ITEM 1. BUSINESS
Overview
Calgene is a biotechnology company that is developing a portfolio of genetically engineered plants and plant products for the food, seed and oleochemical industries. The Company's research and business efforts are focused in three core crop areas--fresh produce (tomato and strawberry), edible and industrial plant oils (canola) and cotton--where Calgene believes biotechnology can provide substantial added commercial value in consumer, industrial and seed markets.
In March 1996, Calgene and Monsanto Company ("Monsanto") entered into a transaction (the "Monsanto Transaction") under which Monsanto contributed Gargiulo, Inc. ("Gargiulo"), $30 million and certain oils and produce related technology to Calgene in exchange for a 49.9% equity interest in Calgene. Gargiulo is a grower, packer, marketer and distributor of tomatoes, strawberries and other produce with operations in Florida, California, Mexico and Puerto Rico. In November 1996, Calgene and Monsanto closed a transaction whereby Monsanto purchased 6,250,000 shares of Calgene common stock for $50 million. The transaction brought Monsanto's equity investment in Calgene to approximately 54.6%. In January 1997, Calgene received an unsolicited proposal from Monsanto Company to acquire all of the outstanding shares of Calgene that Monsanto does not already own at a price of $7.25 per share. The proposal is under consideration by a special committee of three disinterested Directors.
Fresh Produce. The Company is currently growing, packing, marketing and distributing traditionally developed tomatoes, strawberries and other fresh fruits and vegetables through its Gargiulo subsidiary. Calgene scientists are using genetic engineering and plant breeding techniques to develop tomato varieties with increased sweetness and delayed softening in order to market a premium quality product. Calgene scientists are also seeking to develop tomato varieties with higher yield and virus resistance in an effort to reduce production costs. In May 1994, after FDA action, Calgene began commercialization of the FLAVR SAVR tomato, the world's first genetically engineered whole food product. Calgene has also received regulatory clearance to commercialize the FLAVR SAVR tomato in Canada, Mexico and the United Kingdom. In fiscal 1995, Calgene curtailed production of the FLAVR SAVR tomato and began introducing the FLAVR SAVR gene into Gargiulo varieties using traditional plant breeding methods in an effort to develop agronomically suitable varieties. Calgene is also seeking to develop strawberry plants that resist diseases and produce berries with increased sweetness.
Plant Oils. Calgene is developing genetically engineered canola oils with a broad range of food and industrial applications. Calgene scientists have genetically engineered canola varieties that produce substantial quantities of laurate, an important food ingredient and an ingredient in soap, detergent and personal care products. Laurate is not naturally present in canola or other non-tropical oil plants. To date, the Company has sold one million pounds of Laurical(TM) canola oil and is currently planning for approximately 70,000 acres of commercial production for harvest in 1997. The Company is also in field trials with canola plants that have been genetically engineered to produce oil with increased stearate levels, creating a potential substitute for hydrogenated oils in margarine, fluid shortening and confectionery products. The Company's subsidiary, Calgene Chemical, manufactures and distributes plant oil-based chemicals. Calgene is in the early stage of developing polyunsaturated fatty acids ("PUFAs") in canola plants to be sold to food ingredient and medical/nutritional markets based on health benefits.
Cotton. The Company is currently selling genetically engineered BXN(R) cotton seed and traditionally developed cotton seed varieties through its subsidiary Stoneville Pedigreed Seed Company. Calgene's cotton genetic engineering program focuses on reducing farmers' growing costs through the development of cotton varieties that require less pesticides and cotton varieties that produce natural colors. Herbicide resistant and insect resistant cotton varieties have the potential to enable cotton farmers to significantly reduce the total volume of herbicides and insecticides applied, resulting in substantial savings in production costs, added flexibility in crop rotation, improved yields and benefits to the environment. The Company commercially sold its genetically engineered BXN cotton, which is resistant to the herbicide Bromoxynil(R) in 1995 and 1996 at a price premium in excess of 41% over Calgene's non-genetically engineered cotton seed. Calgene plans to commercially introduce cotton varieties genetically engineered to contain both the BXN gene and a Bt gene for resistance to Heliothis, the principal cotton insect pest, in 1998. Company scientists are in the early stages of a development program designed to create cotton varieties having natural fibers which may reduce or eliminate the need for dyeing and provide unique color-fastness. Calgene is seeking to produce identity-preserved genetically engineered cotton and sell premium-priced colored cotton fiber to the fabric, apparel and houseware manufacturers.
Business Strategy
Calgene's business strategy is to build and grow operating businesses in its three core crop areas to facilitate the market introduction of genetically engineered proprietary products and to maximize the long-term financial return from such products. Implementation of this strategy will provide the Company with direct access to markets where it will sell fresh and processed plant products having improved quality traits and/or cost of production advantages, and to markets where it will sell seed that has been engineered with value-added agronomic traits. Calgene has selected fresh produce (tomato and strawberry), edible and industrial plant oils (canola) and cotton as its core crops on the basis of the following criteria:
o Calgene has efficiently transformed and regenerated these crops with proven plant transformation methods, thereby making the crops suitable candidates for genetic engineering.
o These crops offer significant long-term profit opportunities for genetically engineered products in seed (input) or crop and product (output) markets, or both.
o Market characteristics offer the Company a realistic opportunity to attain a leading market share in the input or output markets, or both.
Calgene addresses its core crop opportunities through a combination of operating subsidiaries and commercial partnerships. The Company is developing genetically engineered, premium quality, fresh market tomatoes and strawberries through its Gargiulo subsidiary. In plant oils, the Company has developed and is growing genetically engineered laurate canola and is developing a portfolio of genetically engineered canola oils, some of which it intends to distribute and process through its Calgene Chemical subsidiary. Calgene Chemical currently distributes industrial and edible vegetable oils, and manufactures vegetable oil-based specialty chemicals. In certain market segments where the capital investment and other commitments required to serve the markets exceed Calgene's resources, the Company has established relationships with major corporations which have leading positions in the targeted segments. These arrangements provide for the other company to pay Calgene royalties based on genetically engineered product sales or usage, to purchase genetically engineered and nongenetically engineered plant-based raw materials from Calgene or to assist in Calgene's product and market development. In cotton, the Company is currently developing and marketing conventional seed varieties and genetically engineered herbicide resistant seed varieties through its Stoneville subsidiary and is developing and intends to market genetically engineered insect resistant cotton varieties.
Products and Product Development
The following table sets forth Calgene's primary genetically engineered products and products under development, the potential commercial applications for such products, and the development status of such products:
Fresh Produce
The Company's tomato operations are conducted through Gargiulo Inc., which was contributed by Monsanto to Calgene in 1996 as part of the Monsanto Transaction. Gargiulo engages in the growing, packing, marketing and distribution of tomatoes and strawberries and, to a lesser extent, other fresh fruits and vegetables. Gargiulo also engages in breeding research with respect to tomatoes and, to a lesser extent, strawberries. Gargiulo's tomato producing operations are conducted principally in Florida, California, Mexico and Puerto Rico. Gargiulo's berry production operations are conducted principally in northern California. Tree fruits are grown in Chile, and potatoes, which Gargiulo began producing, packing and distributing for the first time in January 1995, are grown in southwest Florida. In order to diversify the product line, in the early 1980's Gargiulo's predecessor companies commenced an operation to grow, cool, market and distribute strawberries in northern California.
In February 1996, Gargiulo acquired substantially all of the assets and certain specified liabilities of the produce business conducted by certain affiliates of Collier Enterprises under the trade name of "Collier Farms." Collier Farms is an agricultural producer of fresh tomatoes and other vegetables in southwest Florida, and engages in the packing, marketing and distribution of those products into the commodity markets.
Gargiulo believes it has achieved recognition among the wholesalers, retailers, brokers and food service entities which it serves, as a reputable and reliable supplier of tomatoes and berries. Gargiulo intends to continue to concentrate its efforts in this business and to capitalize, whenever possible, on the opportunities to profit in the commodity fruit and vegetable business. With its vertically integrated structure, management, marketing and research capabilities and its established distribution channels, Gargiulo believes its is well positioned to take advantage of opportunities in the commodity fruit and vegetable markets.
Calgene scientists have genetically engineered the patented FLAVR SAVR gene into flavorful tomato varieties to delay softening so that these varieties can remain on the vine longer to allow full flavor and texture to develop before harvest and be distributed with relatively low rates of spoilage. In view of the production scale-up difficulties that it has encountered, Calgene curtailed its FLAVR SAVR tomato growing operations in the Spring of 1996 until it is able to complete the development of varieties of FLAVR SAVR tomatoes that have enhanced commercial agronomic qualities. Calgene, through its Gargiulo subsidiary, intends to focus its tomato operations on plant breeding activities necessary to develop such enhanced varieties of its genetically-engineered tomatoes, but there can be no assurance that such efforts will be successful or will not be discontinued by Calgene. There can be no assurance that Calgene will be successful in developing genetically engineered tomatoes with the agronomic characteristics necessary for commercial production or that it will be successful in marketing a branded tomato line. See "Risk Factors - Risks Applicable to the Branded Tomato Strategy" and "Risk Factors - Risks Associated with Production of Genetically Engineered Tomatoes."
Tomatoes. Gargiulo's principal product is fresh tomatoes. For the six month period ended December 31, 1996, Gargiulo packed and shipped approximately 150 million pounds of fresh tomatoes, which it produced through its own farming operations, through joint ventures or partnerships with other growers. For Gargiulo's and its predecessors' fiscal years ended June 30, 1994, 1995 and, 1996 and the six month period ended December 31, 1996, product revenues from Gargiulo's tomato operations were approximately $50.3 million, $60.1 million, $77.3 million and $32.1 million, respectively.
Gargiulo's tomato operations are vertically integrated with seed research, production, packing, repacking, distribution, marketing, and sales capabilities. With production available year round from its various locations, Gargiulo believes it is well positioned for consistent year round supply of tomatoes to customers throughout the United States and Canada.
Approximately 80% of the tomatoes produced by Gargiulo during calendar 1996 were harvested and processed as green tomatoes. Green tomatoes are typically packed into 25 pound boxes and then stored at 65(degree)F in the presence of ethylene gas for one to four days. This process allows the tomato to achieve a deep red color acceptable to the retail consumer and results in a sufficient shelf-life so that the tomato reaches the retail consumer in an acceptable condition. The vast majority of tomatoes produced in the United States are harvested green and processed in this manner. Gargiulo, through its participation in a joint venture with a Mexican partner, has the capability to produce tomatoes which are ripened on the vine, packed and then shipped. The Mexican climate allows for vine ripening which many retail consumer believe results in a better tasting tomato than tomatoes which are picked green and ripened off the vine.
Pursuant to a plan approved by Calgene's Board of Directors in the quarter ended December 31, 1996, Gargiulo intends to significantly reduce its produce acreage in southwest Florida. The reduction in acreage is in response to increased competitive pressure from Mexico produce.
Gargiulo intends to embark upon a branded tomato program to produce and market a premium tomato under the Gargiulo name. The success of the branded tomato strategy will depend in large measure on Gargiulo's ability (i) to induce customers to identify Gargiulo's premium tomato with the Gargiulo name, (ii) to induce consumers to pay a premium price for that superior tomato, and (iii) to be able to produce and deliver that tomato to customers on a consistent basis. Based on market research performed by Gargiulo and Calgene's experience with the FLAVR SAVR tomato, Gargiulo believes that there is a sufficient customer base willing to pay a premium price for a superior tomato to justify the significant amount of money that will be required for marketing and advertising necessary to promote the branded tomato. Ultimately, Gargiulo's branded tomato strategy is to provide advertising, marketing and promotional services directly to the major retail grocery chains. Gargiulo believes that retailers would embrace this service because it would contribute to their profit. It would benefit Gargiulo by providing a consistent source of sales for Gargiulo's tomatoes and by reducing Gargiulo's reliance on the commodity markets. As one of the few vertically integrated commercial fruit and vegetable growers in the industry, Gargiulo intends to use its plant research capabilities, year round supply
capabilities, geographic and product line diversification and operational skill to enable it to produce tomatoes suitable for sale directly to the retail market. There can be no assurance that Gargiulo's efforts with the branded tomato will be successful. See "Risk Factors--Risks Associated with the Branded Tomato Strategy."
Berries. During the six month period ended December 31, 1996, Gargiulo grew approximately 2.1 million flats of fresh strawberries and cooled approximately 500,000 flats of fresh strawberries through its own farming operations and pursuant to relationships with contract growers. On a smaller scale, Gargiulo also cools and markets raspberries, grown by itself and others, and blackberries and blueberries grown by others. For the fiscal years ended June 30, 1994, 1995 and 1996, and the six month period ended December 31, 1996, product revenues from Gargiulo's berry operations were approximately, $20.8 million, $23.4 million, $30.8 million, and $16.1 respectively.
Other Produce. Gargiulo grows red potatoes in southwest Florida. Gargiulo's strategy is to position itself to produce and market high quality fresh red potatoes during the winter and to take advantage of market timing and potentially stronger prices in competition with potatoes obtained from storage by other producers. As part of its joint venture with a Mexican grower, Gargiulo produces and distributes red, yellow and green peppers from Mexico from January through May. Since the mid 1980's, Gargiulo and its predecessor companies have imported and sold during the winter in the United States, apricots, asparagus, grapes, nectarines, pears, plums and raspberries from Chile and other South and Central American countries. Gargiulo, through its Chilean subsidiary, has interests, together with its Chilean partners, in grape vineyards and nectarine orchards located in Chile. Gargiulo's focus is on importing and distributing high quality fruit during the winter months in the United States and Canada.
Plant Oils
The primary focus of Calgene plant oils business is the development of a specialty lipid food ingredient business that will leverage Calgene's unique genetically engineered oils. Initial efforts in this area are aimed at the commercialization of Calgene's cornerstone product, Laurical(R), a genetically engineered canola oil containing lauric acid. Calgene's secondary focus is the development and commercialization of oils that contain long chain polyunsaturated fatty acids for food ingredient and medical/nutrition markets. The final area of focus is the development and commercialization of oils for industrial markets, in particular, the oleochemical and oleochemical derivative markets.
Specialty Food Ingredients
In 1996 over 14.7 billion pounds of plant oils and oil based products with a value of $3.7 billion were used in U.S. food products and approximately 17 billion pounds with a value of $4.25 billion were used in Europe. The majority of oil markets are commodity based, with purchases driven almost exclusively by price. These markets are served primarily by soybean, sunflower, canola, palm and other commodity oils. At any given time, the prices for these oils seldom differ by more than $0.05 per pound, although the entire commodity oil complex rises and falls as a function of macro supply and demand conditions.
Approximately 5% of the edible plant oils market consists of specialized applications where ingredients are selected principally to meet specific functional requirements. These specialty lipid markets are served primarily by fractionated oil products and formulated ingredients (emulsified oils processed to achieve specific physical properties). Each specialty lipid market is served by a spectrum of products. In contrast to commodity markets, there are significant price differences among these products, which can range from $0.50 to $2.00 per pound, but typically do not vary as much over time as do commodity prices. Functionality of the oil is important in these markets.
Calgene is developing a series of structured triglyceride products with specific saturated fatty acids for the food industry. These products are unique because they produce combinations of fatty acids and triglyceride structure which are not available from either natural or cost effective synthetic sources. Calgene believes oils consisting of these triglycerides are, at their price points, functionally superior to current products in many cases. These functional advantages include better flavor release, mouthfeel, emulsifier functionality, light reflectance (allows reduced fat usage in opaque systems) and air retention in whipped products. Upon development of an oil prototype, Calgene intends to generate the applications data required for customers to derive full product benefits. These data, along with competitive product data, should allow the determination of optimum product formulation (crude oil, formulated ingredient, etc.) and positioning in each addressable market. Calgene's strategy is to become a fully integrated specialty lipid food
ingredient supplier, either alone or in partnership with an existing food ingredient company. The specialty food ingredient products currently being developed and further described below include high laurate oil, high stearate oil, high myristate oil, and medium chain triglycerides.
Polyunsaturated Fatty Acids
Polyunsaturated fatty acids ("PUFA") are long chain fatty acids which are produced by a variety of organisms including algae and fungi. These fatty acids are also found in fish oil. Recent clinical studies have shown that certain PUFA have significant medical benefits, such as cholesterol control and infant nutrition. Existing commercial sources of PUFA are fish oils, which are costly, can contain toxins, and often cannot be used as food additives due to poor odor and taste. Calgene has begun a research program to clone the genes that it believes will allow canola plants to produce PUFA. If successful, Calgene intends to sell PUFA products to food ingredient and medical/nutritional markets based on the oil's health benefits. PUFA are currently available primarily from non-crop sources (fish oils and fermentation) but are very expensive. Plant produced PUFA will have a tremendous cost advantage. Also, the research required to develop PUFA oils has a high level of technical risk. Calgene has therefore chosen to work with strategic partners who will fund PUFA oil development and provide the necessary clinical and marketing capabilities required for commercialization.
Industrial Oils
Approximately 10% of the world's plant oil production is consumed by the oleochemical industry. In particular, coconut and palm kernel oils are key feedstocks because they contain laurate, a fatty acid which offers unique cleansing and foaming properties. Laurate based surfactants are a primary ingredient in the manufacture of soap, detergent and personal care products worldwide. The U.S. oleochemical industry consumed nearly 826 million pounds of lauric oils worth $350 million in 1995 and 1.4 billion pounds worth $550 million were consumed in Europe. All of these oils were imported because there are currently no non-tropical sources of laurate.
Where applicable, the Company intends to market its genetically engineered oils to the oleochemical and oleochemical derivative industries using oils developed for Calgene's food ingredient products. In the U.S., Calgene's oleochemical subsidiary, Calgene Chemical, intends to develop oleochemical derivatives that leverage the unique fatty acid composition of the Company's engineered oils. Calgene Chemical develops, manufactures and markets a wide line of specialty esters, surfactants, ethoxylates and other oleochemicals for the food, cosmetic, soap and detergent, sugar, lubricant and textile markets. Industrial oil products developed or currently being developed and further described below include high laurate oil, high myristate oil and medium chain fatty acids.
Genetically Engineered Oil Programs
The discussion below describes the targets of Calgene's genetically modified oil programs and the estimated size of the current product markets for which Calgene's products, if developed, could serve as equivalents or substitutes. It should be recognized that Calgene's potential products might not be competitive with the entire market identified due to performance and pricing considerations. With the exception of the Company's initial laurate canola (Laurical(R)) product currently being commercialized, Calgene's genetically modified oil products are in various stages of development. These projects involve substantial technical challenges and some are still in the "proof of concept" phase. Most of Calgene's genetically engineered oil products are not expected to be commercially available for several years, and their availability will depend upon, among other things, achievement of certain technical objectives in the product development process. See "Research."
Laurical(R). Calgene has developed and introduced Laurical(R), a novel high value structured triglyceride with broad application in food markets. Laurate-based fats are used in confectionery applications that are cost sensitive or require specialized melting properties. Laurate or C12 is also a key raw material for the soap, detergent, oleochemical, and personal care industries. Currently, commercial sources of laurate are limited to coconut and palm kernel oils, which are imported into the U.S. primarily from Southeast Asia. Calgene has isolated and patented a C12 thioesterase gene responsible for producing laurate. DNA constructs containing this thioesterase gene have been genetically engineered into canola plants, some of which have more than 40% laurate in the oil. The Company began commercial sales of its high laurate oil in 1995 and has sold the Laurical oil to one of the largest laurate oil consumers in the U.S. Calgene is currently evaluating the functional and commercial value of its laurate canola oil in edible applications. Using a different gene that they have cloned, Calgene scientists are also attempting to further elevate the percentage of laurate in canola oil to increase its commercial usefulness, particularly for industrial applications.
High Stearate Oil. Margarines, shortenings and many fat-based food ingredients are currently manufactured from vegetable oils that are chemically processed by hydrogenation to increase the level of solid fat in the oil to provide suitable texture and consistency. Calgene has engineered genetic constructs into canola plants to increase the levels of the fatty acid stearate. These high stearate oils could have superior functionality with respect to melting point, taste and texture and other characteristics. In addition, Calgene's high stearate oils are free of the trans-fatty acids associated with hydrogenation, which some scientists believe promote the formation of cholesterol. The high level of stearate will also allow for the production of food products without chemical processing (hydrogenation). Calgene is evaluating these genetically engineered canola plants in both field trials and in greenhouses. Company scientists are currently attempting to increase the functionality of its high stearate oils for potential use in margarines, shortenings and food ingredients. The Company estimates that annual U.S. consumption of vegetable oils used in premium margarines and shortenings is in excess of several hundred million pounds. Calgene believes that it could capture a portion of that market by producing canola oil with elevated levels of stearate without the expense of hydrogenation and the resultant trans-fatty acids.
High Myristate Oil. Myristate and its derivatives are potential raw materials for soaps and detergents because they show improved performance properties as compared to laurate in certain uses. Currently myristic acid is only available in limited quantities and is expensive compared to other fatty acids. Using a variety of thioesterase genes, Calgene scientists have genetically engineered canola plants that produce oil containing over 40% myristate. Efforts are underway to further elevate the level of myristate to commercial significance.
Medium Chain Fatty Acids. Calgene has isolated and cloned a C8/C10 thioesterase gene responsible for producing Medium chain fatty acids ("MCFA"). DNA constructs containing this thioesterase gene have been genetically engineered into canola plants, some of which have up to 28% MCFA in the oil. Efforts are currently underway to further elevate the level of MCFA to commercial significance.
Medium chain triglycerides ("MCT"), which are currently produced by resynthesizing MCFA into triglycerides, are used as nutritional supplements to treat dietary disorders and to provide a ready source of energy for hospital patients recovering from post-surgical trauma. MCT have also been incorporated into an increasing number of high-oleochemical feed stocks derived from genetically engineered canola. The Company estimates that world consumption of MCT are approximately 22 million pounds. Recent average prices for MCT are approximately $1.55 per pound.
MCFAs are also components of high performance synthetic lubricant ingredients called polyolesters. Currently available MCFA are byproducts of splitting and fractionation of coconut and palm kernel oil for the production of other fatty acids, which limits the supply of MCFA. The limited supply and high cost of MCFA preclude the use of polyolesters in high volume applications such as automotive lubricants, for which petroleum derivatives are currently used, even though polyolesters often provide better functionality. The Company estimates that annual U.S. consumption of polyolesters and of similar products exceeds 200 million pounds. Recent average prices for MCFA are approximately $.90 per pound.
Genetically Engineered Oil Production
To ensure that it will be able to produce its transgenic oils cost effectively in the U.S., Calgene, is developing canola varieties adapted to U.S. growing regions. In addition to its own breeding program, the Company accesses advanced germplasm through joint breeding and commercial agreements with leading canola companies in Denmark, Germany, France, Canada and Australia. Over the past three years, farmers under contract to Calgene planted over 35,000 acres of genetically engineered Laurical Canola. Calgene contracted with third parties to collect and crush the canola crop and thereafter sold the resulting oil and meal. The objective of this program is to demonstrate the Company's ability eventually to produce identity-preserved genetically modified oils under contract at a reasonable cost compared with commodity oils. Calgene is currently growing 16,000 acres of Laurical Canola under identity-preserved contract production for harvest in 1997 and expects to contract for an additional 60,000 acres.
In December 1996, Calgene and Saskatchewan Wheat Pool ("SWP") executed a broad agreement encompassing the development and production of value-added genetically engineered oil products in Canada. SWP will use its breeding program to develop Canadian adapted, specialty canola varieties by combining Calgene's genetically engineered oils traits with SWP's germplasm. SWP will then utilize its extensive distribution and crop-handling systems to produce crops in Canada for Calgene using these varieties.
Monsanto Strategic Alliance
In May 1996, Calgene and Monsanto executed a broad strategic cross licensing agreement encompassing the two companies' oilseed research programs. Under the agreement, Calgene received a royalty free license to current and future Monsanto agronomic technology for use in combination with Calgene's proprietary oils modification genes for use in developing specialty canola oil product. Monsanto received a royalty bearing license to Calgene technology to develop agronomically superior corn, soybean, canola and sunflower crops. In addition, Monsanto paid $7 million to Calgene and will pay royalties based on sales of insect resistant corn, soybean, canola and sunflower seed with increased oil content and modified meal composition utilizing Calgene technology. Also a part of the agreement Monsanto paid Calgene $10 million in cash to help fund oilseed research and development. In exchange, Monsanto will receive a portion of the future profits from Calgene's specialty oils business.
