-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M74gl1sHdYCTfk1lEcYCK1vlSxSXiW4rAGj05r24LJjOygMAqNgiZnVnxmtEf/am DWtj2ZfASEXexERNi71nBg== 0001017062-97-002125.txt : 19971126 0001017062-97-002125.hdr.sgml : 19971126 ACCESSION NUMBER: 0001017062-97-002125 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971125 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MYCOGEN CORP CENTRAL INDEX KEY: 0000813742 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE SERVICES [0700] IRS NUMBER: 953802654 STATE OF INCORPORATION: CA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11643 FILM NUMBER: 97728258 BUSINESS ADDRESS: STREET 1: 5501 OBERLIN DR CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194538030 MAIL ADDRESS: STREET 1: 5501 OBERLIN DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 10-K 1 FORM 10-K (DATED AUGUST 31, 1997) 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 ----- ----- 1 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 2 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 3 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, 4 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. 5 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 6 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. 7 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. 8 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" 9 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 EX-10.11 2 SUPPLEMENT TO FORM OF AGREEMENTS EXHIBIT 10.11 SUPPLEMENT TO FORM OF AGREEMENTS PERTAINING TO 1992 STOCK OPTION PLAN -57- NON-EMPLOYEE BOARD MEMBERS MYCOGEN CORPORATION Special Supplement to January 25, 1993 Plan Summary and Prospectus for 1992 Stock Option Plan The date of this Supplement is March 24, 1997 -58- THIS DOCUMENT CONSTITUTES PART OF THE OFFICIAL PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. Mycogen Corporation (the "Corporation") has previously prepared and distributed the Official Prospectus (the "Prospectus") for the Mycogen Corporation 1992 Stock Option Plan (the "Plan"). The Prospectus is dated January 25, 1993 and has been updated by one or more special supplements. The Prospectus as so updated summarizes the terms and conditions under which shares of the Corporation's common stock (the "Common Stock") are to be offered under the Plan. If you have misplaced your copy of the Prospectus or any of the supplements, or otherwise wish to obtain new copies, you should contact the Corporate Secretary at the Corporation's headquarters at 5501 Oberlin Drive, San Diego, California 92121-1718. The telephone number at the executive offices is (619) 453-8030. The purpose of this new Supplement is to (i) inform you of the recent amendments to the Plan that were approved by the stockholders at the Corporation's 1996 Annual Meeting held on December 12, 1996, (ii) update the information in the Prospectus pertaining to the short-swing trading provisions of Section 16 of the 1934 Securities Exchange Act, as amended (the "1934 Act"), in order to reflect the changes to those provisions made by the Securities and Exchange Commission (the "SEC") effective November 1, 1996, and (iii) provide you with information concerning certain changes in the Federal income tax laws which may have an impact upon transactions conducted under the Plan. AMENDMENTS TO THE PLAN ---------------------- Share Increase. The number of shares of Common Stock authorized for issuance under the Plan has been increased by two million (2,000,000) additional shares. Accordingly, the maximum number of shares of Common Stock issuable over the term of the Plan has been increased to 7,566,719 shares. Director Option Grants. The number of shares of Common Stock subject to the annual stock option grants to be made to certain non-employee Board members pursuant to the provisions of the Automatic Option Grant Program has been increased from 5,000 shares to 7,500 shares. As a result, each non-employee Board member who is not an officer or other executive of DowElanco will receive an automatic option grant for 7,500-shares of Common Stock at each annual stockholders meeting at such individual is re-elected to the Board, beginning with the 1996 Annual Meeting. However, non-employee Board members who are officers or other executives of DowElanco will continue to receive an automatic option grant for only 5,000 shares at each annual stockholders meeting at which they are re-elected to the Board. SECTION 16 CHANGES ------------------ Section 16(b) of the 1934 Act requires the Corporation to recover any profit realized by any officer, Board member or beneficial owner of more than ten percent (10%) of the outstanding Common Stock (a "Section 16 Insider") from any purchase and sale, or sale and purchase, of such Common Stock made within a period of less than six (6) months. The SEC has recently issued a series of revised rules under Section 16(b) of the 1934 Act which govern the short-swing liability treatment of certain transactions effected by a Section 16 Insider under equity incentive plans such as the Plan. The application of the new rules to Plan transactions may be summarized as follows. Option Grant. The receipt of an option grant will not be treated as a ------------ "purchase" of the underlying option shares for short-swing liability purposes. Option Exercise. The exercise of an option under the Plan will be an --------------- exempt transaction and will not be treated as a "purchase" of the acquired shares for short-swing liability purposes. Delivery of Shares. The delivery of shares of Common Stock in payment of ------------------ the exercise price will be an exempt transaction for short-swing liability purposes. -59- Sale of Shares. The sale of shares acquired under the Plan will be treated -------------- as a "sale" for short-swing liability purposes and will be matched with any non- exempt purchases of Common Stock (e.g. open-market purchases) made within six (6) months before or after the date of such sale. Reporting Requirements The receipt of an option grant must be reported by the Section 16 Insider on the annual Form 5 required to be filed by the such individual within forty- five (45) days after the close of the Corporation's fiscal year in which such option is granted and may be reported on any earlier-filed Form 4. However, the receipt of an option grant must in all events be reported on or before the due date for the Form 4 in which the exercise of that option must be reported. The exercise of the option must be reported on a Form 4 filed within ten (10) days after the close of the calendar month in which such exercise occurs. If the exercise price is paid with shares of Common Stock, then the disposition of those shares should also be reported on the same Form 4. The sale of Common Stock must be reported on a Form 4 filed within ten (10) days after the close of the calendar month in which the sale is effected. As an officer or director of the Corporation, you should consult with counsel before offering for sale any shares of Common Stock acquired under the Plan in order to assure your compliance with Section 16 and all other applicable provisions of Federal and state securities laws. FEDERAL INCOME TAX CHANGES -------------------------- The changes in Federal income tax laws that will have an impact upon transactions conducted under the Plan are summarized as follows: Regular Tax Rates. Ordinary income is subject to a maximum Federal tax rate of 39.6% on taxable income in excess of $271,050 ($135,525 for a married taxpayer filing a separate return). The applicable $271,050 or $135,525 threshold is subject to cost-of-living adjustments in taxable years beginning after December 31, 1997. Long-term capital gains are taxed at the same rates as ordinary income, subject to a maximum rate of 28%. Certain limitations are imposed upon a taxpayer's itemized deductions, and the personal exemptions claimed by the taxpayer are subject to phase-out. These limitations may result in the taxation of ordinary income at an effective top marginal rate in excess of 39.6%. For the tax year ending December 31, 1997, itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income for the year exceeds $121,200 ($60,600 for a married taxpayer filing a separate return). However, the reduction may not exceed 80% of the total itemized deductions (excluding medical expenses, casualty and theft losses, and certain investment interest expense) claimed by the taxpayer. The applicable $121,200 or $60,600 threshold is subject to cost-of-living adjustments in taxable years beginning after December 31, 1997. In addition, the deduction for personal exemptions claimed by the taxpayer is reduced by 2% for each $2,500 ($1,250 for a married taxpayer filing a separate return) or fraction thereof by which the taxpayer's adjusted gross income for the year exceeds a specified threshold amount. The applicable thresholds for 1997 are $181,800 for married taxpayers filing joint returns (and in certain instances, surviving spouses), $151,500 for heads of households, $121,200 for single taxpayers and $90,900 for married taxpayers filing separate returns. Accordingly, the deduction is completely eliminated for any taxpayer whose adjusted gross income for the year exceeds the applicable threshold amount by more than $122,500. The threshold amounts will be subject to cost-of-living adjustments in taxable years beginning after December 31, 1997. Further information concerning the tax treatment of your Plan transactions, please see the section of the Prospectus entitled Questions and Answers on Federal Tax Consequences. -60- SECTION 16 INSIDERS MYCOGEN CORPORATION Special Supplement to December 9, 1992 Plan Summary and Prospectus for 1992 Stock Option Plan The date of this Supplement is March 24, 1997 -61- THIS DOCUMENT CONSTITUTES PART OF THE OFFICIAL PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. Mycogen Corporation (the "Corporation") has previously prepared and distributed the Official Prospectus (the "Prospectus") for the Mycogen Corporation 1992 Stock Option Plan (the "Plan"). The Prospectus is dated December 9, 1992 and has been updated by one or more special supplements. The Prospectus as so updated summarizes the terms and conditions under which shares of the Corporation's common stock (the "Common Stock") are to be offered under the Plan. If you have misplaced your copy of the Prospectus or any of the supplements, or otherwise wish to obtain new copies, you should contact the Corporate Secretary at the Corporation's headquarters at 5501 Oberlin Drive, San Diego, California 92121-1718. The telephone number at the executive offices is (619) 453-8030. The purpose of this new Supplement is to (i) inform you of a share increase to the Plan that was approved by the stockholders at the Corporation's 1996 Annual Meeting, (ii) update the information in the Prospectus pertaining to the short-swing trading provisions of Section 16 of the 1934 Securities Exchange Act, as amended (the "1934 Act"), in order to reflect the changes to those provisions made by the Securities and Exchange Commission (the "SEC") effective November 1, 1996, and (iii) provide you with information concerning certain changes in the Federal income tax laws which may have an impact upon transactions conducted under the Plan. -62- AMENDMENT TO THE PLAN --------------------- On December 12, 1996, the Corporation's stockholders approved an amendment to the Plan to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional two million (2,000,000) shares. Accordingly, the maximum number of shares of Common Stock issuable over the term of the Plan has been increased to 7,566,719 shares. SECTION 16 CHANGES ------------------ Section 16(b) of the 1934 Act requires the Corporation to recover any profit realized by any officer, Board member or beneficial owner of more than ten percent (10%) of the outstanding Common Stock (a "Section 16 Insider") from any purchase and sale, or sale and purchase, of such Common Stock made within a period of less than six (6) months. The SEC has recently issued a series of revised rules under Section 16(b) of the 1934 Act which govern the short-swing liability treatment of certain transactions effected by a Section 16 Insider under equity incentive plans such as the Plan. The application of the new rules to Plan transactions may be summarized as follows. Option Grant. The receipt of an option grant will not be treated as a ------------ "purchase" of the underlying option shares for short-swing liability purposes. Option Exercise. The exercise of an option under the Plan will be an --------------- exempt transaction and will not be treated as a "purchase" of the acquired shares for short-swing liability purposes. Delivery of Shares. The delivery of shares of Common Stock in payment of ------------------ the exercise price will be an exempt transaction for short-swing liability purposes. Sale of Shares. The sale of shares acquired under the Plan will be treated -------------- as a "sale" for short-swing liability purposes and will be matched with any non- exempt purchases of Common Stock (e.g. open-market purchases) made within six (6) months before or after the date of such sale. Reporting Requirements The receipt of an option grant must be reported by the Section 16 Insider on the annual Form 5 required to be filed by the such individual within forty- five (45) days after the close of the Corporation's fiscal year in which such option is granted and may be reported on any earlier-filed Form 4. However, the receipt of an option grant must in all events be reported on or before the due date for the Form 4 in which the exercise of that option must be reported. The exercise of the option must be reported on a Form 4 filed within ten (10) days after the close of the calendar month in which such exercise occurs. If the exercise price is paid with shares of Common Stock, then the disposition of those shares should also be reported on the same Form 4. The sale of Common Stock must be reported on a Form 4 filed within ten (10) days after the close of the calendar month in which the sale is effected. As an officer or director of the Corporation, you should consult with counsel before offering for sale any shares of Common Stock acquired under the Plan in order to assure your compliance with Section 16 and all other applicable provisions of Federal and state securities laws. -63- FEDERAL INCOME TAX CHANGES -------------------------- The changes in Federal income tax laws that will have an impact upon transactions conducted under the Plan are summarized as follows: Regular Tax Rates. Ordinary income is subject to a maximum Federal tax rate of 39.6% on taxable income in excess of $271,050 ($135,525 for a married taxpayer filing a separate return). The applicable $271,050 or $135,525 threshold is subject to cost-of-living adjustments in taxable years beginning after December 31, 1997. Long-term capital gains are taxed at the same rates as ordinary income, subject to a maximum rate of 28%. Certain limitations are imposed upon a taxpayer's itemized deductions, and the personal exemptions claimed by the taxpayer are subject to phase-out. These limitations may result in the taxation of ordinary income at an effective top marginal rate in excess of 39.6%. For the tax year ending December 31, 1997, itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income for the year exceeds $121,200 ($60,600 for a married taxpayer filing a separate return). However, the reduction may not exceed 80% of the total itemized deductions (excluding medical expenses, casualty and theft losses, and certain investment interest expense) claimed by the taxpayer. The applicable $121,200 or $60,600 threshold is subject to cost-of-living adjustments in taxable years beginning after December 31, 1997. In addition, the deduction for personal exemptions claimed by the taxpayer is reduced by 2% for each $2,500 ($1,250 for a married taxpayer filing a separate return) or fraction thereof by which the taxpayer's adjusted gross income for the year exceeds a specified threshold amount. The applicable thresholds for 1997 are $181,800 for married taxpayers filing joint returns (and in certain instances, surviving spouses), $151,500 for heads of households, $121,200 for single taxpayers and $90,900 for married taxpayers filing separate returns. Accordingly, the deduction is completely eliminated for any taxpayer whose adjusted gross income for the year exceeds the applicable threshold amount by more than $122,500. The threshold amounts will be subject to cost-of-living adjustments in taxable years beginning after December 31, 1997. Further information concerning the tax treatment of your Plan transactions, please see the section of the Prospectus entitled Questions and Answers on Federal Tax Consequences. -64- EMPLOYEES AND CONSULTANTS MYCOGEN CORPORATION Special Supplement to December 9, 1992 Plan Summary and Prospectus for 1992 Stock Option Plan The date of this Supplement is March 24, 1997 -65- THIS DOCUMENT CONSTITUTES PART OF THE OFFICIAL PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. Mycogen Corporation (the "Corporation") has previously prepared and distributed the Official Prospectus (the "Prospectus") for the Mycogen Corporation 1992 Stock Option Plan (the "Plan"). The Prospectus is dated December 9, 1992 and has been updated by one or more special supplements. The Prospectus as so updated summarizes the terms and conditions under which shares of the Corporation's common stock (the "Common Stock") are to be offered under the Plan. If you have misplaced your copy of the Prospectus or any of the supplements, or otherwise wish to obtain new copies, you should contact the Corporate Secretary at the Corporation's headquarters at 5501 Oberlin Drive, San Diego, California 92121-1718. The telephone number at the executive offices is (619) 453-8030. The purpose of this new Supplement is to (i) inform you of a share increase to the Plan that was approved by the stockholders at the Corporation's 1996 Annual Meeting, and (ii) provide you with information concerning certain changes in the Federal income tax laws which may have an impact upon transactions conducted under the Plan. AMENDMENT TO THE PLAN --------------------- On December 12, 1996, the Corporation's stockholders approved an amendment to the Plan to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional two million (2,000,000) shares. Accordingly, the maximum number of shares of Common Stock issuable over the term of the Plan has been increased to 7,566,719 shares. FEDERAL INCOME TAX CHANGES -------------------------- The changes in Federal income tax laws that will have an impact upon transactions conducted under the Plan are summarized as follows: Regular Tax Rates. Ordinary income is subject to a maximum Federal tax rate of 39.6% on taxable income in excess of $271,050 ($135,525 for a married taxpayer filing a separate return). The applicable $271,050 or $135,525 threshold is subject to cost-of-living adjustments in taxable years beginning after December 31, 1997. Long-term capital gains are taxed at the same rates as ordinary income, subject to a maximum rate of 28%. Certain limitations are imposed upon a taxpayer's itemized deductions, and the personal exemptions claimed by the taxpayer are subject to phase-out. These limitations may result in the taxation of ordinary income at an effective top marginal rate in excess of 39.6%. For the tax year ending December 31, 1997, itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income for the year exceeds $121,200 ($60,600 for a married taxpayer filing a separate return). However, the reduction may not exceed 80% of the total itemized deductions (excluding medical expenses, casualty and theft losses, and certain investment interest expense) claimed by the taxpayer. The applicable $121,200 or $60,600 threshold is subject to cost-of-living adjustments in taxable years beginning after December 31, 1997. In addition, the deduction for personal exemptions claimed by the taxpayer is reduced by 2% for each $2,500 ($1,250 for a married taxpayer filing a separate return) or fraction thereof by which the taxpayer's adjusted gross income for the year exceeds a specified threshold amount. The applicable thresholds for 1997 are $181,800 for married taxpayers filing joint returns (and in certain instances, surviving spouses), $151,500 for heads of households, $121,200 for single taxpayers and $90,900 for married taxpayers filing separate returns. Accordingly, the deduction is completely eliminated for any taxpayer whose adjusted gross income for the year exceeds the applicable threshold amount by more than $122,500. The threshold amounts will be subject to cost-of-living adjustments in taxable years beginning after December 31, 1997. Further information concerning the tax treatment of your Plan transactions, please see the section of the Prospectus entitled Questions and Answers on Federal Tax Consequences. -66- EX-10.22 3 CREDIT AGREEMENT EXHIBIT 10.22 CREDIT AGREEMENT -67- CREDIT AGREEMENT dated as of February 11, 1997 between MYCOGEN CORPORATION and BANK OF AMERICA ILLINOIS -68- TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1. Defined Terms....................................................................... 1 1.2. Use of Defined Terms................................................................ 10 1.3. Cross-References.................................................................... 10 1.4. Accounting and Financial Determinations............................................. 10 ARTICLE II COMMITMENTS, BORROWING PROCEDURES AND NOTES 2.1. Commitments......................................................................... 11 2.1.1. Revolving Loans........................................................... 11 2.1.2. Term Loan................................................................. 11 2.2. Reduction of Revolving Credit Commitment............................................ 11 2.3. Borrowing Procedure-Revolving Loans................................................. 11 2.4. Borrowing Procedure-Term Loan....................................................... 12 2.5. Eurocurrency Rate Loans and Eurodollar Rate Loans................................... 12 2.6. Quoted Rate Loans................................................................... 12 2.7. Reference Rate Loans................................................................ 13 2.8. Proceeds............................................................................ 13 2.9. Continuation and Conversion Elections............................................... 13 2.9.1. Eurocurrency Rate Loans, Eurodollar Rate Loans and Reference Rate Loans... 14 2.9.2. Quoted Rate Loans......................................................... 15 2.10. Currency Equivalents................................................................ 15 2.11. Funding............................................................................. 16 2.12. Notes............................................................................... 17 ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES 3.1. Repayments and Prepayments.......................................................... 17 3.2. Interest Provisions................................................................. 18 3.2.1. Rates..................................................................... 18 3.2.2. Post-Maturity Rates....................................................... 19 3.2.3. Payment Dates............................................................. 19 3.3. Fees................................................................................ 20 3.3.1. Commitment Fee............................................................ 20 3.3.2. Closing Fee............................................................... 20 3.4. Computation of Interest and Fees.................................................... 21 ARTICLE IV CERTAIN INTEREST RATE AND OTHER PROVISIONS 4.1. Fixed Rate Lending Unlawful......................................................... 21 4.2. Deposits Unavailable................................................................ 21 4.3. Increased Capital Costs With Respect to Commitments................................. 21 4.4. Funding Losses...................................................................... 22 4.5. Taxes............................................................................... 22 4.6. Payments, Computations, etc......................................................... 23 4.7. Setoff.............................................................................. 24 4.8. Use of Proceeds..................................................................... 24 4.9. Currency Indemnification............................................................ 24 ARTICLE V CONDITIONS TO BORROWING 5.1. Initial Borrowing of the Company.................................................... 25 5.1.1. Secretary's Certificate................................................... 25
