ======== ========
Net loss per common share............. $ (1.22) $ (1.81) $ (.83)
======== ======== ========
Weighted average number of shares..... 30,920 26,275 19,225
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
31
MYCOGEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
August 31,
Assets 1997 1996
------------- -------------
Current assets:
Cash and cash equivalents.................................... $ 1,712 $ 35,854
Securities available-for-sale................................ 499 32,184
Accounts and notes receivable, net of allowances............. 42,102 30,700
Inventories.................................................. 57,135 37,177
Prepaid expenses and other current assets.................... 5,306 1,880
--------- ---------
Total current assets....................................... 106,754 137,795
Net property, plant and equipment.............................. 87,170 54,905
Net intangible assets.......................................... 32,990 22,581
Other assets................................................... 12,773 12,188
--------- ---------
Total assets................................................... $ 239,687 $ 227,469
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings........................................ $ 18,602 $ 1,520
Accounts payable............................................. 21,100 8,697
Accrued compensation and related taxes....................... 6,124 6,755
Deferred revenues............................................ 8,246 12,101
Other current liabilities.................................... 12,857 11,974
--------- ---------
Total current liabilities.................................. 66,929 41,047
Long-term liabilities.......................................... 15,544 5,228
Commitments
Stockholders' equity:
Common stock, $.001 par value, 40,000,000 shares authorized;
31,381,344 and 30,678,537 shares issued and outstanding at
August 31, 1997 and 1996, respectively..................... 31 31
Additional paid in capital..................................... 344,676 330,973
Deficit........................................................ (187,493) (149,810)
--------- ---------
Total stockholders' equity................................. 157,214 181,194
--------- ---------
Total liabilities and stockholders' equity..................... $ 239,687 $ 227,469
========= =========
See accompanying Notes to Consolidated Financial Statements.
32
MYCOGEN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Common Stock Additional Total
Number Paid in Stockholders'
of Shares Amount Capital Deficit Equity
--------- -------- ----------- ------------ ------------
Balance at August 31, 1994 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 securities
available-for-sale....... - - 478 - 478
Net loss...................... - - - (14,443) (14,443)
Cumulative translation
adjustment................... - - 328 - 328
--------- -------- -------- --------- --------
Balance at August 31, 1995 19,401 19 216,436 (102,752) 113,703
Issuance of common stock
under:
Private offering.......... 3,000 3 29,997 - 30,000
Employee stock plans...... 472 1 3,500 - 3,501
Compensation related to
employee stock plans......... - - 689 - 689
Issuance of common stock for
business acquisitions..... 5,991 6 80,406 - 80,412
Conversion of Preferred Stock. 1,815 2 (2) - -
Change in unrealized gains
and losses on securities
available-for-sale....... - - (167) - (167)
Net loss...................... - - - (47,058) (47,058)
Cumulative translation
adjustment................... - - 114 - 114
--------- -------- -------- --------- --------
Balance at August 31, 1996 30,679 31 330,973 (149,810) 181,194
Issuance of common stock under:
Employee stock plans...... 622 - 5,608 - 5,608
401 (k) plan.............. 14 - 333 - 333
Compensation related to
resignation of officer.... 66 - 7,316 - 7,316
Compensation related to
employee stock plans......... - - 621 - 621
Change in unrealized gains
and losses on securities
available-for-sale....... - - 303 - 303
Net loss...................... - - - (37,683) (37,683)
Cumulative translation
adjustment................... - - (478) - (478)
--------- -------- -------- --------- --------
Balance at August 31, 1997 31,381 $ 31 $344,676 $(187,493) $157,214
========= ======== ======== ========= ========
See accompanying Notes to Consolidated Financial Statements.
33
MYCOGEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended August 31,
1997 1996 1995
-------- -------- --------
Operating activities:
Net loss............................................ $(37,683) $(47,058) $(14,443)
Items which did not use cash:
Depreciation...................................... 6,297 4,862 4,851
Amortization...................................... 3,717 4,216 4,138
Compensation related to employee stock plans...... 954 689 148
Other charges..................................... 17,794 23,218 -
Provision for doubtful accounts................... 1,553 1,990 292
Provision for deferred taxes...................... 682 - -
Loss on disposal of assets........................ 187 361 693
Changes in operating assets and liabilities, net
of effects of business combinations:
Accounts and notes receivable................... (7,562) 8,432 (3,293)
Inventories..................................... (8,323) 14,179 (1,834)
Prepaid expenses................................ (1,460) 53 (346)
Accounts payable................................ 7,961 (5,328) 3,014
Deferred revenues............................... (3,855) (1,815) 989
Other liabilities............................... (3,050) 4,332 (669)
-------- -------- --------
Cash provided by (used in) operating
activities................................... (22,788) 8,131 (6,460)
-------- -------- --------
Investing activities:
Proceeds from sales of available-for-sale securities 28,140 33,675 8,972
Proceeds from maturities of available-for-sale
securities......................................... 3,703 4,159 21,049
Purchases of available-for-sale securities.......... - (58,272) (12,250)
Capital expenditures................................ (35,653) (13,889) (6,566)
Net cash paid for business combinations............. (37,087) (1,791) -
Prepaid contract manufacturing...................... - (286) (8,825)
Change in intangibles and other assets.............. 2,851 1,596 (1,842)
-------- -------- --------
Cash provided by (used in) investing activities. (38,046) (34,808) 538
-------- -------- --------
Financing activities:
Proceeds from short-term borrowings................. 6,903 1,520 -
Proceeds from long-term debt........................ 15,000 - 2,500
Payments on long-term debt.......................... (852) (4,678) (248)
Proceeds from sale of common stock.................. 5,608 59,900 435
-------- -------- --------
Cash provided by financing activities............. 26,659 56,742 2,687
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents.......................................... 33 102 241
-------- -------- --------
Increase (decrease) in cash and cash equivalents...... (34,142) 30,167 (2,994)
Cash and cash equivalents at beginning of year........ 35,854 5,687 8,681
-------- -------- --------
Cash and cash equivalents at end of year.............. $ 1,712 $ 35,854 $ 5,687
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
34
MYCOGEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant Accounting Policies
The Company's significant accounting policies are bracketed 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 subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.]
Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial statements have
been reclassified to conform to the 1997 presentation.
Business Acquisitions and Investments
In September 1996, the Company purchased all of the stock of Morgan Seeds,
located in Argentina, for $27 million in cash. Morgan Seeds' principal products
are corn and sunflower planting seed. The acquisition of Morgan Seeds was
accounted for as a purchase and, accordingly, the assets and liabilities of
Morgan Seeds are included in the Consolidated Balance Sheet as of August 31,
1997 and the results of operations from the acquisition date are reflected in
the 1997 Consolidated Statement of Operation. The excess of the total purchase
price over the fair value of the net assets acquired of $10.0 million was
recorded as goodwill and is being amortized over 25 years.
In February 1996, the Company issued 4,453,334 shares of common stock to
Dowelanco in exchange for $26.4 million in cash and all of the shares in
Dowelanco's seeds business, UAS. The principal seed products of UAS are corn
and soybean. The acquisition of UAS was accounted for as a purchase and,
accordingly, the results of operations of UAS from the date of acquisition are
reflected in the consolidated financial statements of the Company. The total
purchase price aggregated $34.5 million, of which $3.1 million was allocated to
in-process technology and was written-off upon acquisition.
The following consolidated, pro forma, unaudited summary of operations data
assumes that the acquisition of Morgan Seeds occurred on September 1, 1996 and
1995, respectively, and that the acquisition of UAS occurred on September 1,
1995 and 1994.
Years ended August 31,
------------------------------------------------
(In thousands except per share data) 1997 1996 1995
- ------------------------------------ -------------- -------------- --------------
Total revenues $ 212,592 $ 200,559 $ 146,873
Net loss applicable to common shares $ (37,665) $ (40,179) $ (13,301)
Net loss per common share $ (1.22) $ (1.42) $ (.56)
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 dates
indicated, or which may be reported in the future. These results do
35
not include a 1996 nonrecurring charge of $3.1 million related to the write-off
of acquired in-process technology from the UAS acquisition.
In September 1996, the Company acquired rights to SVO's high oleic sunflower
oil technology and other assets (mainly inventory) relating to its specialty oil
business for $7.6 million. In a related transaction, the company entered into a
supply agreement with AC Humko whereby the Company will produce crude high oleic
sunflower oil exclusively for AC Humko in North America.
In December 1996, the Company exchanged its ownership interest in two European
subsidiaries, Mycogen S.A. and Mycogen SRL, and cash of $2.1 million for an
18.75% ownership interest in Verneuil. The Company obtained a call option
whereby Mycogen can purchase an additional 16.25% interest in Verneuil from
Dowelanco. Dowelanco has a put option that may require Mycogen to purchase
Dowelanco's 16.25% ownership interest in Verneuil after December 1997 if certain
conditions are met. Including related investment costs, the investment in
Verneuil totaled $9.7 million. The investment is accounted for using the cost
method and is included in other assets on the 1997 Consolidated Balance Sheet.
The European subsidiaries' fiscal 1997 operating results are reported in the
Consolidated Statements of Operations as other charges.
The investment in Verneuil is considered a financial instrument. Per
Statement of Financial Accounting Standards ("SFAS") No. 107, "Financial
Instruments: Disclosure," the market value of such instruments is required to
be disclosed. However, it was not practicable to estimate the fair value of
Verneuil because of the lack of a quoted market price and the inability to
estimate fair value without incurring excessive costs. The $9.7 million
carrying amount at august 31, 1997, represents the original cost of the
investment, which management believes is not impaired. No dividends were
received during the three year period ended August 31, 1997.
Supplemental Cash Flow Information
In conjunction with the acquisition of Morgan Seeds, the investment in
Verneuil and the purchase of SVO's high oleic sunflower oil assets in fiscal
year 1997 and the acquisition of UAS and the remaining ownership interest in
Mycogen Seeds in fiscal year 1996 and an acquisition in 1995, cash and non-cash
investing and financing activities were allocated as follows:
Years ended August 31,
-----------------------------------------
(In thousands) 1997 1996 1995
- -------------- ---------- ---------- ---------
Business acquisitions:
Fair value of assets acquired, net of cash
received of $1.4 million in 1997 and none
in 1996 and 1995 $ 48,741 $ 55,957 $ 1,350
Liabilities assumed (15,396) (20,886) --
Investment in Verneuil 9,697 -- --
Net assets and liabilities of Mycogen S.A.
and Mycogen SRL, excluding cash,
exchanged for Verneuil (5,955) -- --
Liabilities and acquisition costs incurred -- (673) --
Minority interest purchased from Lubrizol -- 21,406 --
Common stock issued -- (54,013) (1,350)
---------- ---------- ---------
Net cash paid for acquisitions $ 37,087 $ 1,791 $ --
========== ========== =========
36
Other cash and noncash investing and financing activities were as follows:
Years ended August 31,
------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------- -------- -------- --------
Cash payments for interest $ 2,483 $ 263 $ 389
Cash payments for income taxes $ 403 $ -- $ --
Common stock issued upon conversion of
convertible preferred stock $ -- $31,582 $ --
Technology rights acquired by incurring
directly related liabilities $ -- $ 6,000 $ --
Dividends on preferred stock $ -- $ 578 $ 1,503
INDUSTRY SEGMENTS
The Company is organized into two major segments, Seed and Crop Protection.
