-----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, Ko8/Pzx36FtJqLndqJ1AEOFaHEp0YkZRmFPbZeAo8nMfVZGbhq0vPvW3b+iZfKcR Hj/ASqn9qZbhQfhzqQK4eg== 0001017062-98-001520.txt : 19980714 0001017062-98-001520.hdr.sgml : 19980714 ACCESSION NUMBER: 0001017062-98-001520 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980710 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-Q SEC ACT: SEC FILE NUMBER: 001-11643 FILM NUMBER: 98664183 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-Q 1 FOR THE QUARTER ENDED MAY 31, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 1998 ------------ OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ____________________ Commission file number: 0-15881 ------- MYCOGEN CORPORATION ------------------------------------------------------------------ (Exact name of registrant as specified in its charter) California 95-3802654 - --------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5501 Oberlin Drive, San Diego, California 92121 - ------------------------------------------ ---------------- (Address of principal executive offices) (Zip Code) (619) 453-8030 --------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ---- ---- 36,256,604 shares of Common Stock were outstanding as of June 30, 1998. Part 1-FINANCIAL INFORMATION Item 1. Financial Statements Mycogen Corporation Interim Consolidated Condensed Statements of Operations (Amounts in thousands, except per share data)
Three months ended May 31, Nine months ended May 31, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) Net operating revenues .............................. $ 87,907 $ 84,324 $ 177,562 $ 170,895 Contract and other revenues ......................... 2,394 1,883 6,756 6,341 ------------ ------------ ------------ ------------ Total revenues ................................... 90,301 86,207 184,318 177,236 ------------ ------------ ------------ ------------ Costs and expenses: Cost of operating revenues ......................... 57,100 52,552 112,370 106,869 Selling and marketing .............................. 12,321 11,710 35,522 31,001 Research and development ........................... 6,968 5,990 19,936 16,571 General and administrative ......................... 3,583 3,870 12,014 12,129 Amortization of intangible assets .................. 758 732 2,317 2,248 Other charges ...................................... 18,323 10,792 39,000 14,251 ------------ ------------ ------------ ------------ Total costs and expenses ......................... 99,053 85,646 221,159 183,069 ------------ ------------ ------------ ------------ Operating income (loss) ............................. (8,752) 561 (36,841) (5,833) Interest income and expense, net ................... (800) (604) (2,159) (671) Other non-operating income (expense) ............... 97 (15) 299 23 ------------ ------------ ------------ ------------ Net loss before income taxes ........................ (9,455) (58) (38,701) (6,481) Credit (provision) for income taxes ................. 1,158 622 944 (500) ------------ ------------ ------------ ------------ Net income (loss) ................................... $ (8,297) $ 564 $ (37,757) $ (6,981) ============ ============ ============ ============ Net income (loss) per share: Basic .............................................. $ (.23) $ .02 $ (1.13) $ (.23) ============ ============ ============ ============ Diluted ............................................ $ (.23) $ .02 $ (1.13) $ (.23) ============ ============ ============ ============ Weighted average number of shares: Basic .............................................. 36,033 30,792 33,353 30,663 ============ ============ ============ ============ Diluted ............................................ 36,033 33,196 33,353 30,663 ============ ============ ============ ============
See accompanying Notes to Interim Consolidated Condensed Financial Statements. 2 Mycogen Corporation Consolidated Condensed Balance Sheets (Dollars in thousands, except par value data)