-69- 5.1.2. Delivery of Notes........................................................ 26 5.1.3. Opinion of Counsel....................................................... 26 5.1.4. Letter of Awareness...................................................... 26 5.1.5. Good Standing............................................................ 26 5.1.6. Expenses, etc............................................................ 26 5.1.7. Closing Fee.............................................................. 26 5.1.8. Compliance Certificate................................................... 26 5.2. All Borrowings..................................................................... 26 5.2.1. Compliance with Warranties, No Default, etc.............................. 26 5.2.2. Borrowing Request........................................................ 27 5.2.3. Satisfactory Legal Form.................................................. 27 ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1. Organization, etc.................................................................. 27 6.2. Due Authorization, Non-Contravention, etc.......................................... 27 6.3. Government Approval, Regulation, etc............................................... 28 6.4. Validity, etc...................................................................... 28 6.5. Financial Information.............................................................. 28 6.6. No Material Adverse Change......................................................... 28 6.7. Litigation, Labor Controversies, etc............................................... 28 6.8. Subsidiaries....................................................................... 29 6.9. Partnerships; Joint Ventures....................................................... 29 6.10. Ownership of Properties............................................................ 29 6.11. Taxes.............................................................................. 29 6.12. Insurance.......................................................................... 29 6.13. Pension and Welfare Plans.......................................................... 29 6.14. Environmental Warranties........................................................... 30 6.15. Regulations G, U and X............................................................. 31 6.16. Accuracy of Information............................................................ 31 6.17. No Default......................................................................... 31 ARTICLE VII COVENANTS 7.1. Affirmative Covenants.............................................................. 31 7.1.1. Financial Information, Reports, Notices, etc............................. 31 7.1.2. Compliance with Laws, etc................................................ 33 7.1.3. Maintenance of Properties................................................ 33 7.1.4. Insurance................................................................ 33 7.1.5. Books and Records........................................................ 33 7.1.6. Environmental Covenant................................................... 34 7.1.7. Taxes.................................................................... 34 7.1.8. Supplemental Performance................................................. 34 7.1.9. Seasonal Clean-up........................................................ 34 7.2. Negative Covenants................................................................. 35 7.2.1. Consolidated Tangible Net Worth.......................................... 35 7.2.2. Consolidated Total Liabilities to Consolidated Tangible Net Worth........ 35 7.2.3. Consolidated Third-Party Indebtedness.................................... 35 7.2.4. Minimum Cash Flow Coverage............................................... 35 7.2.5. Liens.................................................................... 35 7.2.6. Change in Character of Business.......................................... 36 ARTICLE VIII EVENTS OF DEFAULT 8.1. Listing of Events of Default....................................................... 37 8.1.1. Non-Payment of Obligations............................................... 37 8.1.2. Breach of Warranty....................................................... 37
-70- 8.1.3. Non-Performance of Covenants and Obligations............................. 37 8.1.4. Default on Third-Party Indebtedness...................................... 37 8.1.5. Judgments................................................................ 38 8.1.6. Bankruptcy, Insolvency, etc.............................................. 38 8.1.7. Other Bank Agreements.................................................... 39 8.1.8. Change in Ownership...................................................... 39 8.2. Action if Bankruptcy............................................................... 39 8.3. Action if Other Event of Default................................................... 39 ARTICLE IX MISCELLANEOUS PROVISIONS 9.1. Waivers, Amendments, etc........................................................... 39 9.2. Notices............................................................................ 40 9.3. Payment of Costs and Expenses...................................................... 40 9.4. Indemnification.................................................................... 40 9.5. Survival........................................................................... 41 9.6. Severability....................................................................... 41 9.7. Headings........................................................................... 41 9.8. Execution in Counterparts, Effectiveness, etc...................................... 41 9.9. Governing Law; Entire Agreement.................................................... 42 9.10. Successors and Assigns............................................................. 42 9.11. Forum Selection and Consent to Jurisdiction........................................ 42 9.12. Waiver of Jury Trial............................................................... 42
-71- CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of February 11, 1997 between MYCOGEN CORPORATION, a California corporation (the "Company") and BANK OF AMERICA ILLINOIS, an Illinois banking corporation (the "Bank"). W I T N E S S E T H: WHEREAS, the Company desires to obtain a Commitment from the Bank pursuant to which the Bank shall make to the Company Revolving Loans in a maximum aggregate principal amount at any one time outstanding not to exceed $10,000,000, and a Term Loan in a maximum principal amount not to exceed $15,000,000; and WHEREAS, the Bank is willing, on the terms and subject to the conditions hereinafter set forth, to extend such Commitment and make such Loans to the Company; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1. Defined Terms. The following terms (whether or not ------------- underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Agreement" means, on any date, this Credit Agreement as originally in --------- effect on the Effective Date and as thereafter from time to time amended, supplemented, amended and restated, or otherwise modified and in effect on such date. "Authorized Officer" means, relative to the Company and any action to be ------------------ taken on behalf of the Company, any authorized corporate officer of the Company or its affiliates and any other employee of the Company duly designated and authorized by an authorized corporate officer to take such action. "Bank" is defined in the preamble. ---- "Banking Day" means (a) any day which is neither a Saturday or Sunday nor ----------- a legal holiday on which banks are authorized or required to be closed in Chicago, Illinois, (b) relative to the making, continuing, prepaying or repaying of (i) any Eurodollar Rate Loans, any day on which dealings in Eurodollars are carried on in the interbank eurodollar market and (ii) any Eurocurrency Loans, any day on which dealings in the applicable currency are carried on in both the country of issue of such currency and in the country where payment or disbursement thereof is to be made. "Borrowing" means Loans of the same Type and, in the case of Fixed Rate --------- Loans, having the same Interest Period, made by the Bank on the same Banking Day and pursuant to the same Borrowing Request in accordance with Section 2.1 and ----------- 2.3. - --- "Borrowing Request" means a loan request and certificate duly executed by ----------------- an Authorized Officer of the Company substantially in the form of Exhibit A --------- hereto. -72- "CERCLA" shall mean the Comprehensive Environmental Response, Compensation ------ and Liability Act of 1980, as amended from time to time. "Code" means the Internal Revenue Code of 1986, as amended, reformed or ---- otherwise modified from time to time. "Commitment" means, the Bank's obligation to make Loans pursuant to ---------- Section 2.1. - ----------- "Commitment Amount" means, on any date, $10,000,000 with respect to the ----------------- Revolving Loans (in Dollars and/or Dollar Equivalent) and $15,000,000 with respect to the Term Loan (in Dollars only), as such amount may be reduced from time to time pursuant to Section 2.2. ----------- "Company" is defined in the preamble. ------- "Compliance Certificate" is defined in Section 7.1.1(c). ---------------------- ---------------- "Continuation/Conversion Notice" means a notice of continuation or ------------------------------ conversion and certificate duly executed by an Authorized Officer of the Company substantially in the form of Exhibit B hereto. --------- "Default" means any Event of Default or any condition, occurrence or event ------- which, after notice or lapse of time or both, would constitute an Event of Default. "Demand Deposit Account" means account No. ___________ maintained by the ---------------------- Company at the Bank's 231 South LaSalle Street, Chicago, Illinois location, and any replacements or substitutions therefor. "Designated Currency" is defined in the definition of "Eurocurrency". ------------------- "Determination Date" means each of those dates determined in accordance ------------------ with Section 2.10(b). --------------- "Dollar Equivalent" means, (i) in the case of an amount denominated in ----------------- Dollars, such amount, and (ii) in any currency other than Dollars, the Dollar equivalent of such amount as determined in accordance with Section 2.10. ------------ "Dollars" and the sign "$" mean lawful money of the United States. ------- - "Domestic Dollars" means Dollars on deposit in the United States of ---------------- America. "Domestic Office" means, the office the Bank set forth below its signature --------------- hereto, or such other office of the Bank within the United States as may be designated from time to time by notice from the Bank to the Company. "DowElanco" means DowElanco, an Indiana partnership consisting of Dow --------- Chemical Company's subsidiary Rofan Services, Inc. and Eli Lilly & Company, Inc.'s subsidiary EPCO, Inc. "Effective Date" means the date this Agreement becomes effective pursuant -------------- to Section 9.8. ----------- "Environmental Warranties" is defined in Section 6.14. ------------------------ ------------ "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA also refer to any successor sections. "ERISA Affiliate" means any corporation, partnership, or other trade or --------------- business (whether or not incorporated) that is, along with the Company, a member of a controlled group of corporations or a controlled -73- group of trades or businesses, as described in sections 414(b) and 414(c), respectively, of the Code or section 4001 of ERISA, or a member of the same affiliated service group within the meaning of section 414(m) of the Code. "Eurocurrency" means (i) each of Pounds Sterling, French Francs, Swiss ------------ Francs, Deutschmarks, Canadian Dollars, Australian Dollars, Japanese Yen and European Currency Units (each, a "Designated Currency"), and (ii) any other currency (other than Dollars) to which the Bank shall consent, in each case (x) on deposit outside such currency's country of issuance and (y) as long as such currency is freely transferable and convertible into Dollars. "Eurocurrency Rate Loan" means a Loan made in a Eurocurrency and bearing ---------------------- interest, at all times during an Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the Interbank Rate (Reserve Adjusted) or the LIBOR Rate (Reserve Adjusted), as the case may be. "Eurodollar" mean Dollars on deposit in a bank outside the United States ---------- of America, its territories and possessions, which are available for transfer to and from the United States of America, its territories and possessions. "Eurodollar Rate Loan" means a Loan made and payable in Dollars bearing -------------------- interest, at all times during an Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the Interbank Rate (Reserve Adjusted) or the LIBOR Rate (Reserve Adjusted), as the case may be. "Event of Default" is defined in Section 8.1. ---------------- ----------- "Fixed Rate Loan" means any Eurodollar Rate Loan, Eurocurrency Rate Loan --------------- or Quoted Rate Loan. "F.R.S. Board" means the Board of Governors of the Federal Reserve System ------------ or any successor thereto. "GAAP" is defined in Section 1.4. ---- ----------- "herein", "hereof", "hereto", "hereunder" and similar terms contained in ------ ------ ------ --------- this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular Section, paragraph or provision of this Agreement or such other Loan Document. "Indemnified Liabilities" is defined in Section 9.4. ----------------------- ----------- "Indemnified Parties" is defined in Section 9.4. ------------------- ----------- "Interbank Lending Office" means, the office of the Bank designated as ------------------------ such below its signature hereto or such other office of the Bank as designated from time to time by notice from the Bank to the Company, whether or not outside the United States, which shall be making or maintaining Eurodollar Rate Loans or Eurocurrency Rate Loans of the Bank. "Interbank Rate" means, relative to any Interest Period for Eurocurrency -------------- Rate Loans or Eurodollar Rate Loans, the rate of interest equal to the average (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the rates per annum at which deposits in immediately available funds (a) in the case of a Eurodollar Rate Loan, in Eurodollars and (b) in the case of a Eurocurrency Loan, in either (i) the appropriate Eurocurrency or (ii) Dollars or Eurodollars in an amount equal to the Dollar Equivalent of such Eurocurrency deposits (plus the cost of any contract purchased or sold by the Bank to hedge the conversion of Dollars or Eurodollars, as applicable, into or from such Eurocurrency) are offered to the Bank's Interbank Lending Office by major banks in the interbank eurocurrency market as at or about 9:00 a.m. Chicago, Illinois time two (2) Banking Days prior to the beginning of such Interest Period for delivery on the first day of such Interest Period, and in -74- an amount approximately equal to the amount of such Eurocurrency Rate Loan or Eurodollar Rate Loan, as applicable, and for a period approximately equal to such Interest Period. "Interbank Rate (Reserve Adjusted)" means, relative to any Loan to be --------------------------------- made, continued or maintained as, or converted into, a Eurocurrency Rate Loan or a Eurodollar Rate Loan for any Interest Period bearing interest with reference to the Interbank Rate, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) determined pursuant to the following formula: Interbank Rate = Interbank Rate ------------------------- (Reserve Adjusted) 1.00 - Reserve Percentage "Interest Period" means, (a) with respect to any Eurodollar Rate Loan or --------------- Eurocurrency Rate Loan, the one-month, two-month, three-month or six-month period as selected by the Company and (b) with respect to (i) any Revolving Loan bearing interest at the Quoted Rate, the one-week, two-week, three-week, thirty- day, sixty-day, ninety-day or one hundred and eighty-day period as selected by the Company and (ii) any portion of the Term Loan bearing interest at the Quoted Rate, any period ranging from one week to five years as selected by the Company, in each case beginning on (and including) the date on which such Fixed Rate Loan is made or continued as, or converted into, a Fixed Rate Loan pursuant to Section 2.3 or 2.4, in each case as the applicable Borrower may select in its - ----------- --- relevant notice pursuant to Section 2.3 or 2.4; provided, however, that ----------- --- -------- ------- (a) the Company shall not be permitted to select Interest Periods for Fixed Rate Loans to be in effect at any one time which will have expiration dates occurring on more than five (5) different dates; (b) Interest Periods commencing on the same date for Loans comprising part of the same Borrowing shall be of the same duration; (c) if such Interest Period would otherwise end on a day which is not a Banking Day, such Interest Period shall end on the next following Banking Day (unless, if such Interest Period applies to Eurocurrency Rate Loans or Eurodollar Rate Loans, such next following Banking Day is the first Banking Day of a calendar month, in which case such Interest Period shall end on the Banking Day next preceding such numerically corresponding day); (d) no Interest Period with respect to any Revolving Loan may end later than the date set forth in clause (a) of the definition of "Revolving Credit Termination Date"; and (e) no Interest Period with respect to the Term Loan may end later than the date set forth in clause (a) of the definition of "Term Credit Termination Date". "LIBOR Lending Office" means the office of the Bank designated as such -------------------- below its signature hereto or such other office of the Bank as designated for time to time by notice from the Bank to the Company, whether or not outside the United States, which shall be making or maintaining Eurodollar Rate Loans or Eurocurrency Rate Loans of the Bank. "LIBOR Rate" means, relative to any Interest Period for Eurocurrency Rate ---------- Loans or Eurodollar Rate Loans, the rate of interest equal to the average (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the rates per annum at which deposits in immediately available funds (a) in the case of a Eurodollar Rate Loan, in Eurodollars and (b) in the case of a Eurocurrency Loan, in either (i) the appropriate Eurocurrency or (ii) Dollars or Eurodollars in an amount equal to the Dollar Equivalent of such Eurocurrency deposits (plus the cost of any contract purchased or sold by the Bank to hedge the conversion of Dollars or Eurodollars, as applicable, into or from such Eurocurrency) are offered to the Bank's LIBOR Lending Office by major banks in the London, England eurocurrency market as at or about 9:00 a.m. Chicago, Illinois time three (3) Banking Days prior to the beginning of such Interest Period for delivery on the first day of such Interest Period, and in -75- an amount approximately equal to the amount of the Bank's Eurocurrency Rate Loan or Eurodollar Rate Loan, as applicable, and for a period approximately equal to such Interest Period. "LIBOR Rate (Reserve Adjusted)" means, relative to any Loan to be made, ----------------------------- continued or maintained as, or converted into, a Eurocurrency Rate Loan or a Eurodollar Rate Loan to any Interest Period bearing interest with reference to the LIBOR Rate, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) determined pursuant to the following formula: Interbank Rate = LIBOR Rate ------------------------- (Reserve Adjusted) 1.00 - Reserve Percentage "Lien" means any security interest, mortgage, pledge, hypothecation, ---- assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property to secure payment of a debt or performance of an obligation or other priority or preferential arrangement of any kind or nature whatsoever. "Loans" means the Revolving Loans and the Term Loan made by the Bank to ----- the Company pursuant to this Agreement. "Loan Document" means this Agreement, the Notes, and each other agreement, ------------- document or instrument delivered in connection with this Agreement and the Notes. "Monthly Payment Date" means the last day of each calendar month or, if -------------------- any such day is not a Banking Day, the next succeeding Banking Day. "Notes" means the Revolving Note and the Term Note. ----- "Obligations" means all obligations (monetary or otherwise) of the Company ----------- arising under or in connection with this Agreement, the Notes and each other Loan Document. "Organic Document" means, relative to the Company, its certificate of ---------------- incorporation, its by-laws and all shareholder agreements, voting trusts and similar arrangements applicable to any of its authorized shares of capital stock. "PBGC" means the Pension Benefit Guaranty Corporation and any entity ---- succeeding to any or all of its functions under ERISA. "Pension Plan" means a "pension plan", as such term is defined in section ------------ 3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which the Company or any ERISA Affiliate may have liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Person" means any natural person, corporation, partnership, firm, ------ association, trust, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. "Plan" means any Pension Plan or Welfare Plan. ---- "Prior Currency" is defined in Section 2.9. -------------- ----------- "Property" shall mean all assets and properties of any nature whatsoever, -------- whether real or personal, tangible or intangible, including without limitation biotechnology products and techniques and intellectual property. -76- "Quarterly Payment Date" means the last day of each March, June, ---------------------- September, and December or, if any such day is not a Banking Day, the next succeeding Banking Day. "Quoted Rate" means the rate of interest quoted by the Bank pursuant to ----------- Section 2.6 applicable to a Borrowing of Quoted Rate Loans. - ----------- "Quoted Rate Loan" means a Loan made and payable in Dollars bearing ---------------- interest, at all times during an Interest Period applicable to such Loan, at the Quoted Rate applicable thereto. "Reference Rate" means, on any date and with respect to all Reference Rate -------------- Loans, a fluctuating rate of interest per annum equal to the rate of interest most recently announced by the Bank at Chicago, Illinois as its Reference Rate. The Reference Rate is not necessarily intended to be the lowest rate of interest determined by the Bank in connection with extensions of credit. For purposes of this Agreement, any change in the Reference Rate due to a change in the Reference Rate shall be effective on the date such change in the Reference Rate is announced. The Bank will give notice promptly to the Company of changes in the Reference Rate. "Reference Rate Loan" means a Loan made and payable in Dollars bearing ------------------- interest at a fluctuating rate determined by reference to the Reference Rate. "Reportable Event" has the meaning given to such term in ERISA. ---------------- "Reserve Percentage" means, relative to any Interest Period for ------------------ Eurocurrency Rate Loans or Eurodollar Rate Loans, the reserve percentage (expressed as a decimal) equal to the maximum aggregate reserve requirements (including all basic, emergency, supplemental, marginal and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements) specified under regulations issued from time to time by the F.R.S. Board and then applicable to assets or liabilities consisting of and including "Eurocurrency Liabilities", as currently defined in Regulation D of the F.R.S. Board, having a term approximately equal or comparable to such Interest Period. For purposes of this definition, any Eurocurrency Rate Loans or Eurodollar Rate Loans hereunder shall be deemed to be "Eurocurrency Liabilities" as defined in Regulation D. "Revolving Commitment Termination Date" means the earliest to occur of: ------------------------------------- (a) February 1, 1998; (b) the date on which the Revolving Credit Commitment is terminated in full or reduced to zero pursuant to Section 2.2; or ----------- (c) the date on which any Event of Default occurs. "Revolving Credit Commitment" means the Commitment of the Bank to make --------------------------- Revolving Loans to the Company in an aggregate outstanding amount not to exceed $10,000,000. "Revolving Loans" means the loans made by the Bank to the Company pursuant --------------- to Section 2.1.1. ------------- "Revolving Note" means the promissory note of the Company payable to the -------------- order of the Bank, in the form of Exhibit C hereto (as such promissory note may --------- be amended, endorsed or otherwise modified from time to time), evidencing the aggregate Revolving Loans made by the Bank to the Company hereunder, and all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Second Currency" is defined in Section 2.9. --------------- ------------ -77- "Subsidiary" means, as to any Person, (i) any corporation of which or in ---------- which such Person, such Person and one or more of its Subsidiaries, or one or more Subsidiaries of such Person directly or indirectly own 50% or more of the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (ii) any partnership, joint venture or similar entity of which or in which such Person, such Person and one or more of its Subsidiaries, or one or more Subsidiaries of such Person directly or indirectly own 50% or more of the capital interest or profits interest or (iii) any trust, association or other unincorporated organization of which or in which such Person, and one or more of its Subsidiaries, or one or more Subsidiaries of such Person directly or indirectly own 50% or more of the beneficial interest. "Taxes" is defined in Section 4.6. ----- ----------- "Term Commitment Termination Date" means the earlier to occur of: -------------------------------- (a) February 1, 2002; or (b) the date on which any Event of Default occurs. "Term Credit Commitment" means the Commitment of the Bank to make a Term ---------------------- Loan to the Company in a principal amount not to exceed $15,000,000. "Termination Event" with respect to any Pension Plan means (i) the ----------------- institution by the Company, the PBGC or any other Person of steps to terminate such Plan, (ii) the occurrence of a Reportable Event with respect to such Plan which the Bank or the Required Lenders reasonably believes may be a basis for the PBGC to institute steps to terminate such Plan, or (iii) the withdrawal from such Plan (or deemed withdrawal under section 4062 (f) of ERISA) by the Company or any ERISA Affiliate which is a substantial employer within the meaning of section 4063 of ERISA. "Term Loan" means the loan made by the Bank to the Company pursuant to --------- Section 2.1.2. - ------------- "Term Note" means the promissory note of the Company payable to the order --------- of the Bank, in the form of Exhibit D hereto (as such promissory note may be --------- amended, endorsed or otherwise modified from time to time), evidencing the Term Loan made by the Bank to the Company hereunder, and any other promissory notes accepted from time to time in substitute therefore or renewal thereof. "Type" means, relative to any Loan, the portion thereof, if any, being ---- maintained as a Reference Rate Loan, Eurocurrency Rate Loan, Eurodollar Rate Loan or Quoted Rate Loan. "United States" or "U.S." means the