Seed segment revenues are derived mainly from sales of planting seeds in North
America, South America and Europe. The six principal product lines are corn,
soybean, sunflower, sorghum, other and international. Crop Protection 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 Japan. 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 seeds, crop protection services
and biopesticide products purchased by growers.
Financial information by segment is as follows:
Years ended August 31,
------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------- -------- -------- --------
Net Operating Revenues
Seed $162,286 $102,035 $ 65,329
Crop Protection 40,531 45,886 40,840
Intersegment Elimination (410) (1,121) --
-------- -------- --------
Total $202,407 $146,800 $106,169
======== ======== ========
Contract and Other Revenues
Seed $ 7,675 $ 7,639 $ 5,606
Crop Protection 482 1,040 1,363
Corporate 409 110 80
-------- -------- --------
Total $ 8,566 $ 8,789 $ 7,049
======== ======== ========
Research and Development Expenses
Seed $ 19,789 $ 18,604 $ 14,827
Crop Protection 3,049 4,816 6,354
Corporate 1,267 225 --
-------- -------- --------
Total $ 24,105 $ 23,645 $ 21,181
======== ======== ========
37
Years ended August 31,
------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------- -------- -------- --------
Operating Income (Loss)
Seed $(11,349) $(47,818) $(11,922)
Crop Protection (8,490) 316 (2,336)
Corporate (14,735) (2,527) (1,259)
Intersegment Elimination 27 (120) --
-------- -------- --------
Total $(34,547) $(50,149) $(15,517)
======== ======== ========
Identifiable Assets
Seed $195,890 $108,404 $ 87,238
Crop Protection 30,005 40,210 41,994
Corporate 13,886 78,976 30,376
Intersegment Elimination (94) (121) --
-------- -------- --------
Total $239,687 $227,469 $159,608
======== ======== ========
Depreciation and Amortization
Seed $ 6,350 $ 4,592 $ 4,199
Crop Protection 2,579 3,510 3,665
Corporate 1,085 976 1,125
-------- -------- --------
Total $ 10,014 $ 9,078 $ 8,989
======== ======== ========
Capital Expenditures
Seed $ 34,554 $ 11,987 $ 3,263
Crop Protection 865 597 213
Corporate 234 1,305 3,090
-------- -------- --------
Total $ 35,653 $ 13,889 $ 6,566
======== ======== ========
[Operating revenues, net of estimated returns, are recognized when the product
is shipped to the customer or the service is provided.]
[In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No.131, "Segment Information". Both
of these standards are effective for fiscal years beginning after December 15,
1997. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustment, and unrealized gains and losses on investments,
shall be reported, net of their related tax effect, to arrive at comprehensive
income. The Company intends to adopt SFAS No. 130 in fiscal 1999 and operating
results of prior periods will be reclassified. SFAS No. 131 amends the
requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined in SFAS No. 131, are components of an enterprise for which separate
financial information is available and is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance. The financial
information is required to be reported on the basis that is used internally for
evaluating the segment performance. As of August 31, 1997, the Company had not
yet determined the impact of SFAS No. 131.]
38
Operations By Geographic Area
Information on the Company's operations by geographic area is as follows:
Years ended August 31,
------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------- -------- -------- --------
Revenues
U.S. $162,574 $146,329 $104,780
Argentina 47,972 2,123 1,531
Other Non-U.S. 427 7,137 6,907
-------- -------- --------
$210,973 $155,589 $113,218
======== ======== ========
Operating Income/(Loss)
U.S. $(39,364) $(47,786) $(19,272)
Argentina 6,696 252 309
Other Non-U.S. (1,879) (2,615) 3,446
-------- -------- --------
$(34,547) $(50,149) $(15,517)
======== ======== ========
Identifiable Assets
U.S. $164,707 $215,582 $149,169
Argentina 65,196 3,695 1,833
Other Non-U.S. 9,784 8,192 8,606
-------- -------- --------
$239,687 $227,469 $159,608
======== ======== ========
[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.]
Transfers of products between geographic areas are at prices approximating
those charged to unaffiliated customers and are not material to any geographic
area. The Company's international operations have risks similar to the
Company's domestic operations. Additionally, international operations have the
added risks of different political environments and currency fluctuations.
The Company's international operations have risks similar to the Company's
domestic operations. Additionally, international operations have the added
risks of different political environments and currency fluctuations.
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 and losses on sales of available-for-sale securities for
1997, 1996 and 1995 were not significant. Available-for-sale securities are
summarized as follows:
39
August 31, 1997
-----------------------------------------------
Gross Gross
unrealized unrealized Estimated
(In thousands) Cost gains losses fair value
- ----------------------------- -------- ---------- ---------- ----------
Securities of the U.S.
government and its
agencies $499 $-- $-- $499
==== === === ====
August 31, 1996
-----------------------------------------------
Gross Gross
unrealized unrealized Estimated
(In thousands) Cost gains losses fair value
- ----------------------------- -------- ---------- ---------- ----------
Securities of the U.S.
government and its
agencies $18,753 $-- $(211) $18,542
Corporate debt securities 13,734 -- (92) 13,642
------- --- ----- -------
Total $32,487 $-- $(303) $32,184
======= === ===== =======
As of August 31, 1997, there were no available-for-sale securities with
original maturities of three months or less that were classified as cash
equivalents, and as of August 31, 1996, there were $31,328,000. All available-
for-sale securities at August 31, 1997 are due within one year.