May 31, August 31, 1998 1997 (Unaudited) (Note) ----------- ---------- Assets Current assets: Cash and cash equivalents........................................ $ 1,514 $ 1,712 Securities available-for-sale.................................... - 499 Accounts and notes receivable, net of allowances................. 92,404 42,102 Due from a Dow affiliate......................................... 8,538 - Inventories...................................................... 72,271 57,135 Prepaid expenses and other current assets........................ 5,163 5,306 ---------- ---------- Total current assets........................................... 179,890 106,754 Net property, plant and equipment.................................. 108,696 87,170 Net intangible assets.............................................. 34,444 32,990 Other assets....................................................... 19,329 12,773 ---------- ---------- Total assets....................................................... $ 342,359 $ 239,687 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Advances from Dow affiliates..................................... $ 72,943 $ 13,500 Short-term borrowings............................................ 170 5,102 Accounts payable................................................. 21,166 21,100 Accrued compensation and related taxes........................... 7,707 6,124 Deferred revenues................................................ 4,659 8,246 Other current liabilities........................................ 12,216 12,857 ---------- ---------- Total current liabilities...................................... 118,861 66,929 Long-term liabilities.............................................. 20,266 15,544 Stockholders' equity: Common stock, $.001 par value, 50,000,000 shares authorized; 36,195,621 and 31,381,344 shares issued and outstanding at May 31, 1998 and August 31, 1997, respectively.................. 36 31 Additional paid-in capital....................................... 428,446 344,676 Deficit.......................................................... (225,250) (187,493) ---------- ---------- Total stockholders' equity..................................... 203,232 157,214 ---------- ---------- Total liabilities and stockholders' equity......................... $ 342,359 $ 239,687 ========== ==========
Note: The balance sheet at August 31, 1997 has been derived from the audited financial statements at that date. See accompanying Notes to Interim Consolidated Condensed Financial Statements. 3 Mycogen Corporation Interim Consolidated Condensed Statements of Cash Flows (Dollars in thousands)
Nine months ended May 31, 1998 1997 ----------- ----------- (Unaudited) (Unaudited) Operating activities: Net loss ......................................................... $ (37,757) $ (6,981) Items which did not use cash: Other charges ................................................... 21,879 6,830 Depreciation .................................................... 5,960 4,298 Amortization of intangible assets ............................... 2,317 2,249 Change in deferred taxes ........................................ (1,267) 500 Other expenses not requiring cash ............................... 1,183 2,231 Changes in operating assets and liabilities: Accounts and notes receivable .................................. (46,021) (46,453) Inventories ..................................................... (10,211) (2,992) Prepaid expenses ................................................ 1,444 (2,242) Accounts payable ................................................ (640) 1,552 Deferred revenues ............................................... (3,586) 165 Other current liabilities ....................................... (2,894) (2,482) ----------- ----------- Cash used in operating activities .............................. (69,593) (43,325) ----------- ----------- Investing activities: Proceeds from sales of available-for-sale securities ............ - 28,140 Proceeds from maturities of available-for-sale securities ...... 499 3,703 Capital expenditures ........................................... (18,685) (25,106) Net cash paid for business combinations and intangibles ........ (34,724) (38,105) Change in other assets ......................................... 2,095 1,465 ----------- ----------- Cash used in investing activities ............................. (50,815) (29,903) ----------- ----------- Financing activities: Net change in borrowings from Dow affiliates .................... 50,905 - Net change in short-term borrowings ............................. (6,768) 22,303 Proceeds from long-term borrowings .............................. - 15,000 Payments on long-term borrowings ................................ (2,229) (102) Proceeds from sale of common stock .............................. 79,828 2,721 Purchase of the Company's common stock .......................... (1,350) - ----------- ----------- Cash provided by financing activities .......................... 120,386 39,922 ----------- ----------- Effect of exchange rate changes on cash and cash equivalents .... (176) 52 ----------- ----------- Decrease in cash and cash equivalents ........................... (198) (33,254) Cash and cash equivalents at beginning of period ................ 1,712 35,854 ----------- ----------- Cash and cash equivalents at end of period ....................... $ 1,514 $ 2,600 =========== ===========