Kelco Agreement
In January 1997, Calgene and The Nutra Sweet Kelco Company ("Kelco") entered into an agreement to collaborate on the development of two specialty vegetable oil products. Kelco is a wholly owned subsidiary of Monsanto Company. As part of the agreement, Kelco purchased from Calgene a nonexclusive license to certain Calgene technology for use in research purposes, an option to expand the reserach license to include commercialization rights, and certain product distribution rights.
Cotton
Calgene's cotton genetic engineering program is focused on the development of herbicide resistant and insect resistant cotton varieties. The Company believes that such products will enable cotton farmers to significantly reduce the total quantities of herbicides and insecticides applied to cotton in the field. As a result, Calgene expects significant environmental benefits as well as substantial reductions in farmers' production costs and improved yields. Calgene believes that such cost savings to farmers will enable Calgene to price genetically engineered seed varieties at a premium to current cotton seed market prices. In addition, Company scientists are in the early stages of a development program designed to create cotton varieties that produce colored fiber. See "Research."
Fourteen million acres of cotton were planted in the United States in 1996 making it the nation's fifth largest field crop. Of this total acreage, over eight million acres of "upland picker" cotton are planted in the southern, southeastern and southwestern U.S., the balance being lower value "stripper" cotton planted in the high plains of Texas and Oklahoma (approximately five million acres) and specialty "acala" and "pima" cotton grown in California and Arizona (one to one and one-half million acres). Calgene estimates that the U.S. cotton seed market exclusive of genetically engineered traits has a value in excess of approximately $100 million per year and produces cotton fiber having a value in excess of $5 billion per year at the farm level. Cotton production requires the most intensive use of agricultural chemicals of any major U.S. field crop. Cotton farmers spend over $200 million per year on herbicides and $225 to $400 million per year on insecticides. The majority of these herbicide and insecticide costs occur in areas planted with upland picker cotton. Despite these costs the U.S. Cotton Council estimates that U.S. cotton growers lose crop valued at over one billion dollars to weed and insect damage each year.
Calgene has genetically engineered varieties of upland picker cotton to be resistant to the herbicide bromoxynil (BXN cotton). Rhone-Poulenc manufactures and sells bromoxynil under its Buctril(R) label. Farmers currently use Buctril for broadleaf weed control in growing corn and wheat which are naturally resistant to bromoxynil. However, cotton, a broadleaf plant, is not naturally resistant to bromoxynil and is killed by the doses of bromoxynil which are administered to control broadleaf weeds. Weed control in cotton fields is currently constrained by the lack of post-emergent broadleaf herbicides, such as bromoxynil, which are effective at low application rates. Cotton farmers are therefore limited to using other herbicides, at high application rates, often resulting in crop damage. Buctril is effective at low doses, and rapidly degrades in the environment in less than two weeks, depending on field conditions.
In April 1995 the Company commercially introduced its first BXN cotton varieties, selling 225 tons of seed. Supply limited, in April 1996 the Company sold BXN cotton seed that was grown on over 50,000 acres. The BXN cotton seed was sold at a 41% premium over Calgene's non-genetically engineered cotton seed. Fiscal 1997 commercial seed sales are currently in progress with enough BXN cotton seed to supply up to 400,000 acres.
Calgene has transformed certain of its proprietary cotton varieties with both a gene from a strain of the Bacillus thuringiensis ("Bt") and BXN. These plants produce a Bt toxin that has demonstrated the ability to achieve significant levels of control of Heliothis (the principal cotton insect pests) in laboratory, greenhouse and field tests. U.S. field trials with cotton containing the Bt genes have been conducted since 1994. Calgene plans to commercially introduce cotton varieties with both BXN and Bt traits in 1998.
Calgene scientists are also genetically engineering cotton varieties that produce high quality cotton fiber having unique natural colors. If successfully developed, these fibers could reduce or eliminate the need for dyeing and provide unique color-fastness while retaining superior spinning qualities. The annual U.S. market for dyed cotton used in apparel and home furnishings is estimated to be in excess of $4 billion. If successfully developed, Calgene plans to market these cotton fibers directly to textile mills at a premium price over traditional cotton fiber.
Stoneville, Calgene's cotton seed subsidiary with operations in Mississippi, Arizona and South Carolina, holds the second largest share of the U.S. upland picker cotton seed market with approximately 9.4% U.S. market share in 1996. See "Competition." Since it was acquired by Calgene in December 1986, Stoneville has expanded its cotton seed processing capacity by acquiring an Arizona based delinting and processing facility in 1987, and in 1989 by constructing a highly efficient delinting facility constructed at its Mississippi headquarters. In 1990, Stoneville acquired the cotton assets of Northrup King Co., which include the Coker Pedigreed Seed Company ("Coker") cotton seed label, the Coker cotton breeding program and Coker cotton sales accounts, located primarily in the southeastern U.S. and in Spain.
Stoneville maintains a conventional cotton breeding program to develop new cotton varieties with improved yield, earliness, fiber characteristics, insect and disease resistance, and other important agronomic characteristics. Stoneville's newest variety ST 495, which was developed by Stoneville and introduced in 1995, combines excellent yield with "smooth leaf" traits that improve fiber grades. ST 474, which was introduced in 1994, continues to produce superior yields and exceptional yield stability across different growing regions. In 1993, Stoneville introduced varieties ST 132 and LA 887 (licensed from Louisiana State University), which have demonstrated excellent agronomic performance and superior fiber characteristics.
Research
Overview
Calgene believes that it has one of the world's leading research programs in the application of recombinant DNA technology to plants. Over the past ten years, some of the most significant advances in plant biotechnology have been reported by Calgene's science team, which at December 31, 1996, was comprised of 168 research and product development scientists and support personnel. The expertise of the Company's research scientists covers cell biology, molecular biology, biochemistry, plant physiology, plant pathology, plant breeding and microbiology. Calgene currently holds 47 issued U.S. utility patents and 20 foreign utility patents and has over 187 utility patent applications currently pending in the U.S. and abroad. See "Patents and Trade Secrets." Total research and development expenses for the six month period ended December 31, 1996, and for fiscal years ended June 30, 1996, 1995 and 1994, were approximately $8.4 million, $14.0 million, $15.4 million and $15.6 million, respectively. Research and development expenses incurred under contract with others for the six month period ended December 31, 1996, and for fiscal years ended June 30, 1996, 1995 and 1994, were $1.7 million, $4.2 million, $3.4 million and $2.7 million, respectively.
Calgene's research strategy has been to establish itself as a recognized world leader in the application of recombinant DNA technology to plants by concentrating its research efforts and resources on (i) developing broad-based expertise in modification of the plant oils biosynthesis pathway and in fruit and vegetable postharvest physiology; (ii) building a portfolio of potentially useful agronomic genes from both internal discovery and external licensing; (iii) developing the most effective and efficient plant transformation and regeneration systems and gene expression systems applicable to targeted core crops; and (iv) being the most proficient at integrating molecular techniques with conventional plant breeding.
The plant genetic engineering process can generally be divided into five major phases: (i) identification and isolation (cloning) of genes and gene promoters (sequences of DNA that regulate gene expression); (ii) transfer and integration of a gene or genes into the chromosomes of the recipient cell (transformation); (iii) selection and regeneration of the transformed cells into whole plants using cell culture methods; (iv) verification that the expressed
genes confer the desired trait (phenotype); and (v) genetic analysis to determine that successive generations consistently inherit and express the desired trait. Calgene scientists have developed efficient plant transformation and regeneration systems for tomato, strawberries, cotton and canola. Calgene has received patents on promoters which selectively express plant genes in the tissue of ripening tomatoes and promoters which selectively express plant genes in the seeds of canola plants. These technical tools are necessary to assure the proper expression of recombinant genes. The Company believes that patents on these promoters may provide Calgene with a competitive advantage.
Calgene is investigating a novel method of plant transformation, termed "plastid transformation." This method allows a high number of foreign gene copies to be introduced into plant cells resulting in a high level of foreign gene expression. Such high protein levels are desired for a diverse array of potential applications in transgenic plants, including the enhancement of agronomic traits. One advantage of this technology derives from the fact that plastid-borne genes are inherited exclusively from the maternal parent, and thus there is no pollen transmission. This eliminates any possibility of outcrossing of inserted genes, and thereby facilitates hybrid breeding strategies. Researchers at Calgene have used this technology to obtain foreign protein expression levels that constitute 40% of the total soluble protein in the leaves of transgenic plants. Although plastid transformation generally results in plants containing the foreign gene in every plant cell, Calgene scientists have developed a method to selectively express foreign plastid-borne genes. Such selective gene expression permits the use of this technology with a greater range of gene candidates. Opportunities in each of Calgene's core crops for the plastid transformation method have been identified. In August 1996, Calgene was granted two patents for plastid transformation in plants. The first patent provides a method for enhancing expression of a gene in a plastid by using a gene sequence preferred by the plant plastid. The second patent is co-owned by Calgene and Rutger's University which covers expression of Bt insecticidal protein in chloroplasts. In December 1996, Calgene was granted a third U.S. patent for the system for the expression of foreign genes introduced in plastids, and describes expression levels higher than those previously achieved.
Fresh Produce
Calgene has identified and cloned or acquired rights to a portfolio of genes which influence the ripening and post harvest physiology of many fruits and vegetables. Calgene scientists were among the first to demonstrate the ability to repress endogenous plant genes using antisense technology. Specifically, they have achieved up to a 99% reduction of polygalacturonase ("PG"), a naturally-occurring enzyme involved in the softening of tomatoes, resulting in tomatoes with delayed degradation and spoilage properties. Calgene's efforts in this area have resulted in the issuance of a U.S. patent covering antisense PG in tomatoes as well as a U.S. patent covering the broad use of antisense technology in plants. See "Risk Factors--Patents and Trade Secrets."
Under a research collaboration with scientists from Rousell-Uclaf, S.A., Calgene scientists have cloned a high activity gene for sucrose phosphate synthase, which is believed to play a major role in the production and transfer of photosynthate (sugar) in plant leaves to storage in the fruit, tubers or roots. This gene is being applied to alter the amount and quality of stored sugars in tomato, and is applicable to a broad range of crops. In addition, Calgene has entered into research agreements with several Universities to genetically engineer tomato plants to be resistant to a wide range of viral diseases. Viral diseases are a major cause of low tomato crop yield and poor fruit quality.
Gargiulo began investing in research and development in the early 1980's. At its inception, the primary focus of the reserach and development effort was the seed development program, designed to increase tomato yield and increase fruit size. Research efforts remain concentrated on obtaining better yield per acre, and producing a tomato with attributes such as better taste, texture and color. Other tomato research goals include the development of tomatoes which are resistant to insects, fungal and bacterial disease, which have high temperature fruit set and which have improved flavor, firmness and color, and the development of seeds designed to grow best in the diverse climatic areas in which Gargiulo operates. The research program has produced varieties that are grown by Gargiulo and which Gargiulo believes have resulted in higher yields per acre than varieties available from competing seed companies. Gargiulo believes that one of the competitive strengths of its tomato research effort lies in the ownership of its own seed production facility in Chile and its tight linkage to its commercial operations. This affords Gargiulo the opportunity to screen large numbers of potential commercial varieties in commercial field trials with direct feedback from the market.
Calgene is conducting a research program to genetically engineer strawberry plants to resist Botrytis, a fungal disease which reduces crop yields and resist verticillium and phytopthora to reduce the current reliance on soil fumigation. Calgene scientists are also working to genetically engineer strawberries with increased sweetness.
Plant Oils
Calgene believes that it has a leading research program to modify plant oil composition. Calgene has allocated the largest percentage of its research and development expenditures to develop a portfolio of genetically modified canola oils. Calgene selected canola because of its efficient oil producing capability and its adaptability to a broad range of North American and European growing regions. Canola also has certain biological characteristics that make it a good candidate for genetic engineering. The primary focus of Calgene's oils reserach effort is the manipulation and control of plant oil biosynthesis through identification, isolation and use of the genes necessary for specific changes in plant oil composition. These genes can be used in a variety of oilseed crops. For certain products, soybean is currently being evaluated as an alternative to canola. It is anticipated that Calgene will leverage Monsanto's capabilities in these other crops. Calgene's oils research are working in three areas - modification of saturate levels, modification of fatty acid chain length and control of triglyceride structure. To cost effectively produce its modified oil products, Calgene uses plant breeding to convert the plant prototypes developed by the research group into agronomically competitive cultivars. The plant breeding strategy calls for the coordination of Calgene's own plant breeding program with leading plant breeding programs in target production geographies. Calgene's internal plant breeding program focuses on using research prototypes to produce breeding lines for use in final variety development. In this process, Calgene's plant breeders fine tune the chemical composition of the oil, stabilize the oil trait, and ensure that the breeding lines have no gross agronomic deficiencies. Calgene's breeding partners then use these breeding lines to develop agronomically competitive cultivars for the targeted geographies. Calgene also has royalty free access to Monsanto's agronomic technology for use in developing specialty oil varieties, and will utilize this technology on a broad basis in its product development programs.
In 1990, Calgene cloned a gene for stearoyl-ACP desaturase, a key enzyme in the formation of plant oils used in both food and industrial applications. The Company has introduced the stearoyl-ACP desaturase gene into canola in an antisense orientation and increased the level of the saturated fat stearate in the oil by more than ten times. This was the first reported modification of vegetable oil by genetic engineering. Calgene is currently conducting field trials to evaluate genetically engineered canola plants with elevated levels of stearates. Trials have been conducted in Michigan, Georgia, South Carolina, Alabama and California, as well as in Canada and Scotland. Rapeseed oil with higher levels of stearates could be a potential substitute for hydrogenated oils in margarine, shortening and confectionery products.
In 1991, Calgene cloned the gene for lauroyl-ACP thioesterase, an enzyme that plays an important role in the synthesis of laurate, a medium chain C12 fatty acid used in food industries and in soap, detergent, oleochemical, personal care. Oil containing laurate is naturally produced by coconut and oil palm trees, but is absent in major European and North American oilseed crops such as canola and soybean. Calgene has genetically engineered the lauroyl-ACP thioesterase gene into canola and developed plants that produce oil containing over 40% laurate. This was the first reported development of an oilseed plant producing a fatty acid not naturally present in the seed. Calgene received a U.S. patent on the lauroyl-ACP thioesterase gene in March 1994. An additional U.S. patent was granted to Calgene in May 1996 that expands the coverage of the thioesterase gene. Calgene is currently working to further elevate the laurate level in canola oil and increase the commercial usefulness.
In February 1993, Calgene was granted a U.S. patent to genetically engineered Brassica cells and in August 1993 to genetically engineered Brassica cells in Europe. Brassica is the genus name for a family of plants which includes canola, broccoli, cauliflower, cabbage and brussel sprouts. These patents cover the most efficient transformation method for Brassica species in the industry and is a key technology of Calgene's proprietary vegetable oils. Calgene has sold licenses to other companies for use of this transformation method in areas outside the Company's core crop areas. The European patent is currently being challenged in opposition proceedings.
In June 1994, Calgene scientists announced the cloning of a gene encoding a ketoacyl-CoA synthase which was used to convert canola rapeseed to rapeseed producing a high erucic oil. Calgene believes that this and similar genes can be used to develop oilseed varieties enriched in long chain fatty acids which have value for industrial and edible applications.
In June 1994, Calgene scientists announced the purification and cloning of the coconut gene lysophosphatidic acid acyl transferases ("LPAAT"). This enzyme is efficient at placing short chain saturated fatty acids into the middle position of triacylglycerol molecules during their biosynthesis. Most oilseeds including canola, soybean, sunflower and others cannot build triacylglycerol molecules with saturated fatty acids in the middle position. Calgene anticipates that use of the LPAAT gene could result in the development of oilseeds with levels of laurate, myristate, and medium chain fatty acids at levels as high as 75%. In October 1996 Calgene was granted a U.S. patent that covers medium chain LPAAT.
Using a variety of thioesterase genes, Calgene scientists have genetically engineered canola plants that produce oil containing over 40% myristate, a medium chain C14 fatty acid. Myristate and its derivatives are potential raw materials for soaps and detergents. In October 1995, Calgene was granted a patent covering the myristol thioesterase gene which is potentially useful for the development of plants rich in myristate.
Calgene has isolated and cloned a C8/C10 thioesterase gene responsible for producing MCFA. DNA constructs containing this thioesterase gene have been genetically engineered into canola plants, some of which have up to 28% MCFA in the oil. MCFA are components of high performance synthetic lubricants. Efforts are underway to further elevate the level of MCFA to commercial significance. In May 1996 Calgene was granted patents encompassing synthase genes which may be responsible for increasing the production of C8/C10.
In May 1995, Calgene was granted a patent covering the seed specific promoter napin, which is a key element in many of the Company's genetically engineered plant oils products. Seed specific promoter technology is relevant to almost every genetically modified oil and meal product by allowing specific control of genes introduced into plant cells by genetic engineering. In the case of oil modification, seed specific promoters ensure that only plant storage oils are effected by transgenic oils genes, without otherwise affecting the plant. Because of the timing and strength of expression, the napin promoter is the most common promoter used in plant oils genetic engineering research. In July 1996 Calgene was granted a U.S. patent covering the seed specific promoter BCE4. The BCE4 gene was isolated to take advantage of its ability to express genes early in canola seed development.
Cotton
Under a research collaboration with Rhone-Poulenc, in 1986 Calgene scientists cloned the BXN gene which encodes an enzyme that degrades bromoxynil, a broadleaf herbicide produced and sold by Rhone Poulenc. For cotton farmers, broadleaf weed control is currently inefficient and costly because post-emergent broadleaf herbicides such as bromoxynil, which are effective at low application rates, are lethal to cotton, a broadleaf plant. Cotton farmers are therefore limited to using other herbicides at high application rates, often resulting in crop damage. Calgene proprietary cotton varieties engineered with the BXN gene show no adverse effects when bromoxynil is applied at up to ten times expected field rates. By using BXN cotton seed and bromoxynil, Calgene believes cotton farmers will reduce herbicide usage and crop damage and have more effective weed control. Rhone-Poulenc owns the BXN gene patent, which is licensed exclusively to Calgene for use in cotton. Stoneville, Calgene's cotton seed subsidiary, commercially introduced its first BXN cotton varieties to U.S. growers in April 1995.
Calgene has transformed certain of its proprietary cotton varieties with a BXN gene linked to a gene from a strain of Bt. These plants produce a toxin that has demonstrated the ability to achieve significant levels of control of Heliothis, the principal cotton insect pests. Cotton plants containing both BXN and Bt were developed by Calgene in 1990 and first field tested in 1991. Patents covering Bt technology have been applied for by other companies, two of which have granted Calgene the right to obtain licenses to their technology.
Calgene is also conducting a research program to genetically engineer cotton plants to produce fiber with improved or unique characteristics. Research targets include developing colored cotton fibers that require little or no dye while maintaining its quality spinning characteristics. Calgene scientists have demonstrated from initial test results that they have altered the color of cotton fiber. Further research is focusing on enhancing the shade of color. In July 1996, Calgene was granted a patent covering a gene construct for expression of the pigmentation gene, melanin, in cotton fiber.
Patents and Trade Secrets
Calgene currently holds 47 issued U.S. utility patents and 20 foreign utility patents, three of which have been assigned to contract partners. Calgene has 187 utility patent applications currently pending in the U.S. and abroad and
will continue to file patent applications in order to obtain proprietary protection of certain genes, gene constructs, uses of genes in specific applications and methods for genetic engineering of plants. There is no assurance that patents can be obtained in a timely fashion, or if issued, will afford Calgene any significant protections.
In April 1992, Calgene was granted a U.S. patent covering the use of antisense technology in plants. Calgene is involved in litigation with Enzo, the licensee of other patents intending to cover the use of antisense technology in all cells. Calgene and the other company have each challenged the validity of the other's patents. See "Legal Proceedings." In Europe, a patent intending to cover antisense in all cells has been granted to Enzo. Calgene has filed an opposition to the grant of that patent. Agracetus has been granted a European patent with claims intending to cover the use of antisense in all plants. Calgene has filed an opposition to the grant of that patent. In May 1996, Monsanto Company purchased the plant biotechnology assets of Agracetus along with related intellectual property.
Also related to antisense technology, Calgene is a licensee under the patent rights held by the Fred Hutchinson Cancer Research Center ("FHCRC"). The patent application is pending and is seeking to provoke an interference with the issued Enzo U.S. patent. As part of its agreement with the FHCRC, Calgene has agreed to indemnify certain patent and litigation costs incurred by FHCRC.
Calgene's research efforts resulted in the issuance of a U.S. patent covering the PG gene which Calgene refers to as the FLAVR SAVR gene. In August 1991, Campbell licensed to Calgene the exclusive North American rights to produce and sell fresh market tomatoes containing the FLAVR SAVR gene. In February 1994, Calgene, Campbell and Zeneca A.V.P., another company using PG gene technology, entered into an agreement under which Calgene acquired exclusive worldwide rights to produce and sell fresh market tomatoes with the FLAVR SAVR gene. In November, 1986, Calgene licensed to Kirin Brewery Co., Ltd. exclusive commercial rights to the FLAVR SAVR gene in fresh market tomatoes for Japan, Korea and Taiwan.
In April 1993, Calgene announced the signing of several cross licensing agreements with Monsanto Company. The agreements resolved several current and potential patent conflicts between the two companies. Under the agreements, Calgene received licenses to Monsanto's patent and patent applications pending in the areas of plant transformation technologies, and selectable markers; and the right to obtain certain licenses to Monsanto's Bt insect resistance technology for use in cotton. Monsanto received licenses to Calgene's patents and patents pending in the areas of plant transformation of certain plants and antisense RNA technology. Calgene and Monsanto granted each other licenses to certain of their respective patents pending in the area of ethylene repression, and settled an interference proceeding at the U.S. Patent and Trademark Office directed toward CaMV promoters which are broadly used by agricultural biotechnology companies to control gene expression in genetically engineered plants. In January 1994, Calgene acquired rights to obtain a license to Bt technology owned by Plant Genetic Systems N.V.
In September 1995, Calgene and Monsanto entered into an agreement whereby Calgene will participate in Monsanto's direct licensing program for Bt cotton in the U.S., subject to the issuance of a patent to Monsanto which covers the Bt gene currently used by Calgene in its product development efforts. If one or more patents issue to a party other than Monsanto covering use of the Bt gene(s) used in Calgene's Bt products, it may be necessary for either Calgene and/or Monsanto to obtain a license in order for Calgene to commercialize its Bt products. There is no assurance that it will be possible to obtain licenses under such third party patents on commercially reasonable terms, if at all.
Other patent applications filed by Calgene competitors and others could, if patents are issued, preclude Calgene from using, without a license, technology and techniques basic to genetic engineering and to areas of particular importance to Calgene. The extent to which Calgene may be required to license such patents and the cost and availability of such licenses are currently unknown.
Some of the Company's product development contracts require Calgene to transfer intellectual property rights, including patents, to the contract sponsors, and for Calgene to receive certain license rights.
Plant varieties may also be protected under USDA's Plant Variety Protection ("PVP") program. Calgene has several PVP certificates issued and additional PVP applications pending.
Calgene also seeks to strengthen its intellectual property position by licensing technology developed at universities and other corporations. In some instances, such licenses are necessary to enable the practice of fundamental DNA
technology. In other instances, licenses are used to obtain a competitive or proprietary position or to enhance Calgene's technology.
In addition to patents, the Company seeks to protect its proprietary know-how as trade secrets. Although Calgene takes precautionary measures to maintain the confidentiality of its trade secrets, there is no assurance that competitors will not gain access to Calgene's know-how or independently develop substantially equivalent know-how.
Competition
The plant biotechnology industry is highly competitive. Competitors include independent companies that specialize in biotechnology; chemical, pharmaceutical and food companies that have biotechnology laboratories; universities; and public and private research organizations. Some of these companies and organizations have greater financial, technical and marketing resources than Calgene. Calgene believes that maintaining its leadership position in plant biotechnology will require achieving and retaining technological superiority, attracting and retaining qualified personnel, developing production and marketing expertise and developing proprietary products or processes.
Other companies are developing and seeking to commercialize premium-quality, fresh market tomatoes developed with recombinant DNA or other technologies. DNA Plant Technology Corporation, a competing biotechnology company has developed a vine-ripened tomato using one such other technology, somoclonal variation, which it is currently selling. Competition in the fresh tomato market is expected to intensify as additional companies introduce tomatoes developed through biotechnology and as existing "gas green" tomato producers react to competitive pressures by growing and marketing traditionally developed vine-ripe tomatoes.
