-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oq9fWlxwgtAOMJ8LZ48TfPKbHUzP3e9TYeYe0VxRoDOnBLrVfGati/J/LopLX9Q6 S54aevQ3dgIdpEJPl6m60A== 0001011134-96-000009.txt : 19961001 0001011134-96-000009.hdr.sgml : 19961001 ACCESSION NUMBER: 0001011134-96-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALGENE INC /DE/ CENTRAL INDEX KEY: 0001011134 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - CROPS [0100] IRS NUMBER: 680369863 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20641 FILM NUMBER: 96637180 BUSINESS ADDRESS: STREET 1: 1920 FIFTH ST CITY: DAVIS STATE: CA ZIP: 95616 BUSINESS PHONE: 9167536313 MAIL ADDRESS: STREET 1: 1920 FIFTH ST CITY: DAVIS STATE: CA ZIP: 95616 FORMER COMPANY: FORMER CONFORMED NAME: CALGENE II INC DATE OF NAME CHANGE: 19960322 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended June 30, 1996 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from ________ to ________. For the Fiscal Year Ended Commission File Number June 30, 1996 0-14802 CALGENE, INC. (Registrant) Delaware 68-0115089 68-0369863 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 1920 Fifth Street, Davis, CA 95616 (Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (916) 753-6313 Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $187,002,034 as of July 31, 1996, based upon the closing price on the NASDAQ National Market System reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. 60,443,115 shares of Common Stock were Issued and Outstanding as of August 31, 1996. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held in November 1996 is incorporated by reference into Part III of this Form 10-K to the extent stated herein. PART I 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, packager, marketer and distributor of tomatoes, strawberries and other produce with operations in Florida, California, Puerto Rico and Mexico. Fresh Produce. The Company is currently growing, packaging, 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 30,000 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 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 thereby reducing farmer's growing costs, and cotton varieties that produce natural colors. U.S. cotton farmers spend annually over $200 million on herbicides and $225 to $400 million on insecticides. 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, improved yields and benefits to the environment. Calgene believes that the cost savings to farmers will enable Calgene to price genetically engineered seed varieties at a premium to current cotton seed prices. The Company commercially sold its genetically engineered BXN(TM) 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 has also conducted field trials since 1991 with BXN cotton varieties that are also genetically engineered to contain a Bt gene for resistance to Heliothis, the principal cotton insect pest. Calgene plans to commercially introduce cotton varieties with both BXN and Bt traits in 1998. Company scientists are in the early stages of a development program designed to create cotton varieties having natural colors 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:
PRODUCT PRODUCT APPLICATIONS DEVELOPMENT STATUS PRODUCE FLAVR SAVR Tomato High quality fresh market tomato with Commercialization began on a limited delayed fruit degradation basis in 1994. Varieties with improved agronomic characteristics are currently being developed. High sweetness tomato High quality fresh market tomato Initial target genes have been transformed into tomato plants and are being evaluated. Virus resistant tomato Improved crop yields and quality Initial target genes identified. Disease resistant strawberry Improved crop yields and longer shelf Target genes are identified and are life currently being transformed into strawberry plants. High sweetness strawberry High quality fresh strawberry Target genes are identified and are currently being transformed into strawberry plants. PLANT OILS Laurical(R) Confectionery and other food products Test market began in 1995. with improved functionality. Alternative source of raw materials for soaps and detergents. High Stearate Oil Margarine and shortening ingredient Rapeseed plants with over 30% stearate that requires no hydrogenation. in the oil have been produced and are in Liquid shortening. field trials. High Myristate Oil Butter replacers for baking. Less Rapeseed plants containing 40% myristate expensive and more abundant source of in oil have been produced in the raw materials for milder soaps and greenhouse. personal care products. Medium Chain Fatty Acids/ Less expensive source of raw Rapeseed plants with up to 38% medium Medium Chain Triglycerides materials for high performance chain fatty acids have been produced lubricants, nutritional formulas and in the greenhouse. high energy foods COTTON BXN Cotton Cotton plants that require less Commercialization began in 1995. chemical herbicide usage BXN plus Bt Cotton Cotton plants that require less Initial varieties have been developed. chemical herbicide and insecticide Commercial introduction planned for 1998. usage