See accompanying Notes to Interim Consolidated Condensed Financial Statements. 4 PART I-FINANCIAL INFORMATION - ---------------------------- Item 1. Financial Statements (continued). Mycogen Corporation ------------------- Notes to Interim Consolidated Condensed Financial Statements General - ------- The accompanying financial statements include the accounts of Mycogen Corporation and its wholly-owned and majority-owned subsidiaries ("the Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The interim financial statements have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (which include only normal recurring adjustments) necessary to state fairly the financial position, results of operations and cash flows as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Annual Report and Form 10-K of the Company for the fiscal year ended August 31, 1997. The Company's business is highly seasonal. Operating revenues are expected to be concentrated principally in the quarters ending in February and May as a result of the North American agricultural growing season. Consequently, operating revenues and results of operations for the three months and nine months ended May 31, 1998 are not indicative of operating revenues and results to be expected for a full fiscal year. Reclassifications - ----------------- Certain amounts in the 1997 Consolidated Condensed Financial Statements have been reclassified to conform to the 1998 presentation. Dow AgroSciences LLC - -------------------- In January 1998, Dow AgroSciences LLC ("DAS") purchased 3,762,038 shares of the Company's common stock for $75 million. DAS is owned 100% by the Dow Chemical Company ("Dow"). As of May 31, 1998, DAS owned 24,766,157 shares of the Company's common stock or 68%. In May 1998, the board of directors of the Company appointed a committee of independent board members to respond to a request by DAS to amend an exchange and purchase agreement between DAS and the Company. This amendment would allow DAS to begin discussions regarding the acquisition of the shares of common stock of the Company which it does not already own. The committee of independent board members has engaged Wasserstein, Perella & Co., Inc., as financial advisor and Altheimer & Gray as legal counsel to advise them in responding to DAS' request. 5 Business Acquisitions and Investments - ------------------------------------- In April 1998, the Company paid $19.6 million and assumed debt of $8.4 million to acquire Dinamilho Carol Productos Agricolas Ltda. ("Dinamilho"), a leading Brazilian developer and marketer of high-yielding hybrid seed corn products. The acquisition was accounted for as a purchase and, accordingly, the assets and liabilities of Dinamilho are included in the Consolidated Balance Sheet as of May 31, 1998 and the results of operations from the acquisition date are reflected in the Consolidated Statement of Operations. The acquisition resulted in a purchase price allocation to in-process technology of $11.1 million, which was written-off upon acquisition. The purchase price allocation is an estimate that is subject to final adjustments which are not expected to be material. In January 1998, the Company obtained an additional 16.25% interest in Verneuil Holding, S.A. ("Verneuil") in exchange for the issuance of 483,439 shares of common stock to DAS valued at $9.4 million. The Company now owns 35% of Verneuil and the investment is accounted for under the equity method and is included in other assets on the Consolidated Balance Sheet. The Company's investment in Verneuil totaled $18.1 million, which includes related investment costs and translation adjustments. In December 1997, the Company acquired rights to certain patents and patent applications ("Intellectual Property") from J.G. Boswell Company ("Boswell") and agreed to form a joint venture, Phytogen Seed Company, LLC ("Phytogen"), to develop and market cotton seed internationally. Mycogen paid Boswell $12 million in cash and contributed its cotton breeding materials in return for the Intellectual Property and a 51% interest in Phytogen. Boswell contributed its cotton seed business and cotton breeding materials in return for the remaining 49% interest. The joint venture was accounted for as a purchase and, accordingly, the assets and liabilities of Phytogen are