<PAGE>
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 May 31, 1996
------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
- ----------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5501 Oberlin Drive, San Diego, California 92121
- ------------------------------------------ ------------------------
(Address of principal executive offices) (Zip Code)
(619) 453-8030
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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
---- -----
30,645,558 shares of Common Stock were outstanding as of July 8, 1996.
1
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MYCOGEN CORPORATION
INTERIM CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
1996 1995 1996 1995
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net operating revenues............................. $78,015 $55,869 $125,639 $ 93,039
Contract and other revenues........................ 2,360 1,971 6,511 5,582
------- ------- -------- --------
Total revenues............................... 80,375 57,840 132,150 98,621
------- ------- -------- --------
Costs and expenses:
Cost of operating revenues....................... 57,152 36,529 88,421 59,771
Selling, general and administrative.............. 13,390 8,584 32,821 23,623
Research and development......................... 6,346 4,870 16,005 15,091
Amortization of intangible assets................ 647 581 1,731 1,614
Special charges.................................. - - 22,890 -
------- ------- -------- --------
Total costs and expenses..................... 77,535 50,564 161,868 100,099
------- ------- -------- --------
Operating income (loss)............................ 2,840 7,276 (29,718) (1,478)
Interest income and expense, net................. 810 (34) 1,583 854
Exchange gain (loss)............................. (129) 97 (106) 109
------- ------- -------- --------
Net income (loss).................................. 3,521 7,339 (28,241) (515)
Dividends on preferred stock....................... - (378) (578) (1,120)
------- ------- -------- --------
Net income (loss) applicable to common shares...... $ 3,521 $ 6,961 $(28,819) $ (1,635)
======= ======= ======== ========
Net income (loss) per common share:
Primary.......................................... $ .11 $ .36 $ (1.16) $ (.09)
======= ======= ======== ========
Assuming full dilution........................... $ .11 $ .34 $ (1.16) $ (.09)
======= ======= ======== ========
Weighted average number of shares:
Primary.......................................... 32,334 19,308 24,816 19,182
======= ======= ======== ========
Assuming full dilution........................... 32,415 21,284 24,816 19,182
======= ======= ======== ========
</TABLE>
See accompanying Notes to Interim Consolidated Condensed Financial Statements.
2
<PAGE>
MYCOGEN CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1996 1995
(UNAUDITED) (NOTE)
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 14,805 $ 5,687
Securities available-for-sale................... 39,420 11,913
Accounts and notes receivable, net of allowances 63,948 27,402
Inventories..................................... 32,527 33,633
Other current assets............................ 3,153 1,267
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Total current assets.......................... 153,853 79,902
Net property, plant and equipment................. 51,053 49,646
Net intangible assets............................. 23,250 17,759
Other assets...................................... 13,307 12,301
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Total assets...................................... $ 241,463 $ 159,608
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 8,503 $ 6,760
Accrued compensation and related taxes.......... 4,514 3,553
Deferred revenues............................... 14,651 5,670
Other current liabilities....................... 9,132 5,225
--------- ---------
Total current liabilities..................... 36,800 21,208
Long-term liabilities............................. 5,264 3,291
Minority interest................................. - 21,406
Stockholders' equity:
Common stock, $.001 par value, 40,000,000
shares authorized; 30,636,372 and 19,400,764
shares issued and outstanding at May 31, 1996
and August 31, 1995, respectively.............. 31 19
Additional paid in capital...................... 330,361 216,436
Deficit......................................... (130,993) (102,752)
--------- ---------
Total stockholders' equity.................... 199,399 113,703
--------- ---------
Total liabilities and stockholders' equity........ $ 241,463 $ 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>
NINE MONTHS ENDED
MAY 31,
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net loss......................................... $(28,241) $ (515)
Items which did not use cash:
Special charges................................ 20,890 -
Depreciation................................... 3,687 3,582
Amortization of intangible assets.............. 1,730 1,614
Provision for doubtful accounts................ 1,039 33
Amortization of prepaid contract manufacturing. 525 104
Other expense not requiring cash............... 644 56
Changes in operating assets and liabilities:
Accounts and notes receivable.................. (23,764) (19,863)
Inventories.................................... 19,792 805
Prepaid expenses............................... (146) (138)
Accounts payable............................... (5,279) 1,049
Deferred revenues.............................. 735 (359)
Other current liabilities...................... (1,773) (708)
-------- --------
Cash used in operating activities............ (10,161) (14,340)
-------- --------
Investing activities:
Proceeds from sales of available-for-sale
securities...................................... 28,616 3,993
Proceeds from maturities of available-for-sale
securities...................................... 1,956 5,791
Purchases of available-for-sale securities....... (58,355) -
Capital expenditures............................. (6,202) (4,219)
Prepaid contract manufacturing................... - (8,570)
Net cash paid for business acquistion............ (1,791) -
Change in intangibles and other assets........... (66) (937)
-------- --------
Cash used in investing activities............ (35,842) (3,942)
-------- --------
Financing activities:
Net change in short-term borrowings.............. - 9,140
Proceeds from long-term borrowings............... - 2,500
Payments on long-term borrowings................. (4,554) (156)
Proceeds from sale of common stock............... 59,568 326
-------- --------
Cash provided by financing activities........ 55,014 11,810
-------- --------
Effect of exchange rate changes on cash and cash
equivalents...................................... 107 242
-------- --------
Increase (decrease) in cash and cash equivalents... 9,118 (6,230)
Cash and cash equivalents at beginning of period... 5,687 8,681
-------- --------
Cash and cash equivalents at end of period......... $ 14,805 $ 2,451
======== ========
</TABLE>
See accompanying Notes to Interim Consolidated Condensed Financial Statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (continued).