FRESH PRODUCE 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 Inc., which was contributed by Monsanto to Calgene in 1996 as part of the Monsanto Transaction. Gargiulo engages in the growing, packaging, 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, Puerto Rico and Mexico. 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. Gargiulo's corporate headquarters are located in Naples, 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. Gargiulo acquired interests in companies in Chile in 1987 for the production, sale and importation into the United States of various winter fruits, including nectarines and grapes. Through a relationship with a Chilean grower, during the winter months in the United States, Gargiulo also imports and markets raspberries and asparagus. 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. In fiscal 1996, Gargiulo began to market a premium branded tomato line, but subsequently discontinued such marketing program until it develops a tomato line suited for such branded program. 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 fiscal 1996, Gargiulo packed and shipped approximately 257 million pounds of fresh tomatoes, which it produced through its own farming operations, through joint ventures or partnerships with other growers or pursuant to contractual arrangements with other growers. For Gargiulo's and its predecessors' fiscal years ended June 30, 1994, 1995 and 1996, product revenues from Gargiulo's tomato operations were approximately $50.3 million, 60.1 million and $77.3 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 85% of the tomatoes produced by Gargiulo during Fiscal 1996 were harvested and processed as green tomatoes. Green tomatoes are sorted by grade and size according to specifications promulgated by the USDA and are typically packed into 25 pound boxes. The tomatoes are 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. For a portion of its tomatoes Gargiulo is establishing a direct to retail distribution and marketing program ("DTR"). By controlling the quality of its tomatoes through the entire distribution system, including regional repack operations and into the grocery stores, Gargiulo believes that high quality product can be consistently delivered that commands premium prices. DTR may also enable Gargiulo to obtain relatively long-term supply contracts with fixed prices that avoid some of the price volatility customary with commodity tomatoes. If DTR is successful, 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, year round 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, operational skill and professional management 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 Fiscal 1996, Gargiulo grew approximately 2.7 million flats of fresh strawberries and cooled approximately one million 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, product revenues from Gargiulo's berry operations were approximately $20.8 million, $23.4 million and $30.8 million, respectively. Potatoes. In Fiscal 1995 and 1996, Gargiulo grew and cultivated 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. Peppers. During Fiscal 1995 and 1996, Gargiulo, as part of its joint venture with a Mexican grower, produced and distributed red, yellow and green peppers from Mexico from January through May. Chilean Winter Fruits. 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. Acquisition of Collier Farms 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 (the "Seller") 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 packaging, marketing and distribution of those products into the commodity markets. The purchase price paid by Gargiulo for Collier Farms was approximately $32 million, payable $10 million in cash and $10 million in the form of a purchase money note payable to the Seller, maturing on June 30, 2000, plus the assumption of $12 million in expenses incurred by Collier Farms since July 1, 1995, which expenses relate to the production of Collier Farms 1995-1996 crop. In addition, Gargiulo will make an earn-out payment to the Seller after the fiscal year ended June 30, 2000, based upon the future earnings of the combined southwest Florida operations of Collier Farms and Gargiulo. Gargiulo also entered into a long-term lease with affiliates of the Seller (the "Collier Lease") for a minimum of 6,000 acres of farmland in southwest Florida with the right to lease up to an additional 5,000 acres of farmland. The initial term of the Collier Lease is five years and Gargiulo has three options of five years each to extend such lease. 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 1994 over 16 billion pounds of plant oils and oil based products with a value of $4.5 billion were used in U.S. food products and approximately 19 billion pounds with a value of $5.5 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 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 900 million pounds of lauric oils worth $330 million in 1994 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. 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 many 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 38% 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. Nongenetically Engineered Oils 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. In 1994 and 1995, farmers under contract to Calgene planted 8,000 and 11,000 acres of canola, respectively. 