included in the Consolidated Balance Sheet as of May 31, 1998 and the results of operations from the acquisition date are reflected in the Consolidated Statement of Operations. The formation of the joint venture resulted in a purchase price allocation to in-process technology of $7.6 million, which was written-off upon acquisition. Additionally, the purchase of the Intellectual Property resulted in a $3.0 million in-process technology charge. The purchase price allocation is an estimate that is subject to final adjustments which are not expected to be material. Supplemental Schedule of Non-Cash Investing and Financing Activities - -------------------------------------------------------------------- Non-cash investing and financing activities are as follows: In conjunction with the acquisition of Dinamilho, the formation of Phytogen and the additional investment in Verneuil in fiscal 1998 and the acquisition of Morgan Seeds, the initial investment in Verneuil and the purchase of SVO high oleic sunflower oil assets from the Lubrizol Corporation in fiscal 1997, non- cash investing and financing activities were as follows: 6
Nine months ended May 31, ----------------------------------------------------- (In thousands) 1998 1997 ----------------------- ---------------------- Business acquisitions, investments and purchases of technology: Fair value of assets acquired, other than cash $ 45,610 $ 49,763 Liabilities assumed (10,886) (15,396) Investment in Verneuil 9,400 9,693 Net assets and liabilities of Mycogen S.A. and Mycogen SRL, excluding cash, exchanged for Verneuil -- (5,955) Common stock issued (9,400) -- ----------------------- ---------------------- Net cash paid $ 34,724 $ 38,105 ======================= ======================
Inventories - ----------- Inventories are comprised of:
May 31, August 31, (In thousands) 1998 1997 ----------------------- ---------------------- Raw materials and supplies $ 11,920 $ 5,969 Work in process 16,482 14,742 Finished goods 43,869 36,424 ----------------------- ---------------------- Total $ 72,271 $ 57,135 ======================= =======================
Accumulated Depreciation and Amortization - ----------------------------------------- Accumulated depreciation of property, plant and equipment was $25.1 million and $19.8 million at May 31, 1998 and August 31, 1997, respectively. Accumulated amortization of intangible assets was $14.1 million and $11.8 million at May 31, 1998 and August 31, 1997, respectively. Stockholders' Equity - -------------------- The following table summarizes the transactions affecting common stock outstanding and additional paid in capital:
Common Stock Additional Paid in (In thousands) Number of Shares Capital ----------------------- ----------------------- Balance at August 31, 1997 31,381 $ 344,676 Private placement with DAS 3,762 74,996 Stock exchanged with DAS 483 9,400 Issuance of common stock under stock plans 828 5,290 Compensation related to employee stock plans -- 745 Common stock surrendered in connection with the exercise of stock options (104) (2,060) Severance agreement (see Other Charges) -- (2,045) Purchase of Company's common stock (154) (1,350) Translation adjustment recorded in accounting for the investment in Verneuil under the equity method -- (1,030) Other changes in cumulative translation adjustment -- (176) ----------------------- ----------------------- Balance at May 31, 1998 36,196 $ 428,446 ======================= =======================
7 Income Taxes - ------------ A net benefit for income taxes of $.9 million related to foreign taxes was recognized for the nine months ended May 31, 1998 which was comprised of a $1.4 million benefit recognized for the Argentine subsidiary of Mycogen and a $.5 million provision recognized for foreign tax withholding on interest and royalty payments received from related companies in Argentina and France. A provision for income tax was not recognized for other jurisdictions as the effective tax rate for the current fiscal year for all other jurisdictions is expected to be zero. A valuation allowance will be provided to offset any tax benefits derived in these other jurisdictions. Net Income (Loss) Per Share - --------------------------- In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and unvested restricted stock. Diluted earnings per share is similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods presented conform to the SFAS No. 128 requirements, and, where necessary, have been restated. The following table sets forth the computation of basic and diluted weighted- average shares.