United States of America, its fifty ------------- ---- States and the District of Columbia. "Welfare Plan" means a "welfare plan", as such term is defined in section ------------ 3(1) of ERISA. SECTION 1.2. Use of Defined Terms. Unless otherwise defined or the -------------------- context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in the Schedules to this Agreement and in each Note, Borrowing Request, Continuation/Conversion Notice, Loan Document, notice and other communication delivered from time to time in connection with this Agreement or any other Loan Document. SECTION 1.3. Cross-References. Unless otherwise specified, references in ---------------- this Agreement and in each other Loan Document to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and, unless otherwise specified, references in -78- any Article, Section or definition to any clause are references to such clause of such Article, Section or definition. SECTION 1.4. Accounting and Financial Determinations. Unless otherwise --------------------------------------- specified, all accounting terms used herein or in any other Loan Document shall be interpreted, all accounting determinations and computations hereunder or thereunder shall be made, and all financial statements required to be delivered hereunder or thereunder shall be prepared in accordance with, those generally accepted accounting principles ("GAAP") applied in the preparation of the financial statements referred to in Section 6.5. ----------- ARTICLE II COMMITMENTS, BORROWING PROCEDURES AND NOTES SECTION 2.1. Commitments. On the terms and subject to the conditions of ----------- this Agreement, the Bank agrees to make Loans pursuant to the Commitments described in this Section 2.1. ----------- SECTION 2.1.1. Revolving Loans. From time to time on any Banking --------------- Day occurring from and including the Effective Date but prior to the Revolving Commitment Termination Date, the Bank will make Revolving Loans to the Company in aggregate principal amount equal to the Revolving Credit Commitment. Revolving Loans will be available in Dollars or any Eurocurrency herein provided for. On the terms and subject to the conditions hereof, the Company may from time to time borrow, prepay and reborrow Revolving Loans made to it. SECTION 2.1.2. Term Loan. On any Banking Day occurring from and --------- including the Effective Date but prior to the Term Commitment Termination Date, the Bank will make a term Loan to the Company, in one (1) disbursement, in an amount not to exceed the Term Credit Commitment. The Term Loan will be available only in Dollars. The Company may not reborrow any amounts of the Term Loan which are paid or prepaid hereunder. SECTION 2.2. Reduction of Revolving Credit Commitment. The Company may, ---------------------------------------- from time to time on any Banking Day occurring after the Effective Date, voluntarily reduce the Revolving Credit Commitment; provided, however, that all -------- ------- such reductions shall require at least three (3) Banking Days' prior notice to the Bank and shall be permanent, and any partial reduction of the Revolving Credit Commitment shall be in a minimum amount of $1,000,000 (in Dollars and/or Dollar Equivalent) and in an integral multiple of $1,000,000 (in Dollars and/or Dollar Equivalent). SECTION 2.3. Borrowing Procedure-Revolving Loans. By requesting in ----------------------------------- writing or by telephone (upon request to the Bank, promptly confirmed in writing) on or before 11:00 a.m., Chicago, Illinois time, on a Banking Day, in accordance with the provisions of this Section 2.3 applicable to the Type of ----------- Borrowing requested, the Company, through one of its Authorized Officers may, from time to time irrevocably request that a Revolving Loan be made (a) in the case of Reference Rate Loans, in a minimum aggregate amount of $200,000 and multiples of $200,000, or in the unused amount of the Revolving Credit Commitment and (b) in the case of Fixed Rate Loans of any Type, in a minimum aggregate amount of $200,000 and multiples of $200,000. Each Revolving Loan shall be comprised of the same Type of Loans, and shall be made on the same Banking Day. Upon request of the Bank, all telephonic or other oral requests for a Revolving Loan shall be promptly confirmed in writing by delivery to the Bank of a Borrowing Request therefor (including delivery by facsimile transmission in accordance with Section 9.2) duly executed by an Authorized ----------- Officer not later than three (3) Banking Days after the date of any such oral request, provided, however, that the Company's failure to comply with any of the -------- ------- above requirements shall not in any manner affect the obligations of the Company to repay any Revolving Loan in accordance with the terms of this Agreement and the Revolving Note. -79- SECTION 2.4. Borrowing Procedure-Term Loan. By requesting in writing ----------------------------- or by telephone (upon request of the Bank, promptly confirmed in writing) on or before 11:00 a.m., Chicago, Illinois time, on a Banking Day, the Company, through one of its Authorized Officers may, irrevocably request that the Term Loan be made. Upon request of the Bank, all telephonic or other oral requests for the Term Loan shall be promptly confirmed in writing by delivery to the Bank of a Borrowing Request therefor (including delivery by facsimile transmission in accordance with Section 9.2) duly executed by an Authorized Officer not later ----------- than three (3) Banking Days after the date of any such oral request, provided, however, that the Company's failure to comply with any of the above - -------- ------- requirements shall not in any manner affect the obligations of the Company to repay the Term Loan in accordance with the terms of this Agreement and the Term Note. SECTION 2.5. Eurocurrency Rate Loans and Eurodollar Rate Loans. Each ------------------------------------------------- request for a Borrowing of Eurocurrency Rate Loans or Eurodollar Rate Loans shall be received by the Bank from an Authorized Officer on or before 11:00 a.m., Chicago, Illinois time, on a Banking Day not less than (a) two (2) Banking Days' prior to the date of the requested Borrowing in the case of Eurodollar Rate Loans bearing interest with reference to the Interbank Rate (Reserve Adjusted) and (b) three (3) Banking Days' prior to the date of the requested Borrowing in the case of Eurocurrency Rate Loans [(whether bearing interest with reference to the Interbank Rate (Reserve Adjusted) or the Libor Rate (Reserve Adjusted)] or Eurodollar Rate Loans bearing interest with reference to the Libor Rate (Reserve Adjusted). Each request shall specify (i) whether such Loan is to bear interest initially with reference to the Interbank Rate (Reserve Adjusted) or the LIBOR Rate (Reserve Adjusted), (ii) the borrowing date, which day shall be a Banking Day, (iii) the amount and, if the Borrowing is to be of Eurocurrency Rate Loans, the currency of the requested Borrowing and (iv) the initial Interest Period for such Borrowing. SECTION 2.6. Quoted Rate Loans. Each request for a Borrowing of ----------------- Quoted Rate Loans shall be received by the Bank from an Authorized Officer of the Company on or before 11:00 a.m., Chicago, Illinois time, on the Banking Day of the requested Borrowing. Each request shall specify (i) the amount of requested Borrowing and (ii) the initial Interest Period for such Borrowing. Each such request shall be deemed to constitute a request to receive by telephone, from the Bank, a quotation of the interest rate that would be applicable to the Borrowing of Quoted Rate Loans identified in such borrowing request for the Interest Period specified therein. If such interest rate is satisfactory to the Company an Authorized Officer of the Company shall, no later than 11:00 a.m. Chicago, Illinois time, on such date, so indicate. Such indication by an Authorized Officer of the Company shall constitute an irrevocable request that such Borrowing of Quoted Rate Loans be made at the rate the Bank quoted or would have quoted to the Company at the time of such indication of acceptance, it being understood that the Bank does not guarantee that the interest rate quoted with respect to a particular requested Borrowing of Quoted Rate Loans shall continue to be available if such rate is not accepted by an Authorized Officer of the Company at the time of quotation. SECTION 2.7. Reference Rate Loans. Each request for a Borrowing of -------------------- Reference Rate Loans shall be received by the Bank from an Authorized Officer on or before 11:00 a.m., Chicago, Illinois time, on the Banking Day of the requested Borrowing. Each request shall specify (i) the borrowing date, which day shall be a Banking Day and (ii) the amount of requested Borrowing. SECTION 2.8. Proceeds. Subject to the other provisions of this -------- Agreement, the Bank will pay to the Company the amount of a Borrowing on the date designated in the request therefor upon receipt of the documents required under Sections 5.1 and 5.2 with respect to such Borrowing. Each Borrowing of ------------ --- Reference Rate Loans, Quoted Rate Loans and Eurodollar Rate Loans shall be disbursed in Dollars, on the applicable borrowing date, to the Company through its account with the Bank or if no such account exists, to such account as the Company shall direct. Each Eurocurrency Rate Loan shall be disbursed in the currency specified by the Company, at such branch or affiliate of the Bank or such other bank as the Bank may select. SECTION 2.9. Continuation and Conversion Elections. By requesting in ------------------------------------- writing or by telephone (promptly confirmed in writing as hereinafter provided) to the Bank on or before 11:00 a.m., Chicago, Illinois time, on a Banking Day, the Company may from time to time irrevocably elect that all or a portion of one Type of Loans be continued as such Type or converted into another Type of Loans, in accordance with the -80- applicable provisions of this Section 2.4; provided, however, that (i) the ----------- -------- ------- aggregate dollar amount of Loans which may be converted and/or continued at any one time shall not be less than (a) in the case of Reference Rate Loans, a minimum aggregate amount of $50,000 and multiples of $200,000, and (b) in the case of Fixed Rate Loans of any Type, a minimum aggregate amount of $200,000 and multiples of $200,000, and (ii) no portion of the outstanding principal amount of any Loans may be continued as, or be converted into, Fixed Rate Loans when any Default has occurred and is continuing. Each telephonic or other oral conversion or continuation request referred to in Section 2.9.1 or Section 2.9.2 ------------- ------------- shall be promptly confirmed in writing by delivery to the Bank of a duly completed Conversion/Continuation Notice duly executed by an Authorized Officer of the Company not later than three (3) Banking Days after the date of any such oral request. In the absence of receipt of a telephonic or written request for continuation or conversion with respect to any Fixed Rate Loan in accordance with the provisions of Section 2.9.1 or 2.9.2, as applicable, such Fixed Rate ------------- ----- Loan shall, on such last day, automatically convert to a Reference Rate Loan. Each conversion or continuation of a Loan in one currency (the "Prior Currency") into a Loan in another currency (the "Second Currency") shall result in a Loan in an amount denominated in the Second Currency equal to the equivalent in the Second Currency of the Loan amount denominated in the Prior Currency, in each case determined by the Bank in accordance with the provisions of Section 2.10. ------------ SECTION 2.9.1. Eurocurrency Rate Loans, Eurodollar Rate Loans and -------------------------------------------------- Reference Rate Loans. Subject to the other provisions of this Agreement, -------------------- the Company may elect: (a) to continue all or any portion of any outstanding Eurodollar Rate Loans or Eurocurrency Rate Loans from the current Interest Period of such Loans into a subsequent Interest Period to begin on the last day of such current Interest Period and in the same currency or, in the case of Eurocurrency Rate Loans, in the same or a different Eurocurrency, (b) to convert any outstanding Reference Rate Loans into Eurodollar Rate Loans or Eurocurrency Rate Loans or (c) to convert one Type of Fixed Rate Loan into any other Type of Loan except a Quoted Rate Loan, such conversion to occur on the last day of the then current Interest Period of the Loans being converted. The Company shall give the Bank prior telephonic notice (promptly confirmed in writing) from an Authorized Officer (x) at least two (2) Banking Days' prior to the date of continuation or conversion in the case of continuation of or conversion into a Eurodollar Rate Loan bearing interest with reference to the Interbank Rate and (y) at least three (3) Banking Days' prior to the date of continuation or conversion in the case of continuation of or conversion into a Eurocurrency Rate Loan [whether bearing interest with reference to the Interbank Rate (Reserve Adjusted) or the LIBOR Rate (Reserve Adjusted)] or into a Eurodollar Rate Loan bearing interest with reference to the LIBOR Rate. Each such notice shall specify whether such Loan bears interest with reference to the Interbank Rate or the LIBOR Rate, the date, the amount and the Interest Period, if applicable, and, in the case of a continuation of or conversion into Eurocurrency Rate Loans, the currency of the such Loans. SECTION 2.9.2. Quoted Rate Loans. Subject to the other provisions ----------------- of this Agreement, the Company may elect (a) to continue all or any portion of any outstanding Quoted Rate Loans from the current Interest Period of such Loans into a subsequent Interest Period to begin on the last day of such current Interest Period and in the same currency, (b) to convert all or any portion of any outstanding Eurodollar Rate Loans or Eurocurrency Rate Loans to Quoted Rate Loans, such conversion to occur on the last day of the then current Interest Period of the Loans being converted, or (c) to convert all or any portion of any outstanding Reference Rate Loans into Quoted Rate Loans. If the Company desires to continue or convert outstanding Loans as or into Quoted Rate Loans, the Company shall give the Bank prior telephonic notice (promptly confirmed in writing) from an Authorized Officer of the Company of a requested continuation or conversion under this Section 2.9.2, specifying the date, ------------- amount and Type of Loans to be continued or converted, the applicable Interest Periods and requesting that the Bank provide the Company by telephone a quotation of the interest rate(s) that would be applicable to the requested Quoted Rate Loans for Interest Period(s) of a duration designated by such Authorized Officer and commencing (a) on the last day of the current Interest Period in the case of outstanding Fixed Rate Loans or (b) on the date such rate quotation is requested in the case of outstanding Reference Rate Loans. Each such notice and request from the Company, to be effective, must be received by the Bank no later than 11:00 a.m., Chicago, Illinois time on the Banking Day such conversion into or continuation of Quoted Rate Loans is to occur. If such interest rate is satisfactory to the Company an Authorized Officer shall, no later than 11:00 -81- a.m. Chicago, Illinois time, on such date, so indicate. Such indication by an Authorized Officer of the Company shall constitute an irrevocable request that the requested continuation of or conversion into Quoted Rate Loans be consummated at the rate the Bank quoted or would have quoted to the Company at the time of such indication of acceptance, it being understood that the Bank does not guarantee that the interest rate quoted with respect to a particular requested conversion of or continuation into Quoted Rate Loans shall continue to be available if such rate is not accepted by an Authorized Officer of the Company at the time of quotation. SECTION 2.10. Currency Equivalents. -------------------- (a) Exchange Rate. Whenever pursuant hereto the Dollar Equivalent ------------- of an amount denominated in any currency other than Dollars is to be determined as of a date, such determination shall be made at the spot rate at which the Bank offers to purchase such currency with Dollars at approximately 10:00 am., Chicago, Illinois time on such date. Whenever the equivalent in any currency (other than Dollars) is to be determined as of a date, such determination shall be made in accordance with the preceding sentence, substituting such currency in which such equivalent is being determined for Dollars. (b) Determination Date. For purposes of determining the Commitment ------------------ Fee referred to in Section 3.3.1, the outstanding balance of the Revolving ------------- Loans and the Revolving Credit Commitment from time to time, the Dollar Equivalent of each Loan then denominated in a currency other than Dollars shall be determined as of each of the dates (a "Determination Date") as follows: (i) the date ten (10) Banking Days prior to the last day of each calendar quarter of each calendar year; and (ii) the date five (5) Banking Days prior to each of the following dates (unless such of the following dates is also the last day of any calendar quarter of any calendar year; (A) the date a Loan is made; (B) the date a Eurodollar Rate Loan or Eurocurrency Rate Loan is continued from the current Interest Period of such Loan into a subsequent Interest Period; (C) the date an outstanding Loan is converted from one Type of Loan into another Type of Loan; or (D) the date the principal of a Loan, or portion thereof, is paid or prepaid. The Dollar Equivalent of any Loan, or portion thereof, determined as of any Determination Date, shall be deemed to remain unchanged from such determination until the next succeeding Determination Date. SECTION 2.11. Funding. As to any Eurodollar Rate Loan or Eurocurrency ------- Rate Loan the Bank may, if it so elects, fulfill its obligation to make, continue or convert such Fixed Rate Loans hereunder by causing one of its foreign branches or Related Parties (or an international banking facility created by the Bank) to make or maintain such Fixed Rate Loan; provided, -------- however, that such Fixed Rate Loan shall nonetheless be deemed to have been made - ------- and to be held by the Bank, and the obligation of the Company to repay such Fixed Rate Loan shall nevertheless be to the Bank account of such foreign branch, Related Party or -82- international banking facility. In addition, the Company hereby consents and agrees that, for purposes of any determination to be made hereunder, it shall be conclusively assumed that the Bank elected to fund all Eurodollar Rate Loans and all Eurocurrency Rate Loans by purchasing Eurodollar deposits, or deposits in the applicable Eurocurrency, in its Interbank Lending Office's or LIBOR Lending Office's interbank eurocurrency market. SECTION 2.12. Notes. The Revolving Loans made by the Bank to the Company ----- under this Agreement shall be evidenced by the Revolving Note made by the Company payable to the order of the Bank in the maximum amount of the Bank's Revolving Credit Commitment. The Term Loan made by the Bank to the Company under this Agreement shall be evidenced by the Term Note made by the Company payable to the order of the Bank in the maximum amount of the Bank's Term Commitment or if less, the actual amount of the Term Loan made to the Company. The Company hereby irrevocably authorizes the Bank to make (or cause to be made) appropriate notations on the grid attached to each Note (or on any continuation of such grid), which notations, if made, shall evidence, inter alia, the date ----- ---- of, the outstanding principal of, and the interest rate and Interest Period applicable to the Loans evidenced thereby. Such notations shall be conclusive and binding on the Company absent manifest error; provided, however, that the -------- ------- failure of the Bank to make any such notations shall not limit or otherwise affect any Obligations of the Company. ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES SECTION 3.1. Repayments and Prepayments. The Company shall repay in -------------------------- full the unpaid principal amount of each Revolving Loan no later than the Revolving Commitment Termination Date. The Company shall repay the unpaid principal amount of the Term Loan in twenty (20) consecutive quarterly installments, each on a Quarterly Payment Date, commencing with the first such Quarterly Payment Date following the making of the Term Loan, and each such installment in the amount of $750,000 with the final such payment due and payable on the Term Commitment Termination Date in the principal amount of the Term Loan then outstanding. Prior to the Revolving Commitment Termination Date or the Term Commitment Termination Date, as the case may be, the Company (a) may, from time to time on any Banking Day, make a voluntary prepayment, in whole or in part, of the outstanding principal amount of any Loans; provided, however, that -------- ------- (i) no such prepayment of any Fixed Rate Loan may be made on any day other than the last day of the Interest Period for such Loan or portion thereof; (ii) all such voluntary prepayments shall require at least three (3) Banking Days' prior written notice to the Bank; (iii) all such voluntary partial prepayments shall be in an aggregate minimum amount of $50,000 and an integral multiple of $50,000; (iv) no amount of the Term Loan which is paid or prepaid may be reborrowed; and (v) All prepayments of the Term Loan shall be applied to the installments of the Term Loan in the inverse order of their maturities. (b) shall, on each date when any reduction in the Commitment Amount shall become effective, including pursuant to Section 2.2, make a ----------- mandatory prepayment of all Loans such that the aggregate amount so prepaid shall be equal to the excess, if any, of the aggregate, outstanding principal amount of all Loans over the Commitment Amount as so reduced; and -83- (c) shall, immediately upon any acceleration of the Loans pursuant to Section 8.2 or Section 8.3, repay all Loans; and ----------- ----------- (d) shall, if on any Determination Date, as a result of an increase in the value of a Eurocurrency, the aggregate Dollar Equivalent of the principal amount of all outstanding Loans to the Company exceeds the Commitment Amount, on the last day of the Interest Period during which such Determination Date occurs, make a mandatory prepayment of the aggregate outstanding Revolving Loans to the Company such that the aggregate amount of prepayments shall be equal to the amount of such excess. Each prepayment of any Loans made pursuant to this Section shall be without premium or penalty, except as may be required by Section 4.5. No voluntary ----------- prepayment of principal of any Revolving Loans shall cause a reduction in the Revolving Credit Commitment. SECTION 3.2. Interest Provisions. Interest on the outstanding principal ------------------- amount of Loans shall accrue and be payable in accordance with this Section 3.2. ----------- SECTION 3.2.1. Rates. ----- (a) Reference Rate Loans. That portion of the Loans maintained -------------------- from time to time as a Reference Rate Loans shall accrue and bear interest until maturity at a rate per annum equal to (i) the Reference Rate from time to time in effect minus one-half of one ----- percent (0.50%) with respect to the Revolving Loans and (ii) the Reference Rate from time to time in effect minus one-quarter of one ----- percent (0.25%) with respect to the Term Loan. (b) Eurodollar Rate Loans and Eurocurrency Rate Loans. That ------------------------------------------------- portion of the Loans maintained from time to time as a Eurodollar Rate Loans or Eurocurrency Rate Loans shall accrue and bear interest, during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Interbank Rate (Reserve Adjusted) or the LIBOR Rate (Reserve Adjusted), as the case may be for such Interest Period plus (i) one percent (1.0%) with respect to the Revolving ---- Loans and (ii) one and thirty-five one hundredth of one percent (1.35%) with respect to the Term Loan. (c) Quoted Rate Loans. That portion of the Loans maintained ----------------- from time to time as Quoted Rate Loans shall accrue and bear interest, during each Interest Period applicable thereto, at a rate per annum equal to the Quoted Rate in effect for such Interest Period. SECTION 3.2.2. Post-Maturity Rates. After the date any principal ------------------- amount of any Loan is due and payable (whether at maturity, upon acceleration or otherwise), the Company shall pay, but only to the extent permitted by law, interest (after as well as before judgment) on such Loan at a rate per annum equal to the greater of (a) two percent (2.0%) in excess of the rate applicable to the unpaid amount of such Loan immediately before it became due and (b) the Reference Rate in effect from time to time plus two percent (2.0%). ---- SECTION 3.2.3. Payment Dates. Interest accrued on each Loan shall ------------- be payable, without duplication: (a) on the Revolving Commitment Termination Date with respect to the Revolving Loans and the Term Commitment Termination Date with respect to the Term Loan, as the case may be. -84- (b) on the date of any payment or prepayment, in whole or in part, of principal outstanding on such Loan as the result of a reduction in the Commitment Amount pursuant to Section 2.2; ----------- (c) with respect to Reference Rate Loans, on each Monthly Payment Date occurring after the making of such Loan; (d) subject to clauses (g) and (h) below, with respect to Fixed ----------- --- Rate Loans, on the last day of each applicable Interest Period; (e) with respect to any Reference Rate Loans converted into Fixed Rate Loans on a day when interest would not otherwise have been payable pursuant to clause (c), on the date of such conversion; ---------- (f) Upon the acceleration of the Revolving Commitment Termination Date or the Term Commitment Termination Date, as the case may be, pursuant to Article VIII, immediately upon such acceleration. (g) with