The tomato and berry markets in which Calgene competes are highly competitive. In addition to competition from other domestic growers many of whom have greater resources and are able to produce at lower costs than Calgene, there is increasing competition from foreign producers, particularly Mexican growers who are able to compete both on the basis of quality and price. The more arid climates in which the Mexican tomatoes are grown are conducive to vine ripening. By contrast, the wetter climates in which tomatoes are grown in the southeastern United States require that they be picked while still green and exposed to ethylene gas to promote ripening. Many retail consumers perceive vine ripened tomatoes to have better flavor than standard "gas green" tomatoes. Accordingly, vine ripened tomatoes produced in Mexico may be able to compete effectively against gas green tomatoes which are the predominant product of Gargiulo. Although Calgene produces vine ripened tomatoes in Mexico and Irvine, California, such tomatoes represented only approximately 20% of Gargiulo's total tomatoes produced during calendar 1996. In addition, Gargiulo believes that certain provisions in the North American Free Trade Agreement, coupled with the sharp devaluation of the Mexican peso, are primarily responsible for the below production-cost prices that Florida tomato growers received for their tomatoes during the 1995/1996 winter season in the United States. Although Gargiulo is not able to predict the financial effect which the surge of Mexican tomatoes into the U.S. will have on its revenues, it expects that the large supply, combined with the vine-ripening characteristics that some consumers find more attractive than gas green tomatoes, will continue to have a significant adverse impact on the revenues of Florida tomato growers, including Gargiulo. Furthermore, in the event the branded tomato strategy is successful, there can be no assurance that Calgene's competitors, many of whom have greater resources, will not be able to duplicate such strategy and produce branded tomatoes for sale at premium prices. In such event, the success of Calgene's branded tomato strategy may he adversely affected. See "Risk Factors --Potential Inability to Successfully Produce or Market the Branded Tomato."
Stoneville sells upland picker cotton seed which is grown in the southern, southeastern and southwestern U.S., areas which constitute approximately one-half of the U.S. cotton acreage. Stoneville's primary competitor is Delta and Pine Land Company, which the Company believes has a market share of approximately 65%. Stoneville has the second largest market share. Other competitors have smaller market shares. Calgene believes that a farmer's decision to purchase a particular variety of cotton seed has traditionally been based upon both price and performance criteria, including yield, fiber length, strength and maturity. Calgene expects that the herbicide and insecticide resistant characteristics of its BXN and Bt cotton varieties will also be important factors in the farmer's decision.
Calgene Chemical manufactures and markets specialty oleochemicals and surfactants and food ingredient products which are price sensitive. The market for such products is highly competitive.
Government Regulation
Regulation by federal, state and local government authorities in the U.S. and by foreign governmental authorities will be a significant factor in the future production and marketing of Calgene's genetically engineered plants and plant products.
The federal government has implemented a coordinated policy for the regulation of biotechnology research and products. The USDA has primary federal authority for the regulation of specific research, product development and commercial applications of certain genetically engineered plants. The FDA has principal jurisdiction over plant products that are used for human or animal food. The EPA has jurisdiction over the field testing and commercial application of plants genetically engineered to contain pesticides. Other federal agencies have jurisdiction over certain other classes of products or laboratory research.
The USDA regulates the growing and transportation of most genetically engineered plants and plant products. In October 1992 following a request from Calgene, the USDA issued a determination that allows the growing and shipping of the initial varieties of the FLAVR SAVR tomato anywhere in the U.S. in the same manner as conventionally developed tomato. Laurate canola was de-regulated by the USDA in October 1994.
In February 1994, the USDA deregulated Calgene's herbicide resistant (BXN) cotton, allowing the Company to grow and ship seed of these varieties in the same manner as conventionally developed cotton. The Company intends to commercialize cotton with both BXN and Bt in 1998. Three federal agencies have authority over this product in the U.S., the Environmental Protection Agency, the Department of Agriculture and the Food and Drug Administration. The Company expects to complete the review process with these agencies prior to the 1998 season.
Certain Calgene products will require international approvals as such products are either imported from the U.S. or grown and produced in specific countries. Europe, through the European Union (EU), Japan and Australia are the three regions with defined regulatory processes for genetically engineered products. Calgene is working with the regulatory agencies in these countries in an effort to gain approval for its current genetically engineered products.
In May 1992, the FDA announced its policy on foods developed through genetic engineering (the "FDA Policy"). The FDA Policy provides that the FDA will apply the same regulatory standards to foods developed through genetic engineering as applied to foods developed through traditional plant breeding. Under the FDA Policy, the FDA will not ordinarily require premarket review of genetically engineered plant varieties of traditional foods unless their characteristics raise significant safety questions, such as elevated levels of toxicants, or the presence of allergens, or they are deemed to contain a food additive.
In May 1994, the FDA announced its determination, based on its review of extensive data submitted by Calgene, that the FLAVR SAVR tomato has not been significantly altered with respect to safety or nutritive value when compared to conventional tomatoes. The FDA also issued a food additive regulation permitting the use of the kanr selectable marker gene, which encodes for the enzyme APH(3')11 in genetically engineered tomatoes, cotton and canola.
Calgene has completed its consultation with the FDA on issues of safety concerning BXN cotton and laurate canola. The FDA Policy does not require the submission of data supporting the safety of a genetically engineered product, but does require that the developing company ensure the safety of the product guided by the FDA Policy and consultation with the FDA. The generation of data supporting both products' safety has been completed.
The FDA Policy does not require that genetically engineered products be labeled as such, provided that such products are as safe and have the same nutritional characteristics as conventionally developed products. There can be no assurance that the FDA will not reconsider its position, or that local and state authorities will not enact labeling requirements, either of which could have a material adverse effect on marketing of some future products.
In June 1994, Calgene filed a request with Health Canada for permission to sell FLAVR SAVR tomatoes in Canada. The request was filed pursuant to a proposed Health Canada review process in which Health Canada is notified of Calgene's intention to sell and to advertise for sale FLAVR SAVR tomatoes in Canada. Canada notified Calgene in February 1995 that it has no objections to the importation and sale of the FLAVR SAVR tomato. Calgene also received approval from Agriculture and Agri-Foods Canada in February 1996 and from Health Canada in April 1996 which allows the growing and commercialization of Laurate canola
in Canada. Calgene has received permission from the Mexican Health and Agriculture authorities to grow and sell the FLAVR SAVR tomato in Mexico.
In March 1996, Calgene received approval from the United Kingdom Ministry of Agriculture, Fisheries and Food that ten different lines of fresh tomatoes containing the FLAVR SAVR gene are safe for consumption. This was the first clearance of an unprocessed genetically modified food anywhere in Europe.
Commercialization of BXN cotton required clearance from the EPA to allow use of the herbicide bromoxynil on cotton plants. Bromoxynil is produced and sold by Calgene's strategic partner, Rhone Poulenc. These clearances were received by Rhone-Poulenc on May 5, 1995.
Calgene's activities will be subject to general FDA food regulations and are, or may be, subject to regulation under various other laws and regulations including, among others, the Occupational Safety and Health Act, the Toxic Substances Control Act, the National Environmental Policy Act, other Federal water air and environmental quality statutes, export control legislation, antitrust and other laws. At the present time. most states are generally deferring to federal agencies (USDA or EPA) for the approval of field trials, although all states are provided a review period prior to the issuance of a field trial permit. Failure to comply with applicable regulatory requirements could result in enforcement action, including withdrawal of marketing approval, seizure or recall of products, injunction or criminal prosecution.
The federal regulatory agencies most involved in the predominant business of Gargiulo--the production and marketing of fresh fruit and vegetables--are the USDA and the FDA. The USDA sets standards for raw produce and governs its inspection and certification. Under the Perishable Agricultural and Commodities Act ("PACA"), the USDA exercises broad control over the marketing of produce in domestic and foreign commerce, sets standards of fair conduct as to representations, sales, delivery, shipment and payment for goods and regulates the licensing of produce merchants and brokers. Gargiulo's growing operations are also subject to substantial oversight by the Environmental Protection Agency (the "EPA") in matters ranging from the use of fertilizers and pesticides to the condition of farmland and wetlands protection. Of particular concern in this regard is the current investigation by the EPA and other environmental regulators into the possible harmful effects on the ozone layer of methyl bromide, a chemical widely used by Gargiulo and other agricultural producers. The USDA also has specific authority, under the Federal Seed Act, to oversee the quality and labeling of commercial seed products, such as those developed by Gargiulo.
Through its extensive use of farm labor in its growing operations, Gargiulo is subject to supervision by the United States Department of Labor, under both the Fair Labor Standards Act and the Occupational Safety and Health Act; and the prevalence of foreign workers in this sector of Gargiulo's work force necessarily involves oversight by the Immigration and Naturalization Service.
Almost every aspect of federal regulation is accompanied by regulation on the state level, in each jurisdiction where Gargiulo has growing and/or research operations. In particular in Florida, the South Florida Water Management District regulates surface water management and irrigation water withdrawals. Gargiulo must also, in its Mexican operation, comply with the requirements of Mexican law, most importantly Mexico's environmental protection law.
Human Resources
At December 31, 1996 Calgene employed a total of 745 regular employees, of whom 168 were research and product development scientists and support personnel, 366 were production, farm and packing house employees, 44 were sales and marketing personnel and 167 were in administrative and general management positions. In addition Calgene employed approximately 1,809 seasonal workers. None of Calgene's work force is presently unionized, although there is no assurance that unions, especially for farm workers, may not unionize Calgene's workers in the future. Calgene believes its relations with its employees are good.
Executive Officers
The executive officers of the Company are as follows:
The executive officers are elected by and serve at the discretion of the Board of Directors of the Company.
Mr. Kunimoto has been the President and Acting Chief Executive Officer since July 1996. From June 1995 to July 1996 Mr. Kunimoto served as Vice President of Strategic Planning and Business Development. From November 1983 to June 1995, Mr. Kunimoto served in several senior management positions with the Company.
Dr. Stonard joined Calgene as Senior Vice President and Chief Technical Officer in 1996. Since 1982 Dr. Stonard worked in various positions at Monsanto Company, most recently as Director of Crop Protection Research for Ceregen, a unit of Monsanto.
Mr. Leleu joined the Company as Senior Vice President and Chief Financial Officer in 1996. Mr. Leleu worked in various positions at Monsanto Company, most recently as Director of Business Analysis for Crop Protection.
Mr. Baum joined Calgene as Director of Operations in 1981, became Vice President of Operations in 1987 and became Senior Vice President of Operations in 1991. Since November 1992, Mr. Baum has been the President of Calgene's Oils Division. Mr. Baum is a founding member and is currently Secretary of the U.S. Canola Association.
Mr. Higgins joined Calgene in January 1994 as Human Resources Director and was elected Vice President of Human Resources in May 1994. Prior to joining Calgene, Mr. Higgins served as Vice President of Human resources for Tenera, L.P. from January 1992 through December 1993. From April 1988 through December 1991 Mr. Higgins was President of Consultants in Managing Change. From February 1982 through March 1988 he served as Vice President of Human Resources for Genetech, Inc.
Mr. Hughes joined Stoneville Pedigreed Seed Co. in 1988 as Plant Operations Manager and became President in 1992. Mr. Hughes is Director of the Mississippi Seedmen's Association, President of the Mississippi Seed Improvement Association and is an active member of the Delta Council, Cotton Foundation (National Cotton Council), and the American Seed Trade Association.
Mr. Motroni joined the Company in August 1983 and became Controller in July 1986. He was elected Vice President of Finance and Secretary in May 1992.
Mr. Gargiulo has been Chairman and Chief Executive Officer of Gargiulo L.P. since 1981 and since March 1996 Chief Executive Officer of Gargiulo, Inc., the successor company to Gargiulo L.P.
Risk Factors
Management and Coordination of Operations. In March 1996, Calgene and Monsanto consummated a transaction under which Monsanto contributed Gargiulo, $30 million and certain oils and produce related technology in exchange for a 49.9% interest in Calgene. In November 1996, Monsanto purchased an additional 6,250,000 shares of Calgene common stock at a price of $8 per share. The
transaction increased Monsanto's equity ownership interest to approximately 54.6%. The achievement of the anticipated benefits of the Monsanto Transaction will depend in part upon whether the businesses of Calgene and Gargiulo can be managed and coordinated in an efficient and effective manner, and there can be no assurance that this will occur. The difficulties of managing and coordinating the businesses of Calgene and Gargiulo may be increased by the geographic separation of the organizations and their decentralized managements.
Significant Influence by Monsanto and Possible Conflicts of Interest. Monsanto owns 54.6% of the outstanding shares of Common Stock and has the right to designate five of the nine members of the Calgene Board under a Stockholders Agreement. Monsanto has the right to designate additional directors if and when its percentage ownership of Calgene Common Stock increases. In addition, certain actions may not be taken by Calgene without the approval of Monsanto. Also, Monsanto is obligated, subject to certain terms and conditions, to lend up to $40 million to Gargiulo, and up to $15 million annually for the two year period ended September 30, 1998, although not more than $15 million may be outstanding thereunder at any one time. As of December 31, 1996, $24.8 million of the $40 million credit facility was outstanding. The credit facility agreements each contain various covenants precluding Calgene and its subsidiaries from taking certain actions without the approval of Monsanto. Also, in the event of a default by Calgene under the Calgene credit facility agreements, Monsanto has certain rights to convert the outstanding principal and interest under such agreements into additional shares of Calgene Common Stock at the then market value of the Calgene Common Stock, and any such conversion could substantially dilute the ownership interests of other Calgene stockholders. It is possible that Monsanto's interest as a stockholder of Calgene may differ from its interest as a lender, and there can be no assurance that actions taken by Monsanto pursuant to the exercise of its various rights under the Stockholders Agreement, and the credit facility agreements will be in the best interests of all other stockholders of Calgene.
Possible Need for Additional Financing. Calgene expects its current cash balances and the proceeds of the credit facility agreements and other bank lines of credit expected to be available to Calgene, will be sufficient to fund its operations for the foreseeable future. However, such expectation is based in part on the achievement of the operating plans of Calgene and there can be no assurance such operating plans will be achieved. Also, there can be no assurance that all of Calgene's expected sources of funds will be available. On February 28, 1997, the Company replaced a $13 million line of credit with Harris Bank with a $20 million line of credit with Bank of America ("B of A"). The B of A facility expires on December 1, 1999. Credit increases to $30 million after December 31, 1997 and to $40 million after December 31, 1998, are available. While Monsanto has agreed to make a $40 million loan available to Gargiulo, further advances under such loan are subject to the achievement of certain milestones, and are to be used solely to fund the branded tomato strategy and are repayable out of specified portions of the cumulative free cash flow of Gargiulo. While Monsanto has agreed to advance up to $15 million annually to Calgene until September 30, 1998, not more than $15 million may be outstanding thereunder at any one time. Except as described above, Monsanto has no obligation to loan or otherwise contribute additional cash to Calgene. For all the foregoing reasons, there can be no assurance that Calgene will be able to obtain any future required financing on favorable terms, if at all.
History of Losses; Uncertainty of Future Financial Results. Calgene has incurred aggregate net losses of approximately $338 million from inception in 1981 through December 31, 1996, including research and development expenses in excess of $208 million. The net loss for Calgene in the six month period ended December 31, 1996 was $63.9 million, including asset write-downs and reserves totaling $32.6 million pursuant to a plan approved by Calgene's Board of Directors to significantly reduce Gargiulo's produce acreage in Southwest Florida. The reduction in acreage is in response to increased competitive pressure from Mexico produce. Calgene expects to incur a net loss in the fiscal year ended December 31, 1997. There is no assurance that some or all of the factors which caused these historical losses will not be present in future periods or that Calgene will be able to overcome these or other problems and achieve profitability in the highly unpredictable and volatile fresh produce business.
Potential Inability to Successfully Produce or Market the Branded Tomato. Calgene intends to market a premium quality branded tomato under the Gargiulo brand name, as part of its branded tomato strategy. A branded tomato program requires the production of a tomato which consistently and uniformly combine the characteristics and attributes retail consumers generally look for in the tomatoes they purchase, such as pleasing flavor, tempting color, and good size, shape and firmness. Calgene believes that such tomatoes, if successfully produced and marketed, would gain brand recognition and that a sufficient number of retail consumers would be willing to pay a premium price for such tomatoes. However, to date, no grower or shipper has successfully produced and supplied a branded tomato on a nationwide basis. While Calgene believes the development of
a successful branded tomato program is achievable, it recognizes that such development will take a significant amount of time, effort and capital. Even if Calgene is able to produce tomatoes suitable for a branded program, there can be no assurance that retail consumers will be willing to consistently pay premium prices for such tomatoes. Because Gargiulo has been principally engaged in the commodity tomato business, and has little experience in the fresh tomato business, Calgene will have little or no marketing experience of the type required for a branded tomato program. There can be no assurance that Calgene' s marketing efforts will be successful.
Funding of Branded Tomato Strategy. Upon the terms and conditions of the Gargiulo Credit Facility Agreement, Monsanto has made available to Calgene a revolving credit facility of up to $40 million. The proceeds of loans under the Gargiulo Credit Facility Agreement are to be used solely to support the branded tomato strategy (other than amounts used to finance $10 million of borrowings made by Gargiulo to finance the Collier Transaction and to allow Gargiulo to make an approximate $2 million payment to Monsanto pursuant to the Development Agreement). In order to obtain an advance from Monsanto under the Gargiulo Credit Facility Agreement, Calgene must provide reasonably acceptable documentation to Monsanto verifying that certain milestones have been reached and certain goals have been achieved, all as set forth in the Gargiulo Credit Facility Agreement. In the event such milestones and goals are not achieved, Monsanto will have no obligation to make advances under the Gargiulo Credit Facility Agreement and Calgene will likely be unable to obtain sufficient capital to support the implementation or expansion of the branded tomato program.
Risks Associated with Production of Genetically-Engineered Tomatoes. Calgene has experienced difficulties in scaling-up production of its genetically-engineered tomatoes and has temporarily curtailed its tomato growing operations until it is able to complete its development of varieties with suitable agronomic characteristics. There can be no assurance that Calgene will be able to accomplish such development or production scale-up of genetically-engineered tomatoes. Unless and until such time as Calgene develops genetically-engineered tomatoes with agronomic characteristics which it deems sufficient for cost-effective commercial production, it will be dependent upon the sale of tomatoes into the commodity markets.
Agribusiness Risks. A variety of agribusiness risks affect all of the fresh produce sold by Calgene, including, without limitation, the following:
Supply and Demand. The fresh produce business is particularly sensitive to fluctuation in supply and demand. When the supply of tomatoes and berries in the market exceeds the demand for such products the market price for fresh produce may be driven down significantly, in some instances below the cost of harvesting and packing. In such situations it may be uneconomical to harvest a crop, resulting in a total loss of the costs incurred in growing such crop. Even when market prices are sufficient to permit recovery of direct harvesting and packing costs, prices may not be high enough to permit recovery of growing costs and/or overhead and other indirect costs. In addition, oversupply can also affect the prices obtained for premium quality produce. See "--Risks Associated with the Branded Tomato Strategy."
Limited Barriers to Entry. The relatively low capital requirements for farming permit relatively easy entrance into the fresh produce business, which in turn can result in over-supply.
Weather. Weather conditions greatly affect the amount of fresh produce that is brought to market. and accordingly, the prices received for such produce. Storms, frosts, droughts, and particularly floods. can destroy crop and less severe weather conditions, such as excess precipitation, cold weather and heat, can kill or damage significant portions of a crop, rendering much of it unpackable and unsalable.
Crop Disease and Pestilence. Crop disease and pestilence can be unpredictable and can have a devastating effect on crops, rendering them unsalable and resulting in the loss of all or a major portion of the crop for that harvest season. Even when only a portion of the crop is damaged, the profits a grower could have made on the crop will be severely disrupted because the costs to plant and cultivate the entire crop will have been incurred although only a portion of it can be sold. While some crop diseases and pestilence are preventable or treatable. the costs of prevention or treatment may be high. Calgene is attempting to develop insect and disease resistant strains of tomatoes, other produce and cotton. However, there can be no assurance that these efforts will be successful.
Labor Shortages and Union Activity. The production of fresh produce is heavily dependent upon the availability of a large migrant labor force in order to harvest crops. The turnover rate among the migrant labor force is high due to the strenuous work, long hours, necessary relocation and relatively low pay. Further the pool of such workers willing and able to do such unskilled manual
labor is shrinking. To the extent it becomes necessary to pay more to attract unskilled labor to migrant farm work, labor costs can be expected to increase. In addition, compliance with more stringent immigration laws has increased and is likely to continue to increase migrant labor costs.
The migrant worker work force has not been unionized for the most part, though significant efforts to form collective bargaining units or to have existing ones recognized has occurred in the past, particularly in California and to a lesser extent, Southwest Florida. There can be no assurance that such union organizing activities will not occur in the future. If such organizing efforts were to occur and be successful on a large scale labor costs would likely increase and there could be work stoppages, which would be particularly damaging in an industry where harvesting crops at peak times and getting them to market on a timely basis is critical. The majority of fresh produce is shipped by truck and is therefore susceptible to labor disturbances in the trucking industry. Labor disturbances in the trucking industry can limit the ability to get fresh produce to market before it spoils. Although Gargiulo has never been affected by a nationwide truckers strike, it has been affected by regional strikes and there can be no assurance that Calgene will not be affected by national or regional labor disruptions in the trucking industry in the future.
Availability of Farmland in Florida and California. Calgene intends to lease the majority of the land on which it grows its crops, particularly tomatoes. These leases are generally short term, and as a result, Calgene will likely be required to renegotiate many of its leases on an annual basis, thereby subjecting itself to the possibility of increased rental payments. In addition, a significant amount of the available land in Florida is classified as "wetlands" and subject to significant restrictions on use. While Calgene believes that the acquisition of Collier Farms by Gargiulo reduces this risk in part, there can be no assurance that Calgene will enjoy the benefits it anticipates as a result of the Collier Transaction.
Risks similar to those set forth above are associated with the continued leasing of farmland for the growing of strawberries in California. Additionally, farmland along the California coast is subject to the problem of salt water intrusion which would be adverse to the growing of strawberries.
Seed Sales. Seed sales can be affected by U.S. government agricultural policy. There is no assurance that current or future U.S. government agricultural policies will not have a material adverse effect on Calgene's financial results.
Technological Change. The application of recombinant DNA and related technologies to plants is complex and subject to rapid change. A number of companies are engaged in research related to plant biotechnology including companies that rely on the use of recombinant DNA as a principal scientific strategy and companies that rely on other technologies. Technological advances by others could render Calgene products less competitive. Many of these companies, as well as competitors that supply non-genetically engineered products have substantially greater resources than Calgene. Other companies are developing and seeking to commercialize premium quality, fresh market tomatoes developed with recombinant DNA or other technologies. One of Calgene's competitors. a biotechnology company, has developed a vine-ripened tomato using one such other technology, somoclonal variation, which it is currently selling.
Product Development Uncertainties. Although Calgene has completed the genetic engineering of BXN cotton, BXN cotton with Bt, and laurate canola, Calgene's other genetically engineered products are at various stages of development. There are difficult scientific objectives to he achieved in certain product development programs before the technological feasibility of such products can be demonstrated. Even the more advanced programs could encounter technological problems that could significantly delay or prevent product development or product introduction.
Patents and Trade Secrets. Since 1992, Calgene has been engaged in litigation with Enzo Biochem ("Enzo") a company licensed under three related U.S. patents and counterpart foreign patents (the "Enzo Patents") which purport to cover the use of antisense technology in all cells, including plant cells. Some of Calgene's products, including the FLAVR SAVR tomato, use antisense technology. Enzo claimed that Calgene infringed the Enzo Patents. Calgene denied infringement and challenged the validity of the Enzo Patents. On February 2, 1996, the District Court ruled that the Enzo Patents are invalid. In addition, the validity of a patent owned by Calgene directed to the use of antisense in plant cells was upheld by the District Court. Meanwhile, Calgene subsequently requested that the court clarify certain aspects of the infringement portion of its decision and the court has agreed to reconsider on this basis. Enzo has indicated that it intends to appeal the decision. If on reconsideration or as a result of an appeal a court were to determine that one or more of the Enzo Patents validly covers plant cells and that such patents are infringed by Calgene's sales of products incorporating such antisense technology, Calgene
could he held liable for significant damages and could be precluded from producing and selling the FLAVR SAVR tomato, as well as other products currently under development. There is no assurance that a license, if necessary, could be obtained by Calgene on commercially acceptable terms, if at all. See "Item 3 - Legal Proceedings."