Mycogen Corporation
-------------------
Notes to Interim Consolidated Condensed Financial Statements
General
- -------
The accompanying financial statements include the accounts of Mycogen
Corporation, 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 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 and nine months ended May 31, 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 May 31, 1996 DowElanco owned
14,494,102 shares of the Company's common stock, or 47.31%, and may acquire
additional shares of the Company's common stock subject to certain restrictions.
The acquisition of UAS was accounted for as a purchase and, accordingly, the
assets and liabilities of UAS are included in the Consolidated Balance Sheet as
of May 31, 1996. The results of operations of UAS from the date of acquisition
are 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. The purchase price allocation is an estimate that is subject to
final adjustments which are not expected to be material. The following
consolidated, pro forma, unaudited summary of operations data for the nine
months ended May 31, 1996 and 1995 assumes that the acquisition occurred on
September 1, 1995 and 1994, respectively.
5
<PAGE>
<TABLE>
<CAPTION>
Nine months ended May 31,
------------------------------
(In thousands, except per share data) 1996 1995
------------- -------------
<S> <C> <C>
Total revenues $149,184 $132,277
Net income (loss) applicable to common shares $(25,211) $ 4,537
Net income (loss) per common share $ (.91) $ .19
</TABLE>
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 not include
the nonrecurring special charge of $2.6 million related to the write-off of
acquired in-process technology.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
- --------------------------------------------------------------------
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 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 $2.9 million, of which $1.7 million is included in other current
assets and $1.2 million is included in other long-term assets in the
Consolidated Balance Sheet at May 31, 1996. Exit costs totaling $.9 million are
included in other current liabilities at May 31, 1996.
Purchase and Write-off of In-Process Technology
- -----------------------------------------------
In January 1996, the Company agreed to acquire certain rights in oil seed
technology from a subsidiary of The Lubrizol Corporation ("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 Mycogen Seeds and Conversion of
- -------------------------------------------------------------------------------
Preferred Stock
- ---------------
In January 1996, Lubrizol sold its 19.46% ownership interest in Agrigenetics,
Inc. (d/b/a 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 a premium of 25% over the average closing
price of the Company's common stock for the 60 days prior to the conversion. At
May 31, 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 and outstanding to Lubrizol with an
aggregate liquidation preference of $31 million.
6
<PAGE>
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 Eli 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.
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>
Nine months ended May 31,
-----------------------------
(In thousands) 1996 1995
---------- ----------
<S> <C> <C>
Business acquisitions:
Fair value of assets acquired, other than cash $ 55,692 $ 1,350
Liabilities assumed (20,643) --
Liabilities and acquisition costs incurred (651) --
Minority interest purchased from Lubrizol 21,406 --
Common stock issued (54,013) (1,350)
-------- -------
Net cash paid for acquisitions $ 1,791 $ --
======== =======
</TABLE>
Other non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended May 31,
-----------------------------
(In thousands) 1996 1995
---------- ----------
<S> <C> <C>
Technology rights acquired by incurring
directly related liabilities $ 6,000 $ --
------- -------
Dividends on preferred stock $ 578 $ 1,120
------- -------
Common stock issued upon conversion
of convertible preferred stock $31,582 $ --
======= =======
<CAPTION>
Inventories
- -----------
Inventories are comprised of:
May 31, August 31,
(In thousands) 1996 1995
-------- ----------
<S> <C> <C>
Raw materials and supplies $13,614 $ 5,895
Work in process 4,033 3,578
Finished goods 14,880 24,160
------- -------
Total $32,527 $33,633
======= =======
</TABLE>
7
<PAGE>
Accumulated Depreciation and Amortization
- -----------------------------------------
Accumulated depreciation of property, plant and equipment was $17.7 million and
$16.7 million at May 31, 1996 and August 31, 1995, respectively.