respect to any Eurodollar Loan or Eurocurrency Loan having an Interest Period of six months, the last day of the third month of such Interest Period and the last day of such Interest Period; and (h) with respect to Quoted Rate Loans, on the earlier to occur of (i) the Monthly Payment Date occurring after the making of such Loan or (ii) the last day of each applicable Interest Period. Interest accrued on Loans or other monetary Obligations arising under this Agreement or any other Loan Document after the date such amount is due and payable shall be payable upon demand. SECTION 3.3. Fees. The Company agrees to pay the fees set forth in this ---- Section 3.3. All such fees shall be non-refundable. - ----------- SECTION 3.3.1. Commitment Fee. The Company agrees to pay to the -------------- Bank, for the period (including any portion thereof when its Commitment is suspended by reason of the Company's inability to satisfy any condition of Article V) commencing on the Effective Date and continuing through the --------- Revolving Credit Termination Date, a commitment fee at the rate of one- eighth of one percent (0.125%) per annum on the average daily unused portion of the Revolving Credit Commitment. Such Commitment Fees shall be payable by the Company in arrears on each Monthly Payment Date, commencing with the first such day following the Effective Date, and on the Revolving Credit Commitment Date for the period then ending. SECTION 3.3.2. Closing Fee. The Company agrees to pay to the Bank a ----------- Closing Fee of Fifty Thousand Dollars ($50,000). Such Fee shall be payable, in full, upon the execution by the Bank and the Company of this Agreement. SECTION 3.4. Computation of Interest and Fees. All Fixed Rate Loans -------------------------------- shall bear interest from and including the first day of the applicable Interest Period to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such Fixed Rate Loan. Interest on each Reference Rate Loan, each Fixed Rate Loan and any fees, shall be computed on the basis of a year consisting of 360 days and paid for actual days elapsed. -85- ARTICLE IV CERTAIN INTEREST RATE AND OTHER PROVISIONS SECTION 4.1. Fixed Rate Lending Unlawful. If the Bank shall determine --------------------------- that the introduction of or any change in or in the interpretation of any law makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for the Bank to make, continue or maintain any Loan as, or to convert any Loan into, a Fixed Rate Loan of a certain Type, the obligations of the Bank to make, continue, maintain or convert any such Loans shall, upon such determination, forthwith be suspended until the Bank shall notify the Company that the circumstances causing such suspension no longer exist, and all Fixed Rate Loans of such Type shall automatically convert into Reference Rate Loans or, subject to compliance with the applicable provisions of Section 2.9, ----------- another Type of Fixed Rate Loans, at the end of the then current Interest Periods with respect thereto or sooner, if required by such law or assertion. SECTION 4.2. Deposits Unavailable. If the Bank has determined that -------------------- (a) Dollar or Eurocurrency deposits, as the case may be, in the relevant amount and for the relevant Interest Period are not available to the Bank in its relevant market; or (b) by reason of circumstances affecting the Bank's relevant market, adequate means do not exist for ascertaining the interest rate applicable hereunder to Fixed Rate Loans of a particular Type, then, upon notice from the Bank to the Company, the obligations of the Bank to - ---- make or continue any Loans as, or to convert any Loans into, Fixed Rate Loans of such Type shall forthwith be suspended until the Bank shall have notified the Company that the circumstances causing such suspension no longer exist. SECTION 4.3. Increased Capital Costs With Respect to Commitments. If any ---------------------------------------------------- change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other governmental authority affects or would affect the amount of capital required or expected to be maintained by the Bank or any Person controlling the Bank, and the Bank determines (in its sole and absolute discretion) that the rate of return on its or such controlling Person's capital as a consequence of its Commitment or the Loans made by the Bank is reduced to a level below that which the Bank or such controlling Person could have achieved but for the occurrence of any such circumstance, then, in any such case upon notice from time to time by the Bank to the Company the Company agrees that it shall immediately pay to the Bank additional amounts sufficient to compensate the Bank or such controlling Person for such reduction in rate of return at the time suffered or incurred. A statement of the Bank as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Company. In determining such amount, the Bank may use any reasonable method of averaging and attribution that it (in its sole and absolute discretion) shall deem applicable. SECTION 4.4. Funding Losses. In the event the Bank shall incur any loss -------------- or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Bank to make, continue or maintain any portion of the principal amount of any Loan as, or to convert any portion of the principal amount of any Loan into, a Fixed Rate Loan) as a result of (a) any conversion or repayment or prepayment of the principal amount of any Fixed Rate Loans on a date other than the scheduled last day of the Interest Period applicable thereto; (b) any Loans not being made as Fixed Rate Loans in accordance with the Borrowing Request therefor; or -86- (c) any Loans not being continued as, or converted into, Fixed Rate Loans in accordance with the Continuation/ Conversion Notice therefor, then, upon the written notice of the Bank to the Company, the Company agrees that it shall, within five (5) Banking Days of the Company's receipt thereof, pay to the Bank such amount as will (in the reasonable determination of the Bank) reimburse the Bank for such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Company. SECTION 4.5. Taxes. All payments by the Company of principal of, and ----- interest on, the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and taxes imposed on or measured by the Bank's net income or receipts (such non-excluded items being called "Taxes"). In the event that any withholding or deduction from any payment to be made by the Company hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Company will (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Bank an official receipt or other documentation satisfactory to the Bank evidencing such payment to such authority; and (c) pay to the Bank such additional amount or amounts as is necessary to ensure that the net amount actually received by the Bank will equal the full amount the Bank would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against the Bank with respect to any payment received by the Bank hereunder, the Bank may pay such Taxes and the Company agrees that it will promptly pay such additional amounts (including any penalties, interest or expenses) as is necessary in order that the net amount received by the Bank after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount the Bank would have received had not such Taxes been asserted; excluding, however, all such amounts which are so --------- ------- payable due to the negligence of the Bank. If the Company fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Bank, the required receipts or other required documentary evidence, the Company agrees to indemnify the Bank for any incremental Taxes, interest or penalties that may become payable by the Bank as a result of any such failure. If the Bank receives a refund of any amount paid by the Company pursuant to this Section in respect of amounts required to be withheld or deducted from amounts due to the Bank under this Agreement and the other Loan Documents, and if as a result of the Bank's receipt of such refund the net amount received by the Bank exceeds the amount to which the Bank is entitled under this Agreement and the other Loan Documents, the Bank shall promptly pay to the Company the amount of such excess. SECTION 4.6. Payments, Computations, etc. Unless otherwise expressly --------------------------- provided, all payments by the Company pursuant to this Agreement, the Notes or any other Loan Document shall be made by the Company to the Bank. All such payments required to be made to the Bank shall be made, without setoff, deduction or counterclaim, not later than 12:30 p.m., Chicago, Illinois time, on the date due, in same day or immediately available funds, to such account as the Bank shall specify from time to time by notice to the Company. Funds received after that time shall be deemed to have been received by the Bank on the next succeeding Banking Day. The Company hereby authorizes the Bank and the Bank may, in its sole and absolute discretion, provide for the payment of any amounts required to be paid in Dollars which are due under this Agreement or the other Loan Documents, by debiting the Demand Deposit Account for the amount -87- then due; provided, however, that the failure of the Company to maintain -------- ------- sufficient balances in the Demand Deposit Account to provide for such payment shall not affect the Company's obligation to pay when due all amounts payable by the Company hereunder or under any other Loan Document. Whenever any payment to be made shall otherwise be due on a day which is not a Banking Day, such payment shall (except as otherwise required by clause (c) of the definition of the term ---------- "Interest Period" with respect to Eurodollar Rate Loans or Eurocurrency Rate Loans) be made on the next succeeding Banking Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. SECTION 4.7. Setoff. The Bank shall, upon the occurrence of any Event of ------ Default, have the right to appropriate and apply to the payment of the Obligations (whether or not then due), any and all balances, credits, deposits, accounts or moneys of the Company then or thereafter maintained with the Bank. The Bank agrees promptly to notify the Company after any such setoff and application; provided, however, that the failure to give such notice shall not -------- ------- affect the validity of such setoff and application. The rights of the Bank under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which the Bank may have. SECTION 4.8. Use of Proceeds. The Company will use the proceeds of the --------------- Loans for general operating capital. SECTION 4.9. Currency Indemnification. The obligation of the Company to ------------------------ make payments hereunder in the currencies specified in Article III shall not be discharged as satisfied by any tender or recovery which is expressed in any other currencies except to the extent that such tender or recovery shall result in the actual receipt by the Bank of the full amount in the currencies so specified payable hereunder. The Company's obligations to make payments in the currencies so specified shall be enforceable as an alternative or additional cause of action for the purpose of recovery in such currencies of the amount, if any, by which such actual receipt shall fall short of the full amount in such currencies payable hereunder, and shall not be affected by judgment being obtained for any sums due hereunder. Without limiting the generality of the previous paragraph, the Company agrees to indemnify the Bank against any loss incurred by it as a result of any judgment or order being given or made for the payment of any Indebtedness hereunder and such judgment or order being expressed in a currency other than the currency of the Indebtedness hereunder and as a result of any variation having occurred in rates of exchange between the date of any such amount becoming due hereunder and the date of actual payment thereof. The foregoing indemnity shall constitute a separate and independent obligation and shall apply irrespective of any indulgence granted from time to time and shall continue in full force and effect notwithstanding any such judgment or order as aforesaid. ARTICLE V CONDITIONS TO BORROWING SECTION 5.1. Initial Borrowing of the Company. The obligation of the -------------------------------- Bank to fund an initial Borrowing of the Company shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 5.1, in addition to the applicable conditions precedent set forth in - ----------- Section 5.2. - ----------- SECTION 5.1.1. Secretary's Certificate. The Bank shall have ----------------------- received from the Company, a certificate, dated the date of the initial Borrowing, of its Secretary or Assistant Secretary as to (a) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of this Agreement and the Notes and authorizing the borrowings hereunder and each other Loan Document to be executed by it; -88- (b) all documents evidencing other corporate action necessary for the execution, delivery and performance of any Loan Document; (c) all approvals or consents, if any, with respect to this Agreement and the Notes; (d) the Articles of Incorporation and By-laws of the Company, as duly adopted and then in effect, copies of which Articles of Incorporation and By-Laws shall be attached to such certificate; and (e) the incumbency and signatures of those of its officers authorized to sign to this Agreement, the Notes and each other Loan Document executed by it, upon which certificate the Bank may conclusively rely until it shall have received a further certificate of the Secretary of the Company canceling or amending such prior certificate. SECTION 5.1.2. Delivery of Notes. The Bank shall have received the ----------------- Notes of the Company duly executed and delivered by the Company. SECTION 5.1.3. Opinion of Counsel. The Bank shall have received an ------------------ opinion from Loreen P. Collins, counsel to the Company, substantially in the form of Exhibit F hereto; --------- SECTION 5.1.4. Letter of Awareness. The Bank shall have received a ------------------- letter of awareness from DowElanco, in form and substance satisfactory to the Bank. SECTION 5.1.5. Good Standing. The Bank shall have received a ------------- certificate of Good Standing issued by the Office of the Secretary of State of California, of recent date, and attesting to the good standing of the Company under the laws of the State of California. SECTION 5.1.6. Expenses, etc. The Bank shall have received all ------------- reasonable fees, costs and expenses due and payable pursuant to Section ------- 9.3, if then invoiced. --- SECTION 5.1.7. Closing Fee. The Bank shall have received the ----------- Closing Fee referred to in Section 3.3.2 hereof. ------------- SECTION 5.1.8. Compliance Certificate. The Bank shall have received ---------------------- a duly completed Compliance Certificate and all matters thereon shall be satisfactory to the Bank. SECTION 5.2. All Borrowings. The obligation of the Bank to fund any -------------- Borrowing (including the initial Borrowing) shall be subject to the satisfaction of each of the conditions precedent set forth in this Section 5.2. ----------- SECTION 5.2.1. Compliance with Warranties, No Default, etc. Both ------------------------------------------- before and after giving effect to any Borrowing the following statements shall be true and correct: (a) the representations and warranties set forth in Article VI ---------- shall be true and correct with the same effect as if then made (unless stated to relate solely to an early date, in which case such representations and warranties shall be true and correct as of such earlier date) except for such changes as are specifically permitted hereunder; and (b) no Default shall have then occurred and be continuing or shall result from such Borrowing. -89- SECTION 5.2.2. Borrowing Request. The Bank shall have received a ----------------- request for such Borrowing in accordance with Section 2.3 or Section 2.4, ----------- ----------- as the case may be. Each request for a Borrowing and the acceptance by the Company of the proceeds of such Borrowing shall constitute a representation and warranty by the Company that on the date of such Borrowing (both immediately before and after giving effect to such Borrowing and the application of the proceeds thereof) the statements made in Section 5.2.1 are true and correct. ------------- SECTION 5.2.3. Satisfactory Legal Form. All documents executed or ----------------------- submitted pursuant hereto by or on behalf of the Company shall be satisfactory in form and substance to the Bank and its counsel; the Bank and its counsel shall have received all information, approvals, opinions, documents or instruments as the Bank or its counsel may reasonably request. ARTICLE VI REPRESENTATIONS AND WARRANTIES In order to induce the Bank to enter into this Agreement and to make Loans hereunder, the Company represents and warrants unto the Bank as set forth in this Article VI. ---------- SECTION 6.1. Organization, etc. The Company and each of its Subsidiaries ----------------- is a corporation validly organized and existing and in good standing under the laws of the jurisdiction of its incorporation or formation and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of its business requires such qualification, except such jurisdictions where failure to so qualify and be in good standing is not reasonably likely to have a material adverse effect on the operations or financial condition of the Company and its Subsidiaries taken as a whole. The Company has full power and authority and holds all requisite governmental consents and other approvals to enter into, deliver and perform the Obligations under this Agreement, the Notes and each other Loan Document to which it is a party and to own and hold under lease its property and to conduct its business substantially as currently conducted by it. SECTION 6.2. Due Authorization, Non-Contravention, etc. The execution, ----------------------------------------- delivery and performance by the Company of this Agreement, the Notes and each other Loan Document executed or to be executed by it are within the Company's corporate powers, have been duly authorized by all necessary corporate action, and do not (a) contravene the Company's Organic Documents; (b) contravene any contractual restriction, law or governmental regulation or court decree or order binding on the Company; or (c) result in, or require the creation or imposition of, any Lien on any of the Company's properties. SECTION 6.3. Government Approval, Regulation, etc. The Company and its ------------------------------------ Subsidiaries are in material compliance with all statutes and governmental rules and regulations applicable to them and no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for the due execution, delivery or performance by the Company, of this Agreement, the Notes or any other Loan Document. Neither the Company nor any of its Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 6.4. Validity, etc. This Agreement, the Notes and each other ------------- Loan Document executed by the Company, constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. -90- SECTION 6.5. Financial Information. The audited consolidated balance --------------------- sheets of the Company and its Subsidiaries as at August 31, 1996, and the related statements of earnings and cash flow of the Company and its Subsidiaries, copies of which have been furnished to the Bank, have been prepared in accordance with GAAP consistently applied, and present fairly the consolidated financial condition of the corporations covered thereby as at the date thereof and the results of their operations for the period then ended. SECTION 6.6. No Material Adverse Change. Since the dates of the -------------------------- financial statements described in Section 6.5, there has been no material ----------- adverse change in the financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries taken as a whole. SECTION 6.7. Litigation, Labor Controversies, etc. There is no pending ------------------------------------ or, to the knowledge of the Company, threatened litigation, action or proceeding against the Company or any of its Subsidiaries, or labor controversy involving the Company or any of its Subsidiaries, or any of their respective properties, which might reasonably be expected to materially adversely affect the financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries taken as a whole or which purports to affect the legality, validity or enforceability of this Agreement, the Notes or any other Loan Document, except as disclosed on the Company's Form 10K dated August 31, 1996 as filed with the Securities and Exchange Commission, Washington, D.C., in Schedule -------- 6.7 or in Schedule 6.14. - --- ------------- SECTION 6.8. Subsidiaries. The Company has no Subsidiaries, except those ------------ Subsidiaries which are identified in Schedule 6.8. ------------ SECTION 6.9. Partnerships; Joint Ventures. Neither the Company nor any ---------------------------- of its Subsidiaries is a partner or a joint venturer in any partnership or joint venture other than the partnerships and joint ventures which are identified in Schedule 6.9. - ------------ SECTION 6.10. Ownership of Properties. The Company and each of its ----------------------- Subsidiaries owns good and marketable title to all of its properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all material Liens, charges or claims (including infringement claims with respect to patents, trademarks, copyrights and the like) except as (a) permitted pursuant to Section 7.2.5 or (b) disclosed in the Company's SEC Form 10K dated ------------- August 31, 1996. SECTION 6.11. Taxes. The Company and each of its Subsidiaries has filed ----- all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 6.12. Insurance. The Company and each of its Subsidiaries --------- maintain insurance, including self-insurance, to such extent and against such hazards and liabilities as is commonly maintained by companies similarly situated. SECTION 6.13. Pension and Welfare Plans. No Reportable Event has ------------------------- occurred, no steps have been taken by the PBGC, the Company or an ERISA Affiliate to terminate or withdraw from any Pension Plan, and no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which might result in the incurrence by the Company or any ERISA Affiliate of any material liability, fine or penalty. Except as disclosed in Schedule 6.13 neither the Company nor ------------- any ERISA Affiliate has any contingent liability with respect to any post- retirement benefit under a Welfare Plan, other than liability for continuation coverage described in Part 6 of Title I of ERISA. -91- SECTION 6.14. Environmental Warranties. ------------------------ (a) Except as disclosed in Schedule 6.14, neither the Company nor ------------- any Subsidiary has received any notice to the effect, or has any knowledge, that its Property or operations are not in compliance with any of the requirements of applicable federal, state and local environmental, health and safety statutes and regulations ("Environmental Laws") or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could have material adverse effect on the business, operations, Property, assets or conditions (financial or otherwise) of the Company or any Subsidiary; (b) to the best of the Company's knowledge there have been no releases of hazardous materials at, on or under any Property now or previously owned or leased by the Company or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonable be expected to have, a material adverse effect on the financial condition, operations, assets, business, Properties or prospects of the Company and its Subsidiaries; (c) to the best of the Company's knowledge there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any Property now or previously owned or leased by the Company or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonably be expected to have, a material adverse effect on the financial condition, operations, assets, business, Properties or prospects of the Company and its Subsidiaries; (d) to the best of the Company's knowledge neither the Company nor any Subsidiary of the Company has directly transported or directly arranged for the transportation of any hazardous material to any location which is listed or proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list or which is the subject of federal, state or local enforcement actions or other investigations which may lead to material claims against the Company or such Subsidiary thereof for any remedial work, damage to natural resources or personal injury, including claims under CERCLA; and (e) to the best of the Company's knowledge, except as disclosed on Schedule 6.14 no conditions exist at, on or under any Property now or ------------- previously owned or leased by the Company which, with the passage of time, or the giving of notice or both, would give rise to liability under any Environmental Law. SECTION 6.15. Regulations G, U and X. The Company is not engaged ---------------------- principally, or as one of its important activities, in the business of extending credit for the purpose of, purchasing or carrying margin stock, and no proceeds of any Loans will be used for a purpose which violates, or would be inconsistent with, F.R.S. Board Regulation G, U or X. SECTION 6.16. Accuracy of Information. All factual information ----------------------- heretofore or contemporaneously furnished by or on behalf of the Company in writing to the Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby taken together does not, and all other such factual information hereafter furnished by or on behalf of the Company to the Bank taken together will not, on the date as of which such information is dated or certified, contain any untrue statement of a material fact or omit a material fact necessary to make the factual information contained therein not misleading in light of the circumstances in which it was provided. SECTION 6.17. No Default. Neither the Company nor any Subsidiary is in ---------- default under any material agreement, contract or arrangement to which it is a party or by which it or its properties