The European Patent Office (the "EPO") has granted a patent to Enzo with respect to claims which are intended to cover the use of antisense in all cells, including plant cells. The EPO has also granted a patent to Agracetus, Inc., a plant biotechnology company ("Agracetus"), with claims which are intended to cover the use of antisense technology in all plants. A preliminary decision from the EPO indicates that Calgene's opposition to Enzo's patent should be rejected. Calgene has filed supplemental arguments with the EPO responding to the EPO's reasoning and providing additional grounds for invalidation based upon evidence which surfaced during the course of the U.S. litigation. If these proceedings are not successful in limiting the scope of the claims of the Enzo patent and if Calgene is unable to obtain a license to use such antisense technology, Calgene could be prevented from expanding some of Calgene's genetically engineered products, including tomatoes engineered with the FLAVR SAVR gene, into Europe. There is no assurance that a license could be obtained on commercially reasonable terms, if at all. In May 1996, Monsanto Company purchased the plant biotechnology assets of Agracetus along with related intellectual property.
Other companies have applied for patents covering Bt technology. If patents were to be issued to other companies, Calgene would be required to obtain a license to employ the Bt gene in commercial products. There is no assurance that such 1icenses could be obtained on commercially reasonable terms, if at all. Calgene has rights to obtain certain licenses to Monsanto's Bt technology and has licensed Plant Genetics systems issued Bt patent.
U.S. patents have been issued to Agracetus for the transformation of cotton. Calgene has obtained a license from Agracetus for non-fiber uses. The patents are now in reexamination before the U.S. Patent Office and some claims have been indicated as allowable by the Examiner. Once the reexamination is completed, Calgene may determine that a license under these patents is needed for its genetically engineered cotton fiber products. There is no assurance that such a license could be obtained on commercially reasonable terms if at all. In May 1996, Monsanto Company acquired from Agracetus its technology for cotton fiber improvement.
A U.S. patent has been issued to a competitor for a genetic component which is currently used in Calgene FLAVR SAVR tomato. Although alternatives are available, in the event Calgene would be prevented from utilizing this genetic element, it would cause disruption in the production of FLAVR SAVR tomatoes. Analysis of this patent is currently underway. In the event that it is determined that a license is necessary, there is no assurance that a license can be obtained on commercially reasonable terms, if at all.
Patent applications filed in the United States are not publicly available for examination. Patent applications filed outside of the United States may be available for examination, but may not accurately reflect the applications filed in the United States on the same claimed inventions. Patent application filed or to be filed in the future by Calgene's competitors or others could, if patents are issued, preclude Calgene from using. in the patent issuing countries, technology and techniques basic to genetic engineering and to areas of particular importance to Calgene. If Calgene is unable to obtain licenses to use such technology, there could be a delay in the introduction of some of Calgene's genetically engineered products in those countries. Whether such patents will be issued, the extent to which Calgene would be required to license such patents and the availability and cost of such licenses are currently unknown.
Calgene has received U.S. and foreign utility patents and has filed and will continue to file patent applications in order to obtain proprietary protection of certain genes, gene constructs, uses of genes in specific applications and methods for genetic engineering of plants. There is no assurance that future patents call he obtained in a timely fashion or, if issued, will afford Calgene significant protection. In addition to patents, Calgene seeks to protect its proprietary know-how as trade secrets. Although Calgene takes precautionary measures to maintain the confidentiality of its trade secrets, there is no assurance that competitors will not gain access to Calgene's know-how or independently develop substantially equivalent know-how.
Public Acceptance of Genetically Engineered Products. The commercial success of Calgene's genetically engineered products will depend in part on public acceptance of the cultivation and consumption of genetically engineered plants and plant products. Public attitudes may be influenced by claims that genetically engineered plant products are unsafe for consumption or pose a danger to the environment. There is no assurance that Calgene's genetically engineered products will gain public acceptance.
Government Regulation. The field testing, production and marketing of genetically engineered plants and plant products by Calgene is subject to federal, state, local and foreign governmental regulation. There is no assurance that regulatory agencies administering existing or future regulations or legislation will allow Calgene to produce and market its genetically engineered products in a timely manner or under technically or commercially feasible conditions. In addition, regulatory action or private litigation could result in expenses, delays or other impediments to Calgene's product development programs or the commercialization of resulting products.
Although the U.S. Food and Drug Administration (the "FDA") has announced in a policy statement that it will apply the same regulatory standards to foods developed through genetic engineering as applied to foods developed through traditional plant breeding, genetically engineered food products will be subject to premarket review if they raise safety questions or are deemed to be food additives. Calgene has completed the safety assessment of its FLAVR SAVR tomato, BXN(TM) cotton and laurate canola products in accordance with the FDA policy. There is no assurance that future Calgene products will not be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise safety questions or are deemed to be food additive.
The FDA has announced in a policy statement that it will not require that genetically engineered products he labeled as such, provided that such products are as safe, and have the same nutritional characteristics as conventionally developed products. There can be no assurance that the FDA will not reconsider its position, or that local and state authorities will not enact labeling requirements, either of which could have a material adverse effect on Calgene.
International regulatory requirements for genetically engineered plants and plant products are only partially in place. Consequently, there can be no assurance that additional data, labeling or other requirements will not be required in countries where Calgene intends to grow and/or commercialize its genetically engineered products. Foreign regulatory agencies could require Calgene to conduct further safety assessments and potentially delay product development programs or commercialization of resulting products. In addition the Mexican health and agriculture authorities and Health Canada could reconsider their respective positions regarding the marketing of the FLAVR SAVR tomato and laurate canola.
The United States Department of Agriculture (the "USDA") prohibits genetically engineered plants from being grown and transported except pursuant to a deregulation, or under controls so burdensome as to render commercialization impracticable. The only Calgene plants currently exempted by the USDA are Calgene's initial tomato varieties engineered with the FLAVR SAVR gene, the BXN cotton varieties and laurate canola. No assurance can be given that additional Calgene products will be exempted by the USDA.
ITEM 2.
ITEM 2. PROPERTIES
Calgene's principal research and development, executive and administrative offices are located in three adjacent buildings in Davis, California, totaling approximately 71,000 square feet. Each of the buildings is leased. Including options to extend, the leases expire on 57,000 square feet in the year 2015 and on 14,000 square feet in the year 2003. The company owns a 24,000 square foot greenhouse facility located on ten acres near its main facility. An additional 54,000 square feet of greenhouse space is leased near Galt, California. Including options to extend, the two leases in Galt expire in November 1997 and July 1998, respectively.
In Georgia, the Company leases approximately 9,300 square feet of office and laboratory space. With options to extend, the lease expires in March 2002. A 3,000 square foot greenhouse was constructed in 1994 by the Company.
At Stoneville, Mississippi, the Company owns approximately 182,000 square feet of production and warehouse space, including a 16,000 square foot seed delinting production facility. In addition, the Company also owns approximately 47,450 square feet of administrative and research and development facilities, and 123 acres of research land. The Company's Arizona operations are located on 15 acres of leased land which, including options to extend, expire in the year 2018. The Company owns 107,000 square feet of production and warehouse space on this leased land. The Company's Stoneville and Arizona facilities have the capacity to process up to 20,000 tons of bulk cotton seed.
At its Calgene Chemical facility in Illinois, the Company leases office, production, laboratory and warehouse space located on approximately 4.5 acres. Including options to extend, the lease expires in 2017.
Gargiulo's principal properties presently consist of its executive offices and sales offices and related tomato packing facility located in Naples, Florida; a research facility in Bonita Springs, Florida; a transplant nursery in Immokalee, Florida; tomato packing facilities in Quincy, Florida; Santa Isabela, Puerto Rico; and Firebaugh, California; a sales office in Nogales, Arizona; and various owned and leased farmland. Gargiulo owns or leases farmland in and around Naples and Quincy, Florida; Watsonville, Oxnard, Santa Maria, Irvine, and Firebaugh, California; Santa Isabela, Puerto Rico. The majority of Gargiulo's land is leased.
The Company's facilities are suitable for their respective uses and are, in general, adequate for its needs, at least through 1997. The research and development, executive and administrative offices at the Davis facility will accommodate planned growth beyond 1997.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On or about January 29, 1997, Hanna Obstfeld filed suit in Delaware Chancery Court against the Company and certain of its directors alleging unfairness in connection with the proposed acquisition by Monsanto Company of those shares of the Company's common stock which Monsanto does not own. After Ms. Obstfeld brought her suit, other essentially identical actions followed, none of which have as yet been served upon the Company. It is anticipated that the complaints will shortly be consolidated and the Company has no obligation to answer, move or otherwise plead until such time as a consolidated complaint has been filed and served. No discovery has occurred to date in this action. The Company believes it has meritorious defenses to the allegations set forth in the pending complaints.
On February 11, 1997, three named Plaintiffs filed a Class Action Complaint against Gargiulo, Inc. in the United States District Court for the Northern District of California, San Jose Division. The Complaint arose from the employment relationship between the named and unnamed Plaintiffs and Gargiulo, Inc. The Plaintiffs allege certain violations of the Migrant and Seasonal Agricultural Worker Protection Act ("MSPA"), California's IWC Wage Order, the California Labor Code and the California Business and Professions Code; and Breach of Contract. The Plaintiffs seek damages including all unpaid wages, statutory damages under the California Labor Code; a declaration that Gargiulo violated MSPA, monetary damages pursuant to MSPA; and for an order enjoining Gargiulo, Inc. from violations of MSPA. Gargiulo's insurance carriers were contacted regarding this lawsuit. As of March 27, 1997, Gargiulo has answered the Class Action Complaint, and is initiating discovery regarding class certificaiton. Gargiulo, Inc. is also waiting for the response from its insurance carrier. While the results of the Class Action Complaint cannot be predicted, the Company believes that the ultimate outcome will not have a material adverse effect on the Company's consolidated financial position or results of operations.
From 1992 through early 1996, Calgene was engaged in a litigation with Enzo Biochem, Inc. ("Enzo") a company licensed under three related U.S. patents and counterpart foreign patents (the "Enzo Patents") which purported to cover the use of antisense technology in all cells, including plant cells. Some of Calgene's products, including the FLAVR SAVR tomato, use antisense technology. Enzo had claimed that Calgene infringed the Enzo Patents. Calgene denied infringement and challenged the validity of the Enzo Patents. On February 2, 1996, the District Court ruled that the Enzo Patents are invalid. In addition, the validity of a patent owned by Calgene directed to the use of antisense in plant cells was upheld by the District Court. Calgene subsequently requested that the court clarify certain aspects of the infringement portion of its decision, and the court has agreed to reconsider on this basis. There is no indication that the court would reverse any aspect of its original ruling. Meanwhile, Enzo has indicated that it intends to appeal the decision.
Although the trial court has the option of altering any aspect of its decision upon reconsideration, and Enzo may appeal the decision after its publication, Calgene believes that further proceedings will not have a materially adverse effect on its consolidated financial position or results of operations, based on the trial court's determination that the SUNY/Enzo Patents are invalid and not infringed by Calgene and that the Calgene Antisense Patent is valid.
Nevertheless, if on reconsideration or as a result of an appeal a court were to determine that one or more of the Enzo Patents validly covers plant cells and that such patents are infringed by Calgene's sales of products incorporating such antisense technology, Calgene could be held liable for significant damages and could be precluded from producing and selling the FLAVR SAVR tomato, as well as other products currently under development. There is no assurance that a license, if necessary, could be obtained by Calgene on commercially acceptable terms, if at all. If the court were to determine that the Calgene Antisense Patent is invalid or unenforceable, Calgene would be deprived of the competitive and licensing advantages afforded by its patent. Moreover, the Company would have to expense the capitalized legal fees related to the defense of the Calgene's Antisense Patent, which amounted to approximately $5.7 million at December 31, 1996.
On October 18, 1995, two groups of Plaintiffs filed separate complaints against various Defendants including Gargiulo & Associates in the United StatesDistrict Court for the Eastern District of California. Both complaints arose from the same set of facts and allege the same three theories of recovery. These actions were consolidated. The cases involve personal injury claims relating to vehicle accident in which numerous migrant labor workers being transported to the farm of Gargiulo & Dresick Associates (which was being farmed under contract by Dresick Farms, Inc.) were killed or injured. The two cases, Albertano Alberto Jimenez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vegas; Robles Rios; Jesus Loza and Samuel Santiago Vasquez, and Jose Vasquez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vegas; Robles Rios; Jesus Loza and Samuel Santiago Vasquez, were both filed on October 18, 1995. The plaintiffs sought general damages, including compensation for pain and suffering; special damages, including past, present and future medical expenses; compensation for the loss of past and future income; and punitive damages in an unspecified amount. Gargiulo's insurance carriers have been contacted regarding these lawsuits. As of March 12, 1997, Gargiulo was granted its Motion for Summary Judgment as to all of the claims against it. This matter is now subject to appeal which must be filed by no later than 30 days from entry of judgment which will not occur for a few weeks.
The Company is party to other pending litigation incidental to its business and has from time to time been notified of various claims that are not the subject of pending litigation. While the results of litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of all such other litigation matters and claims will not have a materially adverse effect on its consolidated financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on November 12, 1996. The following table shows voting information for each item voted upon:
Nominees for Election as Directors
For Withheld --- -------- Patrick J. Fortune 56,946,111 1,435,104 Robert T. Fraley 56,936,666 1,444,549 Michael R. Hogan 56,947,316 1,433,899 Lloyd M. Kunimoto 56,974,189 1,407,026 Howard D. Palefsky 56,929,176 1,452,039 John E. Robson 56,978,916 1,402,299 Roger H. Salquist 56,800,715 1,580,500 Allen J. Vangelos 56,979,186 1,402,029 Hendrick A. Verfaillie 56,962,636 1,422,216
With respect to the approval of the Stock Purchase Agreement dated as of September 27, 1996 ("Stock Purchase Agreement") between Calgene and Monsanto Company, a Delaware Company ("Monsanto"), pursuant to which (i) Calgene would issue 6,250,000 shares of Common Stock to Monsanto for $8.00 per share for an aggregate purchase price of $50 million, thereby increasing Monsanto's ownership interest in shares of Calgene Common Stock from 49.9% to approximately 54.6% (without giving effect to the exercise of outstanding options), (ii) Monsanto and Calgene would enter into a Restated Stockholders Agreement ("Restated Stockholders Agreement") amending and restating the Stockholders Agreement dated March 31, 1996 ("Stockholders Agreement") and (iii) the Company's Restated Certificate of Incorporation would be amended to reflect the amendments to the Stockholders Agreement contemplated by the Restated Stockholders Agreement, the vote was: For, 44,639,801; Against; 1,283,791; Abstain, 410,793; Broker Non-Vote, 12,049,830.
With respect to the approval of an increase in the authorized number of shares of Common Stock from 80,000,000 to 100,000,000, the vote was: For, 54,814,037; Against, 2,323,281; Abstain, 222,158; Broker Non-Vote, 1,021,739.
To confirm the appointment of Ernst & Young LLP as the Company's independent auditors, the vote was: For, 57,989,243; Against, 237,423; Abstain, 154,549.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Calgene's Common Stock is traded over-the-counter on the NASDAQ National Market under the symbol CGNE. The following table sets forth for the periods indicated the high and low sale prices of the Common Stock as reported by NASDAQ.
High Low ---- --- Fiscal 1996 Quarter ended September 30, 1995 ....................8.125 6.625 Quarter ended December 31, 1995......................7.250 4.250 Quarter ended March 31, 1996.........................7.375 4.500 Quarter ending June 30, 1996.........................6.875 5.375
Six Months Ended December 31, 1996 Quarter ended September 30, 1996 ....................6.875 4.250 Quarter ended December 31, 1996......................6.000 4.375
As of March 10, 1997, there were approximately 2,989 holders of record of the Calgene Common Stock. Calgene believes that the number of beneficial owners of Calgene Common Stock is in excess of 31,000.
All stockholders of Calgene are urged to obtain a current market quotation for the Calgene Common Stock.
Calgene has never declared or paid cash dividends and does not intend to pay cash dividends in the foreseeable future. Future cash dividends, if any, will be determined by the Calgene Board and will be based upon Calgene's future earnings, capital requirements, financial condition and other factors deemed relevant by the Calgene Board. In addition, the ability of Calgene to pay dividends would be restricted by the terms of certain indebtedness of Calgene as well as the terms of the Calgene Credit Facility Agreement and the Gargiulo Credit Facility Agreement the Company has with Monsanto Company.
Recent Sales of Unregistered Securities
On November 12, 1996, Calgene issued to the Monsanto Company an aggregate of 6,250,000 shares of Calgene's Common Stock at a price of $8 per share. The shares were issued in reliance upon the exemption from registration set forth in Section 4(2) under the Securities Act of 1933, as amended.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Overview
On March 31, 1996, Calgene and Monsanto Company ("Monsanto") entered into a transaction under which Monsanto contributed Gargiulo Inc. ("Gargiulo"), $30 million cash and certain oils and produce related technology in exchange for a 49.9% equity interest in Calgene. Gargiulo is a grower, packer, marketer and distributor of tomatoes, strawberries and other produce. Gargiulo tomato producing operations are conducted principally in Florida, California, Puerto Rico and Mexico. Gargiulo berry production operations are conducted principally in northern California. On February 29, 1996, Gargiulo and Collier Enterprises consummated an asset purchase agreement whereby Gargiulo acquired substantially all the assets subject to the assumption of certain specified liabilities of the produce business conducted by certain affiliates of Collier Enterprises under the trade name Collier Farms ("Collier"). Collier is an agricultural producer of tomatoes and other vegetables in Florida, and engages in the packaging, marketing and distribution of those products in the commodity markets. The Company's tomato operations consist of the combined business of Calgene Fresh, which was organized in 1992 to develop and produce genetically engineered premium tomatoes, and Gargiulo.
Effective January 1, 1997, Calgene changed its fiscal year from June 30 to December 31. Accordingly, the financial presentation in this report for 1996 is for the six month period from July 1, 1996, to December 31, 1996. Prior fiscal year's operations are as previously reported and cover twelve month periods ended June 30, 1996, 1995 and 1994.
Revenues
Calgene's product sales in the six month period ended December 31, 1996 increased 250% to $69.8 million from $19.9 million in the comparable period of the prior year. The increase is due to the inclusion of Gargiulo's operations which resulted in higher fresh market produce sales of $50.4 million. Product sales in fiscal 1996 increased 95.5% to $95.7 million from $49.0 million in fiscal 1995. The increase resulted from the inclusion of Gargiulo's product sales of $48.3 million in the fourth quarter of fiscal 1996. Product sales in fiscal 1995 increased 38.3% to $49.0 million from $35.4 million in fiscal 1994. The increase reflects $6.8 million higher tomato sales, $4.2 million higher cotton seed sales, and $2.3 million higher specialty oleochemical sales.
Product development revenues in the six month period ended December 31, 1996 decreased by 14.2% to $729,000 from $850,000 in the corresponding period of the prior year due to the conclusion of several research contracts and a $125,000 benchmark milestone payment which was recognized in the prior year. This decrease was partly offset by the addition of several new research contracts. Product development revenues in fiscal 1996 increased by 43.6% to $9.3 million from $6.5 million in the prior fiscal year. The increase was due to a $3.3 million increase in technology license sales reflecting the net impact of non-recurring sales of $7.0 million and $3.8 million in fiscal 1996 and 1995, respectively. Product development revenues in fiscal 1995 increased by 113.5% to $6.5 million from $3.0 million in the prior fiscal year. The increase was primarily due to a $3.4 million increase in technology license sales.
Gross Profit
Calgene's gross profit on net product sales was negative $2.3 million in the six month period ended December 31, 1996 as compared to a negative gross profit of $2.2 million in the comparable period of the prior year primarily due to the Company's produce operations. Tomato production yields were reduced due to adverse weather conditions in several growing regions, and gross profit on strawberry production was negatively impacted by exceptionally low prices experienced by the industry. Calgene's gross profit on net product sales was $5.3 million in fiscal 1996 as compared to a negative gross profit of $4.7 million in fiscal 1995. The $10.0 million improvement is attributable to a $10.4 million reduction of negative gross profit at Calgene Fresh, and the inclusion of Gargiulo fourth quarter gross profit of $2.1 million. This improvement was partly offset by a $2.1 million decrease in gross profit from cotton operations primarily due to surplus inventory write downs and higher product costs. Gross profit in fiscal 1995 was negative $4.7 million as compared to a negative gross profit of $8.6 million in fiscal 1994. The negative gross profit is attributable to the Company's fresh market tomato operations. The positive gross profit
variance of $3.9 million in fiscal 1995 is largely due to a gross profit increase of $2.3 million in cotton operations primarily reflecting increased domestic seed sales. In addition, tomato sales incurred a negative gross profit of $14.9 million in fiscal 1995, compared with a negative gross profit of $16.4 million in fiscal 1994.
Research and Development Expenses
Research and development expenses increased by $1.9 million or 29.2% in the six month period ended December 31, 1996 as compared to the corresponding period of the prior year. The increase was primarily due to the inclusion of $1.3 million of Gargiulo variety development expenses, and higher costs incurred for expanded research programs in the areas of produce and modified canola oils. Research and development expenses decreased by $1.4 million or 8.8% to $14.0 million in fiscal 1996 as compared to fiscal 1995. The decrease primarily reflects the full year impact of the Company's third quarter fiscal 1995 implementation of a program to reduce ongoing research expenses. This program included staff reductions of approximately 10% of the Company's 320 regular full time employees, and reflected a shift in resources from research into product development to focus on commercialization of the Company's genetically engineered products. In addition, the decrease reflects lower expenses for licensing activities. The lower research and development expense was partly offset from the inclusion of Gargiulo research and development expenses in the fourth quarter. Research and development expenses decreased $195,000 in fiscal 1995 to $15.4 million as compared to $15.6 million in fiscal 1994 primarily due to lower distribution testing, consulting and product development expenses in the Company's tomato operations. These decreases were partly offset by higher expenses for licensing activities and higher product development expenses for genetically modified canola oils.
Selling, General and Administrative Expenses
Calgene's selling, general and administrative expenses increased by $12.2 million or 162% to $19.7 million in the six month period ended December 31, 1996 as compared to the corresponding period of the prior year. The increase reflects $9.6 million in higher expenses for the Company's fresh market produce operations attributable to the inclusion of Gargiulo. The increase also reflects a corporate severance expense of $905,000, higher cotton selling expenses, higher marketing and application development expenses for genetically engineered plant oils, and higher general corporate expenses. Selling, general and administration expenses increased by $5.6 million or 35.0% to $21.7 million in fiscal 1996 as compared to fiscal 1995. The increase reflects $5.3 million in higher expenses for the Company's fresh market produce operations attributable to the inclusion of Gargiulo expenses in the fourth quarter. Selling, general and administration expenses decreased by $5.2 million or 24.4% to $16.1 million in fiscal 1995 as compared to fiscal 1994. The decrease primarily reflects lower sales and marketing expenses and lower payroll and consulting expenses in the Company's tomato operations. In addition, fiscal 1994 reflects a $1.0 million scale-back charge attributable to the reduction of non-genetically engineered tomato marketing operations. The fiscal 1995 decrease was partly offset by higher general corporate expenses which include a $483,000 write-off of costs associated with Calgene's decision to conclude discussions with a potential strategic partner.
In-process Research & Development Acquired
In connection with Calgene's transaction with Monsanto, Calgene engaged an independent appraiser to provide the Company with recommendations of value for certain assets acquired from Monsanto, including Gargiulo. Based on the valuation analysis, Calgene assigned $59.2 million of the purchase price to in-process research and development. Because the technological feasibility of the acquired in-process research and development has not been established and has no alternative future uses, it was expensed in the third quarter of fiscal 1996. Although the Company is in the process of evaluating its research and development projects, it is expected that future expenditures of over $20 million will be necessary to develop the acquired in-process technology into commercial products.