Accumulated amortization of intangible assets was $8.4 and $6.8 million at May
31, 1996 and August 31, 1995, respectively.
Income Taxes
- ------------
No provision for income tax is recognized for the three and nine months ended
May 31, 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 Income (Loss) Per Common Share
- -----------------------------------
Net income per share for the three months ended May 31, 1996 and 1995 is
determined by deducting dividends on preferred stock from net income and
dividing the net result by the weighted average number of common shares
outstanding during the respective period. Common shares issuable under stock
options were included in the computation of primary earnings per share if the
dilutive effect was greater than 3%. Net income per common share assuming full
dilution includes common shares issuable upon the exercise of stock options and
the conversion of preferred stock into common stock. The computation excludes
the effect of preferred stock dividends.
Net loss per common share for the nine months ended May 31, 1996 and 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. 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.
Research and Development Arrangement
- ------------------------------------
In December 1995, the Company entered into an agreement with Pioneer Hi-Bred
International Inc. ("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 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 $.8 million and $1.5 million
for the three and nine months ended May 31, 1996, respectively. Deferred
revenues of $8.5 million are included in the Consolidated Balance Sheet at May
31, 1996.
8
<PAGE>
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 UAS.
The assets and liabilities of UAS are included in the Consolidated Balance Sheet
at May 31, 1996 and the results of operations from the acquisition date are
reflected in the Company's Consolidated Statement of Operations commencing with
the third quarter.
SEASONALITY
The Company's businesses are highly seasonal as described in each segment
summary. Revenues, expenses, income and losses for the three and nine months
ended May 31, 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.
The following 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
the results discussed in the forward-looking statements as a result of certain
factors. 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.
SEGMENT OPERATING REVENUES AND OPERATING INCOME (LOSS)
<TABLE>
<CAPTION>
Three months ended May 31, Nine months ended May 31,
(In thousands) 1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenues
Seed $66,092 $44,439 $ 98,148 $68,944
Crop Protection 11,923 11,430 27,491 24,095
------- ------- -------- -------
Total Operating Revenues $78,015 $55,869 $125,639 $93,039
======= ======= ======== =======
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three months ended May 31, Nine months ended May 31,
(In thousands) 1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Income (Loss)
Seed $ 2,258 $ 7,006 $(27,213)* $ 2,473
Crop Protection 886 497 (1,339) (2,898)
Corporate (304) (227) (1,166) (1,053)
------- ------- -------- -------
Total Operating Income (Loss) $ 2,840 $ 7,276 $(29,718) $(1,478)
======= ======= ======== =======
</TABLE>
* 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 increased for the three months and nine
months ended May 31, 1996 over the same periods in 1995 from $44.4 million and
$68.9 million to $66.1 million and $98.1 million, respectively. The acquisition
of UAS accounted for $22.7 million of the increase in operating revenues for the
quarter and year-to-date primarily in corn and soybean products. Higher sales of
corn products resulting from more corn acreage planted this year coupled with
higher sales of lead corn products NatureGard (Bt-based corn borer resistance
and native resistance varieties) and Totally Managed Feedstuffs accounted for
$4.3 million of the increase on a year-to-date basis. Droughts in Texas, Kansas
and North Dakota resulted in winter wheat crops dying, causing wheat acreage to
be replanted with sorghum thereby increasing sorghum sales $2.6 million and $3.3
million for the quarter and year-to-date, respectively. Soybean revenues
increased $.8 million and $2.1 million on a quarter and year-to-date basis,
respectively, largely due to a more aggressive sales and marketing focus in 1996
and cooler, wetter weather in certain areas which caused some farmers to switch
crops from corn to soybean. Offsetting these increases were lower sunflower
sales of $2.9 million and $3.5 million for the quarter and year-to-date due to
less acreage planted this year resulting from heavy disease pressure in North
Dakota and higher wheat and corn prices. The majority of Seed operating revenues
are recorded during the second and third fiscal quarters. Second and third
quarter operating revenues include estimates of seed product returns and the
fourth quarter will include adjustments to reconcile those earlier estimates.