may be bound. ARTICLE VII -92- COVENANTS SECTION 7.1. Affirmative Covenants. The Company agrees with the Bank --------------------- that, until all Commitments have terminated and all Obligations have been paid and performed in full, the Company will perform the obligations set forth in this Section 7.1. ----------- SECTION 7.1.1. Financial Information, Reports, Notices, etc. The -------------------------------------------- Company will furnish, or will cause to be furnished, to the Bank copies of the following financial statements, reports, notices and information: (a) as soon as available, and in any event within 45 days after the close of each quarterly fiscal period of the Company (i) a copy of consolidated balance sheets and profits and loss statements for the Company and its Subsidiaries (for such quarterly period and the year to date) for such period of the Company and for the corresponding periods of the preceding fiscal year, and (ii) consolidating balance sheets and profit and loss statements for the Company and each Subsidiary for the year to date, all in reasonable detail, prepared by the Company and certified by the chief financial officer of the Company; (b) as soon as available, and in any event within 120 days after the close of each fiscal year of the Company, a copy of the audit report for such year and accompanying financial statements, including a consolidated balance sheet, reconciliation of changes in stockholders' equity, profit and loss statement and showing in comparative form the figures for the previous fiscal year of the Company, all in reasonable detail, accompanied by the unqualified opinion of Ernst & Young or other independent public accountants of nationally recognized standing selected by the Company and satisfactory to the Bank; (c) as soon as available and in any event within 45 days after the end of each quarterly fiscal period a certificate (the "Compliance Certificate") substantially in the form of Exhibit F --------- hereto, executed by the chief financial officer of the Company, showing (in reasonable detail and with appropriate calculations and computations in all respects satisfactory to the Bank) compliance with the financial covenants set forth in Sections 7.2.1, 7.2.2, -------------- ----- 7.2.3 and 7.2.4 and stating that no Default has occurred and is ----- ----- continuing or, if there is any such Default, a statement setting forth details of such Default and the action which the Company has taken and proposes to take with respect thereto; (d) as soon as possible, and in any event within ten (10) Banking Days after the Company learns of the following, give written notice to the Bank of (a) any material proceeding(s) being instituted or threatened to be instituted by or against the Company or any Subsidiary in any federal, state, local, or foreign court or before any commission or other regulatory body (federal, state, local or foreign), (b) any material adverse change in the business, Property or condition, financial or otherwise of the Company, and (c) the occurrence of any Default; (e) promptly after the sending or filing thereof, copies of all reports which the Company sends to its equity securityholders, and all reports and registration statements (other than S-8 registration statements) which the Company or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange; (f) promptly after becoming aware of the institution of any steps by the Company, the PBGC or any ERISA Affiliate to terminate any Pension Plan, or the failure -93- to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a Lien under section 302(f) of ERISA, or the taking of any action with respect to a Pension Plan which could result in the requirement that the Company furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan which could result in the incurrence by the Company of any material liability, fine or penalty, or any material increase in the contingent liability of the Company with respect to any post-retirement Welfare Plan benefit, notice thereof and copies of all documentation relating thereto; (g) such other information respecting the condition or operations, financial or otherwise, of the Company or any of its Subsidiaries, or the Company's compliance with this Agreement, as the Bank may from time to time reasonably request. SECTION 7.1.2. Compliance with Laws, etc. The Company will, and ------------------------- will cause each of its Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations and orders. SECTION 7.1.3. Maintenance of Properties. The Company will, and ------------------------- will cause each Subsidiary to, keep and maintain all of its Properties necessary or useful in its business in good condition; provided, however, -------- ------- that nothing in the Section shall prevent the Company or any Subsidiary from discontinuing the operating and maintenance of any of its properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business. SECTION 7.1.4. Insurance. The Company will, and will cause each of --------- its Subsidiaries to, maintain or cause to be maintained insurance with respect to its properties and business against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses. SECTION 7.1.5. Books and Records. The Company will, and will cause ----------------- each of its Subsidiaries to, keep books and records which accurately reflect, in accordance with GAAP, all of its business affairs and transactions. The Company shall, and shall cause each Subsidiary to, permit the Bank, by its representatives and agents, to inspect any of the Properties, corporate books and financial records of the Company and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Company and its Subsidiaries and to discuss the affairs, finances and accounts of the Company and its Subsidiaries with, and to be advised as to the same by, its officers at such reasonable times and reasonable intervals as the Bank may request. The Company shall pay to the Bank from time to time upon demand an amount sufficient to compensate the Bank for its reasonable fees, charges and expenses in connection with each such inspection. All such inspections and audits will be performed by experienced personnel and, in the case of employees of the Bank, personnel generally knowledgeable about the industry in which the Company operates. SECTION 7.1.6. Environmental Covenant. The Company will, and will ---------------------- cause each of its Subsidiaries to, (a) use and operate all of its facilities and Properties in compliance with all Environmental Laws where the failure to do so could have a material adverse affect on the condition, financial or otherwise, of the Company or any of its Subsidiaries, use commercially reasonable efforts to keep all necessary permits, approvals, certificates, licenses and other authorizations related to environmental matters in effect and remain in material compliance therewith, and handle all hazardous materials in compliance with all applicable Environmental Laws; and -94- (b) provide such information and certifications which the Bank may reasonably request from time to time to evidence compliance with the Section. SECTION 7.1.7. Taxes. The Company will, and will cause each ----- Subsidiary to, duly pay and discharge all taxes, rates, assessments, fees and governmental charges upon or against the Company or any Subsidiary or against its Properties in each case before the same becomes delinquent and before penalties accrue thereon unless and to the extent that the same is being contested in good faith and by appropriate proceedings and adequate reserves, determined in accordance with generally accepted accounting principles consistently applied, have been established with respect thereto. SECTION 7.1.8. Supplemental Performance. The Company will, and will ------------------------ cause each Subsidiary to, at any time and from time to time upon request of the Bank take or cause to be taken any action or execute, acknowledge, deliver or record any further documents or other instruments which the Bank in its reasonable discretion deems necessary to carry out the purposes of the Loan Documents. SECTION 7.1.9. Seasonal Clean-up. The Company will reduce amounts ----------------- owed under any credit facility used to finance seasonal working requirements to a maximum of $5 million for a period of 30 consecutive days during each fiscal year. Because the Company may maintain more than one credit facility to finance its worldwide business operations, the seasonal clean-up for each facility may occur during different 30-day periods. SECTION 7.2. Negative Covenants. The Company agrees with the Bank that, ------------------ until all Commitments have terminated and all Obligations have been paid and performed in full, the Company will perform the obligations set forth in this Section 7.2. - ----------- SECTION 7.2.1. Consolidated Tangible Net Worth. The Company will ------------------------------- maintain consolidated tangible net worth in an amount not less than $130,000,000 as measured at the end of each fiscal quarter during its 1997 fiscal year; an amount not less than $140,000,000 as measured at the end of each fiscal quarter during its 1998 fiscal year and an amount not less than $150,000,000 as measured at the end of each fiscal quarter during its 1999 fiscal year and at the end of each fiscal quarter of each fiscal year thereafter. SECTION 7.2.2. Consolidated Total Liabilities to Consolidated ---------------------------------------------- Tangible Net Worth. The Company will not permit the ratio of its ------------------ consolidated total liabilities to its consolidated tangible net worth to exceed 1.0 to 1.0 as measured at the end of each fiscal quarter of each fiscal year. SECTION 7.2.3. Consolidated Third-Party Indebtedness. The Company ------------------------------------- will not permit the total of its Consolidated Third-Party Indebtedness to exceed $80,000,000 at any time. As used herein, Consolidated Third-Party Indebtedness shall mean indebtedness for borrowed money (including capitalized leases and guarantees of such indebtedness and capitalized leases) of the Company and any Subsidiary, other than such indebtedness (a) of the Company to any Subsidiary, (b) of any Subsidiary to the Company, (c) any Subsidiary to any other Subsidiary or (d) of the Company to any of its affiliates. SECTION 7.2.4. Minimum Cash Flow Coverage. The Company will not -------------------------- permit the ratio of (a) its net income from operations and investments plus depreciation, amortization and other non-cash charges plus interest ---- ---- expense and lease expense less dividends divided by (b) its current ---- portion of long-term debt plus interest expense plus lease expense to be ---- ---- less than 1.0 to 1.0 as measured at the end of each fiscal quarter of each fiscal year on a rolling four-quarter basis commencing at Company's 1997 fiscal year end. -95- SECTION 7.2.5. Liens. The Company will not, and will not permit any ----- of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its property, revenues or assets, whether now owned or hereafter acquired, except, without duplication: (a) Liens outstanding on the Effective Date and listed in Schedule 7.2.5 or disclosed in the financial statements referred to -------------- in Section 6.5; ----------- (b) any renewal or extension of any Lien permitted by this Section with extension, refunding or refinancing of the indebtedness secured thereby made without increase in the then outstanding principal amount thereof and as long as immediately before and after any such extension, refunding or refinancing of indebtedness no Default exists which is continuing. (c) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (d) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue for a period of more than 30 days or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (e) Liens incurred in the ordinary course of business in connection with workmen's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (f) in addition to Liens permitted by clauses (a) through (e) ------- --- --- above, Liens securing indebtedness, capitalized lease obligations or other liabilities not exceeding $5,000,000 in the aggregate at any time outstanding. SECTION 7.2.6. Change in Character of Business. The Company will ------------------------------- not, and will not permit any Subsidiary to, engage in any business if, as a result, there may occur a material adverse change or effect upon the Company's or such Subsidiary's financial condition or its ability to honor its financial obligations. ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1. Listing of Events of Default. Each of the following events ---------------------------- or occurrences described in this Section 8.1 shall constitute an "Event of ----------- -------- Default". - ------- SECTION 8.1.1. Non-Payment of Obligations. The Company shall -------------------------- default in the payment or prepayment when due of any principal on any Loan, or the Company shall default (and such default shall continue unremedied for a period of five (5) Banking Days) in the payment when due of any fee, any interest or of any other Obligation. SECTION 8.1.2. Breach of Warranty. Any representation or warranty ------------------ of the Company made or deemed to be made hereunder or in any other Loan Document executed by it or any other writing or certificate furnished by the Company, to the Bank for the purposes of or in connection -96- with this Agreement or any such other Loan Document is or shall be incorrect when made or deemed made in any material respect. SECTION 8.1.3. Non-Performance of Covenants and Obligations. The -------------------------------------------- Company shall default in the due performance and observance of any other agreement contained herein (other than referred to in Section 8.1.1 or ------------- 8.1.2) or in any other Loan Document executed by it, and such default ----- shall continue unremedied for a period of 30 days after the earlier of (i) the day on which the Company first obtains actual knowledge of such default, or (ii) notice thereof shall have been given to the Company by the Bank; provided, however, that the Bank shall not take any action -------- ------- permitted hereunder pursuant to Section 8.3 if (x) such default is of a ----------- nature which is curable by the Company, (y) the Company is diligently proceeding to cure such default and (z) such default is so cured within ninety (90) days of the occurrence thereof. SECTION 8.1.4. Default on Third-Party Indebtedness. (a) A default ----------------------------------- shall occur in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Third-Party Indebtedness (as such term is defined in Section 7.2.3) (other than ------------- indebtedness evidenced by this Agreement and the Notes) of, or guaranteed by, the Company or any of its Subsidiaries having a principal amount, individually or in the aggregate, in excess of $1,000,000; or (b) a default shall occur in the performance or observance of any obligation or condition with respect to Third-Party Indebtedness of, or guaranteed by, the Company or any of its Subsidiaries having a principal amount, individually or in the aggregate, in excess of $1,000,000, if the effect of such default is to accelerate the maturity of such Third-Party Indebtedness or such default shall continue unremedied for any applicable period of time sufficient to permit the holder or holders of such Third- Party Indebtedness, or any trustee or agent for such holders, to cause such Third-Party Indebtedness to become due and payable prior to its expressed maturity. SECTION 8.1.5. Judgments. Any judgments or orders for the payment --------- of money aggregating in excess of $5,000,000 (exclusive of any amount covered by insurance) shall be rendered against the Company or any of its Subsidiaries or against any property or assets of either and either (a) enforcement proceedings shall have been commenced by any creditor upon such judgments or orders; or (b) there shall be any period of 60 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect. SECTION 8.1.6. Bankruptcy, Insolvency, etc. The Company or any of --------------------------- its Subsidiaries shall (a) become insolvent or generally fail to pay, or admit in writing its inability or unwillingness to pay, debts as they become due; (b) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Company or any of its Subsidiaries or any property of any thereof, or make a general assignment for the benefit of creditors; (c) in the absence of such application, consent or acquiescence, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Company or any of its Subsidiaries or for a substantial part of the property of any thereof, and such trustee, receiver, sequestrator or other custodian shall not be discharged within 60 days; -97- (d) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Company or any of its Subsidiaries, and, if any such case or proceeding is not commenced by the Company or such Subsidiary, such case or proceeding shall be consented to or acquiesced in by the Company or such Subsidiary or shall result in the entry of an order for relief or shall remain for 60 days undismissed; or (e) take any action authorizing, or in furtherance of, any of the foregoing. SECTION 8.1.7. Other Bank Agreements. A default shall occur in the --------------------- payment or performance under any agreement (other than this Agreement and the Notes) between the Company and the Bank or any Subsidiary or affiliate of the Bank and continuing beyond respective cure periods, if any. SECTION 8.1.8. Change in Ownership. DowElanco shall cease to own ------------------- for any reason, legally and beneficially, at least 50% of all classes of the issued and outstanding capital stock of the Company. SECTION 8.2. Action if Bankruptcy. If any Event of Default described in -------------------- clauses (a) through (d) of Section 8.1.6 shall occur with respect to the Company - ----------- --- ------------- or any Subsidiary, the Commitments (if not theretofore terminated) shall automatically terminate and the outstanding principal amount of all outstanding Loans and all other Obligations shall automatically be and become immediately due and payable, without notice or demand. SECTION 8.3. Action if Other Event of Default. If any Event of Default -------------------------------- (other than any Event of Default described in clauses (a) through (d) of Section ----------- --- ------- 8.1.6) with respect to the Company or any Subsidiary) shall occur for any - ----- reason, whether voluntary or involuntary, the Bank may by notice to the Company declare the outstanding principal amount of the Loans and other Obligations to be due and payable and/or the Commitments (if not theretofore terminated) to be terminated, whereupon the full unpaid amount of such Loans and other Obligations shall be and become immediately due and payable, without further notice, demand or presentment, and/or, as the case may be, the Commitments shall terminate. ARTICLE IX MISCELLANEOUS PROVISIONS SECTION 9.1. Waivers, Amendments, etc. The provisions of this Agreement ------------------------ and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Company and the Bank. No failure or delay on the part of the Bank, or the holder of any Note in exercising any power or right under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Company in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Bank, or the holder of any Note under this Agreement or any other Loan Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. SECTION 9.2. Notices. All notices and other communications provided to ------- any party hereto under this Agreement or any other Loan Document shall be in writing and addressed, delivered or transmitted to such party at its address or facsimile number set forth below its signature hereto or at such other address or facsimile number as may be designated by such party in a notice to the other party. Any notice, if mailed and -98- properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when sent; provided, however, -------- ------- that notices to the Bank under Sections 2.3 through 2.9 shall not be effective ------------ --- until actually received by the Bank; any notice, if transmitted by facsimile, shall be deemed given when transmitted. SECTION 9.3. Payment of Costs and Expenses. The Company agrees to pay on ----------------------------- demand all reasonable expenses of the Bank (including the fees and out-of-pocket expenses of counsel to the Bank) in connection with (a) the negotiation, preparation, execution and delivery of this Agreement and of each other Loan Document, including schedules and exhibits, and (b) any amendments, waivers, consents, supplements or other modifications to this Agreement or any other Loan Document as may from time to time hereafter be required, whether or not the transactions contemplated hereby are consummated; provided, however, that such -------- ------- expenses and fees for the matters referred to in clause (a) hereof shall not ---------- exceed $10,000. The Company further agrees to pay, and to save the Bank harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Agreement, the borrowings hereunder, or the issuance of the Notes or any other Loan Documents or the acceptance of telephonic or other instructions for making Loans. The Company also agrees to reimburse the Bank upon demand its reasonable expenses, including fees and out- of-pocket expenses of counsel (including counsel who may be employees of the Bank), incurred by the Bank in connection with (x) the negotiation of any restructuring or "work-out", whether or not consummated, of any Obligations and (y) the enforcement of any Obligations. SECTION 9.4. Indemnification. In consideration of the execution and --------------- delivery of this Agreement by the Bank and the extension of the Commitments, the Company hereby indemnifies, exonerates and holds the Bank and its respective officers, directors, employees and agents (collectively, the "Indemnified Parties") free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan; or (b) the entering into and performance of this Agreement and any other Loan Document by any of the Indemnified Parties, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence or wilful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. SECTION 9.5. Survival. The obligations of the Company under Sections -------- -------- 4.3, 4.4, 4.5, 4.6, 9.3 and 9.4 shall in each case survive any termination of - --- --- --- --- --- --- this Agreement, the payment in full of all Obligations and the termination of all Commitments. The representations and warranties made by the Company in this Agreement and in each other Loan Document shall survive the execution and delivery of this Agreement and each such other Loan Document. SECTION 9.6. Severability. Any provision of this Agreement or any other ------------ Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 9.7. Headings. The various headings of this Agreement and of -------- each other Loan Document are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such other Loan Document or any provisions hereof or thereof. SECTION 9.8. Execution in Counterparts, Effectiveness, etc. This --------------------------------------------- Agreement may be executed by the parties hereto in several counterparts, each of which shall be executed by the Company and the Bank -99- and be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement shall become effective when counterpart hereof executed on behalf of the Company shall have been received by the Bank. SECTION 9.9. Governing Law; Entire Agreement. This Agreement, the Notes ------------------------------- and each other Loan Document shall each be deemed to be a contract made under and governed by the internal laws of the State of Illinois. This Agreement, the Notes and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 9.10. Successors and Assigns. This Agreement shall be binding ---------------------- upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the Company may not assign or -------- ------- transfer its rights or obligations hereunder without the prior written consent of the Bank. SECTION 9.11. Forum Selection and Consent to Jurisdiction. ANY ------------------------------------------- LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE BANK, OR THE COMPANY SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE COMPANY HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE COMPANY HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. SECTION 9.12. Waiver of Jury Trial. THE BANK AND THE COMPANY HEREBY -------------------- KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE BANK OR THE COMPANY. THE COMPANY ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. [intentionally left blank] -100- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. MYCOGEN CORPORATION By: /s/ Carlton J. Eibl ---------------------------- Title: President & COO ------------------------ Address: 5501 Oberlin Drive San Diego, California 92121 Facsimile No.: Attention: Mr. James A. Baumker Vice President and Chief Financial Officer BANK OF AMERICA ILLINOIS By: /s/ John W. Weubbe ---------------------------- Title: Vice President ------------------------ Address: 231 South LaSalle Street Chicago, Illinois 60697 Facsimile No.: 312-828-1974 Attention: Mr. John W. Weubbe Vice President Address of Bank's Domestic Lending Office, Interbank Lending Office and LIBOR Lending Office: 231 South LaSalle Street Chicago, Illinois 60697 -101- Exhibits and Schedules ---------------------- Exhibit A - Borrowing Request Exhibit B - Continuation/Conversion Notice Exhibit C - Revolving Note Exhibit D - Term Note Exhibit E - Compliance Certificate Exhibit F - Opinion of Counsel Schedule 6.7 - Litigation, Labor Controversies, etc. Schedule 6.8 - Subsidiaries Schedule 6.9 - Partnerships and Joint Ventures Schedule 6.13 - Pension and Welfare Plans Schedule 6.14 - Environmental Warranties Schedule 7.2.5- Liens -102- Schedule 6.7 [Litigation, Labor Controversies, etc. - to be completed by the Company] Mycogen v. Ecogen, Inc. Federal District Court, San Diego (Filed January 1997) Mycogen Plant Science, Inc. v. Monsanto Company Federal District Court, San Diego (Filed May 19, 1995) Plant Genetic Systems NV v. Mycogen Central District Court of North Carolina (Filed October 31, 1995) (Amended August 13, 1996) Monsanto Company v. Mycogen Federal District Court, Wilmington, Delaware (Filed March 19, 1996) Mycogen Plant Science, Inc. v. Monsanto California Court of Appeal, Fourth Appellate District (Reversal of San Diego County Superior Court ruling in a Case filed December, 1993) Mycogen v. Monsanto Superior Court, San Diego, California (Filed May 8, 1996) DeKalb v. Mycogen Federal District Court in Rockford, Illinois (Filed April 30, 1996) -103- Schedule 6.7 Page 2 of 2 DeKalb v. Mycogen Federal District Court, Rockford, Illinois) (Filed July 23, 1996) (Amended August 27, 1996) Mycogen Plant Science, Inc. v. Monsanto Federal District Court, Wilmington, Delaware to reverse a ruling of the Board of Patent Appeals and Interferences (Filed August 15, 1996) Mycogen v. Monsanto, DeKalb, Delta and Pineland Federal District Court, Wilmington, Delaware (Filed October 22, 1996) -104- Schedule 6.8 Subsidiaries MYCOGEN CORPORATION (A CALIFORNIA CORPORATION) SUBSIDIARIES 1997 SEEDS Myocgen Plant Science, Inc. (a Delaware corporation) Agrigenetics, Inc., d/b/a Mycogen Seeds (a Delaware corporation) United Agriseeds (a Delaware corporation) Mycogen de Argentina, S.A. - Argentina Agrigenetics, S.A. de C.V. - Argentina Mycogen Plant Sciences - Puerto Rico Mycogen Canada, Inc. - Canada Santa Ursula S.A.A.I.C. e I. - Argentina Corporacion de Inversiones Frutihorticolas, S.A. BIOPESTICIDES Mycogen Crop Protection, Inc. (a California corporation) Soilserv, Inc. (a California corporation) Parasitix Corporation (a California corporation) Mycosub/BH, Inc. (a Delaware corporation) Mycosub/BA, Inc. (a Delaware corporation) Mycogen S.A. de C.V. - Mexico Mycogen Far East Asia Corporation (a California corporation) -105- Schedule 6.9 Partnerships and Joint Ventures MJTBH/BT Partnership, L.P. between Mycosub/BH, Inc. and J T Biotech USA, Inc. (March 6, 1989) MJTBA Partnership, L.P. between Mycosub/BA, Inc. and J T Biotech USA, Inc. (March 6, 1989) Agrigenetics, L.P. between Mycogen and Mycogen Plant Science, Inc. (August 25, 1992, as amended) -106- Schedule 6.13 Pension and Welfare Plans Soilserv, Inc.'s Pension Plan -107- Schedule 6.14 Environmental Warranties None -108- Schedule 7.2.5 Liens None -109- EXHIBIT A BORROWING REQUEST Bank of America Illinois 231 South LaSalle Street Chicago, Illinois 60697 Attention: John W. Weubbe, Vice President MYCOGEN CORPORATION ------------------- Ladies and Gentlemen: This Borrowing Request is delivered to you pursuant to Section 5.2.2 of ------------- the Credit Agreement, dated as of ____________, 1997 (together with all amendments, if any, from time to time made thereto, the "Credit Agreement"), between Mycogen Corporation, a California corporation (the "Company") and Bank of America Illinois (the "Bank"). Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. [complete the following, as appropriate] The Company hereby requests that the Term Loan be made on ______________ in the principal amount of $________________. Such Term Loan shall be made as a [Eurodollar Rate Loan having an Interest Period of _________________] [Quoted Rate Loan having an Interest Period of _________] [Reference Rate Loan]. The Company hereby requests that a Revolving Loan be made on ____________ in the principal amount of $______________. Such Revolving Loan shall be made as a [Eurodollar Rate Loan having an Interest Period of ________] [a Eurocurrency Rate Loan in ___________ Eurocurrency and having an Interest Period of ____] [Quoted Rate Loan having an Interest Period of _____] [Reference Rate Loan]. The Company hereby acknowledges that the delivery of this Borrowing Request and the acceptance by the Company of the proceeds of the Loans requested hereby constitutes a representation and warranty by the Company that, on the date of such Loans, and before and after giving effect thereto and to the application of the proceeds therefrom, all statements set forth in each of the subsections of Section 5.2.1 are true and correct in all material respects. ------------- -110- The Company has caused this Borrowing Request to be executed and delivered, and the certification and warranties contained herein to be made, by its duly Authorized Official this ____ day of ____________, 1997. MYCOGEN CORPORATION By:___________________________________________ Name: Title: -111- EXHIBIT B NOTICE OF CONTINUATION/CONVERSION Bank of America Illinois 231 South LaSalle Street Chicago, Illinois 60697 Attention: John W. Weubbe, Vice President MYCOGEN CORPORATION ------------------- Ladies and Gentlemen: This Continuation/Conversion Notice is delivered to you pursuant to Section ------- 2.9 of the Credit Agreement, dated as of _____________, 1997 (together with all - --- amendments, if any, from time to time made thereto, the "Credit Agreement"), between Mycogen Corporation, a California corporation (the "Company"), and Bank of America Illinois (the "Bank"). Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. The Company hereby requests that on ____________, 19___, [complete the following, as applicable] (1) $___________ of the presently outstanding principal amount of the [Term Loans] [Revolving Loans] originally made on __________, 19___ [and $__________ of the presently outstanding principal amount of the [Term Loans] [Revolving Loans] originally made on __________, 19___], (2) and all presently being maintained as [Eurodollar Rate Loans], [Eurocurrency Rate Loans] [Quoted Rate Loans] [Reference Rate Loans] (3) be [converted into] [continued as], (4) [Eurodollar Rate Loans having an Interest Period of _________] [Eurocurrency Rate Loans in _________ Eurocurrency and having an Interest Period of ____________] [Quoted Rate Loans having an Interest Period of ___________] [Reference Rate Loans] The Borrower hereby certifies and warrants that no Default or Event of Default has occurred and is continuing. -112- The Borrower has caused this Notice of Continuation/ Conversion to be executed and delivered, and the certification and warranties contained herein to be made, by its Authorized Official this ____ day of ____________, 19__. MYCOGEN CORPORATION By:____________________________________________ Name: Title: -113- EXHIBIT C REVOLVING PROMISSORY NOTE $10,000,000.00 Due: February 1, 1998 Chicago, Illinois: February 11, 1997 ----------- FOR VALUE RECEIVED, the undersigned, MYCOGEN CORPORATION, a California corporation (the "Company"), promises to pay to the order of BANK OF AMERICA ILLINOIS, an Illinois banking corporation (the "Bank"), on February 1, 1998, or such earlier date as set forth in the Credit Agreement hereinafter referred to, the principal sum of Ten Million and No/100 Dollars ($10,000,000), or if less, the then aggregate unpaid principal amount of Revolving Loans (as such term is defined in the Credit Agreement) as may be borrowed by the Company under the Credit Agreement. The Company may borrow, repay and reborrow hereunder in accordance with the provisions of the Credit Agreement. All Revolving Loans and all payments of principal shall be recorded by the holder in its records or, at its option, on the schedule (or any continuation thereof) attached to this Note. The Company further promises to pay to the order of the Bank interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at the rates per annum and times determined in accordance with the provisions of the Credit Agreement. All payments of principal and interest under this Note shall be made in lawful money of the United States of America in immediately available funds at the Bank's office at 231 South LaSalle Street, Chicago, Illinois 60697, or at such other place as may be designated by the Bank to the Company in writing. This Note is the Revolving Note referred to in, and evidences indebtedness incurred under, a Credit Agreement dated as of February 11, 1997 (herein, as it may be amended, modified or supplemented from time to time, called the "Credit Agreement") between the Company and the Bank, to which Credit Agreement reference is made for a statement of the terms and provisions thereof, including those under which the Company is permitted and required to make prepayment and repayments of principal of such indebtedness and under which such indebtedness may be declared to be immediately due and payable. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. This Note is made under and governed by the internal laws of the State of Illinois. -114- THE COMPANY AND THE BANK WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (I) UNDER THIS PROMISSORY NOTE OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH OR (II) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS PROMISSORY NOTE, AND AGREE THAT SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. MYCOGEN CORPORATION By: /s/ Carlton J. Eibl ------------------------------------ Title: President & COO ---------------------------------- -115- Schedule attached to Revolving Note dated February 11, 1997 of Mycogen ------------ Corporation, payable to the order of Bank of America Illinois.
Type of Amount Loan & Interest of Applicable Period Amount of Unpaid Loan Interest (if Principal Principal Notation Date Made Rate applicable) Repaid Balance Made By - ------------- ------------- ------------- --------------- ------------ ------------- ------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------
The aggregate unpaid principal amount shown on this Schedule shall be rebuttable presumptive evidence of the principal amount owing and unpaid on this Note. The failure to record the date and amount of any Revolving Loan on this Schedule shall not, however, limit or otherwise affect the Company's obligations under the Credit Agreement or this Note to repay the principal amount of the Revolving Loans together with all interest accruing thereon. -116- EXHIBIT D TERM PROMISSORY NOTE $15,000,000.00 Due: February 1, 2002 Chicago, Illinois: February 11, 1997 ----------- On or before February 1, 2002 the undersigned, MYCOGEN CORPORATION, a California corporation (the "Company"), for value received, hereby promises to pay to the order of BANK OF AMERICA ILLINOIS, an Illinois banking corporation (the "Bank"), at its office at 231 South LaSalle Street, Chicago, Illinois 60697, the principal sum of Fifteen Million and No/100 Dollars ($15,000,000), or if, less, the principal sum of the Term Loan made by the Bank to the Company pursuant to the Credit Agreement referred to below, which principal sum shall be payable in twenty (20) equal quarterly installments of $750,000 (other than the last such installment, which shall be in such amount so as to pay in full the entire principal amount of the Term Loan then outstanding) on each Quarterly Payment Date as set forth in Section 3.1 of the Credit Agreement. ----------- The Company further promises to pay to the order of the Bank interest on the principal sum hereof from time to time outstanding from the date hereof until paid in full at the rates per annum and times determined in accordance with the provisions of the Credit Agreement. All payments of principal and interest under this Note shall be made in lawful money of the United States of America in immediately available funds at the Bank's office at 231 South LaSalle Street, Chicago, Illinois 60697, or at such other place as may be designated by the Bank to the Company in writing. This Note is the Term Note referred to in, and evidences indebtedness incurred under, a Credit Agreement dated as of February 11, 1997 (herein, as it may be amended, modified or supplemented from time to time, called the "Credit Agreement") between the Company and the Bank, to which Credit Agreement reference is made for a statement of the terms and provisions thereof, including those under which the Company is permitted and required to make prepayments and repayments of principal of such indebtedness and under which such indebtedness may be declared to be immediately due and payable. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. This Note is made under and governed by the internal laws of the State of Illinois. THE COMPANY AND THE BANK WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (I) UNDER THIS PROMISSORY NOTE OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH OR (II) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS PROMISSORY NOTE, AND AGREE THAT SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. MYCOGEN CORPORATION By: /s/ Carlton J. Eibl. -------------------------------------- Title: President & COO ----------------------------------- -117- Schedule attached to Term Promissory Note dated as of February 11, 1997 ------------ Mycogen Corporation, payable to the order of Bank of America Illinois.
Type of Loan & Amount Applicable Period Amount of Unpaid of Loan Interest if Principal Principal Notation Date Made Rate applicable Repaid Balance Made By - ------------- ------------- ------------- ------------- ------------- ------------- ------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
The aggregate unpaid principal amount shown on this Schedule shall be rebuttable presumptive evidence of the principal amount owing and unpaid on this Note. The failure to record the date and a amount of any borrowing on this Schedule shall not, however, limit or otherwise affect the Company's obligations under this Note to repay the principal amount of the Term Loan together with all interest accruing thereon. -118- EXHIBIT E COMPLIANCE CERTIFICATE This Compliance Certificate is furnished by MYCOGEN CORPORATION (the "Company") to BANK OF AMERICA ILLINOIS, pursuant to that certain Credit Agreement dated as of February 11, 1997 (the "Credit Agreement"). Unless ------------ otherwise defined herein, the terms used in this Compliance Certificate have the meanings ascribed thereto in the Credit Agreement. THE UNDERSIGNED HEREBY CERTIFIES THAT: (1) I am the duly elected Chief Financial Officer of the Company; ------------------------- 2. I have reviewed the terms of the Credit Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Company during the accounting period covered by the attached financial statements; 3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or the occurrence of any event which constitutes Event of Default or Unmatured Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; 4. The financial statements required by Section 7.1 of the Credit Agreement ----------- and being furnished to you concurrently with this Certificate, to the best of my knowledge, fairly represent the Company's condition in accordance with GAAP as of the dates and for the periods covered thereby; and 5. The Attachment hereto sets forth financial data and computations evidencing the Company's compliance with the covenants set for in Sections -------- 7.2.1, 7.2.2, 7.2.3 and 7.2.4 of the Credit Agreement, all of which data and - ----- ----- ----- ----- computations are, to the best of my knowledge, true, complete and correct and have been made in accordance with the relevant Sections of the Credit Agreement. Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Company has taken, is taking, or proposes to take with respect to each such condition or event: -119- The foregoing certifications, together with the computations set forth in the Attachment hereto and the financial statements delivered with this Certificate in support hereof, and made and delivered this 11th day of February 11, 1997. ----- ------------ -- MYCOGEN CORPORATION By: /s/ James A. Baumker --------------------------------- Title: Chief Financial Officer ------------------------------ -120- ATTACHMENT TO COMPLIANCE CERTIFICATE MYCOGEN CORPORATION Compliance Calculations for Credit Agreement Dated as of ____________, 1997 Calculations made as of ____________, 199 A. Consolidated Tangible Net Worth (Section 7.2.1) -----------------------------------------------
Period Required Actual ------ -------- ------ 1. 1997 Fiscal Year greater than or equal to $130,000,000 $ 2. 1998 Fiscal Year greater than or equal to $140,000,000 $ 3. 1999 Fiscal Year (and each fiscal greater than or equal year thereafter) to $150,000,000 $ 4. Covenant measured as of the last day of each fiscal quarter of each fiscal year - Company in compliance? (Circle Yes or No) Yes / No --------
B. Consolidated Total Liabilities to Consolidate Tangible Net Worth (Section ------------------------------------------------------------------------- 7.2.2) ------
1. Consolidated Total Liabilities $ 2. Consolidated Tangible Net Worth $ 3. Ratio of Line 1 to Line 2 ______: 4. Ratio on Line 3 must not exceed 1.0 to 1.0 - Company in compliance? (Circle Yes or No) Yes / No --------
C. Consolidated Third-Party Indebtedness (Section 7.2.3) -----------------------------------------------------
1. Consolidated Third-Party Indebtedness $ 2. Line 1 may not exceed $80,000,000 at any time - Company in compliance? (Circle Yes or No) Yes / No --------
D. Minimum Cash Flow Coverage commencing at Company's 1997 Fiscal Year End ----------------------------------------------------------------------- (Section 7.2.4) ---------------
1. Net income from operations $ 2. Net income from investments $ 3. Depreciation, Amortization and other non-cash Charges $ 4. Interest Expense $ 5. Lease Expense $
-121-
6. Dividends paid or declared $ 7. Sum of Lines 1 through 5 $ 8. Line 7 minus Line 6 $ ----- 9. Current portion of Long-Term debt $ 10. Interest expense (Line 4) $ 11. Lease Expense (Line 5) $ 12. Sum of Lines 9, 10 and 11 $ 13. Ratio of Line 8 to Line 12 _____: 14. Ratio on Line 13 must not be less than 1.0 to 1.0 (measured on a rolling, four fiscal quarter basis) - Company in compliance? (Circle Yes or No) Yes / No --------
-122- EXHIBIT F Form of Opinion of Counsel February 11, 1997 Bank of America Illinois 231 South LaSalle Street Chicago, Illinois 60697 Attention: Mr. John W. Weubbe Vice President Re: Credit Agreement dated as of February 11, 1997, between Bank of America Illinois and Mycogen Corporation Ladies and Gentlemen: I have acted as counsel for Mycogen Corporation, a California corporation (the "Company") in connection with the execution and delivery by the Company to Bank of America Illinois (the "Bank") of that certain (a) Credit Agreement dated as of February 11, 1997 (the "Credit Agreement") between the Company and the Bank; (b) Revolving Note dated February 11, 1997, made by the Company payable to the order of the Bank in the principal amount of $10,000,000 (the "Revolving Note"); (c) Term Note dated February 11, 1997, made by the Company payable to the order of the Bank in the principal amount of $15,000,000 (the "Term Note") (the Credit Agreement, the Revolving Note and the Term Note are referred to herein as the "Loan Documents"). This opinion is given pursuant to Section ------- 5.1.3 of the Credit Agreement. Capitalized terms not otherwise defined herein - ----- have the meanings ascribed to them in the Loan Documents. In rendering this opinion, I have examined the Loan Documents. I have also examined originals, or copies certified or otherwise identified to my satisfaction, of such records, documents, certificates and other instruments and made such inquiries of the Company as in my judgment are necessary or appropriate for the purposes of the opinions contained herein. I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity to original documents of all documents submitted to me as certified or photostatic copies. I have further assumed, with respect to all documents I have reviewed, the due authorization, execution and delivery thereof by parties other than the Company. I have relied as to factual matters upon certificates or statements of such public officials and such officers and duly appointed agents of the Company as I have deemed relevant or necessary. Based upon the foregoing, I am of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, and has the corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. 2. The Company has the corporate power and authority to enter into the Loan Documents and to perform its obligations thereunder. -123- 3. The Loan Documents have been duly authorized, executed and delivered by the Company and constitute the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. 4. The execution and delivery of the Loan Documents by the Company and the performance by the Company of its obligations thereunder do not and will not, to the best of my knowledge, (i) contravene or conflict with any provision of any existing law, statute, rule or regulation applicable to the Company, (ii) contravene or conflict with, result in any breach of, or constitute a default under, any indenture, mortgage, deed of trust, credit agreement, loan agreement or other agreement, contract or instrument binding on it, (iii) conflict with or result in a violation of any order, writ, judgment or decree which the Company is a party or by which it may be bound, (iv) conflict with or result in a violation of the Company's certificate of incorporation or by-laws, or (v) result in the creation or imposition of any lien. 5. No order, authorization, consent, license or exemption of, or filing or registration with, any court or governmental department, agency, instrumentality or regulatory body is or will be required in connection with either the execution and delivery by the Company of any Loan Documents, or the performance by the Company of its obligations thereunder that are required to be performed on or before the effective dates of the Loan Documents with respect to the transactions evidenced thereby. 6. To my knowledge, except as described in the Loan Documents, there are no actions, suits or proceedings pending or threatened against or affecting the Company or the properties of the Company before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Company, would have a material adverse effect on the financial condition, properties or operations of the Company. 7. The Company is not engaged principally, or in one of its important activities, in the business of extending credit for the purpose of purchasing or carrying "margin stock" within the meaning of the Regulations G and U of the Board of Governors of the Federal Reserve Bank. 8. The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 9. The Company is not a "holding company," nor a "subsidiary company" of a "holding company," nor an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 10. No taxes or other charges, including without limitation, intangible or documentary stamp taxes, mortgage or recording taxes, transfer taxes or similar charges, are payable on account of the execution or delivery of the Loan Documents or the creation of the indebtedness evidenced or secured by any of the Loan Documents or the recording or filing of any of the Loan Documents. Very truly yours, /s/ Loreen P. Collins ------------------------------- Loreen P. Collins Legal Counsel LPC/cm -124- EX-10.23 4 LOAN AGREEMENT EXHIBIT 10.23 LOAN AGREEMENT -125- LOAN AGREEMENT This Loan Agreement ("Agreement") is made as of September 29, 1997 between DowElanco, an Indiana general partnership (the "Lender"), and Mycogen Corporation, a California corporation (the "Borrower"). The parties hereto have agreed and do hereby agree as follows: 1. The Loan -------- 1.1 The Advance From the above date to April 1, 1998, the Lender agrees to make from time to time advances to the Borrower ("Advances"), in an aggregate amount not exceeding $50,000,000 (fifty million U.S. dollars), at any time outstanding ("Commitment"). Advances repaid prior to April 1, 1998, may be reborrowed. This Agreement involves U.S. dollars only. 1.2 Repayment Repayment may be made at any time, provided that the final repayment be made on or prior to April 1, 1998. Borrower must receive Lender's request for repayment by 9:00 a.m. Eastern Standard Time on any Business Day if repayment is to be made that day. 1.3 Cancellation/Reduction From time to time and upon 30 days written notice, except as provided under 2, Events of Default, the Borrower or Lender may at any time ----------------- permanently reduce the Commitment and the unpaid principal and all interest shall be due and payable immediately. 1.4 Evidence of Debt The Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower resulting from the Loan and the amounts of principal and interest payable and paid from time to time hereunder. In any legal action or proceeding in respect of the Agreement, the entries made in such account or accounts shall, unless in case of obvious or manifest error, be conclusive evidence of the existence and amounts of the obligations of the Borrower therein recorded. -126- 1.5 Interest The Loan shall bear interest from day to day at Lender's cost of borrowing, as advised from time to time by Lender, plus 1/8% per annum payable every three months from the date hereof to maturity on the outstanding balance. 2. Events of Default ----------------- In the event that: (A) The Borrower fails to pay any sum payable hereunder when due; or (B) The Borrower defaults in the due performance and observance of any other term of this Agreement and such default is not remedied within 15 days after notice of such default; or (C) The Borrower goes bankrupt or becomes insolvent or is subject to a receivership either voluntary or compulsory; or (D) Any order is made or law, decree, regulation or resolution passed for the liquidation, winding up or dissolution of the Borrower; or (E) All or any substantial part of the business or assets of the Borrower is expropriated, nationalized, compulsorily acquired or taken into public ownership or the Borrower ceases to be able or entitled to exercise the rights of control or ownership of the same; or (F) The Borrower ceases to be directly or indirectly controlled by Lender, then and in any such event, and at any time thereafter if any such event shall then be continuing, the Lender may, by written notice to the Borrower declare the Loan immediately due and payable together with all interest accrued thereon and all other amounts payable hereunder, including all interest accrued on any past due principal, to the extent permitted by law. 3. Representations and Warranties of Borrower. The Borrower represents and ------------------------------------------ warrants as follows: (A) The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of California; (B) The execution, delivery and performance by the Borrower of this Agreement are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Borrower's Articles of Incorporation or By-laws or (ii) any law or any judgment or contractual restriction binding on or affecting the Borrower; (C) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body which has not already been obtained or made is required for the due execution, delivery and performance by the Borrower of this Agreement; and (D) This Agreement is the legal, valid and binding obligation of the Borrower enforceable against Borrower in accordance with its terms. 