Three months ended May 31, Nine months ended May 31, ------------------------------------------ ------------------------------------------ (In thousands) 1998 1997 1998 1997 ------------------ ------------------ ------------------ ------------------ Denominator for basic net income (loss) per share -weighted-average shares 36,033 30,792 33,353 30,663 ------------------ ------------------ ------------------ ------------------ Effect of dilutive securities: Stock options --* 2,253 --* --* Restricted stock --* 151 --* --* ------------------ ------------------ ------------------ ------------------ Dilutive potential common shares -- 2,404 -- -- ------------------ ------------------ ------------------ ------------------ Denominator for diluted net income (loss) per share -adjusted weighted-average shares and assumed conversions 36,033 33,196 33,353 30,663 ================== ================== ================== ==================
* Common shares issuable under employee stock options and unvested restricted shares are not included in the computation of net loss per common share because their effect was not dilutive. Other Charges - -------------
Three months ended May 31, Nine months ended May 31, ----------------------------- ----------------------------- (In thousands) 1998 1997 1998 1997 ------------ ----------- ----------- ----------- In-process technology $ 12,059 $ -- $ 23,924 $ -- Patent litigation fees 6,264 2,229 17,121 4,362 Severance agreement -- 8,563 (2,045) 8,563 Equity in loss of investees -- -- -- 1,326 ------------ ----------- ----------- ----------- Total $ 18,323 $ 10,792 $ 39,000 $ 14,251 ============ =========== =========== ===========
8 During fiscal 1998, an in-process technology charge of $21.7 million was recorded in connection with the acquisition of Dinamilho and the formation of Phytogen and the purchase of Intellectual Property. The Company also purchased cotton germplasm in Argentina and patent rights related to disease resistance in plants which resulted in a $2.2 million charge to in-process technology. The Company incurred $17.1 million and $4.4 million of expenses in the nine months ended May 31, 1998 and 1997, 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 enforcing 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 counsel, management believes the outcome of the existing pending and threatened legal actions will not have a material adverse effect on the financial condition of the Company. In connection with the resignation of the Company's former chief executive officer, Dr. Caulder, DAS entered into an agreement with Dr. Caulder in May 1997 whereby Dr. Caulder had the option to sell to DAS any shares acquired by Dr. Caulder through the surrender of his stock options to the Company at prices based on a specified formula. For the nine months ended May 31, 1998, a credit of $2.0 million was recognized based on the revaluation of 389,445 options. Dr. Caulder exercised the option in February 1998 therefore, no future charges or credits will be recorded. 9 PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS Mycogen's Strategic Direction Considering the continued rapid consolidation within the seed and agricultural biotechnology industry, management and the board of directors of the Company initiated a process to analyze the Company's strategic direction and to explore possible alternatives to maximize shareholder value. On April 30, 1998, Dow through its wholly owned subsidiary DAS, requested an amendment to its 1996 exchange and purchase agreement with Mycogen that would allow DAS to begin discussions regarding the acquisition of the remaining shares of common stock of Mycogen that it does not already own. On May 6, 1998, the board of directors of the Company appointed a committee of independent board members to respond to that request. The committee of independent board members has engaged Wasserstein, Perella & Co., Inc., as financial advisor and Altheimer & Gray as legal counsel to advise them in responding to the DAS request. The committee will consider the DAS request and respond as appropriate. The process may take a number of weeks. Acquisitions Mycogen has made several acquisitions to put the Company into the cotton seed business and to expand its corn seed business into Brazil and other areas. In April 1998, the Company acquired Dinamilho for $19.6 million in cash and $8.4 million of debt assumption. Dinamilho is a leading Brazilian developer and marketer of high-yielding hybrid seed corn products. In December 1997, the Company acquired Intellectual Property from Boswell and agreed to form a joint venture to develop and market cotton seed internationally. Mycogen paid Boswell $12 million in cash and contributed its cotton breeding materials in return for the Intellectual Property and a 51% interest in Phytogen. Boswell contributed its cotton seed business and cotton breeding materials. In January 1998, the Company obtained an additional 16.25% ownership interest in Verneuil in exchange for the issuance of 483,439 shares of the Company's common stock to DAS valued at $9.4 million. The