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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended February 29, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to __________________
Commission file number: 0-15881
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MYCOGEN CORPORATION
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(Exact name of registrant as specified in its charter)
California 95-3802654
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5501 Oberlin Drive,
San Diego, California 92121
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(Address of principal executive offices) (Zip Code)
(619) 453-8030
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
---- ----
30,570,160 shares of Common Stock were outstanding as of March 31, 1996.
1
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Part 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
MYCOGEN CORPORATION
INTERIM CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1996 1995 1996 1995
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net operating revenues............... $ 35,575 $ 27,661 $ 47,624 $ 37,170
Contract and other revenues.......... 2,580 1,715 4,151 3,611
------------ ------------ ------------ ------------
Total revenues............... 38,155 29,376 51,775 40,781
------------ ------------ ------------ ------------
Costs and expenses:
Cost of operating revenues......... 23,446 16,997 31,269 23,242
Selling, general and administrative 11,250 8,024 19,431 15,039
Research and development........... 5,080 5,025 9,659 10,221
Amortization of intangible assets.. 480 540 1,084 1,033
Special charges.................... 22,890 - 22,890 -
------------ ------------ ------------ ------------
Total costs and expenses..... 63,146 30,586 84,333 49,535
------------ ------------ ------------ ------------
Operating loss ...................... (24,991) (1,210) (32,558) (8,754)
Interest income and expense, net... 625 324 773 888
Exchange gain ..................... 16 47 23 12
------------ ------------ ------------ ------------
Net loss............................. (24,350) (839) (31,762) (7,854)
Dividends on preferred stock......... (194) (373) (578) (742)
------------ ------------ ------------ ------------
Net loss applicable to common shares. $ (24,544) $ (1,212) $ (32,340) $ (8,596)
============ ============ ============ ============
Net loss per common share $ (1.00) $ (.06) $ (1.47) $ (.45)
============ ============ ============ ============
Weighted average number of shares 24,426 19,138 21,937 19,118
============ ============ ============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Condensed Financial Statements.
2
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MYCOGEN CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31,
1996 1995
ASSETS (UNAUDITED) (NOTE)
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<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 38,924 $ 5,687
Securities available-for-sale.................... 36,429 11,913
Accounts and notes receivable, net of allowances. 35,659 27,402
Inventories...................................... 62,985 33,633
Other current assets............................. 5,031 1,267
------------ ----------
Total current assets........................... 179,028 79,902
Net property, plant and equipment.................. 48,362 49,646
Net intangible assets.............................. 23,716 17,759
Other assets....................................... 14,077 12,301
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Total assets....................................... $ 265,183 $ 159,608
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 14,787 $ 6,760
Accrued compensation and related taxes........... 4,186 3,553
Deferred revenues................................ 33,044 5,670
Other current liabilities........................ 10,878 5,225
------------ ----------
Total current liabilities...................... 62,895 21,208
Long-term liabilities.............................. 7,085 3,291
Minority interest.................................. - 21,406
Stockholders' equity:
Common stock, $.001 par value, 40,000,000 shares
authorized; 30,534,281 and 19,400,764 shares
issued and outstanding at February 29, 1996
and August 31, 1995, respectively.............. 31 19
Additional paid in capital....................... 329,686 216,436
Deficit.......................................... (134,514) (102,752)
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Total stockholders' equity..................... 195,203 113,703
------------ ----------
Total liabilities and stockholders' equity......... $ 265,183 $ 159,608
============ ==========
</TABLE>
Note: The balance sheet at August 31, 1995 has been derived from the audited
financial statements at that date.
See accompanying Notes to Interim Consolidated Condensed Financial Statements.