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. In 1996 Calgene expects to harvest approximately 8,000 acres of genetically engineered Laurical Canola. Calgene plans to grow 30,000 acres of Laurical Canola under identity-preserved contract production for harvest in 1997. Calgene's specialty oleochemical manufacturer, 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. Calgene Chemical also provides a facility for processing oleochemical feed stocks derived from genetically engineered canola. 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. 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 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. Calgene estimates that conversion of the three to four million broadleaf weed-plagued cotton acres to BXN cotton could save farmers up to approximately $40 million annually by reducing total herbicide chemical usage by as much as nine million pounds. Buctril is effective at low doses, generates no residues in any of the food crops it is used on, 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 is currently growing on over 50,000 acres. The BXN cotton seed was sold at a 41% premium over Calgene's non-genetically engineered cotton seed. BXN seed production for 1997 commercial sales is currently in progress 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, Greece and certain Latin American countries. 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 June 30, 1996, was comprised of 128 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 42 issued U.S. utility patents and 18 foreign utility patents and has over 178 utility patent applications currently pending in the U.S. and abroad. See "Patents and Trade Secrets." Total research and development expenses for fiscal 1996, 1995, and 1994 were approximately $14.0 million, $15.4 million and $15.6 million, respectively. Research and development expenses incurred under contract with others for fiscal 1996, 1995 and 1994 were $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. 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." Calgene has rights to the l-aminocyclopropane-l-carboxylic acid deaminase ("ACCD") gene and from USDA to the l-aminocyclopropane-l-carboxylic acid synthase ("ACC Synthase") gene. The expression of the ACCD gene or the antisense expression of the ACC Synthase gene in plants has been shown to significantly reduce the ability of the plant to produce ethylene, the plant hormone which controls ripening and other aspects of plant development. ACCD may be useful in crops where antisense is not available or useful. 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 and sunflower are currently being evaluated as alternatives 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 saturated fats (stearates) 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 LPAAT gene. 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%. 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 38% 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. 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, issued in March 1989 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 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, as well as cotton fiber with increased length, strength and absorbency. 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 42 issued U.S. utility patents and 18 foreign utility patents, three of which have been assigned to contract partners. Calgene has 178 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 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 Puerto Rico, such tomatoes represented only approximately 14.6% of Gargiulo's total tomatoes produced during Fiscal 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 last winter 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. 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. Laurate canola was de-regulated by the USDA in October 1994. 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 engineering 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. The FDA is in the process of modifying its policy on foods developed through genetic engineering to include a Premarket Notification ("PMN") procedure. This policy modification will require companies that develop genetically engineered foods to inform the FDA that its safety evaluation is complete and that the company intends to commercialize the product. The objective of the PMN is to make the FDA and the public aware of all new genetically engineered food products entering the market. If PMN is required, the Company believes it should not delay Calgene's plans to commercialize its genetically engineered food 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 June 30, 1996 Calgene employed a total of 1,341 regular employees, of whom 128 were research and product development scientists and support personnel, 854 were production, farm and packing house employees, 52 were sales and marketing personnel and 307 were in administrative and general management positions. In addition Calgene employed approximately 3,053 seasonal workers. None of Calgene's work force is presently unionized, although there is no assurance that unions, especially for farm workers, may not attempt to 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: Name Age Position Since ---- --- -------- ----- Lloyd M. Kunimoto....43 Acting Chief Executive Officer.....................1996 Richard J. Stonard...41 Senior Vice President and Chief Technical Officer..1995 Christian Leleu......43 Senior Vice President and Chief Financial Officer..1996 Andrew Baum..........40 Vice President and President of Oils Division......1987 Thomas Hughes........37 President, Stoneville Pedigreed Seed Co............1992 Michael J. Motroni...41 Vice President of Finance and Secretary............1992 Jeffrey D. Gargiulo..43 Chief Executive Officer, Gargiulo, Inc.............1996 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. 