Write-off of Assets and Restructure Expenses
Pursuant to a plan approved by Calgene's Board of Directors in the quarter ended December 31, 1996, Gargiulo intends to significantly reduce its produce acreage in Southwest Florida. The reduction in acreage is in response to increased competitive pressure from Mexico produce and is expected to be accomplished over the next two to three years. As a consequence, during the quarter ended December 31, 1996, the Company recorded a charge of approximately $32.6 million for the write-off of assets, and other reserves. The write-offs include $9.4 million for the write-down of tomato germplasm, an $8.3 million asset impairment charge due to further consolidation of the Company's tomato packing facilities, and a $10.4 million charge related to the excess purchase price of net assets acquired allocated to the asset write-downs. The Company is actively seeking buyers for the packing facilities. In addition, a reserve of $4.5 million relating to other restructuring costs was recorded.
During fiscal 1996 the Company recorded a charge of $15.6 million for the write-off of assets as compared to $1.1 million in the prior fiscal year. The write-off for fiscal year 1996 includes $10.4 million primarily related to the merger of Calgene's tomato operations into Gargiulo. The write-off of tomato assets primarily reflects a $5.4 million asset impairment charge due to the consolidation of facilities and equipment and a $2.5 million write-off of obsolete technology licenses. The Company also recorded $1.5 million for the write-off of its investment in a majority owned potato joint venture (before minority interest), and $1.0 million for the write-off of a technology license option the Company does not intend to exercise. As a consequence of the Company's decision in the third quarter of fiscal 1996 to reduce its emphasis on commodity distribution products at Calgene Chemical, the excess purchase price of net assets acquired associated with the commodity distribution business was written-down to net realizable value resulting in a $1.2 million expense. The $1.1 million expense in fiscal 1995 reflects the write-off of obsolete assets by Calgene Fresh.
Interest Expense
Interest expense, which reflects the Company's borrowings on its bank line of credit, Monsanto credit facilities, and long-term debt obligations, increased by $2.5 million to $3.8 million in the six month period ended December 31, 1996 as compared to $1.3 million in the corresponding period of the prior year. The increase was due to interest of $3.2 million attributable to Gargiulo's debt obligations. This increase was partly offset by a lower borrowings on the Company's credit facility with Monsanto, and lower borrowings on its bank line of credit. Interest expense increased $2.5 million to $3.4 million in fiscal 1996 as compared to $924,000 in fiscal 1995. The increase was primarily due to interest expense of $1.7 million attributable to Gargiulo's debt obligations. In addition, the increase includes higher interest expense incurred due to a $23 million loan made by Monsanto in the form of a subordinated convertible note. The note was converted into equity on March 31, 1996 pursuant to the terms of the Reorganization Agreement (see Note 4 to the consolidated financial statements). Interest expense increased $195,000 to $924,000 in fiscal 1995 as compared to $729,000 in the prior fiscal year. The increase was primarily due to higher interest rates and higher borrowings on the Company's bank line of credit used to finance inventories and receivables.
Other Income (Expense), Net
Other income in the six month period ended December 31, 1996 increased $1.6 million to $2.2 million as compared to $541,000 in the corresponding period of the prior year. The increase is primarily due to a $1.5 million gain resulting from the Company's sale of assets. This gain included $1.2 million realized from the sale of a leased asset with a net book value of $2.9 million for a gross sales price of $4.1 million. Commensurate with the sale, the Company paid off a capitalized lease obligation of $3.1 million. Other income in fiscal 1996 was $2.3 million as compared to $1.1 million in fiscal 1995. The increase reflects a $595,000 increase in the minority partner's interest share of the higher net losses from a potato joint venture as a consequence of management's decision to cease its operation and sell remaining assets. In addition, the increase reflects a $238,000 gain realized from an insured casualty loss. In fiscal 1995 other income increased $747,000 as compared to the prior fiscal year. The increase was primarily due to a $370,000 reduction in the net loss of an affiliate, and $352,000 in higher interest income.
Pre-Tax Losses from Operations
During the six month period ended December 31, 1996, Calgene incurred a pre-tax loss of $63.9 million as compared to a pre-tax loss of $16.1 million in the corresponding period of the prior year. The increased six month pre-tax loss of $47.8 million reflects non-cash asset write-downs and other restructuring expenses totaling $32.6 million at Gargiulo. In addition, the higher pre-tax loss reflects higher selling, general and administrative expenses, higher interest expense, and higher research expenses, primarily due to the inclusion of Gargiulo. These factors were partly offset by an increase in other income due primarily to a gain realized on sale of assets. In fiscal 1996, Calgene incurred a pre-tax loss of $97.0 million as compared to a pre-tax loss of $30.6 million in the prior fiscal year. The increased fiscal 1996 pre-tax loss of $66.4 million reflects non-recurring charges associated with closing the Reorganization Agreement including $59.2 million for the purchase of in-process research and development, and $15.6 million for the write-off of assets. In addition, the higher loss reflects higher selling, general, and administrative expenses and higher interest expense due the to inclusion of Gargiulo operations. These factors were partly offset by a gross profit improvement from net product sales, higher product development revenues, an increase in other income, and lower research and development expenses. In fiscal 1995, Calgene incurred a pre-tax loss of $30.6 million as compared to a pre-tax loss of $42.7 million in the prior fiscal year. The decreased fiscal 1995 pre-tax loss is
primarily attributable to lower selling, general and administration expenses at Calgene Fresh and higher product development revenues. In addition, the decreased pre-tax losses reflect increases in gross profits on net product sales from cotton seed and oleochemical sales, and a reduction in gross losses on net product sales at Calgene Fresh. These factors were partly offset by higher selling, general and administrative expenses for general corporate purposes, and the loss on disposition of obsolete assets.
Provision for Income Taxes
For federal income tax return purposes, as of December 31, 1996 the Company has a net operating loss carryover of approximately $234 million which expires between 1997 and 2012, and a general business tax credit carryover of approximately $4 million which expires between 1997 and 2012. In addition, as of December 31, 1996 the Company has a net operating loss carryover of approximately $143 million for state income tax purposes which expires between 1997 and 2012. Approximately $20 million and $3 million of the federal and state net operating loss carryovers, respectively, and $700,000 of the general business tax credit carryover, are available only to offset the separate federal and state taxable income, if any, of Calgene Fresh. For financial reporting purposes, a valuation allowance of approximately $118.4 million has been recognized at December 31, 1996 to offset the deferred tax assets related to all of the aforementioned carryforwards.
Because of the "change in ownership" provisions of the Tax Reform Act of 1986, a portion of the Company's federal net operating loss and tax credit carryovers will be subject to an annual limitation regarding their utilization against taxable income in future periods. The Company expects that the annual limitation will not have a material adverse effect on the Company's ability to utilize the net operating loss and credit carryovers prior to the expiration of the carryover periods.
Seasonality
Tomato prices are generally higher and unit volume lower during winter months due to adverse weather conditions. The opposite effects occur in the summer months. Sales of planting seed are seasonal, causing significant fluctuations in product sales and working capital requirements. Cotton seed sales are concentrated in the quarters ending March 31 and June 30. Strawberry sales occur predominantly in the quarters ended June 30 and September 30. Specialty oleochemical sales are generally not seasonal.
Litigation
See "Legal Proceedings."
Government Farm Legislation
Cotton seed sales are affected by changes in U.S. government agricultural policy, which may impose limitations on planting acreage as a criterion for farmers' eligibility to receive government subsidy payments and other benefits. An increase in the acreage set-aside for a subsidized crop will generally reduce farmer demand for seed for that crop, and a decrease in the set-aside will generally increase demand for the seed. In situations where growing conditions give farmers the alternative of planting either of two crops, an increase in the set-aside for one crop will tend to increase farmer demand for the seed of the competing crop.
Inflation and Price Fluctuations
The market price for fresh produce can experience substantial fluctuations in short periods. When the supply of tomatoes and berries on the market exceeds the demand for such products, the market price may be driven down significantly, in some instances below the cost of harvesting and packing. In such situations it may be uneconomical to harvest a crop, resulting in a total loss of the costs incurred in growing such crop. Even when market prices are sufficient to permit recovery of direct harvesting and packing costs, prices may not be high enough to permit recovery of growing costs and/or overhead and other indirect costs. Calgene's plant oil and cotton operations can also be affected by changes in
prices of commodity plant oil and cottonseed oil and meal. The effects of general inflation have not had a material impact on Calgene's consolidated results of operations.
Liquidity and Capital Resources
At December 31, 1996 Calgene had cash and equivalents and short term available-for-sale securities of approximately $3.3 million, excluding $878,000 in securities pledged as collateral for certain obligations. This was a decrease of $25.3 million from June 30, 1996. Uses of cash in the six month period ended December 31, 1996 include financing the Company's net loss (excluding non-cash expenses of $28.0 for the write-off of assets and $6.4 million in depreciation and amortization expense); payments of $26.6 million on long-term debt; a $12.9 million decrease in operating liabilities; a $7.4 million net decrease in notes payable; the acquisition of $3.8 million in property, plant and equipment; and a $3.2 million increase in operating assets. Sources of cash include the Company's November 1996 offering of common stock to Monsanto which contributed $50 million in net proceeds and $7.1 million received in proceeds for the sale of assets. The Company's investment policy is to invest excess cash in high quality, liquid, short-term fixed income securities.
Inventories at December 31, 1996 increased by $13.4 million as compared to June 30, 1996 primarily due to seasonal buildup of bulk cottonseed and higher tomato growing costs. Accounts receivable decreased by $9.4 million due to the seasonality of sales at Gargiulo, and a $1.1 million reduction in receivables for research contracts and corporate reimbursements.
Current liabilities decreased $42.4 million in the six month period ended December 31, 1996 as compared to June 30, 1996 largely due to a $17.7 million decrease in current portion of long term debt; a $7.4 million decrease in notes payable; a $6.2 million decrease in trade accounts payable; a $4.7 million decrease in amounts due customers; a $3.4 million decrease in other current liabilities; and a $3.2 million decrease in accrued restructure expenses. The decreases in current portion of long-term debt and notes payable reflect the repayment by Gargiulo of a line of credit and four mortgage loans due NationsBank which totaled $23.1 million at June 30, 1996. The decrease of $4.7 million in amounts due customers reflects seasonal cotton seed returns consistent with industry practice.
Net working capital increased $20.3 million from a negative $959,000 at June 30, 1996 to a positive $19.3 million at December 31, 1996 primarily due to a $42.4 million decrease in current liabilities and a $13.4 million increase in inventories. This increase was partly offset by a $25.3 million decrease in cash and equivalents and available for sale securities, and a $9.4 million decrease in accounts receivable.
In the normal course of business, the Company enters into various grower contracts with third party growers. Pursuant to these contracts, the Company contracts with growers to purchase their crop, subject to certain quality standards, at the end of the growing cycle which is generally less than one year. The amount of outstanding grower contract commitments was approximately $4.4 million at December 31, 1996.
The Company has capitalized the legal fees incurred in its lawsuit with Enzo Biochem, Inc. related to Calgene's defense of its antisense patent. On February 2, 1996, the court ruled on behalf of the Company and held that Calgene's patent was valid. If the defense of Calgene's patent is unsuccessful as a result of potential appeals, the Company would have to expense all of these unamortized legal costs. At December 31, 1996, the amount of these unamortized costs was $5.7 million.
On November 12, 1996, Calgene and Monsanto Company consummated a transaction whereby Monsanto purchased 6,250,000 shares of Calgene Common Stock at a price of $50 million or $8 per share. The transaction increased Monsanto's equity ownership interest in Calgene to approximately 54.6% and gave Monsanto the right to designate five of the nine members of the Board.
Monsanto is obligated, subject to certain terms and conditions, to lend up to $40 million to Gargiulo ("Gargiulo Credit Facility"), and up to $15 million annually to Calgene until September 30, 1998 ("Calgene Credit Facility"), although not more than $15 million may be outstanding thereunder at any one time. As of December 31, 1996, $24.8 million of the Gargiulo Credit Facility was outstanding. In addition, $1.9 million in interest payable under this credit facility has been accrued. The credit facility agreements each contain various covenants precluding Calgene and its subsidiaries from taking certain actions without the approval of Monsanto. Also, in the event of a default by Calgene under the Garguilo Credit Facility and the Calgene Credit Facility, Monsanto has certain rights to convert the outstanding principal and interest under such
agreements into additional shares of Calgene Common Stock at the then market value of the Calgene Common Stock, and any such conversion could substantially dilute the ownership interests of other Calgene stockholders.
During the six month period ended December 31, 1996, and the fiscal year ended June 30, 1996, Calgene had a $13 million line of credit with Harris Bank (the "Harris Credit Facility") which expired on February 28, 1997. Borrowings under the line of credit bore interest at the greater of one half percent over the bank's prime rate or two and one half percent over the federal funds rate. On December 31, 1996 the bank's prime rate was 8.25% and the federal funds rate was 6.26% The effective annual interest rates for the line of credit were 8.62% and 8.90% for the six month period ended December 31, 1996 and the fiscal year ended 1996, respectively. As of December 31, 1996, $6.5 million of indebtedness was outstanding of the bank line of credit. Subsequent to December 31, 1996, the Company replaced this line of credit with a $20 million working capital line of credit with Bank of America ("B of A"). The B of A facility expires on December 1, 1999. Available credit increases to $30 million after December 31, 1997 and to $40 million after December 31, 1998.
A $3.5 million line of credit with a bank is used to finance working capital requirements at Gargiulo's Puerto Rico operations. Borrowings under the line bear interest at prime. The credit line expires on September 30, 1997. On December 31, 1996, the bank's prime rate was 8.25%. As of December 31, 1996, there was $2.5 million outstanding on the line of credit.
While Monsanto has agreed to make a $40 million loan available to Gargiulo, further advances under such loan are subject to the achievement of certain milestones, and are to be used solely to fund the branded tomato strategy and are repayable out of specified portions of the cumulative free cash flow of Gargiulo. While Monsanto has agreed to advance up to $15 million annually to Calgene until September 30, 1998, not more than $15 million may be outstanding thereunder at any one time. Except as described above, Monsanto has no obligation to loan or otherwise contribute additional cash to Calgene.
Calgene believes its current cash balances together with the proceeds of the credit facility agreements and other bank lines of credit expected to be available to Calgene, will be sufficient to fund its operations for at least the next twelve months. However, such expectation is based in part on the achievement of the operating plans of Calgene and there can be no assurance such operating plans will be achieved. Also, there can be no assurance that all of Calgene's expected sources of funds will be available. Accordingly, there can be no assurance that Calgene will not be required to obtain additional sources of financing or that any future required financing will be available on favorable terms, if at all.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements and Supplementary Data Page
Report of Independent Auditors.............................................33
Consolidated Balance Sheets - December 31, 1996 and June 30, 1996 and 1995.....................................................34
Consolidated Statements of Operations - Six months ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994..............................................................36
Consolidated Statements of Shareholders' Equity - Six months ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994...............................................37
Consolidated Statements of Cash Flows - Six months ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994..............................................................38
Notes to Consolidated Financial Statements.................................39
Supplementary Data (Unaudited).............................................60
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders Calgene, Inc.
We have audited the accompanying consolidated balance sheets of Calgene, Inc. as of December 31, 1996, June 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the six months ended December 31, 1996, and each of the three years in the period ended June 30, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. 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 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Calgene, Inc. at December 31, 1996, June 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for the six months ended December 31, 1996, and each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to be the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Sacramento, California February 24, 1997
CALGENE, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
See accompanying notes.
CALGENE, INC. CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands, except per share amounts)
See accompanying notes.
CALGENE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
See accompanying notes.
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
Change in fiscal year
The Company has changed its fiscal year end from June 30 to December 31, beginning with the period ended December 31, 1996 to conform with the fiscal year end of the Monsanto Company which holds an equity ownership in Calgene of approximately 54.6% (Note 13).
Accordingly, the financial presentation in this report for 1996 is for the six month period from July 1, 1996 to December 31, 1996. Prior fiscal year's operations are as previously reported and cover twelve month periods ended June 30.
Unaudited comparative information for the six months ended December 31, 1995, is as follows (in thousands, except per share amounts):
Revenues $ 20,790 Gross profit (loss) (1,309) Net loss (16,104) Net loss per share (0.53)
Organization and Business
Calgene is a biotechnology company that is developing a portfolio of genetically engineered plants and plant products for the food, seed and oleochemical industries. The Company's research and business efforts are focused in three core crop areas--fresh produce (tomato and strawberry), edible and industrial plant oils (canola) and cotton--where Calgene believes biotechnology can provide substantial added commercial value in consumer, industrial and seed markets.
Consolidation and Equity Accounting
The consolidated financial statements include the accounts of Calgene, its wholly-owned subsidiaries and its majority owned joint venture (together the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.
Calgene uses the equity method to account for its investments in its 50 percent or less owned joint ventures. Under the equity method, Calgene recognizes its proportionate share of the net income or loss of these joint ventures currently, rather than when realized through dividends or disposal.
Cash Equivalents and Available-for-sale Securities
Cash equivalents and available-for-sale securities, consisting principally of certificates of deposit, bankers acceptances, commercial paper, U.S. treasury and agency securities, and money market funds, are stated at fair market value, and are adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. Unrealized gains and losses, net of tax, on available-for-sale securities are reported in shareholders' equity. Gross realized gains and losses on available-for-sale securities were not material during the periods presented. The aggregate fair market value of available-for-sale
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies (continued)
Cash Equivalents and Available-for-sale Securities (continued)
securities at December 31, 1996 is $1,960,000 of which $578,000 is included in cash and equivalents. The aggregate fair market value of available-for-sale securities at June 30, 1996 is $28,288,000 of which $17,369,000 is included in cash and equivalents. The aggregate fair market value of available-for-sale securities at June 30, 1995 is $20,276,000 of which $9,993,000 is included in cash and equivalents. The contractual maturities of available-for-sale securities at December 31, 1996 are as follows: $1,409,000 in 1997, $313,000 in 1998, and $238,000 in 2002.
Inventories
Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated or amortized on a straight-line basis over the estimated useful lives of the assets or the capital lease term, whichever is less. The estimated useful lives range from 3 to 30 years.
Product Rights, Patents and Other Intangible Assets
Product rights of approximately $3,939,000 at December 31, 1996; $3,042,000 at June 30, 1996 and $7,827,000 at June 30, 1995 are stated at cost and are amortized on a straight-line basis over the lesser of their contractual lives or their estimated useful lives (generally 10 to 20 years).
External costs incurred in obtaining patents are capitalized. The costs of successful patent applications are amortized on a straight-line basis over the lesser of their statutory lives or their estimated useful lives (generally 17 years). External costs incurred in defense of patents are capitalized and amortized on a straight-line basis over the remaining life of the patent. The costs of unsuccessful patent applications or patent defense are charged to expense in the period in which the patent applications are denied or the patent defense is unsuccessful. The net book value of capitalized patent related costs is $7,950,000, $7,908,000 and $8,372,000 at December 31, 1996 and June 30, 1996 and 1995, respectively.
Other intangible assets consist primarily of the seed library acquired in connection with the acquisition of Gargiulo (Note 4), which is being amortized over its estimated useful life of 15 years. See write-off of other intangible assets in Note 7.
Costs in excess of fair values assigned to net assets acquired are capitalized and amortized on a straight-line basis over periods of 10 to 25 years.
Revenue Recognition and Product Development Arrangements
Revenue from product sales is recognized primarily at the time of shipment net of estimated product returns. The Company performs research under contracts for the development of certain products for other entities. Revenue from product development contracts is recognized according to the percentage of completion
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition and Product Development Arrangements (continued)
method. Funding received in advance of research performed under these contracts is recorded as deferred revenue. Related contract expenses are charged to expense as incurred.
Income Taxes
The liability method is used to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. General business tax credits will be accounted for as a reduction of federal income taxes payable under the flow-through method.
Net Loss Per Share
Net loss per share has been computed by dividing the net loss by the weighted average number of common shares outstanding during each period. Common equivalent shares related to stock options have been excluded from the computation of net loss per share since their inclusion would be antidilutive.
Statement of Cash Flows
For purposes of the consolidated statement of cash flows, the Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. During the six month period ended December 31, 1996 and fiscal year 1996, 1995 and 1994, the Company paid cash for interest and income taxes as follows:
(In thousands) 1996 1996 1995 1994 ---- ---- ---- ---- (six months)
Interest $3,282 $1,619 $895 $621 Income taxes 17 83 91 53
The Company maintains its cash and equivalents and short-term investments in several different instruments. This diversification of risk is consistent with the Company's policy to maintain liquidity and ensure the safety of principal.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
During the quarter ended September 30, 1996, the Company adopted the provisions of the Financial Accounting Standards Board Statement of Financial Accounting No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires impairment losses to be recognized for long-lived assets and identifiable intangibles used in operations when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies (continued)
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (continued)
its carrying amount. Costs in excess of fair values assigned to net assets acquired in purchase business combinations are included in impairment evaluations when events or circumstances exist that indicate the carrying amount of the acquired assets may not be recoverable. SFAS 121 also requires that assets held for disposal be valued at the lower of carrying amount or fair value less cost to sell.
Accounting for Stock Based Compensation
The Company accounts for its stock option plans and its employee stock purchase plan in accordance with the provisions of the Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based Compensation." SFAS 123 provides an alternative to APB 25 and is effective for fiscal years beginning after December 15, 1995. The Company expects to continue to account for its stock plans in accordance with APB 25. Accordingly, SFAS 123 is not expected to have a material impact on the Company's financial position or results of operations.
Fair Values of Financial Instruments
The carrying amounts reported in the balance sheet for cash and equivalents and available-for-sale securities approximates their respective fair values. The carrying amounts of the Company's borrowings under its debt agreements approximate their fair value. The fair values of the Company's long-term debt are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
Use of Estimates and Certain Risks
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported to the financial statements and accompanying notes. Actual results could differ from those estimates. Among other things, the Company is subject to risks from changes in farm legislation, market price fluctuations for the Company's products, and adverse weather conditions which may effect the ultimate realization of certain of its inventories.
Reclassifications
Certain amounts reported for prior years have been reclassified to conform with the presentation of the December 31, 1996 financial statements.
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
2. Receivables
Receivables consist of the following:
3. Inventories
Inventories consist of the following at December 31, 1996 and June 30, 1996 and 1995:
4. Strategic Alliance
On March 31, 1996, Calgene and Monsanto Company ("Monsanto") consummated an Agreement and Plan of Reorganization (the "Reorganization Agreement") and related Plan of Merger under which Monsanto contributed Gargiulo, Inc. ("Gargiulo"), $30 million and certain oils and produce related technology in exchange for a 49.9% equity interest in Calgene. Gargiulo is a grower, packager, marketer and distributor of tomatoes, strawberries and other produce with operations in Florida, California, Puerto Rico and Mexico. The acquisition of Gargiulo was accounted for as a purchase.
In connection with the Reorganization Agreement a total of 30,161,114 shares of Calgene common stock were issued with an aggregate fair value of approximately $144,206,000. The per share value of Calgene common stock assigned to the transaction was based on the last trade as reported on the National Market System on the day the Company's negotiations with Monsanto concluded. The common stock trade price was discounted to account for Monsanto's liquidity restrictions based on an independent appraisal. The purchase price consists of the following:
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
4. Strategic Alliance (continued)
(In thousands)
30,161,114 shares of common stock $ 144,206 Acquisition costs, consisting primarily of financial advisory, legal and accounting fees 1,530 Less cash received (30,000) ----------- $ 115,736 ===========
A summary of the purchase price allocation is as follows:
(In thousands)
Net assets acquired $ 11,506 Identified intangible assets 21,680 Excess purchase price over net assets acquired 23,350 In-process research and development 59,200 ----------- $ 115,736 ===========
Intangible assets include completed technology, assembled workforce and costs in excess of fair values assigned to net assets acquired. The estimated useful lives are expected to range from 5 to 15 years. Because the technological feasibility of the acquired in-process research and development has not been established and has no alternative future uses, the $59.2 million allocated to in-process research and development has been expensed.
Between June 29, 1995 and March 19, 1996 Calgene received $23 million in advances toward the $30 million proceeds in the form of a subordinated promissory note. The subordinated note was converted to equity upon consummation of the transaction. The additional $7 million was received on April 1, 1996.