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) 1997 1996
- -------------------------------- -------- --------
Trade accounts receivable $40,763 $30,219
Notes and other receivables 5,718 4,282
------- -------
46,481 34,501
Allowance for doubtful accounts (4,379) (3,801)
------- -------
$42,102 $30,700
======= =======
At August 31, 1997, the significant concentration of the Company's trade
receivables were from farmers located in the U.S., Argentina and other 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 93% and 86% of total inventories at August
31, 1997 and 1996, 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) 1997 1996
- ------------------------------------------- -------- --------
Raw materials and supplies $ 5,969 $ 3,819
Work in process 14,742 10,810
Finished goods 36,424 22,548
------- -------
$57,135 $37,177
======= =======
Planting seeds are produced by independent growers who contract specific
acreage for the production of seeds 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 seeds
are 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,
1997, the Company had short-term futures contracts totaling $27.1 million for
the purchase of commodities (principally soybean and corn) at various dates
during 1997. The fair value of these contracts at August 31, 1997, was $27.4
million. At August 31, 1997, the Company had entered into short-term contracts
totaling $5.9 million for the sale of commodities (principally corn). At August
31, 1997, the unrealized gain on these contracts totaled $.4 million.
Production of hybrid seeds 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 and maintains 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) 1997 1996
- ------------------------------------------- -------- --------
Land and improvements $ 7,093 $ 4,901
Buildings and improvements 33,238 26,452
Machinery and equipment 44,595 30,171
Leasehold improvements 291 424
Construction in progress 21,739 10,281
-------- --------
106,956 72,229
Accumulated depreciation and amortization (19,786) (17,324)
-------- --------
$ 87,170 $ 54,905
======== ========
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:
1997
Useful --------------------------------------
Life Accumulated
(In thousands) in years Cost Amortization Net Value
- ------------------------------------- -------- ------------ ---------
Goodwill 25 $20,301 $ (2,795) $17,506
Purchased technology 3-15 10,317 (4,169) 6,148
Patents 10 8,345 (1,878) 6,467
Non-compete agreements 5-7 2,681 (2,337) 344
Customer base 10 2,386 (365) 2,021
Assembled work force 5 726 (222) 504
------- -------- -------
$44,756 $(11,766) $32,990
======= ======== =======
1996
Useful -------------------------------------
Life Accumulated
(In thousands) in years Cost Amortization Net Value
- ------------------------------------- -------- ------------ ---------
Goodwill 25 $10,267 $(1,979) $ 8,288
Purchased technology 3-15 8,802 (3,451) 5,351
Patents 10 6,686 (1,126) 5,560
Non-compete agreements 5-7 2,681 (2,173) 508
Customer base 10 2,386 (131) 2,255
Assembled work force 5 726 (107) 619
------- ------- -------
$31,548 $(8,967) $22,581
======= ======= =======
During 1995, an impairment loss of $1.6 million was recognized by the Crop
Protection segment, 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
Consolidated Statement of Operations.
[The carrying value of tangible and other long-lived 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 asset, a charge for impairment is recognized to
reduce the carrying value of the intangible asset to its fair value.]
Lines of Credit and Short-term Borrowings
In April 1997, the Company entered into an agreement with DowElanco whereby
DowElanco will provide an unsecured advance up to $50 million to meet the needs
of the Company's operations. The advance, which expires in April 1998, provides
for short-term borrowings in U.S. dollars at DowElanco's cost of borrowing (5.9%
at August 31, 1997) plus 1/8% per annum. At August 31, 1997, amounts
outstanding under the advance were $13.5 million.
The company has available a $40 million unsecured revolving bank line of
credit, of which no amounts were outstanding at August 31, 1997. This line,
which expires November 30, 1997, provides for short-term borrowings in U.S.
dollars at the bank's prime rate (8.5% at August 31, 1997) less 1% or in
Eurodollars at an adjusted Eurodollar rate (5.7% at August 31, 1997) plus 1%.
On an annual basis, the Company is required to pay a commitment fee of .15% on
the unused portion.
42
The Company has available a $10 million unsecured revolving bank line of
credit, of which no amounts were outstanding at August 31, 1997. This line,
which expires February 1, 1998, provides for short-term borrowings at the bank's
reference rate (8.5% at August 31, 1997) less .50% or in Eurodollars at the sum
of the interbank rate or the LIBOR rate (5.6% at August 31, 1997) plus 1%.
Additionally, the Company is required to pay a commitment fee of .125% per annum
on the average daily unused portion of the revolving credit commitment.
The $40 million and $10 million line of credit agreements contain certain
covenants which include the maintenance of a minimum consolidated net worth,
maintenance of certain financial ratios and certain limitations on the
incurrence of indebtedness or liens on the Company's assets.
As of August 31, 1997, Morgan Seeds had $5.1 million of short-term borrowings
outstanding from various banks at interest rates ranging from 7.5% to 8% and
maturing at various dates through January 1998.
Long-term Liabilities
Long-term liabilities (amounts due after one year) at August 31 are as
follows:
(In thousands) 1997 1996
- ---------------------------------------------------- -------- --------
Unsecured note payable to bank $14,250 $ --
Pension and other liabilities 4,294 2,470
Liability for purchased technology -- 6,000
------- -------
18,544 8,470
Less current portion included in current liabilities (3,000) (3,242)
------- -------
Total long-term liabilities $15,544 $ 5,228
======= =======
The company has a $14.25 million unsecured term loan due February 1, 2002
which bears interest at a rate of 7.5% through February 1999. the rate of
interest in effect after February 1999 will be determined through negotiations
with the lender and will reflect prevailing rates in effect at that time.