OPERATING INCOME (LOSS): Seed operating income for the three months ended May
31, 1996 decreased $4.7 million and operating losses for the nine months ended
May 31, 1996, excluding special charges of $22.9 million, increased $6.8 million
compared to the same periods in fiscal 1995. The majority of this decline in
operating results, excluding UAS, is attributable to lower gross profit margins
of $8.1 million and $7.3 million for the quarter and year-to-date, respectively.
While operating revenues have risen, seed cost of goods sold as a percent of
sales has increased. There are three major factors impacting seed costs; 1) how
much the Company pays growers for its seed crop, 2) how efficiently plant
capacity is utilized 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. While the Company anticipated higher seed costs resulting
from the first two factors, the Seed segment experienced a much higher level of
product D&O than originally expected. 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 were higher than anticipated. D&O
10
<PAGE>
increased by $1.2 million and $4.3 million for the quarter and year-to-date,
respectively, over the same periods in 1995. Higher expenses for sales and
promotion efforts of $2.3 million, bad debt expense of $.8 million and legal
fees of $1.2 million incurred to enforce the Company's patent position also
contributed to the increase in operating loss on a 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. This operating loss was offset by
the acquisition of UAS which provided operating income of $5 million, excluding
special charges, for the quarter and nine months ended May 31, 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 Lubrizol and
related to the acquisition of UAS.
CROP PROTECTION SEGMENT
OPERATING REVENUES: Crop Protection operating revenues increased $.5 million and
$3.4 million to $11.9 million and $27.5 million for the three months and nine
months ended May 31, 1996, respectively, compared to the same periods last year.
Biopesticides sales of new products, Mattch and Scythe(R), higher international
sales of MVP(R) and increased shipments of MVP(R) powder to Kubota accounted for
$1.7 million of the increase on a year-to-date basis. Lower sales of M-Pede(R)
and M-Trak(R) in North America, attributable to the introduction of new
chemistry products by competitors, offset $.5 million of this increase.
Soilserv accounted for the remainder of the increase on a quarter and year-to-
date basis as a result of higher penetration into the crop protection markets in
Arizona and drier weather in application areas that shifted a portion of
Soilserv sales to earlier in the fiscal 1996 year. The majority of Crop
Protection revenues are recorded during the third and fourth fiscal quarters.
OPERATING INCOME (LOSS): Crop Protection operating income increased $.4 million
for the three months ended May 31, 1996 and operating losses decreased $1.6
million for the nine months ended May 31, 1996 compared to the same periods in
fiscal 1995. The improvement in operating results on a quarter and year-to-date
basis is mainly due to higher gross profits of $.7 and $2.3 million attributable
to higher sales volumes during 1996 coupled with lower biopesticide
manufacturing costs. Higher sales and marketing costs offset these profits by
$.2 million and $.7 million for the quarter and year-to-date, respectively.
NON-OPERATING ITEMS
Non-operating income items for the quarter and nine months ended May 31, 1996
increased by $.6 million and $.5 million, respectively, compared to the same
periods in 1995 due mainly to higher net interest income as a result of more
cash available for investment during the year.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and securities available-for-sale increased
by $36.6 million to $54.2 million during the nine months ended May 31, 1996.
This increase was primarily due to proceeds of $30 million, $26.4 million and
$3.2 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 $18.2 million, cash used to pay
$4.6 million of long-term debt, cash paid to Lubrizol for technology rights of
$2 million, cash paid to DowElanco of $1.8 million in connection with the
acquisition of UAS and capital expenditures which totaled $6.2 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 May 31, 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 a subsidiary of Lubrizol for $8.0 million of which $7.2 million
of the value was assigned to in-process technology. The Company 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 $7.1
million to modernize seed production facilities in addition to the remaining
projected capital expenditures for fiscal 1996 of $1.1 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 for such construction.
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,
12
<PAGE>
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. However,
there can be no assurance that the Company can raise additional capital under
favorable terms, if at all.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 18, 1995, the Company's wholly owned subsidiaries Myocgen Plant Science,
Inc. and Agrigenetics, Inc. filed a patent infringement suit against Monsanto
Company ("Monsanto") in U.S. District Court in San Diego for infringement of
Mycogen's patent issued on January 10, 1995 that covers methods of designing
synthetic Bacillus thuringiensis ("Bt") toxin genes for higher expression in
----------------------
plants. The patent also claims specific gene products. The suit contends that
Monsanto is infringing this patent in the development and now the sale of
transgenic cotton, potato and corn seed that contain synthetic Bt genes. The
suit also contains multiple state law claims for unfair competition. Several
motions have been ruled on by the court including a motion on the applicability
of 35 USC 271(g) to products made by a process patented in the U.S. but which
have been made before the issuance of the patent. The court ruled in favor of
Monsanto on the 271(g) issue stating that 271(g) does not apply 'retroactively'
to products made before the issuance of the patent. Mycogen plans on appealing
this aspect of the decision but there are two remaining motions before the court
which have to be ruled on before the appeal can begin.