On November 12, 1996, the Company entered into a Stock Purchase Agreement with Monsanto (the "Stock Purchase Agreement"), pursuant to which (i) the Company sold and issued to Monsanto, and Monsanto purchased 6,250,000 shares of Common Stock of the Company (the "Additional Shares"), at $8.00 per share, for an aggregate purchase price of $50 million, thereby increasing Monsanto's ownership interest in shares of Calgene Common Stock from 49.9% to approximately 54.6% (without giving effect to the exercise of outstanding options and warrants), (ii) Monsanto and Calgene agreed to enter into a Restated Stockholders Agreement ("Restated Stockholders Agreement") amending and restating the Stockholders Agreement dated March 31, 1996 ("Stockholders Agreement"), and (iii) the Restated Certificate of Incorporation was amended to reflect the amendments to the Stockholders Agreement contemplated by the Restated Stockholders Agreement. As a consequence of the transaction, Monsanto owned approximately 36,396,114 shares of Common Stock of the Company, representing approximately 54.6% of the issued and outstanding shares of Common Stock of the Company.
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
4. Strategic Alliance (continued)
Acquisition of Collier Farms
On February 29, 1996, Gargiulo and Collier Enterprises consummated an asset purchase agreement whereby Gargiulo acquired substantially all the assets, subject to the assumption of certain specified liabilities, of the produce business conducted by certain affiliates of Collier Enterprises under the trade name Collier Farms ("Collier"). Collier is an agricultural producer of tomatoes and other vegetables in Florida, and engages in the packaging, marketing and distribution of those products in the commodity markets.
The purchase price consists of $10 million in cash and a $10 million promissory note, plus an earn-out payment based upon achieving certain earnings of the combined operations of Gargiulo and Collier in Southwest Florida. Gargiulo also acquired Collier's 1995-1996 crop and assumed liabilities related thereto, and committed to lease certain farmland from affiliates of Collier. The acquisition was accounted for as a purchase. The purchase price consists of the following:
(In thousands)
Cash $10,000 Promissory note 10,000 Investment in 1995-1996 crop 12,127 Acquisition costs, consisting primarily of financial advisory, legal and accounting fees 200 ------- $32,327 =======
A summary of the purchase price allocation is as follows:
(In thousands)
Net assets acquired $23,500 Excess purchase price over net assets acquired 8,827 ------- $32,327 =======
Unaudited Proforma Combined Results of Operations
Unaudited proforma combined results of operations for the year ended June 30, 1996, giving effect to certain adjustments as if the Gargiulo and Collier acquisitions occurred on July 1, 1995 are displayed in the following table. These unaudited proforma combined results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition been in effect on July 1, 1995 or which may result in the future.
(In thousands, except per share amounts)
Revenue $182,041 Net loss $(128,115) Net loss per share $(2.12)
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
5. Oilseed Cross Licensing Agreement
In May 1996, the Company entered into a broad cross licensing agreement with Monsanto encompassing the two companies' oilseed research programs. The agreement has an initial term of 15 years.
Under the agreement Calgene received a royalty free license to current and future Monsanto agronomic technology for use in combination with Calgene's proprietary oils modification genes for development of specialty canola oil products. Calgene also received $10 million from Monsanto for best-efforts research and development activities to be performed by Calgene over a three year period relating to further development of plant expression or oil modification technologies. In exchange for the above, Calgene will pay royalties to Monsanto based on a portion of the net profits of Calgene's oils division. The Company recorded the $10 million research and development funding as a long-term liability in the accompanying balance sheet. Royalties payable to Monsanto as described above will be charged against the liability in the period incurred. In the event the aggregate royalties to Monsanto exceeds $10 million, such amounts will be charged to expense as incurred.
In exchange for a $7 million non-refundable license fee paid to Calgene, Monsanto received a royalty bearing license to Calgene technology to develop agronomically superior corn, soybean, canola and sunflower crops. The license fee was recorded as product development revenue in the accompanying Statement of Operations.
6. PGI-Kirin Partnership
In March 1990 the Company and Kirin Brewery Co., Ltd. established PGI-Kirin Partnership ("PGK"), a joint venture to develop and commercialize new potato varieties. In January 1996 management decided to cease PGK operations and sell its remaining assets. Consequently, Calgene recorded an estimated net write-off of its investment in PGK of $982,000 in the third fiscal quarter of fiscal 1996. PGK's revenues in fiscal 1996 and fiscal 1995 were $1.6 million and $1.5, respectively.
7. Write-off of Assets and Restructuring Expenses
During the fiscal year ended June 30, 1996, the Company recorded a charge of approximately $15.6 million for the write-off of assets, including $10.4 million primarily related to the merger of Calgene's tomato operations into Gargiulo. The write-off of tomato assets primarily reflects a $5.4 million asset impairment charge due to the consolidation of facilities and equipment and a $2.5 million write-off of obsolete technology licenses. The Company also recorded $1.5 million for the write-off of its investment in PG-K (before minority interest), and $1.0 million for the write-off of an option to a technology license the Company does not intend to exercise. As a consequence of the Company's decision in the third quarter of fiscal 1996 to reduce its emphasis on commodity distribution products at Calgene Chemical, the excess purchase price of net assets acquired associated with the commodity distribution business was written-down to net realizable value resulting in a $1.2 million expense.
Pursuant to a plan approved by Calgene's Board of Directors in the quarter ended December 31, 1996, Gargiulo intends to significantly reduce its produce acreage in Southwest Florida. The reduction in acreage is in response to increased competitive pressure from Mexico produce and is expected to be accomplished over the next two to three years. As a consequence, during the quarter ended December 31, 1996, the Company recorded a charge of approximately $32.6 million for the write-off of assets, and other reserves. The write-offs include $9.4 million for the write-down of tomato germplasm, an $8.3 million asset impairment charge due to further consolidation of the Company's tomato packing facilities, and a $10.4 million charge related to the excess purchase price of net assets acquired allocated to the asset write-downs. The Company is actively seeking buyers for the packing facilities. In addition, a reserve of $4.5 million relating to other restructuring costs was recorded.
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
8. Long-term Debt and Notes Payable
Long-term debt consists of the following at December 31, 1996 and June 30, 1996 and 1995:
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
8. Long-term Debt and Notes Payable (continued)
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
8. Long-term Debt and Notes Payable (continued)
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
8. Long-term Debt and Notes Payable (continued)
The capitalized lease obligations listed above contain certain restrictive covenants which, among other things, require the Company to maintain a specified level of working capital. In addition, certain debt and capital lease obligations prohibit the Company from paying dividends on common stock.
At December 31, 1996 aggregate future principal payments by year on long-term debt and note payable to affiliate are due as follows:
(In thousands)
1997 $5,139 1998 3,848 1999 4,580 2000 27,795 2001 797 Thereafter 1,935 -------- $44,094
Notes Payable
A $13 million bank line of credit is used to help finance working capital requirements for Calgene's subsidiaries, excluding Gargiulo. Borrowings under the line bear interest at the greater of one quarter percent over the bank's prime rate or two and one half percent over the federal funds rate. On December 31, 1996 the bank's prime rate was 8.25% and the federal funds rate was 6.26%. The weighted average annual interest rate under the line of credit was 8.62%, 8.90%, and 8.92% for the six month period ended December 31, 1996 and for the fiscal year ended June 30, 1996, and 1995, respectively. Borrowings are subject to certain financial covenants which include prohibiting the Company from paying cash dividends on its
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
8. Long-term Debt and Notes Payable (continued)
Notes Payable (continued)
common stock. Borrowings are secured by qualifying accounts receivable and inventory and must be repaid on a monthly basis to the extent they exceed qualifying accounts receivable and inventory. As of December 31, 1996, and June 30, 1995 there was $6,500,000 and $5,973,000, respectively, outstanding on the line of credit.
During fiscal year 1996 the Company entered into a credit facility agreement with Monsanto. Monsanto is obligated, subject to certain terms and conditions, to lend up to $15 million annually for a period of three years to Calgene, although not more than $15 million may be outstanding at any one time. The credit facility agreement contains various covenants precluding Calgene and its subsidiaries from taking certain actions without the approval of Monsanto. Also, in the event of a default by Calgene, Monsanto has certain rights to convert the outstanding principal and interest under such agreement into additional shares of Calgene Common Stock, not to exceed 3,000,000 shares. The outstanding balance of this credit facility shall bear interest at two percent above the prime rate (aggregating 10.25% at December 31, 1996). This credit facility expires on September 30, 1998. As of December 31, 1996, the Company's advances under this credit facility had been paid in full.
A $3.5 million line of credit with a bank is used to finance working capital requirements at Gargiulo's Puerto Rico operations. Borrowings under the line bear interest at prime. The credit line expires on September 30, 1997. On December 31, 1996, the bank's prime rate was 8.25%. As of December 31, 1996, there was $2,500,000 outstanding on the line of credit.
9. Commitments and Contingencies
Leasing Arrangements
The Company leases certain research and office equipment as well as office and research space. These leases are accounted for as follows in the accompanying consolidated financial statements:
Capital Leases
The following amounts are included in property, plant and equipment as assets recorded under capital leases:
(In thousands)
December 31, 1996 June 30, 1996 June 30, 1995 ----------------- ------------- ------------- Cost $4,235 $6,847 $4,192 Less accumulated depreciation 1,525 1,245 1,113 ------- ------- ------- $2,710 $5,602 $3,079 ====== ====== ======
Depreciation expense charged to operations pursuant to these capital leases amounted to approximately $294,000, $482,000, $537,000 and $462,000 during the six month period ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 respectively.
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
9. Commitments and Contingencies (continued)
Capital Leases (continued)
During the six month period ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994, the Company capitalized equipment of approximately $334,000, $489,000, $1,506,000 and $773,000, respectively which represents the present value of the net minimum lease payments of capital lease obligations entered into during such fiscal periods.
The future minimum lease payments by fiscal year under capital leases, together with the present value of the net minimum lease payments are as follows at December 31, 1996:
(In thousands)
1997 $1,322 1998 621 1999 445 2000 555 2001 71 ------- 3,014
Less amount representing interest 433
Present value of net minimum lease payments (Note 8) $2,581 ======
Operating Leases
Future minimum payments by fiscal year under non-cancelable operating leases are as follows at December 31, 1996:
(In thousands)
1997 $ 6,379 1998 3,732 1999 3,153 2000 2,815 2001 1,436 Thereafter 637 -------- $ 18,152 ========
Rental expense charged to operations for all operating leases was approximately $3,445,000, $3,971,000, $3,259,000 and $1,761,000 for the six month period ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994, respectively. Rent expense related to leases with related parties was approximately $202,000 for the six month period ended December 31, 1996 and $143,000 for the year ended June 30, 1996.
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
9. Commitments and Contingencies (continued)
Inventory Purchase Commitments
In the normal course of business, the Company has entered into various grower contracts with third party growers. Pursuant to these contracts, the Company has agreed to purchase the resulting crop, subject to certain quality standards, at the end of the growing cycle which is generally less than one year. The amount of outstanding grower contract commitments is approximately $4.4 million at December 31, 1996.
Patents
Certain institutions and companies have been issued patents, have patent applications pending or have otherwise obtained proprietary rights to technology necessary or potentially useful to Calgene. These patents or patent applications, if patents are issued, could delay product introduction or preclude Calgene from using this technology without a license. The extent to which Calgene would be required to license such patents and cost and availability of such licenses are currently unknown.
Legal Proceedings and Other Contingencies
On or about January 29, 1997, Hanna Obstfeld filed suit in Delaware Chancery Court against the Company and certain of its directors alleging unfairness in connection with the proposed acquisition by Monsanto Company of those shares of the Company's common stock which Monsanto does not own. After Ms. Obstfeld brought her suit, other essentially identical actions followed, none of which have as yet been served upon the Company. It is anticipated that the complaints will shortly be consolidated and the Company has no obligation to answer, move or otherwise plead until such time as a consolidated complaint has been filed and served. No discovery has occurred to date in this action. The Company believes it has meritorious defenses to the allegations set forth in the pending complaints.
On February 11, 1997, three named Plaintiffs filed a Class Action Complaint against Gargiulo, Inc. in the United States District Court for the Northern District of California, San Jose Division. The Complaint arose from the employment relationship between the named and unnamed Plaintiffs and Gargiulo, Inc. The Plaintiffs allege certain violations of the Migrant and Seasonal Agricultural Worker Protection Act ("MSPA"), California's IWC Wage Order, the California Labor Code and the California Business and Professions Code; and Breach of Contract. The Plaintiffs seek damages including all unpaid wages, statutory damages under the California Labor Code; a declaration that Gargiulo violated MSPA, monetary damages pursuant to MSPA; and for an order enjoining Gargiulo, Inc. from violations of MSPA. Gargiulo's insurance carriers were contacted regarding this lawsuit. As of March 27, 1997, Gargiulo has answered the Class Action Complaint, and is initiating discovery regarding class certificaiton. Gargiulo, Inc. is also waiting for the response from its insurance carrier. While the results of the Class Action Complaint cannot be predicted, the Company believes that the ultimate outcome will not have a material adverse effect on the Company's consolidated financial position or results of operations.
From 1992 through early 1996, Calgene was engaged in a litigation with Enzo Biochem, Inc. ("Enzo") a company licensed under three related U.S. patents and counterpart foreign patents (the "Enzo Patents") which purported to cover the use of antisense technology in all cells, including plant cells. Some of Calgene's products, including the FLAVR SAVR tomato, use antisense technology. Enzo had claimed that Calgene infringed the Enzo Patents. Calgene denied infringement and challenged the validity of the Enzo Patents. On February 2, 1996, the District Court ruled that the Enzo Patents are invalid. In addition, the validity of a patent owned by Calgene directed to the use of antisense in plant cells was upheld by the District Court. Calgene subsequently requested that the court clarify certain aspects of the infringement portion of its decision, and the court has agreed to reconsider on this basis. There is no indication that the court would reverse any aspect of its original ruling. Meanwhile, Enzo has indicated that it intends to appeal the decision.
Although the trial court has the option of altering any aspect of its decision upon reconsideration, and Enzo may appeal the decision after its publication, Calgene believes that further proceedings will not have a materially adverse effect on its consolidated financial position or results of operations, based on the trial court's determination that the SUNY/Enzo Patents are invalid and not infringed by Calgene and that the Calgene Antisense Patent is valid.
Nevertheless, if on reconsideration or as a result of an appeal a court were to determine that one or more of the Enzo Patents validly covers plant cells and that such patents are infringed by Calgene's sales of products incorporating such antisense technology, Calgene could be held liable for significant damages and could be precluded from producing and selling the FLAVR SAVR tomato, as well as other products currently under development. There is no assurance that a license, if necessary, could be obtained by Calgene on commercially acceptable terms, if at all. If the court were to determine that the Calgene Antisense Patent is invalid or unenforceable, Calgene would be deprived of the competitive and licensing advantages afforded by its patent. Moreover, the Company would have to expense the capitalized legal fees related to the defense of the Calgene's Antisense Patent, which amounted to approximately $5.7 million at December 31, 1996.
On October 18, 1995, two groups of Plaintiffs filed separate complaints against various Defendants including Gargiulo & Associates in the United States District Court for the Eastern District of California. Both complaints arose from the same set of facts and allege the same three theories of recovery. These actions were consolidated. The cases involve personal injury claims relating to vehicle accident in which numerous migrant labor workers being transported to the farm of Gargiulo & Dresick Associates (which was being farmed under contract by Dresick Farms, Inc.) were killed or injured. The two cases, Albertano Alberto Jimenez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vegas; Robles Rios; Jesus Loza and Samuel Santiago Vasquez, and Jose Vasquez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vegas; Robles Rios; Jesus Loza and Samuel Santiago Vasquez, were both filed on October 18, 1995. The plaintiffs sought general damages, including compensation for pain and suffering; special damages, including past, present and future medical expenses; compensation for the loss of past and future income; and punitive damages in an unspecified amount. Gargiulo's insurance carriers have been contacted regarding these lawsuits. As of March 12, 1997, Gargiulo was granted its Motion for Summary Judgment as to all of the claims against it. This matter is now subject to appeal which must be filed by no later than 30 days from entry of judgment which will not occur for a few weeks.
The Company is party to other pending litigation incidental to its business and has from time to time been notified of various claims that are not the subject of pending litigation. While the results of litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of all such other litigation matters and claims will not have a materially adverse effect on its consolidated financial position or results of operations.
Employment Agreements
Calgene has various employment and consulting agreements with certain key individuals. The aggregate fixed commitment under these agreements is $2,125,000. In addition, one employment agreement provides for additional compensation based on a percentage of the net profit of Gargiulo.
10. Shareholders' Equity
Stock Options
At December 31, 1996, the Company has three stock-based compensation plans, which are described below. The Company applies APB 25 and related interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing the stock options. Under APB 25, because the
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
10. Shareholders' Equity (continued)
Stock Options (continued)
exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The Company established stock option plans in June 1991 (the "1991 Plan") and March 1996 (the "1996 Plan"), under which all officers, employees and directors of the Company may participate. Either incentive stock options or non-qualified stock options can be granted under both plans. 2,500,000 and 5,000,000 shares of the Company's common stock have been reserved for issuance under the 1991 Plan, and the 1996 Plan, respectively. Options granted under the plans generally have a term of ten years from the date of grant. The exercise price of incentive stock options granted under the plans may not be less that 100% of the fair market value of Calgene's common stock on the date of grant.
The administrative committee of the option plans has the authority to provide that options issued may be exercised by either (1) cash, (2) surrender by the optionee of other shares of common stock of the Company of a value equal to the exercise price of the shares as to which the option is being exercised, or (3) the optionee's issuance of an interest-bearing, full-recourse promissory note.
The Company also has a 1981 Stock Option Plan having terms generally similar to the 1991 Plan. The 1981 Plan has been terminated subject to the rights of holders of outstanding options.
Pro forma information regarding net loss and net loss per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to June 30, 1995 under the fair value method of that Statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the year ended June 30, 1996, and the six month period ended December 31, 1996: dividend yield of 0; volatility factors of the expected market price of the Company's common stock of .44; risk-free interest rate of 6.6%; and a weighted-average expected life of the options of 3.5 years for certain option holders and five years for all other option holders.
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 the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information, which includes the stock option plans and the Employee Stock Purchase Plan, follows (in thousands except for net loss per share information):
Six Months Ended Year Ended December 31, 1996 June 30, 1996 ----------------- ------------- Net loss - actual $ (63,934) $ (97,014) Net loss - pro forma (65,085) (97,564) Net loss per share - actual (1.03) (2.56) Net loss per share - pro forma (1.05) (2.58)
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
10. Shareholders' Equity (continued)
Stock Options (continued)
Because SFAS 123 is applicable only to options granted subsequent to June 30, 1995, its pro forma effect will not be fully reflected until 1999.
A summary of the status of the Company's stock option plans and changes during the periods is presented below:
The weighted-average fair value of options granted during the six month period ended December 31, 1996, and the year ended June 30, 1996, was $2.37 and $2.54, respectively.
The following table summarizes information about the stock options outstanding at December 31, 1996:
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
10. Shareholders' Equity (continued)
Stock Options (continued)
At June 30, 1995, 814,421 options were exercisable at prices ranging from $5.25 to $15.25 per share. At June 30, 1996, 1,088,775 options were exercisable at prices ranging from $4.75 to $15.25 per share. At December 31, 1996, there are 404,917 shares and 2,138,072 shares available for grant under the 1991 plan and 1996 plan, respectively. Of the options outstanding at December 31, 1996, options to purchase 1,583,871 shares were immediately exercisable at prices ranging from $4.75 to $15.25 per share on dates ranging from 1996 to 2006.
In November 1994, the Board of Directors approved an amendment to all outstanding options held by employees of the Company under the 1991 plan with exercise prices in excess of $7.50 per share. The amendment allowed employees to elect to reduce the option exercise price to $7.50 per share in exchange for an extended vesting period. A total of 1,268,081 options with option prices ranging from $7.75 to $16.00 were repriced.
Employee Stock Purchase Plan
The Company established a stock purchase plan in March 1990 (the "1990 Plan") under which most employees of the Company may participate. A total of 500,000 shares of the Company's common stock have been reserved for issuance under the 1990 Plan. The 1990 Plan is administered by the Board of Directors or by a committee appointed by the Board of Directors. Employees can elect to have from two to ten percent of their monthly gross salary deducted during each offering period and applied to the purchase of stock. The purchase price is an amount equal to 85% of the fair market value of a share of common stock of the Company on the enrollment date or on the purchase date, whichever is lower. During the fiscal years ended December 31, 1996, June 30, 1996, 1995 and 1994, the Company sold 21,521 shares of common stock for $91,464, 31,593 shares of common stock for $166,183, 31,462 shares of common stock for $216,179, and 23,045 shares of common stock for $223,144, respectively. For purposes of calculating the pro forma disclosures required by SFAS 123, the fair value of the employees' purchase rights was estimated using the Black-Scholes option pricing model with the following assumptions for the six month period ended December 31, 1996 and the year ended June 30, 1996: dividend yield of 0; expected life of 6 months; expected volatility of .33; and risk-free interest rate of 5.81%. The weighted-average fair value of those purchase rights granted during the six month period ended December 31, 1996 and the year ended June 30, 1996, was $1.60 and $1.97, respectively.
11. Income Taxes
The income tax provision for the six month period ended December 31, 1996 and years ended June 30, 1996, and 1995 is comprised of state franchise taxes. Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes are as follows:
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
11. Income Taxes (continued)
At June 30, 1994 the valuation allowance for deferred tax assets was $61.1 million.
For federal income tax return purposes, as of December 31, 1996, the Company has a net operating loss carryover of approximately $234 million which expires between 1997 and 2012 and a general business tax credit carryover of approximately $4 million which expires between 1997 and 2012. In addition, as of December 31, 1996, the Company has a net operating loss carryover of approximately $143 million for state income tax purposes which expires between 1997 and 2012.
Approximately $20 million and $3 million of the federal and state net operating loss carryovers, respectively, and $700,000 of the general business tax credit carryover, were generated by Plant Genetics prior to its merger with Calgene. Such net operating loss and general business tax credit carryovers are available only to offset the separate federal and state taxable income, if any, of Calgene Fresh (Plant Genetics was renamed Calgene Fresh in January, 1992). For financial reporting purposes, a valuation allowance of approximately $118.4 million has been recognized to offset the deferred tax assets related to all of the aforementioned carryforwards.
CALGENE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and June 30, 1996, 1995 and 1994
11. Income Taxes (continued)
Because of "change in ownership" provisions of the Tax Reform Act of 1986, a portion of the Company's federal net operating loss and credit carryovers will be subject to an annual limitation regarding their utilization against taxable income in future periods. The Company expects that this annual limitation will not have a material adverse effect on the Company's ability to utilize the net operating loss and credit carryovers prior to the expiration of the carryover periods.
12. Tax Deferred Investment Plan
Substantially all full-time employees of the Company are eligible to participate in a tax deferred investment plan (the "401(k) Plan"). The 401(k) Plan permits each employee to contribute 2% to 15% of compensation on a pre-tax basis, to a maximum amount per calendar year. For the six month period ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994, matching contributions by the Company were $118,000, $227,000, $179,000 and $151,000, respectively.
13. Subsequent Events
In January 1997, the Company received an unsolicited proposal from Monsanto to acquire all of the outstanding shares of the Company's stock that Monsanto does not already own at a price of $7.25 per share. Monsanto currently owns approximately 54.6% of the Company's outstanding shares. The proposal is under consideration by a special committee of three disinterested Calgene Directors.
In February 1997, the Company replaced its $13 million bank line of credit with a $20 million bank line of credit with a different bank. The bank line is used to help finance working capital requirements for Calgene. Borrowings are secured by accounts receivable, inventory and equipment. The line of credit expires on December 1, 1999. Available credit increases to $30 million after December 31, 1997 and to $40 million after December 31, 1998.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Board of Directors of Calgene, Inc. (the "Company") is as follows:
There is no family relationship between any director and any other director or executive officer of the Company.
Mr. Fortune was appointed Corporate Vice President, Information Technology and Chief Information Officer of Monsanto Company in October 1995. From August 1994 to August 1995, Mr. Fortune was president and Chief Operating Officer of Coram-Healthcare Corporation, whose business is home infusion therapy for cancer and AIDS patients. From 1991 to 1994, Mr. Fortune was Corporate Vice President, Information Management for Bristol-Meyers Squibb. From 1989 to 1991, Mr. Fortune was Senior Vice President and General Manager of Packaging Corporation of America, prior to which he served as Vice President, Information Services and Corporate Vice President of the Parenterals Group of Baxter International. He is also a member of the Board of Directors of Parexel Corporation, a clinical research organization, and serves on the Board of Visitors of the School of Physical Sciences at the University of Chicago.