Principal payments are due quarterly and total $750,000. The loan covenants
reflect the same terms as the lines of credit. Maturities on the note payable
are $3.0 million in 1998, $3.0 million in 1999, $3.0 million in 2000, $3.0
million in 2001 and $2.3 million in 2002. As of August 31, 1997, the Company
was not in compliance with certain covenants on its $14.25 million term loan.
The Company has received a waiver from the bank for up to and including August
31, 1998.
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 or $2,000. Effective
January 1, 1997, the Company began matching employee contributions by issuing
shares of the Company's common stock to the plan. Matching contributions to
these plans during the years ended August 31, 1997, 1996 and 1995 totaled
$665,000, $521,000 and $531,000, respectively.
Effective January 1, 1997, the Company adopted an Investment and Savings Plan
whereby individuals, who are employed with the Company on December 31 and who
have met other eligibility requirements, may receive contributions of 2.5% of
their base salary. At August 31, 1997, accrued contributions to the plan were
$427,000.
43
Commitments
At August 31, 1997, the Company had operating lease commitments on certain
premises, machinery and office equipment which expire at various dates through
2002. Minimum future commitments under non-cancelable lease agreements having
terms in excess of one year total: 1998, $1,424,000; 1999, $441,000; 2000,
$184,000; 2001, $98,000 and 2002, $22,000. The Company also leases equipment
and other facilities on a month-to-month basis. Rent expense under operating
leases totaled $4.3 million, $2.4 million, and $2.0 million in 1997, 1996 and
1995, respectively, and includes rent expense of $.8 million in 1997 incurred by
the Company for leased laboratory facilities from DowElanco.
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.]
[SFAS No. 128, "Earnings Per Share" prescribes new requirements for computing
earnings per share. The application of this statement will be effective
beginning with the Company's second quarter in fiscal 1998. The Company does
not believe adoption of this SFAS No. 128 will have a material impact on its
consolidated financial statements.]
Stock Incentive Plans
Directors and key employees were issued options to purchase the Company's
common stock 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, 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
Granted 1,266,500 $14.50
Exercised (346,122) $ 9.15
Canceled (109,614) $ 9.30
----------
Balance at August 31, 1996 4,117,950 $10.34
Granted 1,026,834 $17.08
Exercised (585,296) $ 8.58
Canceled (123,498) $13.86
----------
Balance at August 31, 1997 4,435,990 $12.03
==========
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. All other options vest in equal yearly
installments from the date of the grant or at the end of three years. Of the
4,435,990 outstanding options, 2,354,757 were vested as of August 31, 1997. As
of August 31, 1997, a total of 5,358,523 shares of common stock were reserved
for future issuance under the plans and 922,533 shares of common stock were
available for future grants.
44
Pursuant to the Company's 1990 Restricted Stock Issuance Plan, officers and
key employees were awarded a total of 96,000 shares of restricted stock in 1996.
As of August 31, 1997, a total of 38,500 shares of common stock were reserved
for future issuance under the plan. Compensation expense related to these stock
plans was $801,000, $689,000 and $148,000 in 1997, 1996 and 1995, respectively.
Unamortized deferred compensation expense with respect to restricted stock
issued aggregated $611,000 and $1,517,000 at august 31, 1997 and 1996,
respectively.
Pursuant to the Company's 1995 and 1988 Employee Stock Purchase Plans,
employees purchased 41,008 shares at an average price of $14.24 per share,
32,669 shares at an average price of $9.99 per share and 42,334 shares at an
average price of $7.65 per share in 1997, 1996 and 1995, respectively. As of
August 31, 1997, there were 185,891 shares of common stock reserved for future
issuance under the Plan.
[As allowed under SFAS No. 123, "Accounting for Stock-Based Compensation" the
Company has elected to continue accounting for stock compensation under APB
Opinion No. 25, "Accounting for Stock Issued to Employees."] In 1997,
compensation expense recognized under the Company's stock plans totaled $7.3
million and related solely to severance expense for the Company's former
chairman and chief executive officer as discussed in "Other Charges." If the
determination of compensation expense for the Company's option plans had been
based on the fair value at the grant dates for awards under these plans
consistent with SFAS No. 123, the Company's net loss and net loss per common
share would have increased to the following pro forma amounts:
(In thousands except for
per share data) 1997 1996
- --------------------------------- ---------- ----------
Net loss:
As reported $(37,683) $(47,636)
Pro forma (41,418) (49,256)
Loss per share:
As reported $ (1.22) $ (1.81)
Pro forma (1.34) (1.87)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants in 1997 and 1996:
1997 1996
- --------------------------------- ---------- ----------
Expected dividend yield 0.0% 0.0%
Expected volatility 45.0% 50.0%
Risk-free interest rates 6.4% 5.6%
Expected option lives (years) 5.0 5.0
The effects of applying SFAS No. 123 for pro forma disclosure purposes are not
likely to be representative of the effects on pro forma net income (loss) in
future years because they do not take into consideration pro forma compensation
expense related to grants made prior to 1996.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of its employee stock options.