3
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MYCOGEN CORPORATION
INTERIM CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net loss....................................... $ (31,762) $ (7,854)
Items which did not use cash:
Special charges ............................. 20,890 -
Depreciation ................................ 2,472 2,487
Amortization of intangible assets............ 1,084 1,033
Other expense not requiring cash............. 1,003 335
Changes in operating assets and liabilities:
Accounts and notes receivable................ 4,935 (377)
Inventories.................................. (10,666) (18,127)
Prepaid expenses............................. (1,473) (259)
Accounts payable............................. 1,005 1,467
Deferred revenues............................ 19,128 14,345
Other current liabilities.................... (4,847) (3,281)
------------ ------------
Cash provided by (used in) operating
activities............................... 1,769 (10,231)
------------ ------------
Investing activities:
Proceeds from sales of available-for-sale
securities................................... 13,420 2,000
Proceeds from maturities of available-for-sale
securities... 564 4,462
Purchases of available-for-sale securities..... (38,431) -
Capital expenditures........................... (1,990) (3,650)
Prepaid contract manufacturing................. - (6,758)
Change in intangibles and other assets......... (793) (742)
------------ ------------
Cash used in investing activities.......... (27,230) (4,688)
------------ ------------
Financing activities:
Net change in short-term borrowings............ - 3,800
Proceeds from long-term borrowings............. - 2,500
Payments on long-term borrowings............... (208) (95)
Proceeds from sale of common stock............. 58,744 169
------------ ------------
Cash provided by financing activities........ 58,536 6,374
------------ ------------
Effect of exchange rate changes on cash and cash
equivalents.................................... 162 275
------------ ------------
Increase (decrease) in cash and cash equivalents. 33,237 (8,270)
Cash and cash equivalents at beginning of period. 5,687 8,681
------------ ------------
Cash and cash equivalents at end of period....... $ 38,924 $ 411
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Condensed Financial Statements.
4
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PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (continued).
Mycogen Corporation
-------------------
Notes to Interim Consolidated Condensed Financial Statements
General
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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. The interim
financial statements have been prepared by the Company, without audit, according
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (which include only normal recurring adjustments) necessary to state
fairly the financial position, results of operations and cash flows as of and
for the periods indicated.
It is suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto included in the Annual Report and
Form 10-K of the Company for the fiscal year ended August 31, 1995.
The Company's business is highly seasonal. Operating revenues are expected to
be concentrated principally in the quarters ending in February and May as a
result of the North American agricultural growing season. Consequently,
operating revenues and results of operations for the three months ended and six
months ended February 29, 1996 are not indicative of operating revenues and
results to be expected for a full fiscal year.
Acquisition of United AgriSeeds, Inc.
- -------------------------------------
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 seed business, United AgriSeeds, Inc. ("UAS"). The principal seed
products of UAS are corn and soybean. As of February 29, 1996 DowElanco owned
14,088,366 shares of the Company's common stock or 46.14%, and may acquire
additional shares of the Company's common stock subject to certain restrictions.
The acquisition of UAS is accounted for as a purchase and, accordingly, the
assets and liabilities of UAS are included in the Consolidated Balance Sheet as
of February 29, 1996. The results of operations of UAS from the date of
acquisition will be reflected in the consolidated financial statements of the
Company commencing with the third fiscal quarter. The acquisition resulted in a
purchase price allocation to in-process technology of $2.6 million, which was
written-off upon acquisition. It is anticipated that the required pro forma
financial information will be available within the next 30 days and will be
filed separately under form 10-Q/A.
5
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Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
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The Company's Seed Segment recognized impairment losses and exit costs totaling
$11.7 million and $.9 million, respectively, during the quarter ended February
29, 1996 as a result of management's decision to dispose of or sell certain corn
production plants and related assets that do not meet quality production
standards in connection with a plan to upgrade the quality of seed production.
The asset disposals will occur during the third quarter of 1996. The production
plants are expected to be sold during 1996 and 1997. 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 special charges in the
Consolidated Statement of Operations. The carrying amount of the assets held
for sale total $3.5 million, of which $2.3 million is included in other current
assets and $1.2 million is included in other long-term assets in the
Consolidated Balance Sheet at February 29, 1996. Exit costs totaling $.9
million are included in other current liabilities at February 29, 1996.
Purchase and Write-off of In-Process Technology
- -----------------------------------------------
In January 1996, the Company agreed to reacquire certain rights in oil seed
technology from SVO Specialty Products, a subsidiary of Lubrizol, for $8.0
million. Of the $8.0 million in rights acquired, $7.2 million was allocated to
certain technologies not yet completed and, therefore, was written-off as in-
process technology on the acquisition date. The Company made an initial payment
of $2.0 million and will pay $2.5 million and $3.5 million in January 1997 and
1998, respectively.