4. Covenants of the Borrower; Reporting Requirements. So long as the Loan ------------------------------------------------- shall remain unpaid, the Borrower will, unless the Lender shall otherwise consent in writing, furnish to the Lender: -127- (A) As soon as practicable, in any event within five Business Days after the occurrence of each Event of Default, or each event which with notice or lapse of time or both would become an Event of Default, which is continuing on the date of such statement, a statement of an authorized representative of the Borrower setting forth details of such Event of Default or event and the action which the Borrower proposes to take with respect thereto; and (B) Such other information respecting the business, properties or the condition or operations, financial or otherwise, of the Borrower as the Lender may from time to time reasonably request. 5. Costs and Expenses ------------------ The Borrower agrees to pay on demand all losses and all costs and expenses, if any, in connection with the enforcement of this Agreement and any instruments or other documents delivered hereunder, including, without limitation, losses, costs and expenses sustained as a result of a default by the Borrower in the performance of its obligations contained in this Agreement or any instrument or document delivered hereunder. 6. Alternative Dispute Resolution ------------------------------ The parties shall negotiate in good faith to resolve any dispute arising out of or relating to this Agreement. In the event that the parties fail to resolve a dispute by good faith negotiations, or if either party deems a resolution by such means to be improbable, either party may initiate mediation of the dispute upon written notice to the other party. Such mediation shall be conducted promptly in accordance with the Center for Public Resources Model Procedure for Mediation of Business Disputes. If, within 60 days after notice of mediation, the parties have failed to resolve the dispute by mediation, either party may propose binding arbitration or initiate litigation. If either party requests mediation, it shall occur in Indianapolis, Indiana. 7. Change of Control. After any change of Control (as defined below) of the ----------------- Borrower, the Lender may, at its option, upon notice to the Borrower declare all principal, interest, and other amounts payable under this Agreement to be immediately due and payable, whereupon the same shall become immediately due and payable. 8. Definitions. Capitalized terms as to which such capitalization would not ----------- be required in accordance with standard rules of grammar shall have the meanings specified below. "Affiliate" means, with respect to each party hereto, a party that directly, or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, the party specified. The term "control" is defined below. For purposes of this Agreement, Borrower is not an Affiliate of Lender. "Business Day" means any day other than a Saturday, Sunday or other day on which banking institutions in Indianapolis, Indiana are required or authorized by law to suspend operations. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any individual, corporation, partnership, unincorporated association or other entity, whether through the ownership of voting stock, by contract or otherwise. A person who is the owner of 20% or more of a corporation's outstanding voting stock shall be deemed to have Control of such corporation. -128- 9. Miscellaneous ------------- The Borrower agrees to take all such steps and actions and to execute and to deliver and/or cause to be delivered all such further documents and instruments as may be necessary in the opinion of the Lender to establish, maintain and protect the rights of the Lender hereunder and generally to carry out the true intent of this Agreement. 10. Assignment ---------- This Agreement may not be assigned in whole or in part by Borrower without the express written consent of the other party. This Agreement may be assigned by Lender to any Affiliate. 11. Successors ---------- This Agreement and any instrument or document executed in accordance herewith shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assignees. -129- 12. Governing Law ------------- This Agreement and any instruments or other documents executed in accordance herewith shall be governed by and construed in accordance with the laws of the State of Indiana. 13. Amendments, Etc. --------------- No amendment or waiver of any provision of this Agreement or any instrument delivered hereunder, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by an authorized representative of the Lender. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date first written above. LENDER: BORROWER: DowElanco Mycogen Corporation By: /s/ SEAN S. SKINNER By: /s/ JAMES A. BAUMKER ------------------- -------------------- Printed: Sean S. Skinner Printed: James A. Baumker --------------- ---------------- Title: Treasurer Title: Vice President/CFO --------- ------------------ Date: May 20, 1997 Date: June 10, 1997 ------------ ------------- -130- EX-10.24 5 FORM OF MYCOGEN CORPORATION EXHIBIT 10.24 MYCOGEN CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN -131- MYCOGEN CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN THIS AGREEMENT, made and entered into as of this _________ day of ________, 19___, by and between Mycogen Corporation, a California corporation, (hereinafter referred to as the "Corporation" or the "Employer") with offices located at 5501 Oberlin Drive, San Diego, California 92121-1718 and that executive employee indicated on the signature page hereto, an individual (hereinafter referred to as the "Employee"). WITNESSETH THAT: WHEREAS, the Employee is employed by the Corporation, and has been selected by the Corporation for participation in this plan; and WHEREAS, the Corporation recognizes the valuable services heretofore performed for it by the Employee and wishes to encourage Employee's continued employment; and WHEREAS, the Employee wishes to defer a certain portion of compensation payable to him; and WHEREAS, the Employer, at its sole discretion, may from time to time determine by Board of Directors resolution to make supplemental contributions to the retirement account established hereunder; and WHEREAS, the parties hereto wish to provide the terms and conditions upon which the Corporation shall pay such deferred compensation to the Employee or his designated beneficiary; and WHEREAS, the parties hereto intend that this Agreement be considered an unfunded arrangement maintained primarily to provide deferred compensation benefits for the Employee, a member of a select group of management or highly compensated employees of the Corporation for purposes of the Employee Retirement Income Security Act of 1974, as amended. WHEREAS, the parties hereto wish to provide the terms and conditions upon which the Corporation shall pay such additional compensation to the Employee after his or her retirement or other termination of employment or any death benefit to beneficiaries after the Employee's death; and WHEREAS, the parties hereto intend that this Agreement be considered an unfunded arrangement, maintained primarily to provide deferred compensation benefits for the Employee, a member of a select group of management and highly compensated employees of the Corporation, for purposes of the Employee Retirement Income Security Act of 1974, as amended, NOW, THEREFORE, in consideration of the premises and of the mutual promises herein contained, the parties hereto agree as follows: 1. DEFINITION OF TERMS. Certain words and phrases are defined when first used in later paragraphs of this agreement. In addition, the following words and phrases when used herein, unless the context clearly requires otherwise, shall have the following respective meanings: (a) Accrued Benefit. The sum of all Supplemental Compensation, as defined at paragraph 2., below, credited to the Employee's Retirement Account and due and owing to the Employee or any designated beneficiaries pursuant to this Agreement, together with -132- Additions thereto calculated as set forth in paragraph 3., hereof, minus any distributions made hereunder. (b) Affiliate. Any corporation, partnership, joint venture, association, or similar organization or entity, the employees of which would be treated as employed by the Corporation under Section 414 (b) or 414 (c) of the Code. (c) Agreement. This Agreement, together with any amendments or supplements, thereto. (d) Board of Directors. The Board of Directors of the Company. (e) Code. The Internal Revenue Code of 1986, as amended or as it may be amended from time to time. (f) Change of Control. A change of control of the Company within the meaning specified in Section 280G of the Code. (g) Early Retirement Date. The date the Employee attains the age of fifty-five (55). (h) Effective Date. The effective date shall be July 15, 1997. (i) Election of Contribution. A written notice filed by the Employer with the Treasurer of the Corporation in substantially the form attached hereto as Exhibit A, specifying the Annual Supplemental Sum to be credited to the Employee's Accrued Benefit. (j) Election of Deferral. A written notice filed by the Employee with the chief financial officer or controller of the Corporation in substantially the form attached hereto as Exhibit A, Part 1, specifying the amount of Compensation to be deferred. (k) Fiscal Year. The taxable year of the Corporation. (l) Normal Retirement Date. The date the Employee attains the age of sixty-five (65). (m) Plan Year. The calendar year: provided however that the first Plan Year shall be a period beginning on the date of execution of this Agreement and ending on December 31 of the same calendar year. (n) Retirement Account. Book entries maintained by the Corporation reflecting the Accrued Benefit after application of the Vesting Percentage; provided, however, that the existence of such book entries and the Retirement Account shall not create and shall not be deemed to create a trust of any kind, or a fiduciary relationship between the Corporation and the Employee, any designated beneficiaries or other beneficiaries under this Agreement. In determining the Retirement Account, the Accrued Benefit shall be multiplied by the Vesting Percentage set forth as Exhibit D hereto. (o) Survivor Benefit. The Survivor Benefit shall be the greater of: (a) the amount set forth at Schedule 1, attached hereto, which may be updated from time to time by the Corporation, minus any distributions made hereunder, or (b) the Retirement Account. In either (a) the absence of any amount set forth at Schedule 1, or (b) in the event that the Employee's death is the result of suicide occurring within three years of the date of this Agreement, then the Survivor Benefit shall be equal to the Retirement Account. -133- (p) Vesting Percentage. The Vesting Percentage set forth at Exhibit D, representing the portion of the Accrued Benefit which is payable under the terms of this Agreement, based on Years of Service. The Vesting Percentage is credited on the first day of each Plan Year following the Year of Service, e.g., vesting for the first Year of Service shall be credited on the first day of the second Year of Service. The Vesting Percentage shall be applied to each Supplemental Sum independently so that each annual contribution and related additions shall vest over a five year period, as set forth at Exhibit C, below, Provided However, that the entire Accrued Benefit shall vest in full upon the attainment by the Employee of a combined sum of Years of Service and age in the total amount of sixty-five (65) (q) Years of Service. A Plan Year in which the Employee is a full time employee of the Company for the entire Plan Year. 2. DEFERRED COMPENSATION. (a) Employee Deferrals (Election of Employee). Commencing on the Effective Date, and continuing through the date on which the Employee's employment terminates because of his death, retirement, disability, or any other cause, the Employee and the Corporation agree that the Employee shall defer into his Retirement Account the amount set forth in the Election of Deferral, Schedule A, Part 1,which the Employee would otherwise be entitled to receive from the Corporation in each Fiscal Year of the Corporation. The amount selected for deferral by the Employee pursuant to an Election of Deferral is referred to as the "Annual Deferral Sum". The amounts of compensation actually deferred, taking into account discontinuance of deferral pursuant to a Notice of Discontinuance, are hereinafter collectively included as the "Deferred Amounts". The Employee's Deferred Amounts shall be credited to the Employee's Retirement Account as of the dates such Deferred Amounts would, but for such deferral, be payable to the Employee. The Employee may elect an Annual Deferral Sum hereunder by filing an Election of Deferral. The initial Election of Deferral must be filed within one (1) day of the Effective Date of this Agreement. Such initial Election of Deferral, if any, shall be effective commencing with the following pay cycle. Thereafter, an Election of Deferral must be filed at least ten (10) days prior to the beginning of the Plan Year to which it pertains and shall be effective on the first day of the Plan Year following the filing thereof. The Employee may elect to defer a maximum Annual Deferral Sum of one hundred percent (100%) of base salary and one hundred percent (100%) of any incentive bonus. The minimum Annual Deferral Sum, if any is elected, shall be no less than one percent (1%) of Compensation. (b) Supplemental Deferral (Election of Employer) Commencing on the Effective Date, and continuing through the date on which the Employee's employment terminates because of death, normal retirement, disability, or any other cause, the Employer may at the discretion of the Board of Directors, make an Election of Contribution, as defined at paragraph 4., below. While the amount of the Election of Contribution shall be determined at the sole discretion and in such manner as the Board of Directors determines from time to time, the initial -134- policies and procedures for determination of the amount of such Election of Contribution is set forth at Exhibit A, which may be amended at any time, Provided However, that the Initial Election of Contribution, set forth at Exhibit D shall continue in effect unless terminated or amended by the Board of Directors by subsequent termination or election. The amount credited pursuant to an Election of Contribution is referred to as the "Annual Supplemental Sum". The sum of all Annual Supplemental Sums set forth on all Elections of Contribution for the Employee are hereinafter collectively referred to as the "Supplemental Compensation". The Employee's Supplemental Compensation shall be credited to the Employee's Retirement Account as of the dates such Annual Supplemental Sum is approved, or otherwise stated to be credited by resolution of the Board of Directors of the Employer. (c) Vesting The Employee shall vest and have a nonforfeitable right to all amounts credited to his or her Retirement Account as Supplemental Deferrals, and all Additions related thereto, in accordance with the schedule set forth at Exhibit C, attached hereto. In the event Exhibit C is not completed or there is a change in control of the Employer, the employee shall be immediately vested in all such amounts credited to his or her Retirement Account. For purposes of applying any vesting schedule, the Employee shall be considered as having a completed Year of Service for each complete year of full-time service with the Employer or an Affiliate, measured from the later of (1) the Employee's first date of employment or, (2) the date any amount is first credited to the Retirement Account of the Participant under this Agreement. To the extent that any Supplemental Deferrals credited to the Employee's Retirement Account are not vested at the time such amounts are otherwise payable to the Employee under paragraph 6. 7., 9., or 10., below, such amounts shall be forfeited. 3. ADDITIONS TO DEFERRED AMOUNTS AND AMOUNT OF SUPPLEMENTAL. The Corporation agrees that it will credit Deferred Amounts in the Employee's Retirement Account with additions thereon ("Additions") from and after dates Deferred Amounts are credited to the Retirement Account. Additions to Deferred Amounts shall accrue commencing on the date the Retirement Account first has a positive balance and shall continue up to the date that the Retirement Account has been reduced to zero. Additions shall be calculated as an amount (the "As If Rate") equal to the yield that would be realized, including any dividends, interest, or other current yield, as well as any capital gain or loss based on an adjustment to fair market value on any date of calculation, as if hypothetically invested in whole or fractional shares in the assets set forth at Schedule 2 (the Calculation Assets), which may be changed at the sole discretion of the Employer, from time to time. The Employer shall have no obligation to actually acquire any of the Calculation Assets set forth at Schedule 2, and such return shall be only for purposes of calculating Additions to Deferred Amounts hereunder. The Employee shall have no rights in or to any Calculation Assets set forth at Schedule 2, as provided elsewhere in this Agreement. The As If Rate shall be adjusted on the last day of each fiscal quarter the plan year at the mean trading price of the Calculation Assets on such date or the first business date thereafter, as quoted in Barrons financial news publication, or in the absence of a quotation therein, in a similar publication or other authoritative valuation of the specified Calculation Assets. Any such designation of new Calculation Assets by the Employer must be in writing. For purposes of calculating Additions, it shall be assumed that the Calculation Assets is sold and the alternate Calculation Assets is purchased on the first business day following such revised designation by the Corporation. -135- Additions related to Supplemental Deferrals are subject to any Vesting Schedule attached hereto and determined by the Employer. Additions to Employee Deferrals are not subject to any Vesting Schedule. 4. ELECTION TO MAKE CONTRIBUTION. The Corporation may make an Election of Contribution by action of the Board of Directors and set forth in a form of Election of Contribution as set forth at Exhibit A, Part 2, or such similar form of election as may be approved by the Board of Directors. Any Election of Contribution shall apply only to the amounts and years set forth in such Election of Contribution and shall not require any subsequent contributions beyond those set forth in such Election of Contribution, Provided However, that the Initial Election of Contribution at Exhibit D shall remain in effect unless subsequently terminated or amended by the Board of Directors. 5. TERMINATION OF PLAN. The Employer may at any time during the term of this Agreement, modify, suspend or terminate this Agreement in any manner or at any time. Such modification, suspension or termination may not reduce the Employee's Retirement Account, but may alter modify, suspend or terminate future Annual Supplemental Sums and any other aspects of the Agreement. 6. (a) RETIREMENT BENEFIT. The Corporation agrees that, from and after the retirement of the Employee from the service of the Corporation upon reaching his or her Early Retirement Date or Normal Retirement Date, the Corporation shall thereafter pay as a retirement benefit ("Retirement Benefit") to the Employee in the amount of the Employee's entire Accrued Benefit in equal monthly installments for one hundred eighty (180) consecutive months, commencing on the first day of the calendar month immediately following the Employee's retirement; provided however, that the Employee may, at his or her sole option make one election prior to the time benefit payments begin to receive the Accrued Benefit in his or her Retirement Account in a lump sum or equal monthly installment payments over a shorter period of either one hundred twenty (120) or sixty (60) months, to be designated by him in writing (by delivery to the Corporation of a completed Exhibit D, or similar statement) than would otherwise apply, or in a single payment. The election referred to in the preceding sentence must be made at least one year prior to the date benefit payments begin and shall be irrevocable. In the event of such election by the Employee, the first designated monthly payment or the single payment, whichever applies, shall be due and payable on the first day of the calendar month immediately following the Employee's retirement. Monthly installment payments, if applicable, shall continue monthly thereafter, for the period designated by the Employee. (b) ELECTION OF BENEFITS UPON RETIREMENT DATE. The Employee shall have the option, upon attaining his or her Early Retirement Date or Normal Retirement Date, to elect to receive his or her Retirement Benefit, notwithstanding his or her continued employment with the Corporation after attaining the Early Retirement Date or Normal Retirement Date. The Employee's election to receive his or her Retirement Benefit notwithstanding continued employment must be made in writing at least one year prior to Early Retirement Date or Normal Retirement Date, whichever applies. The Retirement Benefit payable upon election pursuant to this paragraph 6. b. shall be the amount that would have been payable had the Employee retired from service with the Corporation as of the Early Retirement Date or Normal Retirement Date, whichever applies. Any such election shall be irrevocable, and shall result in the termination of the Employee's right to any further deferrals hereunder. 7. DISABILITY RETIREMENT. Notwithstanding any other provision hereof, the Employee shall be entitled to receive payments hereunder prior to his or her Early Retirement Date or Normal Retirement Date, whichever applies, in any case in which it is -136- determined by a duly licensed physician selected by the Corporation that, because of ill health, accident, disability or general inability because of age, the Employee is no longer able, properly and satisfactorily, to perform his or her regular duties as an Employee. If the Employee's employment is terminated pursuant to this paragraph 7., the disability retirement benefit payable hereunder ("Disability Retirement Benefit") shall be that amount that would have been payable as a Retirement Benefit had the Employee attained his or her Normal Retirement Date on the date of the physician's disability determination. The Disability Retirement Benefit payable under this paragraph 7. shall be distributed in accordance with the provisions of paragraph 6.a. as if the Employee had retired on the date of the physician's disability determination. 8. (a) DEATH BENEFIT PRIOR TO COMMENCEMENT OF RETIREMENT BENEFITS. In the event of the Employee's death while in the employment of the Corporation and prior to commencement of the Retirement Benefits or Disability Retirement Benefits, the Corporation shall pay as a survivor's benefit the Employee's entire Survivor Benefit in a single lump sum to the Employee's designated beneficiary (the "Beneficiary"), in accordance with the last such designation received by the Corporation from the Employee prior to death. provided however, that the Beneficiary may elect to receive the Survivor Benefit in either ten (10) or five (5) annual installments, to be designated in writing by such Beneficiary. If no such designation has been received by the Corporation from the Employee prior to death said payments shall be made to the Employee's then living spouse, if any, and if there is no such living spouse, then said payment shall be made to the living children of the Employee, if any, in equal shares, and if there is no surviving spouse or surviving children, then such payments shall be made to the estate of the Employee. Such payments shall be made on the first day of the second month following the Employee's death. (b) DEATH BENEFIT AFTER COMMENCEMENT OF BENEFITS. In the event of the Employee's death after commencement of Retirement benefits, Normal Retirement Benefits, or Disability Retirement Benefits, but prior to the completion of all such payments due and owing hereunder, the Corporation shall pay the balance of the Accrued Benefit in a single lump sum the Employee's designated beneficiary, in accordance with the last such designation received by the Corporation from the Employee prior to his or her death. If no such designation has been received by the Corporation from the Employee prior to death said payments shall be made to the Employee's then living spouse, if any, and if there is no such living spouse, then said payment shall be made to the living children of the Employee, if any, in equal shares, and if there is no surviving spouse or surviving children, then such payments shall be made to the estate of the Employee. Such payments shall commence on the first day of the second month following the Employee's death. At its sole option, the Corporation may pay the Employee's entire Accrued Benefit as a single lump sum. 9. TERMINATION BENEFIT. In the event of either (a) the Employee's termination of employment with the Corporation before the Early Retirement Date for any reason, other than disability, retirement or death, or (b) a Change of Control of the Employer, the Corporation shall pay to the Employee, as compensation for services rendered prior to such termination, an amount equal to the total Retirement Account (the Termination Benefit) in the manner pre- determined at the time of deferral and set forth in Exhibit A -137- (Part 1) Election of Deferral. In the absence of such designation a single lump sum shall be payable. The Termination Benefit shall be payable on the first day of the second month following the termination of the Employee's employment with the Corporation. 