45
The weighted-average fair values of options granted during 1997 and 1996 were
$6.69 and $6.22, respectively. The following table summarizes information about
stock options outstanding as of August 31, 1997:
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Shares contractual Exercise Shares Exercise
Exercise prices Outstanding Life (years) Price Exercisable Price
- --------------- ----------- ------------ --------- ----------- ---------
$ 4 to $ 7 161,168 .67 $ 5.72 161,168 $ 5.72
8 to 11 2,052,768 6.45 8.68 1,816,508 8.64
12 to 15 1,365,220 7.24 13.96 1,161,871 13.97
16 to 25 856,834 8.99 18.17 146,324 18.24
---------- --------- ---- ------ --------- ------
$ 4 to $25 4,435,990 6.97 $12.03 3,285,871 $10.80
========== ========= ==== ====== ========= ======
Stockholder Rights Agreement
In October 1995, the Company entered into an Amended and Restated Rights
Agreement ("the Rights Agreement") which amended and restated the 1992
Stockholder Rights Agreement. The Rights Agreement 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 entitle the holders (other
than the 25% holder) to purchase one one-hundredths of a Preferred share upon
payment of an exercise price per Right. The exercise price is currently $65.00;
however, the purchase price is subject to adjustment under certain conditions.
Under certain conditions, the Rights may be redeemed by the Company's 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 February 20, 2002.
Senior Convertible Cumulative Preferred Stock, Series A
In January 1996, Lubrizol converted 3,158 shares of the Company's Series A
Senior Convertible Cumulative Preferred Stock, representing their entire
interest in preferred stock, into 1,815,274 shares of common stock at a rate of
$17.398 per share which was based on a premium of 25% over the average closing
price of the Company's common stock for the 60 days prior to the conversion.
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, 1994 2,950 $ 29,501
Preferred stock dividend accrual 150 1,503
------ --------
Balance at August 31, 1995 3,100 $ 31,004
preferred stock dividend accrual 58 578
Conversion to common stock (3,158) (31,582)
------ --------
Balance at August 31, 1996 -- $ --
====== ========
At August 31, 1997, there were 3,940 shares authorized for issuance of the
Company's Series A Preferred Stock, $.001 par value, and no outstanding shares.
46
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
$3.3 million, $4.4 million and $3.0 million in 1997, 1996 and 1995,
respectively.
Related Party Transactions
In December 1995, the Company entered into an agreement with Pioneer to
develop transgenic crops with insect resistance. Under the agreement, Pioneer
purchased 3,000,000 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 calendar year 1998.
Pioneer will receive non-exclusive rights to all Bt crop protection technology
and associated technologies co-developed 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
worldwide rights to license jointly developed technology to third parties. No
proprietary seed lines will be shared by the companies. Contract revenues
recognized under this agreement totaled $4.9 million in 1997 and $2.4 million in
1996. Deferred revenues of $3.5 million are included in the Consolidated
Balance Sheet at August 31, 1997. in 1997, DowElanco purchased 1,000,000 shares
of common stock of the Company from Pioneer.
Lubrizol, a related party through February 1996, provided to Mycogen Seeds
funding for research and development projects related to planting seeds that
yield plants capable of producing oils with special characteristics. Related
party research revenues under these agreements totaled $1.2 million and $2.6
million in 1996 and 1995, respectively. Mycogen Seeds was the exclusive
supplier of specified planting seed to a division of Lubrizol and managed the
production of crops from such planting seed through September 1996. Related
party operating revenues recognized under this arrangement through February
1996, totaled $1.4 million and $2.5 million in 1996 and 1995, respectively.
In January 1996, the Company agreed to acquire certain rights in oilseed
technology from Lubrizol for $8.0 million. The Company made payments of $2.5
million and $2.0 million in 1997 and 1996, respectively, and will make a final
payment of $3.5 million in 1998.
In February 1996, Lubrizol sold its entire interest in the Company,
9,502,348 shares of common stock or 36.58% of the Company's outstanding shares
of common stock, to DowElanco. As of August 31, 1997, DowElanco owned 17,923,245
shares of the Company's common stock, or 57.11% of the Company's outstanding
shares of common stock, and may acquire additional shares of the Company's
common stock subject to certain restrictions. In 1997, the Company recorded $.7
million of operating revenues with DowElanco related to sales of seed and $.7
million of contract revenue related to the development of specialty canola and
high oil corn varieties.
Other Charges
(In thousands) 1997 1996
- ---------------------------------- -------- --------
Impairment of facilities and costs
to exit those facilities $11,277 $14,905
Severance 9,050 --
Patent litigation fees 9,777 2,373
Acquired in-process technology -- 10,313
Equity in net loss of investees 1,626 --
------- -------
$31,730 $27,591
======= =======
47
The Company has an exclusive manufacturing agreement through 2010 for certain
of its biopesticide products. Under the terms of the agreement, the Company
pays for the actual cost of manufacturing, excluding depreciation, plus a fee
based on the actual number of units produced. The Company originally paid $11.2
million to the manufacturer to fund the construction of a manufacturing facility
which was classified as an other asset. In August 1997, the Company's Crop
Protection segment restructured its biopesticide unit as part of a corporate
initiative to achieve operating profitability for each of the Company's business
units for the fiscal year ending August 31, 1998. The restructuring resulted in
a write-down of the Company's underutilized biopesticide production plant and
overhead reductions to bring costs in line with projected net cash flows.
Accordingly, the Company recognized $9.8 million of impairment costs and $.8
million of exit costs related to this restructuring. The impairment and exit
costs are included in other charges in the Consolidated Statements of
Operations.
The Company's Seed segment recognized impairment losses and exit costs
totaling $13.4 million and $1.0 million, respectively, during 1996 as a result
of management's decision to dispose of or sell certain corn production plants
and related assets that did not meet quality production standards in connection
with a plan to upgrade the quality of seeds production. In 1997, impairment
losses of $.6 million were recorded as a result of adjustments to the estimates
made in 1996. The fair values of the assets were based on letters of intent
from prospective buyers and management estimates. The impairment losses and
exit costs are included in other charges in the Consolidated Statements of
Operations. The carrying amount of the assets held for sale at August 31, 1997
total $.4 million and is included in other current assets in the Consolidated
Balance Sheets.