Mr. Fraley was named President of Ceregen, a business unit of Monsanto, in 1995. From 1993 to 1995, Mr. Fraley was Vice President, New Products Division, of the Monsanto Agricultural Products Group. From 1990 to 1993, Mr. Fraley was Vice President, Research and Development, New Products Division, of the Monsanto Agricultural Products Group. Mr. Fraley is a director of Dekalb Genetics Corp., an agricultural products company.
Mr. Hogan was appointed Corporate Vice President and Corporate Controller of Monsanto Company in January 1996. From 1986 to 1995, Mr. Hogan was Executive Vice President of General American Life and while holding such position also served as president and Director of Gencare Health Systems, Inc. and its predecessor organization from 1990 through 1994.
Mr. Kunimoto has been the President and Acting Chief Executive Officer of the Company since July 1996. From June 1995 to July 1996, Mr. Kunimoto served as Vice President of Strategic Planning and Business Development. From November 1983 to June 1995, Mr. Kunimoto served in several senior management positions with the Company.
Mr. Palefsky has been Chairman of Collagen Corporation, a medical products company, since 1995. Mr. Palefsky was Chief Executive Officer of Collagen Corporation, from 1978 to 1997 and served as president from 1978 to 1995. He is also a director of Target Therapeutics, Inc. and Innovasive Devices, Inc., both medical products companies.
Mr. Robson has been a Senior Advisor of Robertson, Stephens & Company since 1993. From 1989 to 1992, Mr. Robson was Deputy Secretary of the United States Treasury. Mr. Robson is also a director of Monsanto Company, a chemicals, pharmaceuticals and agricultural products company, Northrop Grumman Corporation, an aerospace and defense company, and Security Capital Industrial Trust, a real estate investment trust.
Mr. Salquist has been a principal of the Craves Group, a private merchant bank since February 1997. Mr. Salquist had previously served as an executive officer of the Company since September 1983 and its Chief Executive Officer since November 1985. Mr. Salquist is a director of Collagen Corporation, a medical products company.
Mr. Vangelos has been the President and Chief Executive Officer of Calavo Growers of California since September 1986, prior to which he held management positions at Castle & Cooke, including Vice President and General Manager of Processed Products and President of International Diversified Business and Fresh Marketing. From 1980 to 1984, he was the Chief Executive Office of Impact corporate Group, a food brokerage company. Mr. Vangelos was the 1993 Chairman of the Board of Directors of the Agricultural Council of California and a past Chairman of the United Fresh Fruit and Vegetable Association.
Mr. Verfaillie was appointed an Executive Vice President of Monsanto Company in July 1995. Prior to this he served as President of The Agricultural Group, Vice President and Advisory Director--Monsanto Company from 1993 to 1995, Vice President and General Manager, Roundup Division--The Agricultural Group from 1990 to 1993, and Vice President-Commercial Development--Monsanto Agricultural Company from 1986 to 1990.
Board Meetings, Committees and Director Compensation
The Board of Directors of the Company (the "Board") held five meetings during the six month fiscal period ended December 31, 1996. No nominee attended fewer than 75% of the meetings of the Board of Directors and of the committee of the Board on which he served that were held during the period of the director's service.
The Board has an Audit Committee, a Human Resources Committee and a Replacement/Retention Committee. From time to time, the Board has created various ad hoc committees for special purposes.
The Audit Committee consists of Messrs. Salquist, Fortune, Fraley, and Hogan. The Audit Committee held three meetings in the last fiscal period. The Audit Committee recommends engagement of the Company's independent auditors and is primarily responsible for approving the services performed by the Company's independent auditors and for reviewing and evaluating the Company's accounting principles and its system of internal accounting controls.
The Human Resources Committee consists of Messrs. Vangelos, Verfaillie, Palefsky and Robson. The Human Resources Committee held two meetings during the fiscal period. The Human Resources Committee considers and makes recommendations to the Calgene Board of Directors concerning general compensation policies and employee benefit plans and specifically recommends salary levels and bonus awards for certain senior executive officers, including the Chief Executive Officer. The Human Resources Committee also administers Calgene's stock option plans and has sole authority to grant options to officers.
The Retention/Replacement Committee consists of Messrs. Palefsky, Verfaillie and Robson. The Retention/Replacement Committee is responsible for the retention and/or replacement of all of the executive officers of the Company. Under the terms of the Restated Stockholders Agreement, the Retention/Replacement Committee was eliminated, thus leaving the Calgene Board of Directors thereafter responsible for the retention and/or replacement of all of the executive officers of the Company.
Directors who are not also employees of the Company or Monsanto or their subsidiaries receive a fee of $1,000 per meeting ($250 per telephone meeting) attended, $500 per Board committee meeting attended (unless held on the same day as a Board meeting) and a monthly retainer of $1,000, plus out-of-pocket travel expenses. Prior to April 1, 1996 directors received an annual retainer of $3,000 (accruing and payable $250 per month). Under the 1996 Stock Option Plan, non-employee directors (excluding directors employed by Monsanto) receive an option to purchase 10,000 shares of Common Stock at the time of their initial election to the Board, and receive annually thereafter options to purchase 3,000 shares of Common Stock. These automatically granted options have terms of five years (subject to continued service on the Board), become exercisable in equal monthly increments over the twelve months following the respective grant dates and have exercise prices equal to the fair market value of the Common Stock on their dates of grants. On March 25, 1996, annual options were automatically granted to each of the nonemployee directors then serving (excluding directors employed by Monsanto) at an exercise price of $6.00 per share.
There we no consulting fees paid to directors in the six month fiscal period ended December 31, 1996.
In addition to the fees listed above, Monsanto Company transferred to Mr. Robson 15,000 shares of Common Stock of the Company pursuant to the terms of a letter agreement dated May 6, 1996 between John E. Robson and Monsanto Company. Such shares are subject to a three-year vesting period, under which 33 1/3% of the total number of shares originally granted become non-forfeitable on each March 31 commencing March 31, 1997.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
The following table provides certain summary information concerning compensation earned during the last two fiscal years and the six month fiscal period ended December 31, 1996 by the Company's Chief Executive Officer and each of the four other most highly compensated executive officers of the Company who were serving at December 31, 1996 (the "named executive officers"). The table also includes such information for one former executive officer who at December 31, 1996 was no longer employed by the Company or a subsidiary of the Company.
SUMMARY COMPENSATION TABLE
(1) Includes amounts earned in the fiscal year even if paid in the subsequent fiscal year or deferred pursuant to the Company's 401(k) savings plan. Excludes amounts paid during the fiscal year that were earned in a prior year. (2) Amounts reported as "All Other Compensation" represent the Company's matching contributions under its 401(k) savings plan. (3) The options shown in the table as granted to Mr. Salquist in fiscal 1994 were originally granted in 1987 for a six-year term and extended for four additional years in fiscal 1994. (4) In August 1996, Mr. Salquist resigned as Chairman of the Board and Chief Executive Officer. Mr. Salquist remains as a member of the Board and has also become a consultant to the Company. See "Executive Compensation--Change of Control Employment Agreements." (5) Since the resignation of Mr. Salquist, Mr. Kunimoto served as Acting Chief Executive Officer. (6) Mr. Leleu's "other annual compensation" in the transition period and fiscal 1996 consisted of reimbursement of relocation expenses. (7) The "Transition" fiscal period is for the six month period ended December 31, 1996.
Change of Control Employment Agreements
Mr. Salquist entered into a Change of Control Employment Agreement, dated as of July 19, 1995, with the Company. The agreement became effective only upon a Change of Control (as defined) of the Company and provides that, if the employment of the officer is terminated by the Company without Cause (as defined) or by the officer for Good Reason (as defined) within the three-year term of the agreement or if he resigns upon the six-month of three-year anniversaries of the effective date of the agreement, the officer shall receive severance benefits that include a payment equal to 2.99 times his base salary and average bonus for the prior three fiscal years. For purposes of such agreements, a Change of Control included the closing of the transaction on March 31, 1996 pursuant to which Monsanto Company acquired a 49.9% equity interest in the Company.
In connection with his resignation in August 1996, Mr. Salquist and the Company entered into an amendment to his Change of Control Employment Agreement
pursuant to which Mr. Salquist agreed that payments required to be made to him under such agreement would be paid over a 13 month period rather than in a lump sum. The amended agreement provided for the payment of $315,000 upon Mr. Salquist's resignation and monthly payments of $25,000 during a 12 month consulting period and an additional payment of $290,000 at the end of the 12 month period.
On May 31, 1996, Mr. Motroni and the Company entered into an amendment to his Change of Control Employment Agreement pursuant to which Mr. Motroni agreed to remain in the employ of the Company until the earlier of (i) May 31, 1997, or (ii) the occurrence, after May 31, 1996, of any event that constitutes Good Reason (as defined) in consideration of the Company's payment to Mr. Motroni or $100,000. In addition, the amended agreement provides for the payment to Mr. Motroni of $335,000 upon the earliest of (i) the cessation of his employment for any reason after May 31, 1997, (ii) the termination of his employment without Cause (as defined) or by reason of death, or (iii) his resignation as a result of the occurrence of any event that constitutes Good Reason.
Stock Option Tables
No stock options were granted in the six month fiscal period ended December 31, 1996 to the named executive officers in the Summary Compensation Table.
Options Exercises and Fiscal Period-End Values
The following table shows stock options exercised by the named executive officers in the Summary Compensation Table during the six month fiscal period ended December 31, 1996, the aggregate value of gains on the dates of exercise, the number of shares covered by both exercisable and non-exercisable stock options as of fiscal year-end, and the year-end values for such options.
(1) Value is based on market value of the Common Stock at exercise date (for value realized), or at December 31, 1996 (for value of unexercised options), minus the option exercise price.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock of the Company as of February 28, 1997, by each director, by each executive officer shown in the Summary Compensation Table (see "Executive Compensation"), by all directors and executive officers as a group and by each person known by the Company to be a beneficial owner of more than 5% of the shares outstanding.
* Less than 1%. (1) The Company believes that all beneficial owners named in the table have sole voting and investment power with respect to the shares they beneficially own. The shares shown in the table to be beneficially owned include any shares that the person has the right to acquire within 60 days of January 31, 1997, by exercise of any stock option for which the Company has knowledge. The shares subject to such options are as follows: Mr. Baum; 49,079: Mr. Gargiulo; 16,667: Mr. Leleu; 20,833: Mr. Stonard; 23,333: Mr. Kunimoto; 35,329: Mr. Palefsky; 17,000: Mr. Robson; 15,000: Mr. Salquist; 224,762: Mr. Vangelos; 21,000: and all executive officers and directors as a group; 531,804. (2) Percent of the 66,729,861 outstanding shares of Common Stock, counting as outstanding for each named person all shares issuable to such person on exercise of options that are included in the first column. (3) Based on a Schedule 13G filed on January 22, 1997, with respect to beneficial ownership as of December 31, 1996. The total includes 4,076,654 shares beneficially owned by Smith Barney Holdings Inc.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Agreements with Monsanto
Reorganization Agreement. On October 13, 1995, the Company and Monsanto entered into an Agreement and Plan of Reorganization ("Reorganization Agreement") and certain other agreements whereby Monsanto contributed all of the outstanding shares of capital stock of Tomato Investment Associates, Inc., a wholly-owned subsidiary of Monsanto ("TIA"), whose principal asset was the entire equity interest in Gargiulo, L.P., $30 million in cash and certain technology licenses in exchange for a 49.9% equity interest in the Company. In connection with the Reorganization Agreement, a total of 30,146,114 shares of
Common Stock of the Company were issued to Monsanto. The Reorganization Agreement was approved by the stockholders of the Company on March 25, 1996. On March 31, 1996 (the "Effective Time"), the Company and Monsanto consummated the transactions contemplated by the Reorganization Agreement which included entering into the agreements discussed below. Subsequent to the Effective Date, Gargiulo L.P. was merged into TIA and TIA changed its name to "Gargiulo, Inc."
Stock Purchase Agreement. On September 27, 1996, the Company entered into a Stock Purchase Agreement with Monsanto (the "Stock Purchase Agreement"), pursuant to which (i) the Company sold and issued to Monsanto, and Monsanto purchased 6,250,000 shares of Common Stock of the Company (the "Additional Shares"), at $8.00 per share, for an aggregate purchase price of $50 million, thereby increasing Monsanto's ownership interest in shares of Calgene Common Stock from 49.9% to approximately 54.6% (without giving effect to the exercise of outstanding options and warrants), (ii) Monsanto and Calgene agreed to enter into a Restated Stockholders Agreement ("Restated Stockholders Agreement") amending and restating the Stockholders Agreement dated March 31, 1996 ("Stockholders Agreement"), and (iii) the Restated Certificate of Incorporation was amended to reflect the amendments to the Stockholders Agreement contemplated by the Restated Stockholders Agreement. As a consequence of the transaction, Monsanto owned approximately 36,396,114 shares of Common Stock of the Company, representing approximately 54.6% of the issued and outstanding shares of Common Stock of the Company.
Stockholders Agreement and Restated Stockholders Agreement. On March 31, 1996, the Company and Monsanto entered into a Stockholders Agreement. On November 12, 1996, Calgene and Monsanto entered into the Restated Stockholders Agreement which amends and restates the existing Stockholders Agreement. The following is a summary of the Stockholders Agreement as amended by the Restated Stockholders Agreement ("the Stockholders Agreement").
Composition of the Calgene Board.
Composition of the Calgene Board and the manner of selecting members thereof shall be as follows:
(a) Until otherwise changed in accordance with the Restated Stockholders Agreement, the Board of Directors of Calgene shall be comprised of nine Directors consisting of one Company Management Director, three Independent Directors and five Directors designated by Monsanto, at least one of which shall be an Independent Director.
(b) At any time that Monsanto's Percentage Interest is at least seventy percent (70%), Calgene shall nominate (i) six directors designated by Monsanto which shall consist of one Company Management Director and five Monsanto directors (including at least one Independent Director) and (ii) three Independent Directors. At such time as Monsanto's Percentage Interest is at least ninety-nine percent (99%), Calgene shall nominate nine directors designated by Monsanto.
If an when Monsanto's Percentage Interest is less than 40%, 20%, 10% or 5%, the number of directors designated by Monsanto is reduced to three, two, one and zero, respectively.
The Stockholders Agreement also provides that the Board of Directors, by unanimous action, may increase the number of directors comprising the Board and may elect, or nominate for election, the director(s) to fill the vacancy or vacancies created by such increase.
Registration Rights. The Stockholders Agreement provides Monsanto and certain assignees may, subject to certain conditions and limitations, require Calgene, whether or not Calgene proposes to register its Common Stock for sale, to register with the Securities and Exchange Commission all or part of the shares held by Monsanto. The Restated Stockholders Agreement provides that the Additional Shares acquired by Monsanto pursuant to the Stock Purchase Agreement shall also be entitled to these registration rights. Calgene is not required to effect such a registration prior to September 30, 1998, unless an event of default has occurred and is continuing under the Credit Agreements. See "Certain Transactions--Credit Agreements."
Anti-Dilution Rights. If at any time Calgene agrees to sell shares of Calgene Common Stock or other securities having the right to vote generally in any election of directors of Calgene (collectively, "Calgene Securities") in a private or public offering (other than pursuant to Calgene stock option plans), Monsanto is entitled to notice of such proposed sale and has the right, but not
the obligation, to acquire all or any portion of the Calgene Securities to be offered for sale sufficient for Monsanto to maintain, after the consummation of the proposed offering, the same percentage of ownership of Calgene Securities as Monsanto possessed immediately prior to such offering. With respect to shares of Calgene Securities issued pursuant to Calgene's stock option plans, Monsanto shall have the right to maintain its percentage ownership of issued and outstanding Calgene Securities by making open market purchases in accordance with the Stockholders Agreement. This provision is unchanged by the Restated Stockholders Agreement.
Limitations on Monsanto's Ownership of Calgene Securities. The Stockholders Agreement provides that until September 30, 1998 Monsanto may not increase its Percentage Interest above 54.6% except in limited circumstances such as:
(a) conversion of principal and/or interest under the Credit Agreements;
(b) issuance of Calgene Securities in an asset sale by Monsanto to Calgene;
(c) A tender offer for 100% of the publicly held shares, provided that the price must be approved by disinterested directors and supported by a fairness opinion by an investment banking firm.
Limitations on Monsanto's Resale of Calgene Securities. Monsanto shall not, directly or indirectly, sell any Calgene Securities (other than to an affiliate) except as follows: (a) on and after March 31, 1997, Monsanto may sell Calgene Securities (i) as part of a joint venture, merger or sale of all or substantially all of its current Crop Protection business unit, as such business may be subsequently renamed or reorganized, or (ii) pursuant to a tender offer by a third party to the stockholders of Calgene; (b) after September 30, 1998, in addition to the rights set forth in (a) above, Monsanto may sell Calgene Securities (ii) in a registered public offering pursuant to the registration rights granted to Monsanto under the Stockholders Agreement; (ii) through sales pursuant to Rule 144 under the Securities Act of 1933 (the "Securities Act"); (iii) through sales of not more than 10% of the total issued and outstanding Calgene Securities to a Non-Financial Purchaser (as defined in the Stockholders Agreement); or (iv) through sales to a Financial Purchaser (as defined in the Stockholders Agreement); (c) after September 30, 1999, in addition to the rights set forth in (a) and (b) above, Monsanto may sell Calgene Securities through a private sale of 35% or more of the total issued and outstanding Calgene Securities to a Non-financial Purchaser under circumstances where such third party assumes the applicable and proportionate rights and obligations of Monsanto under the Stockholders Agreement and the other transaction agreements; and (d) notwithstanding the foregoing, at any time, Monsanto may sell Calgene Securities issued to Monsanto upon conversion by Monsanto of principal or accrued interest under the Credit Agreements after the occurrence of an event of default (see "Certain Transactions--Credit Agreements" ).
Approval Required for Certain Actions.
The Restated Stockholder Agreement provides that:
(a) Until the earlier of (i) March 31, 1999 or (ii) such time as Monsanto's Percentage Interest is at least seventy percent (70%), a majority of the Calgene Board, including at least two Company Directors, shall be required to approve any of the following: (i) the entry by the Company or any of its Affiliates into any merger or consolidation or the acquisition by the Company or any of its Affiliates of any business or assets that would constitute more than 10% of the Company's total assets determined on a consolidated basis (a "Substantial Part"); (ii) the sale, pledge, grant of security interest in transfer, retirement or other disposal of a Substantial Part of the Company, except pursuant to a security interest granted in connection with borrowings permitted under the Restated Stockholders Agreement or the pledge or granting of a security interest in certain intangible property as further described in the Restated Stockholders Agreement; (iii) the establishment of any new committees of the Calgene Board or new or revised delegations of Calgene Board authority to any Calgene Board committee or changes or revisions to general delegations of authority to officers or other persons for categories of expenditures; (iv) the election, appointment or removal of the Chief Executive Officer, Chief Operating Officer or Chief Financial Officer of the Company and its successors and the establishment of its annual or long-term compensation level and benefits (other than agreements in effect at the Effective Time); provided, however, that Monsanto shall have the right to select the Chief Technical Officer of the Company and a controller reporting to the Chief Financial Officer of the Company; (v) approval of the Operating Plan and Strategic Plan of the Company and its Affiliates, as
well as the annual operating plan and long-term strategic plan for the Gargiulo business, to be submitted to the Calgene Board annually for approval, and any material changes thereto; (vi) any modification of the Transaction Agreements; or (vii) any transaction between the Company (and its Affiliates) and Monsanto or any Affiliate of Monsanto.
(b) From and after March 31, 1999, and until Monsanto's Percentage Interest is at least 99%, neither Monsanto nor any of the Affiliates shall enter into any transaction with Calgene or any of its Affiliates without the approval of at least two Company Directors.
Credit Agreements
Calgene Credit Facility Agreement
On March 31, 1996, Monsanto and Calgene entered into the Calgene Credit Facility Agreement pursuant to which Monsanto shall, during the Commitment Period (as hereinafter defined), and subject to the terms and conditions contained therein, make, at the request of Calgene, three consecutive one-year loans of up to $15 million each (each a "Calgene Loan" and together the "Calgene Loans"), collectively totaling not more than $45,000,000. At no time shall the outstanding principal of all Calgene Loans exceed $15 million. Prior to the occurrence of an Event of Default (as defined in the Calgene Credit Facility Agreement), Calgene may borrow, repay and reborrow under each Calgene Loan, each such borrowing or reborrowing being an "Advance." The "Commitment Period" began on March 31, 1996 and ends on the earlier of September 30, 1998, or such earlier time that Monsanto terminates its obligations to make further Advances under the Calgene Credit Facility Agreement. The Calgene Loans made pursuant to the Calgene Credit Facility Agreement are to be secured by the joint and several guaranty of the subsidiaries of Calgene.
Prior to the occurrence of an Event of Default, the Calgene Loans bear interest at the per annum rate equal to 2.00% above Citibank's published prime rate (the "Calgene Base Rate"), and following an Event of Default at the per annum rate equal to 3.00% above the Calgene Base Rate. During the continuance of an Event of Default, Calgene shall have no right to obtain any new Advances under this Agreement. The Calgene Loans may be prepaid in whole or in part at any time after giving at least three days prior written notice to Monsanto.
In lieu of repayment of outstanding principal and accrued interest on each Calgene Loan, Calgene, subject to Monsanto's right to require Calgene to sell shares and pay cash, as provided below, may elect to convert all or any portion of the principal and accrued interest due under the applicable Calgene Loan (the "Conversion Amount") into shares of Calgene Common Stock at the average of the closing market price for such shares during the thirty trading days immediately preceding the applicable maturity date for such Calgene Loan.
Monsanto may, in its sole discretion and within five business days after its receipt of notice from Calgene that Calgene intends to exercise Calgene's rights to convert the Conversion Amount, give written notice to Calgene stating that (i) all or any part of the Conversion Amount shall be payable in cash (the "Alternative Conversion Amount"), (ii) Calgene shall, at its expense, sell publicly such number of shares of its common stock as Monsanto would have received if the Alternative Conversion Amount had been converted as described above and (iii) the net proceeds of such sale shall be paid by Calgene to Monsanto in full payment and satisfaction of such Alternative Conversion Amount.
Upon any such conversion, the Conversion Amount shall first be applied to reduce the accrued interest due on the applicable Calgene Loan as of the applicable maturity date, and any remaining portion of the Conversion Amount shall be applied to reduce the principal due on such Calgene Loan. In any event, on each annual Maturity Date (as defined in the Calgene Credit Facility Agreement), all outstanding principal and accrued interest not converted by Calgene into shares of Calgene Common Stock shall be repaid in full to Monsanto.
Upon the occurrence and during the continuation of an Event of Default, for a period of thirty (30) days from the occurrence of the Event of Default, Calgene, subject to Monsanto's right to require Calgene to sell shares and pay cash, as described above, may similarly elect to convert all or any portion of the principal and accrued interest under any outstanding Calgene Loan into shares of Calgene Common Stock. If Calgene does not elect to exercise its conversion rights upon such an Event of Default, Monsanto may, in addition to
its other remedies, elect to convert all or a portion of the remaining principal and accrued interest under such Calgene Loan into shares of Calgene Common Stock at the average of the closing market prices for such shares during the thirty days preceding such Event of Default. In no event, however, shall Monsanto elect to convert principal and accrued interest into more than 3,000,000 shares of Calgene Common Stock (as such number is adjusted for stock dividends, stock splits and similar events affecting holders of Calgene's common stock).
The obligation of Monsanto to provide Advances is subject to the fulfillment of certain conditions, including, among others: (i) the continued accuracy of all representations and warranties made by Calgene and its subsidiaries; (ii) the compliance with all covenants contained in the Calgene Credit Facility Agreement; (iii) no event shall have occurred which would constitute an Event of Default or Potential Event of Default (as defined in the Calgene Credit Facility Agreement); or (iv) there shall not have occurred any circumstance which could reasonably be expected to have a material adverse effect on (A) the business, assets, operations or financial condition of Calgene and its subsidiaries, taken as a whole, or (B) the ability of the Company and its subsidiaries to perform their obligations under the Calgene Credit Facility Agreement.