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 shortened Bt genes.
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 Corporation ("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. Recently, the Court in North Carolina denied the Company's motion to
dismiss the case or transfer it to San Diego.
On March 20, 1996, Monsanto filed suit against the Company and 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 is vigorously defending against
this infringement action.
On April 2, 1996, the California Court of Appeal reversed a lower court ruling
and affirmed that Mycogen Seeds is entitled to exercise options to license
certain herbicide tolerance and insect resistance technology from Monsanto. The
California Supreme Court denied Monsanto's appeal to review the appellate
court's decision. The options give the Company the right to license Monsanto's
Roundup Ready (R) herbicide tolerance technology in cotton, corn and (rape) oil
seed, and Bt insect resistant gene technology for corn on "terms as favorable as
any other third party licensee." On May 8, 1996, the Company filed suit, seeking
actual and punitive damages from Monsanto Company for breach of contract and
interference with the Company's seed business.
14
<PAGE>
On May 1, 1996, DeKalb filed suit against the Company and Ciba-Geigy in Federal
District Court in Illinois, alleging that the Company's and Ciba-Geigy's seed
corn products with Bt based insect resistance infringe DeKalb patents covering
Bt and glufosinate herbicide tolerance in corn. The Company is vigorously
defending against this infringement action.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit 11 - Statement re Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule. See Exhibit 27 attached
hereto.
b) Reports on Form 8-K
Current report on Form 8-K/A was filed on April 25, 1996 to amend
the Form 8-K filed February 29, 1996, reporting the Company's
acquisition of UAS, to include Item 7. Financial statements and
Exhibits.
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: July 12, 1996 /s/ James A. Baumker
------------- ------------------------
James A. Baumker
Executive Vice President
Chief Financial Officer
15
<PAGE>
EXHIBIT 11
MYCOGEN CORPORATION
EXHIBIT 11
STATEMENTS RE COMPUTATION OF PER
SHARE EARNINGS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, NINE MONTHS ENDED MAY 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)..................................... $ 3,521 $ 7,339 $(28,241) $ (515)
Dividends on preferred stock.......................... - (378) (578) (1,120)
------- ------- -------- -------
Net income (loss) applicable to common shares......... 3,521 6,961 (28,819) (1,635)
Adjustment for dividends on preferred stock........... - 378 -(1) -(1)
------- ------- -------- -------
Net income (loss) for computation assuming
full dilution....................................... $ 3,521 $ 7,339 $(28,819) $(1,635)
======= ======= ======== =======
Weighted average number of shares outstanding:
Average common shares................................. 30,575 19,308 24,816 19,182
Stock option equivalent shares........................ 1,759 -(2) -(2) -(2)
------- ------- -------- -------
Average common shares for computation
of primary net income (loss) per common share....... 32,334 19,308 24,816 19,182
Additional stock option equivalent shares............. 81 315 -(2) -(2)
Conversion of preferred shares........................ - 1,661 -(1) -(1)
------- ------- -------- -------
Average shares for computation of net income (loss)
per common share assuming full dilution............. 32,415 21,284 24,816 19,182
======= ======= ======== =======
Net income (loss) per common share:
Primary............................................. $ .11 $ .36 $ (1.16) $ (.09)
======= ======= ======= =======
Assuming full dilution.............................. $ .11 $ .34 $ (1.16) $ (.09)
======= ======= ======= =======
</TABLE>
(1) Additional shares from the conversion of preferred stock and respective
adjustments for preferred stock dividends were not included in the calculation
assuming full dilution where the effect was antidilutive or the dilutive effect
was less than 3%.
(2) Additional shares from stock option equivalents were not included in the
calculation of net income (loss) per common share where the effect was
antidilutive or the dilutive effect was less than 3%.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 14,805
<SECURITIES> 39,420
<RECEIVABLES> 63,948
<ALLOWANCES> 0
<INVENTORY> 32,527
<CURRENT-ASSETS> 153,853
<PP&E> 68,779
<DEPRECIATION> 17,726
<TOTAL-ASSETS> 241,463
<CURRENT-LIABILITIES> 36,800
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 330,361
<TOTAL-LIABILITY-AND-EQUITY> 241,463
<SALES> 125,639
<TOTAL-REVENUES> 132,150
<CGS> 88,421
<TOTAL-COSTS> 88,421
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,039
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (28,241)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,241)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,241)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