In connection with the resignation of the Company's former chairman and chief
executive officer, Dr. Jerry Caulder, the Company incurred severance charges of
$9.1 million. These charges include non-cash stock compensation of $7.3 million
and severance and other benefits of $1.8 million. In connection with Dr.
Caulder's resignation, Dr. Caulder and DowElanco entered into an agreement
whereby Dr. Caulder has the option to sell to DowElanco any shares acquired by
Dr. Caulder through the surrender of his stock options to the Company at prices
based on a specified formula. This option becomes available upon Dr. Caulder's
resignation from the board of directors of Mycogen and expires after six months.
Options where vesting was accelerated are "marked to market" each quarter until
the options are exercised or expire. For the year ended August 31, 1997, these
charges totaled $2.3 million based on the revaluation of 389,445 options to
$24.75, the closing price of the Company's stock at August 31, 1997. The
Company will incur charges or credits each quarter based on fluctuations in the
value of the Company's stock until the options are exercised or expire.
The Seed segment incurred $9.8 million and $2.4 million in 1997 and 1996,
respectively, to enforce its patent position and license rights to insect
resistance and herbicide tolerance technology in plants. The Company expects to
continue to incur significant legal expenses in defending its positions in these
matters. Because of the nature of its business, the Company is subject to
pending and threatened legal actions which arise out of the normal course of its
business. Based on information furnished by legal counsels, management believes
the outcome of the existing pending and threatened legal actions will not have
an adverse effect on the financial conditions of the Company.
In connection with the acquisition of UAS and the rights in oilseed technology
from Lubrizol in 1996, $10.3 million of the purchase price was allocated to
certain technologies not yet completed and, therefore, was written-off as
acquired in-process technology as of the acquisition date.
The Seed segment recognized equity losses of $1.6 million incurred by the
Company's European subsidiaries through the date they were transferred to
Verneuil, and by an oilseed joint venture with Verneuil.
Income Taxes
At August 31, 1997, the Company has a federal tax net operating loss
carryforward of approximately $129.8 million and a California net operating loss
carryforward of approximately $22.8 million. The Company has federal and state
research tax credit carryforwards totaling approximately $2.7 million and $.5
million,
48
respectively. The federal tax loss and credit carryforwards will expire in years
1998 through 2012 unless previously utilized. California tax loss and credit
carryforwards, if not utilized, will expire in years 1998 through 2002. The
Company also has a capital loss carryforward of $2.6 million which will expire
in 2000 if not utilized.
At August 31, 1997 and 1996, approximately $6.0 million and $3.5 million,
respectively, of the deferred tax assets relate to tax benefits associated with
the exercise or disqualifying disposition of stock options. Such benefits are
credited to additional paid-in capital when realized.
The Company incurred a change in ownership, as defined by Internal Revenue
Code Section 382, during 1996. Such change of ownership could limit the use of
the net operating loss and tax credit carryforwards previously described in any
one year. 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.
For financial reporting purposes, net income (loss) before dividends on
preferred stock includes the following components:
Years ended August 31,
------------------------------
(In thousands) 1997 1996 1995
- ---------------------- --------- -------- --------
Pretax income (loss):
United States $(39,194) $(44,440) $(17,785)
Foreign 1,511 (2,618) 3,342
-------- -------- --------
$(37,683) $(47,058) $(14,443)
======== ======== ========
The components of the provision for income taxes are as follows:
Years ended August 31,
------------------------------
(In thousands) 1997 1996 1995
- ---------------------- -------- --------- --------
Current
Federal $ -- $ -- $ --
State -- -- --
Foreign 852 -- --
-------- --------- --------
852 -- --
Deferred
Federal -- -- --
State -- -- --
Foreign 682 -- --
-------- --------- --------
682 -- --
-------- --------- --------
Provision $ 1,534 $ -- $ --
======== ========= ========
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:
49
(In thousands) 1997 1996
- ---------------------------------------------- -------- --------
Deferred tax assets:
Net operating loss carryforwards $ 46,806 $ 24,120
Tax basis of inventory greater than book 3,513 4,532
Reserve for impaired assets 6,110 6,150
Research credit carryforwards 3,247 3,247
Deferred revenue 1,422 3,131
Capitalized research expenditures 2,539 3,016
Acquired in-process technology 2,116 2,706
Tax basis of receivables greater than book 1,778 1,455
Capital loss carryforward 1,073 1,073
Foreign deferred tax assets 2,072 --
-------- -------
Total deferred tax assets 70,676 49,430
Less: Valuation allowance (60,791) (46,633)
-------- --------
Net deferred tax assets 9,885 2,797
Tax depreciation in excess of book (7,099) (2,473)
Other net deferred tax liabilities (714) (324)
-------- --------
Net deferred tax assets $ 2,072 $ --
======== ========
Due to the uncertainty surrounding the future realization of the deferred tax
assets, a valuation allowance of $60.8 million was included as a reduction of
deferred tax assets at August 31, 1997. The net deferred tax assets of $2.1
million related solely to Morgan Seeds and are comprised of $2.0 million of
current deferred tax assets and $.1 million of non-current deferred tax assets.