10. HARDSHIP WITHDRAWAL. In the event the Employee suffers an unforeseen financial emergency, as defined hereafter, the Corporation may, if it deems advisable in its sole and absolute discretion, distribute to or utilize on behalf of the Employee as a hardship benefit (the "Hardship Benefit") any portion of the Employee's Retirement Account. The Corporation shall have exclusive authority to determine whether to make a hardship distribution, and the Corporation's decision shall be final and binding on all parties. Any hardship distribution shall, like all distributions, reduce the amounts available for subsequent distributions and be deducted from the Retirement Account. The Employee shall apply for such a Hardship Benefit in writing in a form approved by the Corporation and shall provide such additional information as the Corporation shall require. For purposes of this Paragraph, "unforeseen financial emergency" means an immediate and heavy financial need caused by an unforeseeable emergency, as described in Treasury Regulations Section 1.457-2(h) (4) and (5), resulting from any of the following, and in an amount not in excess of the amount needed to pay for the following unreimbursed expenses: (a) expenses which are not covered by insurance and which the Employee or his or her spouse or dependents (as defined in Code Section 152 (a)) has incurred as a result of, or is required to incur in order to receive, medical care described in Code Section 213 (d), as a result of a sudden or unexpected illness; (b) payment of funeral, marital dissolution and other costs recognized by the Company to pose an immediate and heavy financial need on the Employee, or (c) payment of extraordinary, unforeseeable expenses attributable to forces beyond the Employee's control in order to prevent eviction of the Employee from his or her principal residence or foreclosure on the mortgage of the Employee's principal residence. No distribution shall be made pursuant to this paragraph in excess of the amount of the immediate and heavy financial need of the Participant. The amount of the immediate and heavy financial need may include any amounts necessary to pay federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution. Any distribution under this paragraph shall reduce the Retirement Account. Any distribution under this paragraph shall be limited to the lesser of either: (a) the amount designated by the Employee as a requested Hardship benefit in a form determined by the Company, or (b) Fifty Percent (50%) of the Retirement Account. 11. IN SERVICE DISTRIBUTION. The lesser of either: (a) the In Service Distribution amount designated by the Employee on a validly submitted Election of Deferral in the form set forth at Exhibit A, or (b) the Accrued Benefit, shall be distributed in a lump sum on the In Service Distribution Date. The In Service Distribution Date shall be the later of either: (a) the In Service Distribution Date set forth at Exhibit A, or (b) a date 12 months after the Election Date as defined in this Agreement. No In Service Distribution shall be effective unless it is elected on an Election of Deferral submitted and dated as provided at Exhibit A. 12. OFFSET FOR OBLIGATIONS TO CORPORATION. If, at such time as the Employee becomes entitled to benefit payments hereunder, the Employee has any debt, obligation or other liability representing and amount owing to the Corporation or an Affiliate of the Corporation, and if such debt, obligation or other liability is due and owing at the time -138- benefit payments are payable hereunder, the Corporation may offset the amount owing it or an Affiliate against the amount of benefits otherwise hereunder. 13. BENEFICIARY DESIGNATION. The Employee shall have the right, at any time to submit in substantially the form attached hereto as Exhibit B, a written designation of primary and secondary beneficiaries to whom payment under this Agreement shall be made in the event of death prior to complete distribution of the benefits due and payable under the Agreement. Each beneficiary designation shall become effective only when receipt thereof is acknowledged in writing by the Corporation. 14. CLAIMS PROCEDURE. If any benefits become payable under this agreement, the Employee (or designated beneficiary in the case of the Employee's death) shall file a claim for benefits by notifying the Corporation in writing. If the claim is wholly or partially denied, the Corporation shall provide a written notice within ninety (90) days specifying the reason for the denial, the plan provisions on which the denial is based, and additional material or information necessary to receive benefits, if any. Also, such written notice shall indicate the steps to be taken if a review of the denial is desired. If a claim is denied and a review is desired, the Employee (or designated beneficiary in the case of the Employee's death) shall notify the Corporation in writing within sixty (60) days after receipt of a written notice of a denial of a claim. In requesting a review plan documents and submit any written issues and comments her or she feels are appropriate. The Corporation shall then review the claim and provide a written decision within sixty (60) days of receipt of a request for review. This decision shall state the specific reasons for the decision and shall include references to specific provisions on which the decision is based. 15. ASSIGNMENT OF RIGHTS. Neither the Employee nor any designated beneficiary shall have any right to sell, assign, transfer, or otherwise convey the right to receive any payments hereunder without the prior written consent of the Corporation. 16. NO CONTRACT OF EMPLOYMENT. Nothing contained herein shall be construed to be a contract of employment for any term of years, nor as conferring upon the Employee the right to continue to be employed by the Corporation, in any capacity. It is expressly understood by the parties hereto that this Agreement relates exclusively to discretionary supplemental compensation as set forth in this Agreement. This Agreement is not intended to be an employment contract, or to obligate the Company to make any contribution of an Annual Supplemental Sum, other than as approved at the discretion of the Board of Directors. 17. CONSTRUCTION OF AGREEMENT. Any payments under this Agreement shall be independent of, and in addition to, those under any other plan, program, or agreement which may be in effect between the parties hereto, or any other compensation payable to the Employee or the Employee's designated beneficiary by the Corporation. 18. NO TRUST CREATED. Nothing contained in this Agreement, and no action taken pursuant to its provisions by either party hereto, shall create, nor be construed to create, a trust of any kind of a fiduciary relationship between the Corporation and the Employee, the Employee's designated beneficiary, any other beneficiary of the Employee or any other person. 19. BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS; UNSECURED GENERAL CREDITORS STATUS OF EMPLOYEE. The payments to the Employee, the Employee's designated beneficiary or any other beneficiary hereunder -139- shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Corporation; no person shall have nor acquire any interest in any such assets by virtue of the provisions of this Agreement. The Corporation's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that the Employee or any person acquires a right to receive payments from the Corporation under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Corporation; no such person shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Corporation. In the event that, in its sole discretion, the Corporation purchases an insurance policy or policies insuring the life of the Employee (or any other property) to allow the Corporation to recover the cost of providing the benefits, in whole, or in part, hereunder, neither the Employee, the Employee's designated beneficiary, any other beneficiary nor any other person shall have nor acquire any rights whatsoever therein or in the proceeds therefrom. The Corporation shall be the sole owner and beneficiary of any such policy or policies and, as such, shall possess and, may exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for the Employee or any other person nor as collateral security for any obligation of the Corporation hereunder. 20. AMENDMENT. This Agreement may not be altered, amended, or revoked except by a written agreement signed by the Corporation and Employee. 21. INTERPRETATION. Where appropriate in this Agreement, words used in the singular shall include the plural and words used in the masculine shall include the feminine. 22. MISCELLANEOUS. (a) The law of the State of California shall govern this Agreement. (b) In the event of a material change in Federal or State laws applicable to this Agreement, the Corporation may, in the Corporation's reasonable discretion, modify or terminate this Agreement. If the Corporation elects to terminate this Agreement, the Employee shall be entitled to receive the Retirement Account, as defined above. -140- IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first hereinabove written. MYCOGEN CORPORATION By ___________________________ _____________________________ (Witness) _____________________________ (Witness) ATTEST: By____________________________ Secretary By___________________________ Employee -141- =============================================================================== SCHEDULE 1 SURVIVOR BENEFIT =============================================================================== INITIAL SURVIVOR BENEFIT________________ - ------------------------------------------------------------------------------- DATE OF REVISION REVISED AMOUNT - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- -142- Mycogen Corporation Executive Deferred Compensation Agreement Schedule 2, Calculation Assets - -------------------------------------------------------------------------------- The Corporation agrees that it will credit Deferred Amounts in the Employee's Retirement Account with additions from and after dates Deferred Amounts are credited to the Retirement Account at the "As If" rate specified in the Agreement. In determining the "As If" calculation under the agreement the Company will utilize the following Calculation Assets, subject to the terms of the Agreement. FUND Percentage ----------------------------------------------------------------------- Merrill Lynch Institutional Fund % ----------------------------------------------------------------------- Merrill Lynch Corporate Bond High Income Fund % ----------------------------------------------------------------------- Merrill Lynch Corporate Intermediate Term Fund % ----------------------------------------------------------------------- Merrill Lynch Basic Value Fund % ----------------------------------------------------------------------- Merrill Lynch Growth Fund % ----------------------------------------------------------------------- Merrill Lynch Special Value Fund % ----------------------------------------------------------------------- Merrill Lynch Capital Fund % ----------------------------------------------------------------------- Merrill Lynch Global Balanced Allocation Fund % ----------------------------------------------------------------------- 100% -------------------- Mycogen Corporation __________________ By __________________________ Date____________________ -143- - ------------------------------------------------------------------------------- MYCOGEN CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT A - (Part 1) ELECTION OF DEFERRAL (Page 1 of 2) - ------------------------------------------------------------------------------- 1. I acknowledge that the terms and conditions of the Mycogen Corporation Executive Deferred Compensation Plan ("Agreement") have been explained to me, including the tax consequences of my decision to participate in the Agreement. 2. I agree to defer a portion of my current compensation, and to have that income paid to me at a later date pursuant to the terms and conditions of the Agreement, which is incorporated by reference, in its entirety, in this Election of Deferral Form. 3. I understand that this Election Form is not an employment agreement, does not guarantee that I will receive any predetermined amount of compensation, and does not guarantee that I will receive any bonus. 4. I understand that any compensation I defer will be held as an asset of Mycogen Corporation, and will remain subject to the claims of the general creditors of Mycogen Corporation ELECTION TO DEFER COMPENSATION I hereby elect to defer (no less than 1% of Compensation, if any deferral is elected): __________ (A Stated Amount) _____% of my future salary _____% of my future bonus I understand that I may discontinue deferral of future compensation if notice is filed at least twenty (20) days prior to any 1st day of the first month, 1st day of the fourth month, 1st day of the seventh month, or 1st day of the tenth month of the Plan Year. Such Notice of Discontinuance shall be effective commencing with the 1st day of the first month, 1st day of the fourth month, 1st day of the seventh month, or 1st day of the tenth month of the Plan Year following filing in writing the change I desire. I also understand that if I discontinue deferral of future compensation during the year, I cannot restart deferral until the beginning of the succeeding calendar year. The foregoing Election is voluntarily made by me after reviewing the terms of the Agreement and with knowledge that this Election is irrevocable until changed in accordance with the terms of the Agreement. -144- EXHIBIT A - (Part 1) ELECTION OF DEFERRAL (Page 2 of 2) IN SERVICE DISTRIBUTION I hereby elect to receive an in service distribution on the In Service Distribution Date specified below in the amount of the lesser of the Accrued Benefit, or the following amount: AMOUNT: ____________________ (Insert Amount) IN SERVICE DISTRIBUTION DATE:__________________ (At least 12 months after Effective Date) IN SERVICE DISTRIBUTION. The lesser of either: (a) the In Service Distribution amount designated by the Employee on a validly submitted Election of Deferral in the form set forth at Exhibit A, or (b) the Accrued Benefit, shall be distributed in a lump sum on the In Service Distribution Date. The In Service Distribution Date shall be the later of either: (a) the In Service Distribution Date set forth at Exhibit A, or (b) a date 60 months after the Election Date defined by this Agreement . No In Service Distribution shall be effective unless it is elected on a Election of Deferral submitted as required by this Agreement. TERMINATION BENEFIT DISTRIBUTION Supersedes any previous distribution election and applies to all amounts deferred during the 1997 calendar year, adjusted for earnings, losses, and administrative expenses credited to or charged against the Employee's Account. In the event of either (a) the Employees' termination of employment with the Corporation before the Early Retirement Date for any reason, other than disability, retirement, or death; or, (b) a Change of Control of the Employer, I wish to receive my 1997 deferrals in the following form: CHECK (i) OR (ii), BUT NOT BOTH. IF YOU CHECK (ii), YOU MUST INDICATE THE NUMBER OF YEARS OVER WHICH INSTALLMENT DISTRIBUTIONS SHOULD CONTINUE. ______(i) lump sum; _____(ii) in _______ substantially equal annual installments. (N.B. must be at least 5 but no more than 15 years.) -145- This Election of Deferral is executed and Agreed: __________________________________ (Signature) __________________________________ (Print Name) __________________________________ (Social Security Number) __________________________________(Election Date) (Date) Agreed: Mycogen Corporation By:__________________________ _______________ (Date) - ------------------------------------------------------------------------------- -146- EXHIBIT A - ELECTION OF CONTRIBUTION (Part 2) --------------------------------------------- TO: ___________________ (NAME OF EMPLOYEE) FROM: MYCOGEN CORPORATION The Company hereby elects to contribute the amount of _______________, and does credit such amount under the terms of the Mycogen Corporation, Defined Contribution Executive Deferred Compensation Plan (the "Plan"), as of the _______ day of ______________, 19__, on behalf of the Retirement Account of the above named Employee. This contribution is subject to the terms of the Plan. Mycogen Corporation BY:___________________ -147- Mycogen Corporation, EXECUTIVE DEFERRED COMPENSATION AGREEMENT EXHIBIT B- BENEFICIARY DESIGNATION ---------------------------------- I. _________________________ (Insert Employee's name as it appears in the Agreement.) ============================================================================= II. The above-named Employee's Revocable Beneficiary under the Executive Deferred Compensation Agreement is set forth below: ___1. Employee's spouse, ____________________, if living at Employee's death, if not, such of the children of the marriage of the Employee and said spouse as shall be then living, equally. ___2. Employee's spouse, ____________________, if living at Employee's death, if not, such of the Employee's children as shall be then living, equally. ___3. Such of the following children of the Employee as shall be living at the Employee's death, equally: ____________________, ____________________, ____________________. ___If this space is checked, and if paragraph 1, 2 or 3 is checked, then the living children of any deceased child designed shall take the share, divided equally, which such child would have if living. ___4. Employee's ____________________, if living at the Employee's death, if not, Employee's ____________________, if then living, if not, Employee's ____________________, if then living. (Insert relationship to Employee and name.) ___5. Such of the following as shall be living at the Employee's death, equally: Employee's______________________________________________________________________ ________________________________________ (Insert relationship to Employee and name.) ___6. Employee's ____________________, if living at Employee's death, if not, such of the following as shall be then living, equally: Employee's______________________________________________________________________ ________________________________________ (Insert relationship to Employee and name.) ___7. Employee's_____________________________________________ ____________________________________________________________ (Insert relationship to Employee and name.) ___8. _____________________________________________, as trustee(s) or the successor trustee(s) under an Agreement dated _______________, 19__, made by and between (the Employee) (_______________) and said trustee(s), as now existing or hereafter amended, or if said trust is not in existence at the Employee's death, the executor(s) or administrator(s) of the Employee. ___9. The trustee(s) or successor trustee(s) under the instrument probated as the Last Will and Testament of the Employee, or, if the Employee shall die intestate or shall leave a Will creating no trust, the executor(s) or administrator(s) of the Employee. -148- ___10. Employee's executor(s) or administrator(s). ___11. _____________________________________________________, or its successors. (Insert Name and address of firm or organization.) =============================================================================== III. If any one of subparagraphs 1 through 7 of paragraph II above is applicable and if no individual beneficiary named is living at the Employee's death, the Beneficiary shall be the executor(s) or administrator(s) of the Employee. IV. This Designation of Beneficiary revokes all prior designations and shall be effective as of the date it is filed with the Company. The Employee retains the right to revoke this Designation of Beneficiary. Dated at _______________, State of _______________, on _______________, 19__. _________________________ (Signature of Employee) Witness: _________________________ -149- CONSENT OF SPOUSE (Required in Community Property States) I hereby consent to the designation of the above beneficiary(ies) to receive the benefits payable under the MYCOGEN CORPORATION, EXECUTIVE DEFERRED COMPENSATION AGREEMENT a the result of the death of the above Employee and waive any and all rights necessary to provide the payment of such benefits to such beneficiary(ies). Dated at , State of__________, on _______________, 19__. _____________________________ (Signature of Spouse) Witness: _____________________________ FILING ACKNOWLEDGEMENT Filed with the records of the Company this ___ day of _______________, 19__. By___________________________ ______________________________ Title -150- EXHIBIT C --------- Mycogen Corporation EXECUTIVE DEFERRED COMPENSATION AGREEMENT Vesting Schedule The Vesting Percentage set forth below represents the portion of each Annual Supplemental Sum, together with related Additions, which is payable under the terms of this Agreement, based on Years of Service. The Vesting Percentage is credited on the first day of each Plan Year following the Year of Service, e.g., vesting for the first Year of Service shall be credited on the first day of the Second Year of Service.
Years of Service Cumulative Vesting Percentage ---------------- ----------------------------- Less than 12 0% 12 but less than 24 0% 24 but less than 36 0% 36 but less than 48 60% 48 but less than 60 80% 60 or more 100%
-151- EXHIBIT D --------- Mycogen Corporation -------------------- EXECUTIVE DEFERRED COMPENSATION AGREEMENT INITIAL ELECTION OF CONTRIBUTION -------------------------------- Annual Supplemental Sum The Company hereby elects to contribute an amount equal to any Matching Contribution Deficiency, as defined below, and shall credit such amount under the terms of the Mycogen Corporation, Defined Contribution Executive Deferred Compensation Plan (the "Plan"), as of the day the related Matching Contribution would have otherwise been made to the Mycogen Corporation deferred savings plan on behalf of the Employee, were in not for the limitation on the amount contributed by the Employee as a result of being characterized as a Highly Compensated Employee under Internal Revenue Code Section. Matching Contribution Deficiency The Company has adopted a deferred savings plan which allows each Employee to contribute fifteen percent (15%) of compensation on a pre-tax basis. Under the terms of the deferred savings plan, the Matching Contributions will be equal to one hundred percent (100%) of such individual's deferred savings contributions, to the extent those deferred savings contributions do not exceed two percent (25%) of his/her Eligible Earnings, and (ii) the Matching Contributions will be equal to twenty five percent (25%) of such individual's deferred savings contributions, to the extent those deferred savings contributions exceed two percent (2%) but not more than six percent (6%) of his/her Eligible Earnings. However, the aggregate Matching Contribution made on behalf of any Qualified Participant shall not exceed Two Thousand dollars ($2,000.00) per Plan Year. Highly Compensated Employees, as defined by the Internal Revenue Code, may be restricted as to the amount they may contribute to the deferred savings plan as a result of their status as Highly Compensated Employees, and therefore the related Matching Contribution that would otherwise have been contributed for their benefit may be restricted. The amount of the Matching Contribution that the Company is actually precluded from contributing and would otherwise have contributed to the deferred savings plan on behalf of the Employee, but for the application of the limitations on contributions by Highly Compensated Employees is referred to here as the Matching Contribution Deficiency. This contribution is subject to the terms of the Plan, and may be terminated or amended at the sole discretion of the Board of Directors, provided however, that this Initial Election of Contribution shall remain in effect from year to year unless terminated or amended by subsequent act of the Board of Directors. -152- EX-23.1 6 CONSENT OF E&Y EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS -153- CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 33-58721 and Forms S-8 Nos. 333-21467, 333-00901, 333-00899, and 33-66206) and the related Prospectuses of our report dated 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, with respect to the consolidated financial statements of Mycogen Corporation, included in the Annual Report (Form 10-K) for the year ended August 31, 1997. /s/ Ernst & Young ERNST & YOUNG LLP San Diego, California November 24, 1997 -154- EX-23.2 7 CONSENT OF D&T EXHIBIT 23.2 CONSENT OF DELOITTE & CO., INDEPENDENT AUDITORS -155- INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33- 58721 on Form S-3 and Registration Statements No. 333-21467, 333-00901, 333- 00899 and 33-66206 on Forms S-8 of Mycogen Corporation of our report dated October 1, 1997 (relating to the 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 not presented separately herein) appearing in the Annual Report on Form 10-K of Mycogen Corporation for the year ended August 31, 1997. Buenos Aires, Argentina November 19, 1997 DELOITTE & Co. Hugo Alberto Luppi (Partner) Contador Publico (U.B.A.) C.P.C.E.C.F. - Tomo 56 - Folio 96 -156- EX-24 8 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY -157- POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Carlton J. Eibl and James A. Baumker and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Form 10-K or any and all amendments to this Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ NICKOLAS D. HEIN Chairman 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)
-158- EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR AUG-31-1997 SEP-01-1997 AUG-31-1996 1,712 499 46,481 4,379 51,135 106,754 106,754 19,786 239,687 66,929 0 0 0 31 344,676 239,687 202,407 210,973 126,857 126,857 0 1,553 0 (36,149) (1,534) (37,683) 0 0 0 (37,683) (1.22) (1.22)
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