Company's investment in Verneuil totaled $18.1 million, which included related investment costs and translation adjustments. The Company also purchased cotton germplasm in Argentina and patent rights related to disease resistance in plants. Mycogen plans to continue to acquire seed companies, germplasm and other technology assets. Seasonality The Company's businesses are highly seasonal as described in each segment summary. Revenues, expenses, income and losses for the three and nine months ended May 31, 1998 are not indicative of the revenues, expenses and income or loss to be expected for a full fiscal year. Summary 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 10 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. The Company's international operations also have the added risks of different political environments and currency fluctuations. These and other factors may affect the Company's ability to increase operating revenues and achieve profitability. The Company also must continue to invest in commercializing existing products and in discovering and developing new products, so the trend in losses from operations may continue. Segment Operating Revenues and Income (Loss)
Three months ended Nine months ended May 31, May 31, (In thousands) 1998 1997 1998 1997 ---------- --------- ---------- ---------- Operating Revenues: Seed......................... $ 76,989 $ 73,945 $ 151,428 $ 146,518 Crop Protection.............. 11,067 10,789 26,448 24,787 Intersegment sales........... (149) (410) (314) (410) ---------- --------- ---------- ---------- Total $ 87,907 $ 84,324 $ 177,562 $ 170,895 ========== ========= ========== ========== Income (Loss) Seed......................... $ 8,012 $ 11,714 $ 1,510 $ 13,240 Crop Protection.............. 2,145 974 3,431 (784) Intersegment sales........... - (68) - (68) ---------- --------- ---------- ---------- Total operations 10,157 12,620 4,941 12,388 Corporate...................... (586) (1,267) (2,782) (3,970) Other credits (charges): In-process technology........ (12,059) - (23,924) - Patent litigation fees....... (6,264) (2,229) (17,121) (4,362) Severance agreement.......... - (8,563) 2,045 (8,563) Equity in loss of investees.. - - - (1,326) Net interest and other......... (703) (619) (1,860) (648) ---------- --------- ---------- ---------- Net loss before taxes (9,455) (58) (38,701) (6,481) Credit (provision) for income taxes 1,158 622 944 (500) ---------- --------- ---------- ---------- Net income (loss) $ (8,297) $ 564 $ (37,757) $ (6,981) ========== ========= ========== ==========
For the first nine months of fiscal 1998, the Company's operating revenues have increased $6.7 million over fiscal 1997 providing an improvement in gross margins of $1.2 million. This improvement was offset by higher patent litigation fees, in-process technology charges and increased research, development, sales and marketing efforts. The Company plans to continue investing in litigation and in research and development and sales and marketing activities to build and expand its retail seeds 11 business. The Company also intends to continue acquiring seed companies and other technology assets which will result in in-process technology charges. Seed revenues have increased primarily due to the addition of Roundup Ready soybean varieties in North America and the formation of Phytogen. Seed income is lower due reduced corn seed sales in Argentina and higher investments in sales and marketing and breeding, testing and bio tech discovery and trait development. Seed revenues are discussed in more detail under the caption Seed Operating Revenues. The improvement in Crop Protection operations is due to improved gross margins and lower expenses attributable to the restructuring of the biopesticide unit in August 1997 and higher Soilserv revenues. Crop Protection revenues are discussed in more detail under the caption Crop Protection Operating Revenues. Corporate expenses include costs associated with the pursuit of acquisitions and strategic alliances and other corporate activities. The write off of in-process technology of $23.9 million primarily relates to the acquisition of Dinamilho, the formation of Phytogen and the purchase of Intellectual Property. The Company's results continue to be negatively impacted by legal fees and expenses associated with enforcing its intellectual property rights. The Company is currently a party to numerous actions arising out of disputes over patent and license rights for insect resistance and herbicide tolerance technology in plants. The Company will continue to assert and enforce its positions in these matters and, therefore, will continue to incur significant associated expenses. A credit of $2.0 million was recognized in the first quarter related to the revaluation of certain options as discussed in further detail under the Other Charges footnote of Item 1. The equity in loss of investees in fiscal 1997 reflects expenses incurred by the Company's European subsidiaries through the date that they were transferred to Verneuil. Net interest expense has increased due to higher levels of borrowing in fiscal 1998 attributable to funds used for business acquisitions and capital expenditures. The tax credit relates to the Company's Argentine subsidiary, net of a tax provision for foreign tax withholding on interest and royalty payments. Seed Operating Revenues