The net change in the valuation allowance was $14.2 million, representing a 100%
valuation allowance against the net increase in U.S. deferred tax assets for
fiscal 1997.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is as
follows:
Years ended August 31,
--------------------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------ ------------- ------------ -------------
Tax at U.S. federal statutory rate $ (12,267) $ (16,470) $ (5,055)
State taxes, net of federal benefit (2,103) (2,823) (867)
Benefits eliminated by valuation allowance -- 19,293 5,922
Change in valuation allowance 14,158 -- --
Effect of non-deductible items 1,314 -- --
Other 432 -- --
------------ ----------- ------------
Tax provision $ 1,534 $ -- $ --
============ =========== ============
Subsequent Events
On November 12, 1997, the Company's Board of Directors approved a private sale
of $75 million of newly issued common shares to DowElanco. These shares may be
sold in a single transaction or in a series of transactions totaling $75
million. The sales price will be calculated for each transaction based on the
average of the Company's closing price on Nasdaq for the 90 calendar days
preceding the transaction.
On November 14, 1997, DowElanco increased the limit of its unsecured advance
to the Company from $50 million to $75 million and extended the maturity date of
such advance to September 30, 1998.
50
MYCOGEN CORPORATION
QUARTERLY FINANCIAL DATA
(Unaudited)
(In thousands, except per share data) Quarter
- --------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
1997:
Net operating revenues $ 16,290 $ 70,281 $84,324 $ 31,512
Cost of operating revenues 10,148 44,169 52,552 19,988
Gross profit 6,142 26,112 31,772 11,524
Contract and other revenues 2,410 2,048 1,883 2,225
Operating expenses 18,919 24,187 33,094 42,463
Operating income (loss) (10,367) 3,973 561 (28,714)
Non-operating income (loss) 139 (168) (619) (954)
Credit (provision) for income taxes -- (1,122) 622 (1,034)
Net income (loss) applicable to common shares (10,228) 2,683 564 (30,702)
Net income (loss) per common share (.33) .08 .02 (.98)
1996:
Net operating revenues $ 12,049 $ 35,575 $78,015 $ 21,161
Cost of operating revenues 7,824 21,891 53,406 10,387
Gross profit 4,225 13,684 24,609 10,774
Contract and other revenues 1,571 2,580 2,360 2,278
Operating expenses 13,363 41,255 24,129 33,483
Operating income (loss) (7,567) (24,991) 2,840 (20,431)
Non-operating income 155 641 681 1,614
Dividends on preferred stock 384 194 -- --
Net income (loss) applicable to common shares (7,796) (24,544) 3,521 (18,817)
Net income (loss) per common share (.40) (1.00) .11 (.61)
The Company's fiscal quarters end in November, February, May and August.
51
MYCOGEN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(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, 1997
- ---------------------------------
Allowance for doubtful accounts $3,801 $1,553 $ -- $ (975)/1/ $4,379
Inventory allowances $9,519 $2,437 $ -- $(7,572)/2/ $4,384
Year ended August 31, 1996
- ---------------------------------
Allowance for doubtful accounts $2,585 $1,990 $ -- $ (774)/1/ $3,801
Inventory allowances $4,288 $9,737 $ -- $(4,506)/2/ $9,519
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
/1/ Amount relates to accounts receivable written off.
/2/ Amount relates to inventory written off.
52
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders
Mycogen Corporation
We have audited the accompanying consolidated balance sheets of Mycogen
Corporation as of August 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended August 31, 1997. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of
Mycoyen, S.A., a wholly-owned subsidiary, which statements reflect total assets
of $65,196,000 as of August 31, 1997, and total revenues of $48,156,000 for the
year then ended. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for Mycoyen, S.A., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Mycogen Corporation at
August 31, 1997 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended August 31, 1997, 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 therein.
/s/ Ernst & Young LLP
San Diego, California
October 10, 1997, except for
the two paragraphs under "Subsequent
Events" in the Notes to Consolidated
Financial Statements as to which the
date is November 14, 1997
53
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of
Mycoyen, S.A.
Buenos Aires, Argentina
We have audited the accompanying consolidated balance sheet of Mycoyen, S.A. and
its subsidiary as of august 31, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the Unites States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the companies at August 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
Our audits also comprehended the translation of the Argentine peso amounts into
U.S. dollar amounts for the purpose of consolidation with the financial
statements of Mycogen Corporation. In our opinion, such translation has been
made in conformity with accounting principles generally accepted in the United
States of America, as set forth in Statement of Financial Accounting Standards
No. 52, applicable to foreign currency financial statements to be incorporated
in the financial statements of an enterprise by consolidation.
Buenos Aires, October 1, 1997.
/s/ DELOITTE & Co.
DELOITTE & Co.
Hugo Alberto Luppi (Partner)
Contador Publico (U.B.A.)
C.P.C.E.C.F. - Tomo 56 - Folio 96
54
Copies of Form 10-K
Shareowners may call (888) SEE-MYCO (888-733-6924) for a stock quote, voice
recordings, fax or mail on demand of news releases and recent SEC filings,
including forms 10-K, 10-Q and 8-K. This information, product information and
other Company information are also available on Mycogen's website:
http://www.mycogen.com. Shareowners may reach Mycogen's Investor Relations
group by calling (800) 745-7475, between the hours of 7:30 a.m. and 4:30 p.m.,
Pacific time, via e-mail at info@mycogen.com, by telefax at (619) 453-0142, or
by writing to Investor Relations, Mycogen Corporation, 5501 Oberlin Drive, San
Diego, CA 92121-1718.
Annual Meeting
The Annual Meeting of Mycogen Corporation will be held at 10:00 a.m. on January
8, 1998, in the Corn Conference room at the Company's headquarters located at
5501 Oberlin Drive, San Diego, California. All shareowners are cordially
invited to attend.
55