Common Shares Issued for Lubrizol's Interest in MPS and Conversion
- ------------------------------------------------------------------
of Preferred Stock
- ------------------
In January 1996, The Lubrizol Corporation ("Lubrizol") sold its 19.46% ownership
interest in Mycogen Plant Sciences (formerly MPS, now "Mycogen Seeds") to the
Company for 1,538,008 shares of common stock. In a simultaneous transaction,
Lubrizol converted 3,158 shares of 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 25% over the average closing price of the Company's common stock for the 60
days prior to the conversion. At February 29, 1996 there were 3,940 shares
authorized for issuance of Series A Preferred Stock, $.001 par value, and no
outstanding shares. At August 31, 1995 there were 3,100 shares issued to
Lubrizol and outstanding with an aggregate liquidation preference of $31
million.
In February 1996 Lubrizol sold its entire interest in the Company, 9,502,348
shares of common stock or 36.58%, to DowElanco for $126 million. DowElanco is a
joint venture partnership between Dow Chemical and Ely Lilly and Company engaged
in the discovery, development, manufacture and distribution of agricultural
products used in crop protection and production, and for industrial pest
control.
6
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Supplemental Schedule of Non-Cash Investing and Financing Activities
- --------------------------------------------------------------------
In conjunction with the acquisition of UAS and the remaining ownership interest
in Mycogen Seeds in 1996, and an acquisition in 1995, non-cash investing and
financing activities were allocated as follows:
<TABLE>
<CAPTION>
Six months ended
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(In thousands) February 29, February 28,
1996 1995
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<S> <C> <C>
Business acquisitions:
Fair value of assets acquired, other than cash $ 55,692 $ 1,350
Liabilities assumed (20,573) --
Liabilities and acquisition costs incurred (2,512) --
Minority interest purchased from Lubrizol 21,406 --
Common stock issued (54,013) (1,350)
------------ ------------
Net cash paid for acquisitions $ -- $ --
============ ============
</TABLE>
Other non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Six months ended
----------------------------
(In thousands) February 29, February 28,
1996 1995
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<S> <C> <C>
Technology rights acquired by incurring
directly related liabilities $ 6,000 $ --
============ ============
Dividends on preferred stock $ 578 $ 742
============ ============
Common stock issued upon conversion
of convertible preferred stock $ 31,582 $ --
============ ============
</TABLE>
Inventories
- -----------
Inventories are comprised of:
<TABLE>
<CAPTION>
February 29, August 31,
(In thousands) 1996 1995
------------ ----------
<S> <C> <C>
Raw materials and supplies $ 5,580 $ 5,895
Work in process 12,231 3,578
Finished goods 45,174 24,160
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Total $ 62,985 $ 33,633
============ ==========
</TABLE>
Accumulated Depreciation and Amortization
- -----------------------------------------
Accumulated depreciation of property, plant and equipment was $16.2 million and
$16.7 million at February 29, 1996 and August 31, 1995, respectively.
Accumulated amortization of intangible assets was $7.8 and $6.8 million at
February 29, 1996 and August 31, 1995, respectively.
7
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Income Taxes
- ------------
No provision for income tax is recognized for the three and six months ended
February 29, 1996 since the Company anticipates that the effective tax rate for
the year ending August 31, 1996 will be zero due to the available net operating
loss carryforwards.
Net Loss Per Common Share
- -------------------------
Net loss per common share for the three and six months ended February 29, 1996
and February 28, 1995 is determined by deducting dividends on preferred stock
from net loss and dividing the net result by the weighted average number of
common shares outstanding during the respective period. The dilutive effect of
common shares issuable under stock options was less than 3% and was not included
in the computation of primary earnings per share.
Research and Development Arrangement
- ------------------------------------
In December 1995, the Company entered into an agreement with Pioneer to develop
transgenic crops with built-in 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 1998. Pioneer will receive
non-exclusive rights to all Bt crop protection technology and associated
technologies codeveloped by the Company and Pioneer during the next 10 years.