The covenants contained in the Calgene Credit Facility Agreement require Calgene to maintain a minimum consolidated net worth of not less than $10 million and a minimum consolidated working capital of not less than $5 million. The Calgene Credit Facility Agreement also requires that Calgene and its subsidiaries meet certain specified financial ratios, including a ratio of total long-term liabilities to net worth and a current ratio. In addition, the Calgene Credit Facility Agreement imposes a number of limitations on Calgene with respect to future acquisitions, liens, mergers and the sale of assets, loans and investments, guaranties, capital expenditures, the payment of dividends and the incurrence of indebtedness. The existence of these covenants could limit Calgene's ability to finance the growth of its existing operations if cash flows were to decrease substantially or if expenses were to increase substantially. These covenants would also limit Calgene's ability to engage in additional acquisitions that would significantly increase the ratio of long-term indebtedness to net worth following such acquisitions. The failure of Calgene to satisfy these covenants would cause an Event of Default which could have a material adverse effect on its business and results of operations.
All of the Calgene Loans shall be subordinated and subject in right of payment to the prior payment in full of a certain senior indebtedness of Calgene as more fully described in the Calgene Credit Facility Agreement. No payment on account of principal or interest on the Calgene Loans shall be made if at the time of such payment or immediately after giving the effect thereto: (i) there shall exist a default in any payment with respect to any such senior indebtedness or (ii) there shall have occurred an event of default (other than a default in the payment of amounts due thereon) with respect to any such senior indebtedness.
As of December 31, 1996, there was no outstanding balance of principal and interest under the Calgene Credit Facility Agreement.
Gargiulo Credit Facility Agreement
On March 31, 1996, Monsanto and Calgene entered into the Gargiulo Credit Facility Agreement pursuant to which Monsanto shall, during the Commitment Period (as hereinafter defined), and subject to the terms and conditions contained therein, make available to Calgene a revolving credit facility of up to $40 million (the "Gargiulo Loan").
The Gargiulo Loan has been used to acquire Collier Farms and to support the branded tomato strategy of Gargiulo as determined by the Gargiulo Board of Directors (other than amounts used to finance the acquisition of Collier Farms). Prior to the occurrence of an Event of Default (as defined in the Gargiulo Credit Facility Agreement), Gargiulo may borrow, repay and reborrow, each such borrowing or reborrowing being an " Advance." In order to obtain an Advance from Monsanto under the Gargiulo Credit Facility Agreement, Gargiulo must provide documentation reasonably acceptable to Monsanto verifying that Gargiulo has reached certain milestones and achieved certain goals as set forth therein. The maximum amount of each Advance is subject to certain limitations based upon such milestones and goals. The "Commitment Period" began on March 31, 1996 and ends on the earlier of the fourth anniversary or such earlier time that Monsanto terminates its obligations to make further Advances. The Gargiulo Loan is secured by the joint and several guaranty of the subsidiaries of Calgene.
Prior to the occurrence of an Event of Default, the Gargiulo Loan shall bear interest at the per annum rate equal to 2.00% above Citibank's published prime rate (the "Gargiulo Base Rate"), and following an Event of Default at the per annum rate equal to 3.00% above the Gargiulo Base Rate. During the continuance of an Event of Default, Calgene shall have no right to obtain any new Advances. The Gargiulo Loan may be prepaid in whole or in part at any time after giving at least three days prior written notice to Monsanto.
The Gargiulo Loan is payable, unless extended as described below, in one payment on the fourth anniversary of the Effective Time (the "Maturity Date") in an amount equal to the lesser of (i) the Repayment Portion of the Cumulative Free Cash Flow (as defined in the Gargiulo Credit Facility Agreement) of Gargiulo from the Effective Time to the Maturity Date and (ii) the amount of the outstanding principal and accrued interest on the Gargiulo Loan. "Repayment Portion" means the sum of 20% of the first $10 million of Cumulative Free Cash Flow, 50% of the next $10 million and 80% of the remaining balance. In the event that the Repayment Portion is not sufficient to pay all of the then outstanding principal and accrued interest at the Maturity Date, the maturity date with respect to the unpaid amount of outstanding principal and interest shall be extended to the sixth anniversary of the Effective Time (the "Extended Maturity Date"). In the event the Repayment Portion of the Cumulative Free Cash Flow (less amounts previously paid) is not sufficient to pay the then outstanding principal and accrued interest at the Extended Maturity Date, Calgene shall pay Monsanto such lesser amount and Monsanto, at its sole option, may do any one or combination of the following: (i) convert all or any portion of the then outstanding principal and accrued interest into shares of Calgene Common Stock at the average of the closing market prices for such shares during the thirty trading days immediately preceding the date of such conversion, (ii) further extend the Final Maturity Date (as defined in the Gargiulo Credit Facility Agreement) upon the same terms as are contained in the Gargiulo Credit Facility Agreement, or (iii) as to any unpaid amount which is not converted under clause (i) or for which payment is not extended pursuant to clause (ii), cause Calgene to sell publicly that number of shares of Calgene Common Stock as Monsanto would have received if such amount has been converted under clause (i) above with the net proceeds of such sale being delivered to Monsanto in full payment and satisfaction of such amount.
Upon the occurrence and during the continuation of an Event of Default, Monsanto may, in addition to its other remedies, similarly elect to convert all or any portion of the principal and accrued interest under the Gargiulo Loan (the "Gargiulo Conversion Amount") into shares of Calgene Common Stock at the average of the closing market prices for such shares during the thirty days preceding such Event of Default. In no event, however, shall Monsanto elect to convert principal and accrued interest into more than 8,000,000 shares of Calgene Common Stock (as such number is adjusted for stock dividends, stock splits and similar events affecting holders of Calgene's common stock). Upon any such conversion, the Gargiulo Conversion Amount shall first be applied to reduce the accrued interest due on the Gargiulo Loan, and any remaining portion of the Gargiulo Conversion Amount shall be applied to reduce the principal due on such Gargiulo Loan.
The obligation of Monsanto to provide Advances is subject to the fulfillment of certain conditions, including, among others: (i) the continued accuracy of all representations and warranties made by Calgene and its subsidiaries; (ii) the compliance with all covenants contained in the Gargiulo Credit Facility Agreement; (iii) no event shall have occurred which would constitute an Event of Default or Potential Event of Default (as defined in the Gargiulo Credit Facility Agreement); or (iv) there shall not have occurred any circumstance which could reasonably be expected to have a material adverse effect on (A) the business, assets, operations or financial condition of Calgene and its subsidiaries, taken as a whole or (B) the ability of the Company and its subsidiaries to perform their obligations under the Gargiulo Credit Facility Agreement.
The covenants contained in the Gargiulo Credit Facility Agreement require Calgene to maintain a minimum consolidated net worth of not less than $ 10 million and a minimum consolidated working capital of not less than $5 million. The Gargiulo Credit Facility Agreement also requires that Calgene and its subsidiaries meet certain specified financial ratios, including a ratio of total long-term liabilities to net worth and a current ratio. In addition, the Gargiulo Credit Facility Agreement imposes a number of limitations on Calgene and each of its subsidiaries with respect to future acquisitions, liens, mergers and the sale of assets, loans and investments, guaranties, capital expenditures, the payment of dividends and the incurrence of indebtedness. The existence of these covenants could limit Calgene's ability to finance the growth of its existing operations if cash flows were to decrease substantially or if expenses were to increase substantially. These covenants would also limit Calgene's ability to engage in additional acquisitions that would significantly increase the ratio of long-term indebtedness to net worth following such acquisitions. The failure of Calgene to satisfy these covenants would cause an Event of Default which could have a material adverse effect on its business and results of operations.
The Gargiulo Loan is to be subordinated and subject in right of payment to the prior payment in full of certain senior indebtedness of Calgene as more fully described in the Gargiulo Credit Facility Agreement. No payment on account of principal or interest on the Gargiulo Loan shall be made if at the time of such payment or immediately after giving the effect thereto, (i) there shall exist a default in any payment with respect to any such senior indebtedness or
(ii) there shall have occurred an event of default (other than a default in the payment of amounts due thereon) with respect to any such senior indebtedness.
As of December 31, 1996, the outstanding balance of principal and interest under the Gargiulo Credit Facility Agreement was $24.8 million.
License Agreements
As part of the Initial Monsanto Transaction in March 1996, Monsanto contributed certain technology licenses to Calgene pursuant to various license agreements and letter agreements. The technologies underlying the License Agreements are summarized below.
ACC Synthase and ACC Deaminase. ACC is a precursor of ethylene, a plant growth regulator that induces ripening in certain fruits. By reducing the amount of ACC available for conversion into ethylene, the ripening process can be delayed. Control of the ripening process may enable Calgene to improve the efficiency of its tomato production operations. Calgene will be granted non-exclusive, perpetual, royalty-free rights to the ACC synthase and ACC deaminase genes for use in certain produce crops and shall be able to practice under Monsanto's ACC Synthase license from the USDA.
Fruit-specific Promoters. Promoters control the expression of genes in each plant cell. In order for certain genes to function in a beneficial manner, expression of these genes must be restricted to certain parts of the plant. Fruit-specific promoters provide a means of limiting gene expression to the fruit. For example, these promoters may be useful in regulating carbohydrate metabolism (e.g., sugar content) in ripening fruits such as tomatoes and strawberries. Calgene has been granted non-exclusive, perpetual, royalty-free rights to certain fruit-specific promoters for use in certain produce crops.
Virus Resistance Genes. Virus infection is known to significantly reduce the yields of certain crops, including tomatoes. Monsanto has developed methods of interfering with viral replication in engineered plants, which slows the rate and degree of infection, and reduces the yield loss resulting from the infection. Calgene has been granted non-exclusive, perpetual, royalty-free or royalty-bearing rights to certain aspects of Monsanto's patent estate related to the engineering of virus resistance into certain produce crops.
FAD 3 Gene. The FAD 3 gene controls the relative amount of polyunsaturated fatty acids found in plant oils, including canola oil. Calgene believes that reducing the expression of the FAD 3 gene in engineered canola plants may result in an oil with reduced linoleic and linolenic acid content. Such an oil would be a superior cooking oil, as well as a superior raw material for the production of margarine and shortening. Calgene has been granted exclusive, perpetual, royalty-bearing rights to the FAD 3 gene for use in certain oilseed crops.
Insect Resistance Gene. Monsanto has modified genes from a soil microorganism called Bacillus thurengiensis ("B.t.") the encode proteins that are toxic to certain insects. Use of insecticides to control insects is a major cost in the production of tomatoes. Calgene has been granted non-exclusive, perpetual, royalty-free rights to Monsanto's B.t. patent estate for use in certain produce crops.
ADP Glucose Pyrophosphorylase("ADP GPP")Gene. The ADP GPP gene is a bacterial gene involved in starch biosynthesis. By expression of this gene in plants, the starch and/or sugar content of plants can be increased. This may improve the flavor or sweetness of produce crops such as tomatoes or strawberries. Calgene has been granted non-exclusive, perpetual, royalty-free rights to Monsanto's patent estate related to ADP GPP for use in certain produce crops. Monsanto and Calgene are parties to an interference at the United States Patent and Trademark Office relating to the ADP GPP gene.
Oil Modification Technology. Monsanto has certain patent rights and know-how related to the production of plants with altered oil compositions. By modifying oil composition it may be possible to provide temperate sources of certain tropical oils and the production of novel oil compositions. The Monsanto oil modification genes include sucrose phosphorylase, cytochrome b5 and PEP carboxylase. Calgene has been granted nonexclusive, perpetual, royalty-free rights under Monsanto's patents and know-how for use in certain oilseed crops.
Insect Protected Cotton Direct Grower Licensing Agreement
Calgene has entered into an agreement with Monsanto under which Calgene will participate in the direct licensing of Monsanto's B.t. technology to cotton growers. Under the terms of this agreement, Monsanto has granted to Calgene a non-exclusive, royalty-free U.S. license to use Monsanto's B.t. technology in Calgene's cottonseed products. Subject to the issuance of a Monsanto patent that covers the B.t. gene that is currently being utilized in Calgene's cottonseed product development program, Calgene would be obligated under applicable patent law to end use of its current B.t. gene and is permitted under such agreement to incorporate Monsanto's B.t. gene into its product development program over a four-year period.
Monsanto intends to enter into license agreements directly with cotton growers. Under the terms of these agreements, cotton growers would obtain a one-time right to purchase a specified number of units of cottonseed containing Monsanto's B.t. gene in return for the payment of a license fee. Monsanto has agreed to pay to Calgene a specified percentage of the net license fees received from licensed growers who subsequently purchase Calgene's cottonseed products containing Monsanto's B.t. gene. The material terms of Calgene's agreement shall be modified to reflect any more favorable terms that may be granted to any other cottonseed company that may participate in the direct licensing program.
Oilseed Development Agreement
In May 1996, Calgene and Monsanto executed a broad strategic cross-licensing agreement encompassing the two companies' oilseed research programs. Under the agreement, Calgene received a royalty free license to current and future Monsanto agronomic technology for use in combination with Calgene's proprietary oils modification genes for use in developing specialty canola oil product. Monsanto received a royalty bearing license to Calgene technology to develop agronomically superior corn, soybean, canola and sunflower crops. In addition, Monsanto paid $7 million to Calgene and will pay royalties based on sales of insect resistant corn, soybean, canola and sunflower seed with increased oil content and modified meal composition utilizing Calgene technology. Also as part of the agreement, Monsanto paid Calgene $10 million in cash to help fund oilseed research and development. In exchange, Monsanto will receive a portion of the future profits from Calgene's specialty oils business.
Kelco Agreement
In January 1997, Calgene and The Nutra Sweet Kelco Company ("Kelco") entered into an agreement to collaborate on the development of two specialty vegetable oil products. Kelco is a wholly owned subsidiary of Monsanto Company. As part of the agreement, Kelco purchased from Calgene a nonexclusive license to certain Calgene technology for use in research purposes, an option to expand the reserach license to include commercialization rights, and certain product distribution rights.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. The following Consolidated Financial Statements and Report of Independent Auditors are included in Part II, Item 8, of this Report:
Report of Independent Auditors.
Consolidated Balance Sheets -- December 31, 1996 and June 30, 1996 and 1995.
Consolidated Statements of Operations -- Six month period ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994.
Consolidated Statements of Shareholders' Equity -- Six month period ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows -- Six month period ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994.
2. Financial Statement Schedules. The following financial statement schedule of Calgene, Inc. is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Calgene, Inc.
Schedule for the six month period ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994:
Schedule Page
II Valuation and Qualifying Accounts...........................75
All other schedules have been omitted because they are not applicable or because the required information is disclosed in the consolidated financial statements and notes thereto.
3. Exhibits
See index to exhibits.
(b) Reports on Form 8-K:
None
(c) Separate Financial Statements of Fifty Percent or Less Owned Persons:
None.
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.
CALGENE, INC.
By: /s/Christian Leleu ------------------------------ Chief Financial Officer Dated: March 31, 1997 (Principal Financial and Accounting -------------- Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lloyd M. Kunimoto and Christian Leleu, substitution, for him in any and all capacities, to sign any amendments to other documents in connection therewith, with the securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
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.
Signature Title Date
Director and Acting Chief /s/ Lloyd M. Kunimoto Executive Officer (Principal Lloyd M. Kunimoto Executive Officer) March 31, 1997
/s/ Christian Leleu Chief Financial Officer Christian Leleu (Principal Financial and March 31, 1997 Accounting Officer)
Robert Fraley Director March 31, 1997
/s/ John E. Robson John E. Robson Director March 31, 1997
/s/ Hendrik A. Verfaillie Hendrik A. Verfaillie Director March 31, 1997
/s/ Howard D. Palefsky Howard D. Palefsky Director March 31, 1997
/s/ Allen J. Vangelos Allen J. Vangelos Director March 31, 1997
Patrick Fortune Director March 31, 1997
/s/ Roger H. Salquist Roger H. Salquist Director March 31, 1997
/s/ Michael Hogan Michael Hogan Director March 31, 1997
INDEX TO EXHIBITS
Exhibits Page -------- ---- 2.1 Agreement and Plan of Reorganization Between Calgene, Inc. and Monsanto Company dated as of October 13, 1995.........................................(P)
2.2 Stock Purchase Agreement dated as of September 27, 1996, between Calgene, Inc. and Monsanto Company...................................................82
3.1 Restated Certificate of Incorporation of the Registrant, as amended....................................92
3.3 By-Laws of the Registrant................................(P)
10.0 Amended and Restated Stockholders Agreement between the Registrant and Monsanto Company..............129
10.1 Form of Credit Facility Agreement between the Registrant and Monsanto Company..........................(P)
10.2 Form of Gargiulo Credit Facility Agreement between the Registrant and Monsanto Company..............(P)
10.3 Form of ACC Deaminase License Agreement between the Registrant and Monsanto Company......................(P)
10.4 Form of ADPGPP License Agreement between the Registrant and Monsanto Company..........................(P)
10.5 Form of CMV License Agreement between the Registrant and Monsanto Company..........................(P)
*10.6 Form of FAD 3 License Agreement between the Registrant and Monsanto Company..........................(P)
10.7 Form of Fruit Specific Promoter License Agreement between the Registrant and Monsanto Company..............(P)
10.8 Form of Gemini Virus License Agreement between the Registrant and Monsanto Company......................(P)
10.9 Form of Insect Resistance License Agreement between the Registrant and Monsanto Company..............(P)
10.10 Form of Oil License Agreement between the Registrant and Monsanto Company..........................(P)
10.11 Form of Letter Agreement between Calgene, Inc. and Monsanto Company with respect to license of Recombinant ACC Synthase.................................(P)
10.12 Form of Insect-Protected Cotton License and Seed Services Agreement between Calgene, Inc. and Monsanto Company.....................................(P)
10.13 Second Amended and Restated Employment Agreement dated October 16, 1995 between Gargiulo, L.P. and Jeffrey D. Gargiulo...................(P)
10.14 Joint Venture Agreement dated as of December 15, 1992 between Gargiulo, L.P. and Dresick Farms, as amended June 1, 1993..................................(P)
Exhibits Page
10.15 Joint Venture Agreement dated as of January 1, 1981 between Gargiulo L.P. and Harllee-Gargiulo, Inc., as amended October 31, 1989 and October 31, 1994.....................................................(P)
10.16 Joint Venture Agreement dated as of October 31, 1994 between Gargiulo Mexico, L.L.C. and Hermanos Ley......................................................(P)
10.17 Marketing Agreement dated as of September 1, 1988 between Gargiulo, Inc. and Harllee-Gargiulo, Inc....(P)
10.18 Change of Control Employment Agreement dated as of July 19, 1995, between Calgene, Inc. and Roger H. Salquist....................................(P)
10.19 Change of Control Employment Agreement dated as of July 19, 1995 between Calgene, Inc. and Roderick N. Stacey...................................(P)
10.20 Change of Control Employment Agreement dated as of July 19, 1995 between Calgene, Inc. and Michael J. Motroni...................................(P)
10.21 Asset Purchase Agreement dated as of December 29, 1995 between Gargiulo, L.P. and Collier Enterprises..............................................(P)
*10.22 Partnership Agreement dated January 31, 1986 between Registrant and Rhone-Poulenc Agrochimie, together with Reserach Agreement dated March 15, 1984 and Amendment thereto dated January 31, 1985........(A)
*10.23 Amendment One to the Partnership Agreement dated January 31, 1986 between Registrant and Rhone-Poulenc Agrochimie dated September 30, 1989........(B)
*10.24 License Agreement between Registrant and Rhone-Poulenc Agrochimie dated October 1, 1989...........(B)
*10.25 Agreements dated March 21, 1985 between Registrant and Roussel-Uclaf S.A....................................(A)
*10.26 Agreement dated April 1, 1988 between Registrant and Roussel-Uclaf S.A. which amend the Agreements dated March 21, 1985 between Registrant and Roussel-Uclaf S.A........................................(B)
*10.27 Agreement dated August 1, 1984 and Agreement dated August 26, 1985 amending the prior Agreement between Registrant and Campbell Soup Company.............(A)
*10.28 Tomato Research Agreement 1988 to 1990 between Campbell Soup Company and Registrant effective as of August 1, 1988 which supersedes the Agreements of August 1, 1984 and August 26, 1985 between Campbell Soup Company and the Registrant.................(B)
*10.29 Agreement dated March 20, 1986 between Registrant and The Procter and Gamble Company ......................(A)
10.30 Commercial Lease dated August 17, 1987, as amended, covering property located at 1910 and 1920 Fifth Street, Davis, California.............(C)
10.31 Commercial Lease dated August 31, 1983, as amended, covering property located at 1970 Fifth Street, Davis, California..........................(A)
Exhibits Page
10.32 Commercial Lease dated August 22, 1983, as amended, covering property inYolo County.................(A)
10.33 Commercial Lease dated May 21, 1987, as amended, covering property located at 1950 Fifth Street, Davis, California........................................(C)
10.34 Form of Directors and Officers Indemnification Agreement................................................(C)
10.35 401 (k) Tax Deferred Investment Plan.....................(D)
10.36 Secured Revolving Credit Agreement Among Registrant and Harris Trust and Savings Bank and Caisse Nationale De Credit Agricole Dated April 26, 1990.....................................(G)
10.37 First Amendment to Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Registrant and Harris Trust and Savings Bank dated January 31, 1992..............................(E)
10.38 Second Amendment to Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Registrant and Harris Trust and Savings Bank Dated January 31, 1993...................................(I)
10.39 Third Amendment to Secured Revolving Credit Agreement Among Registrant and Harris Trust and Savings Bank Dated August 26,1993........................(O)
10.40 Fourth Amendment to Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Registrant and Harris Trust and Savings Bank Dated February 26, 1994.............................(O)
10.41 Fifth Amendment to Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Registrant and Harris Trust and Savings Bank Dated March 15, 1995................................(O)
10.42 Sixth Amendment to Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Registrant and Harris Trust and Savings Bank Dated August 8, 1995................................(O)
10.43 Seventh Amendment to the Secured Revolving Credit Agreement and Waiver 1995.........................(M)
10.44 Eighth Amendment to the Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Calgene, Inc. and Harris Trust and Savings Bank dated January 23,1996.......................(M)
10.45 Ninth Amendment to the Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Calgene, Inc. and Harris Trust and Savings Bank dated March 28, 1996........................(N)
10.46 1989 Employee Stock Purchase Plan........................(G)
10.47 Joint Venture and Partnership Agreement by and between Kirin Brewery Co. Ltd. and Registrant dated March 14, 1990..........................(G)
*10.48 License Agreement between Registrant and Campbell Soup Company dated August 9, 1991...............(J)
Exhibits Page
**10.50 Oilseed Development Agreement between Registrant and Monsanto Company dated May 8, 1996...................(Q)
10.51 1981 Stock Option Plan as amended........................(B)
10.52 1991 Stock Option Plan...................................(J)
10.53 1996 Stock Option Plan...................................(P)
10.54 Tenth Amendment to the Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Calgene, Inc. and Harris Trust and Savings Bank dated September 30, 1996................(R)
10.57 Bank of America Revolver.................................168
21.1 Subsidiaries of Registrant...............................(I)
23.1 Consent of Independent Auditors..........................204
27 Article 5 of Financial Data Schedule for the Six Month Period ended December 31, 1996.................205
(A) Incorporated by reference to Registrant's Form S-1 Registration No. 33-5921 (B) Incorporated by reference to Registrant's Form 10-K dated September 30, 1989 (C) Incorporated by reference to Registrant's Form 10-K dated September 30, 1987 (D) Incorporated by reference to Registrant's Form 10-K dated September 30, 1988 (E) Incorporated by reference to Registrant's Form 10-K dated June 30, 1992 (F) Intentionally omitted (G) Incorporated by reference to Registrant's Form 10-K dated June 30, 1990 (H) Intentionally omitted (I) Incorporated by reference to Registrant's Form 10-K dated June 30, 1993, as amended (J) Incorporated by reference to Registrant's Form 10-K dated June 30, 1991 (K) Intentionally omitted (L) Incorporated by reference to Registrant's Form 8-K dated June 28, 1995 (M) Incorporated by reference to Registrant's Form 10-Q dated December 31, 1995 (N) Incorporated by reference to Registrant's Form 10-Q dated March 31, 1996 (O) Incorporated by reference to Registrant's Form 10-K/A dated October 30, 1995 (P) Incorporated by reference to Registrant's Registration Statement on Form S-4 dated February 6, 1996 (Q) Incorporated by reference to Registrant's Form 10-K dated June 30, 1996 (R) Incorporated by reference to Registrant's Form 10-Q dated September 30, 1996
* Confidential treatment of certain portions of these documents has been granted
** Confidential treatment has been requested as to portions thereof