Three months ended Nine months ended May 31, May 31, (In thousands) 1998 1997 1998 1997 ---------- ---------- ----------- ----------- Domestic Seed: Corn......................... $ 27,611 $ 30,753 $ 61,988 $ 64,761 Soybean...................... 12,078 13,255 24,438 20,979 Cotton....................... 5,961 - 7,593 - Sunflower.................... 6,746 5,945 7,482 6,640 Sorghum and other............ 7,237 9,535 11,528 12,497 Argentina...................... 5,212 4,834 16,567 22,384 Specialty oil.................. 12,103 8,633 21,061 16,854 Other international............ 41 990 771 2,403 ---------- ---------- ----------- ----------- Total $ 76,989 $ 73,945 $ 151,428 $ 146,518 ========== ========== =========== ===========
12 Lower corn sales are due to decreased volumes as a result of discounting and free product promotions by competitors. This is partially offset by increased prices due to an improved product mix. Soybean revenues are ahead of last year primarily due to the addition of Roundup Ready varieties in 1998. Cotton revenues in 1998 are attributable to the formation of Phytogen in fiscal 1998. The decrease in Argentina seed revenues is primarily due to a 20% decrease in corn acres planted. The increase in specialty oil revenues is attributed to higher shipments to AC Humko. Other international revenues declined primarily due to lower export sales of sunflower. The majority of North American seed operating revenues are recorded during the second and third fiscal quarters. Similarly, the majority of Argentina seed operating revenues are recorded during the fourth and first fiscal quarters. Operating revenues include estimates of seed product returns. Adjustments to reconcile those earlier estimates are made in the fourth quarter for North America and in the second quarter for Argentina. Crop Protection Operating Revenues
Three months ended Nine months ended May 31, May 31, (In thousands) 1998 1997 1998 1997 --------- --------- --------- --------- Soilserv..................... $ 8,537 $ 7,514 $ 21,127 $ 18,779 Biopesticides................ 2,530 3,275 5,321 6,008 --------- --------- --------- --------- Total $ 11,067 $ 10,789 $ 26,448 $ 24,787 ========= ========= ========= =========
Soilserv sales are higher due to increased disease and insect pressure caused by wet weather conditions. The decline in Biopesticides revenues was due to lower international sales of MVP(R) technical powder to Kubtoa and M-Pede(R) in the Middle East. Those declines were partially offset by higher sales of Mattch(R) bioinsecticide and Scythe(R) herbicide. The majority of Crop Protection revenues are recorded during the third and fourth fiscal quarters. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and securities available-for-sale decreased by $.2 million to $1.5 million during the nine months ended May 31, 1998. Cash proceeds of $79.8 million from the sale of the Company's common stock and $50.9 million from net advances from DAS and Dow affiliates were used for operating activities of $69.6 million, acquisitions of $34.7 million, capital expenditures of $18.7 million and payments of $9.0 million on other borrowings. The Company may borrow up to $75 million from DAS, of which $46.6 million was unused at May 31, 1998. Any of these advances from DAS are due September 30, 1999. Additionally, the Company's Argentina subsidiary may borrow up to $50 million from DAS, of which $9.7 million was unused at May 31, 1998; any of these borrowings are due December 31, 1998. The Company maintains an $12.0 million unsecured term loan due February 1, 2002, which bears interest at a rate of 7.5% through February 1999. Additionally, the Company has a $10 million bank line of credit facility, which expires February 1999, all of which was unused at May 31, 1998. The Company advanced Dow Quimica S.A., a subsidiary of Dow, $8.5 million. Any advances to Dow Quimica are due April 27, 1999. During the first nine months ended May 31, 1998, the Company invested $3.0 million in a new business system and spent $15.5 million on other capital expenditures and expects to spend another 13 $3.0 million on that business system and $4.0 million on other capital needs during the remainder of fiscal 1998. The Company's new business system will be year 2000 compliant. Pioneer will provide $11 million in research and development funding near the end of calendar year 1998 in accordance with a technology collaboration agreement with the Company. 