The Company and Pioneer are able to market their own products resulting from the
collaboration, royalty-free, in North America. Pioneer will pay a royalty to
Mycogen for jointly developed technology that it markets through seed products
outside of North America. The Company has exclusive world wide rights to
license jointly developed technology to third parties. No proprietary seed
lines will be shared by the companies. Contract revenues recognized under this
agreement totaled $.7 million for the three and six months ended February 29,
1996. Deferred revenues of $9.3 million are included in the Consolidated
Balance Sheet at February 29, 1996.
8
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PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
ACQUISITION
In February 1996, the Company acquired all of the shares of common stock of
United AgriSeeds, Inc. ("UAS"). The assets and liabilities of UAS are included
in the Consolidated Balance Sheet at February 29, 1996 and the results of
operations of UAS from the acquisition date will be reflected in the Company's
Consolidated Statement of Operations commencing with the third quarter results.
SEASONALITY
The Company's businesses are highly seasonal as described in each segment
summary. Revenues, expenses and losses for the three and six months ended
February 29, 1996 are not indicative of the revenues, expenses and income or
loss to be expected for a full fiscal year.
SUMMARY
Mycogen develops and markets value-added planting seeds for major agricultural
crops and environmentally compatible biopesticide products and provides crop
protection services to control pests and improve food and fiber production. The
Company is organized into two business units, Seed and Crop Protection.
Varying climatic conditions can shift revenues between quarters. Operating
revenues and seed costs are impacted by weather. Weather can influence pest
populations, the effectiveness of pesticides and seeds, seed production yields,
commodity prices, growers' planting decisions and other factors affecting
revenues and costs. Operating revenues also depend on a number of other
factors, including market acceptance of products, competition and U.S. and
foreign government policies that affect crop acreage and farm income. Planted
acreage is a key factor in determining volumes of seed, crop protection services
and biopesticide products purchased by growers.
Weather, competition, regulation and other external factors may affect
Mycogen's ability to increase operating revenues and achieve profitability.
The Company also must continue to invest in commercializing existing products
and in discovery and development of new products, so the trend in losses from
operations may continue if revenues do not increase.
SEGMENT OPERATING REVENUES AND OPERATING LOSS
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------------- ---------------------------
February 29, February 28, February 29, February 28,
(In thousands) 1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenues
Seed $ 30,930 $ 23,908 $ 32,056 $ 24,504
Crop Protection 4,645 3,753 15,568 12,666
------------ ------------ ------------ ------------
Total Operating
Revenues $ 35,575 $ 27,661 $ 47,624 $ 37,170
============ ============ ============ ============
Operating Income
(Loss)
Seed $ (21,830)* $ 2,158 $ (29,471)* $ (4,533)
Crop Protection (2,560) (2,879) (2,224) (3,395)
Corporate (601) (489) (863) (826)
------------ ------------ ------------ ------------
Total Operating
Loss $ (24,991)* $ (1,210) $ (32,558)* $ (8,754)
============ ============ ============ ============
</TABLE>
9
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* The net operating loss for the Seed segment includes special charges of $22.9
million recorded during the second quarter of fiscal 1996.
SEED SEGMENT
OPERATING REVENUES: Operating revenues for the three months and six months
ended February 29, 1996 increased over the same periods in 1995 from $23.9
million and $24.5 million to $30.9 million and $32.1 million, respectively.
Higher sales of corn products resulting from more corn acreage planted this year
coupled with higher sales of lead corn products NatureGard(TM) (Bt-based corn
borer resistance and native resistance varieties) and Totally Managed
Feedstuffs(TM) accounted for $5.2 million of the increase on a year-to-date
basis. Earlier shipments of soybean and sunflower sales this year accounted
for another $1.9 million of the increase. The majority of 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.
OPERATING INCOME (LOSS): Excluding special charges of $22.9 million recognized
during the second quarter of fiscal 1996, Seed operating income for the three
months ended February 29, 1996 decreased $1.1 million and operating losses for
the six months ended February 29, 1996 increased $2.0 million compared to the
same periods in fiscal 1995. Higher expenses for sales and promotion efforts
and higher legal fees incurred to enforce the Company's patent position
accounted for the majority of the increase in expenses on a quarter and year-to-
date basis. It is expected that the Company will continue to incur legal
expenses associated with the ongoing enforcement of its patent estate. These
higher costs were slightly offset by higher dollar gross margins in 1996 than in
1995 as a result of the significant increase in volumes of corn seed sold.
However, gross profit margins as a percent of sales have declined due to higher
seed cost of goods sold. There are three major factors impacting seed costs; 1)
how much the Company pays growers for its seed crop, 2) plant utilization and 3)
the amount of product discards and obsolescence ("D&O"). Last summer's dry
spell, followed by early frosts reduced 1995 planting seed yields. This,
coupled with an already low production plan, resulted in low plant utilization.
The Company recognized the first two factors early on and included their effect
in the 1996 budget, but the Seed segment experienced a much higher level of
product D&O than originally anticipated. Due to a commitment by the Company to
have consistent quality product performance, the Company decided to raise
quality standards and, as a result, seed discards are higher than anticipated.
In fiscal 1995, the Seed segment reported full year margins of 34%, including
extra D&O charges and other cost adjustments recorded in the second half of the
year. Because of the reasons stated above, the Company does not expect any
significant improvement in full year margins for fiscal 1996.
SPECIAL CHARGES: Special charges recognized during the second quarter of 1996
totaled $22.9 million and are comprised of impairment losses of $12.6 million
related to the planned disposal and sale of certain corn production plant
assets, write-offs of acquired in-process technology totaling $9.8 million
related to certain rights in oil seed technology acquired from SVO and related
to the acquisition of UAS.
10
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CROP PROTECTION SEGMENT
OPERATING REVENUES: Crop Protection operating revenues increased $.9 million and
$2.9 million to $4.6 million and $15.6 million for the three months and six
months ended February 29, 1996, respectively, compared to the same periods last
year. Biopesticides sales of new products, Mattch(TM) and Scythe(R), and higher
shipments of MVP(R) powder to Kubota accounted for $.8 million and $1.4 million
of the increases on a quarter-to-date and year-to-date basis, respectively.
Soilserv accounted for the remainder of the increase on a year-to-date basis as
a result of higher penetration this year into the winter crop protection markets
in Arizona. The majority of Crop Protection revenues are recorded during the
third and fourth fiscal quarters. Second quarter operating revenues are not
significant.
OPERATING LOSS: The Crop Protection segment recognized operating losses of $2.6
million and $2.2 million for the three months and six months ended February 29,
1996 compared to $2.9 million and $3.4 million, respectively, for the same
periods in fiscal 1995. The improvement on a year to date basis in operating
results is due mainly to higher gross profits of $1.6 million due to higher
sales volumes during 1996 coupled with lower biopesticide manufacturing costs.
NON-OPERATING ITEMS
Non-operating income items for the quarter ended February 29, 1996 increased by
$.3 million compared to the same period in 1995 due mainly to higher net
interest income as a result of more cash available for investment during the
quarter. On a year to date basis non-operating items remained relatively flat
for 1996 compared to the same period in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and securities available-for-sale increased
by $57.8 million to $75.4 million during the six months ended February 29, 1996.
This increase was due primarily to proceeds of $30 million, $26.4 million and
$2.3 million from the sale of common stock to Pioneer, DowElanco and employees,
respectively, and $10.0 million in research funding from Pioneer. These
proceeds were reduced by net cash used in operations of $8.2 million, cash paid
to SVO for technology rights of $2 million and capital expenditures which
totaled $2.0 million. The Company has a $25 million bank line of credit
facility, which expires November 30, 1996, to fund portions of its seasonal
working capital needs, all of which was unused at February 29, 1996.
In December 1995, the Company signed a definitive agreement for technology
collaboration with Pioneer. Under the agreement, Pioneer purchased three
million shares of the Company's common stock for $30 million and has provided
$10 million in research and development funding. Pioneer will provide an
additional $11 million in funding near the end of 1998.
In January 1996, Lubrizol converted its entire interest in shares of
preferred stock into 1,815,274 shares of common stock of the Company and sold
its 19.46% ownership interest in Mycogen Seeds to the Company for 1,538,008
shares of common stock. In February 1996, the Company issued common stock to
DowElanco in exchange for $26.4 million in cash and all of the shares in UAS.