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, the Company 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 also will 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, will also be necessary to enforce the Company's intellectual property rights or to determine the scope and validity of third-party proprietary rights. The Company anticipates that its current cash position, revenue from operations and contract and other revenues and funds from its existing lines of credit will be sufficient to finance working capital and capital requirements for the immediate future. However, the Company's capital requirements may vary as a result of competitive and technological developments, the timing of regulatory approval for new products and the terms and conditions of any future strategic transactions. If such requirements change, the Company may need to raise additional capital. However, there can be no assurance that the Company can raise additional capital under favorable terms, if at all. 14 PART II - OTHER INFORMATION 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 Bacillus thuringiensis ("Bt") insect resistant plants and Monsanto's narrow application on Bt insect resistant tomatoes. The interference is proceeding in the Patent Office. 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 are still 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. The trial is set for November 18, 1998. 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 June 30, 1998, a jury returned a verdict invalidating the Monsanto patent. Monsanto has stated that it will ask the court to set aside the verdict. 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. A judgment was entered on March 26, 1998, on the jury verdict awarding Mycogen $174.9 million in compensatory damages. Monsanto filed motions seeking a new trial or modification of the jury verdict. On May 21, 1998, Superior Court Judge Herbert Hoffman upheld the jury verdict and the damages awarded. Monsanto has appealed the verdict. On April 30, 1996, DeKalb Genetics Corporation ("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. 15 On August 15, 1996, MPSI filed in Federal District Court in Wilmington, Delaware, an action to reverse a U.S. Patent Office ruling in an interference with Monsanto relating to truncated Bt gene technology. The U.S. Patent Office ruled that the Monsanto and Mycogen patent applications did not overlap. This suit was jointly dismissed by MPSI and Monsanto on March 26, 1998. MPSI agreed to the dismissal because of the issuance to Mycogen on January 20, 1998 of U.S. patent 5,710,020 that covered cells containing shortened or truncated Bt genes. 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 infringe U.S. patents issued to Mycogen that covered 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. On February 5, 1998, a jury returned a verdict invalidating these Mycogen patents. Motions were filed on February 20, 1998, by Mycogen to set aside the verdict. A hearing on these motions is expected to take place later in 1998. On November 14, 1996, the U.S. Patent Office notified MPSI, that an interference had been declared with MPSI's broad patent (USSN: 5,380,831) on synthetic Bt technology and two patent applications owned by Monsanto. The interference is proceeding in the Patent Office, but Mycogen's patent is the subject of litigation between Mycogen and Monsanto in Federal District Court in San Diego. On January 21, 1997, Mycogen filed suit against Ecogen, Inc. in Federal District Court in San Diego, California, 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 U.S. Patent Office declared an interference between Mycogen's U.S. patent 5,188,960 and an application filed by Ecogen, Inc. Monsanto now owns the Ecogen, Inc. patent application. On March 10, 1998, Mycogen settled the patent infringement action with Ecogen, Inc. and that lawsuit has been dismissed. The interference proceeding relating to the Cry1F gene is still pending in the U.S. Patent Office. In May, 1998, the following seven class-action shareholder suits were filed in San Diego Superior Court alleging, among other things, breach of fiduciary duty to Mycogen's shareholders by DAS and Mycogen's board of directors: Anderson v. Mycogen, et al. (Case No. 720391); Boettcher v. Mycogen, et al. (Case No. 720530); Ellis Investments, Ltd. V. Carlton H. Eibl [sic], et al. (Case No. 720257); Harbor Finance Partners v. Mycogen, et al. (Case No. 720256); Kolb v. Mycogen, et al. (Case No. 720388); Susser v. Mycogen, et al. (Case No. 720255); and Verrone v. Mycogen, et al. (Case No. 720700). 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 (Loss) section of Item 2. These legal proceedings are not expected to have a material adverse effect on the Company's business or consolidated financial position. 16 Item 6. Exhibits and Reports on Form 8-K. a) Exhibits Exhibit 27 - Financial Data Schedule b) Reports on Form 8-K None SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Mycogen Corporation ------------------- (Registrant) Date: July 10, 1998 /s/ James A. Baumker -------------- --------------------- James A. Baumker Vice President and Chief Financial Officer 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS AUG-31-1998 MAY-31-1998 1,514 0 92,404 0 72,271 179,890 133,816 25,120 342,359 118,861 0 0 0 36 428,446 342,359 177,562 184,318 112,370 112,370 0 0 0 (38,701) 944 (37,757) 0 0 0 (37,757) (1.13) (1.13)
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