In January 1996, the Company purchased certain rights in oil seed
technology from SVO for $8.0 million of which $7.2 million of the value was
assigned to in-process technology. The Company
11
<PAGE>
is currently evaluating program alternatives to arrive at a recommended level
of funding and effort to commercialize this technology. In February 1996, the
Company acquired in-process technology of $2.6 million associated with the
acquisition of UAS. The Company expects funding necessary to commercialize
this technology to approximate $2.5 million over the next three to five years.
The funding and related efforts are within the normal course of research
efforts typically required by the breeding and development programs at UAS.
During the remainder of fiscal 1996 the Company expects to incur $10.0
million to modernize seed production facilities in addition to the projected
capital expenditures for fiscal 1996 of $5.4 million. The investment in this
additional equipment is a result of the Seed segment's strategy to transition
from a seller of low-cost generic products to proprietary, value-added seed
products and a plan to upgrade the quality of seed production. The Company is
also building a new headquarters for the Seed segment operations and expects to
incur about $3.5 million during the next year. The Company will continue to
pursue an aggressive acquisition and joint venture strategy for both the Seed
and Crop Protection business units.
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 patent protection for its products both in the United States and other
countries. To date, the Company has obtained numerous patents and has filed a
large number of patent applications in the United States 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 also will depend in part on
the Company not infringing patents issued to competitors. If any licenses are
required, there can be no assurance that the Company will be able to obtain such
license on commercially favorable terms, if at all. Litigation, which can
result in substantial cost to the Company, may also be 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, and revenue from
operations and contract and other revenues will be sufficient to finance working
capital and capital requirements for the immediate future. However, the
Company's capital requirements may vary as a result of competitive and
technological developments, the timing of regulatory approval for new products
and the terms and conditions of any future strategic transactions. If such
requirements change, the Company may need to raise additional capital.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 2, 1996, the California Court of Appeal reversed a lower court ruling
and affirmed that the Company's subsidiary, Mycogen Plant Science, Inc., is
entitled to exercise options to license certain herbicide tolerance and insect
resistance technology from Monsanto Company. The options give the Company the
right to license Monsanto's Roundup Ready(R) herbicide tolerance technology in
cotton, corn and oil seed rape, and Bacillus thuringiensis ("Bt") insect
----------------------
resistant gene technology for corn on "terms as favorable as any other third
party licensee."
On March 20, 1996, Monsanto Company filed suit against the Company and Ciba-
Geigy Corporation ("Ciba-Geigy") alleging that the first seed corn products
being sold by the Company and Ciba-Geigy with Bt based insect resistance
infringe on a Monsanto patent on a particular modified DNA sequence. The
Company has reason to believe that, in view of the Company's pioneering work in
modifying Bt genes for plant expression and early patent applications which it
has pending in this area, the Monsanto patent will be found to be invalid. The
Company intends to vigorously defend against this infringement action.
On October 31, 1995, the Company filed a declaratory judgment action in the
United States District Court in San Diego against Plant Genetic Systems N.V. and
Plant Genetic Systems (America), Inc. (collectively,"PGS"). This declaratory
judgment action seeks to invalidate two PGS patents, one of which is directed to
plant cells containing shortened Bt genes and the other to a single Bt gene.
The Company's declaratory judgment action also seeks a declaration that the
Company's seed corn product with Bt-based insect resistance does not infringe on
these PGS patents. Also pending is a patent infringement suit filed by PGS on
October 18, 1995 against the Company and Ciba-Geigy in the United States
District Court in North Carolina. PGS' patent infringement suit alleges that
the Bt-based insect resistant seed corn products being sold by the Company and
Ciba-Geigy infringe one of the PGS patents involved in the Company's declaratory
judgment action pending in the United States District Court in San Diego. The
Company is vigorously pursuing its action against PGS in the United States
District Court in San Diego and vigorously defending against the infringement
action in the United States District Court in North Carolina.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit 27 - Financial Data Schedule. See Exhibit 27 attached hereto.
b) Reports on Form 8-K
Current reports on Form 8-K were filed as follows: on February 29,
1996 to report the Company's acquisition of UAS; and on March 22, 1996
to report the amendment of the Company's Rights Agreement by and
between the Company and Boston EquiServ.
13
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mycogen Corporation
------------------------------------
(Registrant)
Date: April 11, 1996 /s/ James A. Baumker
-------------- ------------------------------------
James A. Baumker
Vice President and
Chief Financial Officer
14
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