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. Mr. Gargiulo is Chairman of the Executive Committee of the Produce Marketing Association. 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. 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. The coordination of the businesses of Calgene and Gargiulo may require the dedication of management resources which may temporarily distract attention from the day-to-day business of the combined companies. In addition, Gargiulo is in the process of integrating the operations of Collier Farms into its own operations, which may further distract the management of Gargiulo from day-to-day operations. In connection with the Collier Transaction, Gargiulo incurred approximately $20 million of indebtedness in the form of $10 million loan from Monsanto under an existing credit facility and a $10 million purchase money note payable to Collier Enterprises (the "Seller Note"). Gargiulo's ability to repay such indebtedness will depend, in part, on the successful integration of the operations of Collier Farms into the operations of Gargiulo and the success of the Collier Farms operations which are subject to the same agribusiness risks as apply to Calgene as described below. Combination of Tomato Businesses. Gargiulo acquired the right to lease up to 11,000 acres of farmland in southwest Florida as a consequence of the Collier acquisition. Consequently, certain of the farmland owned by Gargiulo in Florida will no longer be necessary and will be sold. At June 30, 1996, such farmland secured approximately $10 million of mortgage indebtedness. Such farmland is also used as security for the Seller Note. There can be no assurance that Gargiulo will be able to sell such farmland for an amount that is sufficient to repay the indebtedness secured by such farmland, if at all. Calgene anticipates further consolidations, the financial impact of which cannot be estimated at this time. Significant Influence by Monsanto and Possible Conflicts of Interest. Monsanto owns 49.9% of the outstanding shares of Common Stock and has the right to designate four 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. In July 1996, Calgene announced that it and Monsanto Company entered into a letter of intent under which Monsanto will purchase an additional 6,250,000 shares of Calgene common stock at a price of $8 per share (the "Proposed Monsanto Transaction"). If approved by Calgene's shareholders, the purchase would bring Monsanto's equity ownership interest to approximately 54.6% and give Monsanto the right to designate five of the nine members of the Board. 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 a period of three years to Calgene, although not more than $15 million may be outstanding thereunder at any one time. As of June 30, 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. At June 30, 1996, Calgene was in violation of certain financial covenants in the $40 million credit facility. Monsanto has agreed to waive such financial covenants until September 30, 1997. Possible Need for Additional Financing. Calgene expects its current cash balances, together with the $50 million cash contribution to be made by Monsanto for the purchase of additional common stock under the Proposed Monsanto Transaction 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 Calgene's shareholders will approve the Proposed Monsanto Transaction, or that all of Calgene's expected sources of funds will be available. Calgene currently has a $13 million line of credit with Harris Bank (the "Harris Credit Facility"). The Harris Credit Facility which was scheduled to expire on January 31, 1996, has been extended until December 31, 1996. The bank may require changes in the terms of the Calgene credit facility agreement with Monsanto and, if the required changes cannot be accommodated, there can be no assurance that such bank will continue to make these lines of credit available or, if such lines are not available, that Calgene will be able to obtain alternative bank financing on favorable terms, if at all. As of August 31, 1996, Calgene was not in compliance with certain financial covenants under its credit agreement with Harris Bank. While Calgene has obtained waivers of such defaults through December 31, 1996, there can be no assurance that it will be in compliance with such covenants in the future or, in the event it is not in compliance, that it will be able to obtain waivers of any such covenants. Gargiulo was not in compliance with certain financial covenants in its credit agreement with NationsBank. Gargiulo has received waivers under such covenants until November 30, 1996. There can be no assurance that Gargiulo will be in compliance with such covenants or other covenants in its credit agreement in the future or that, in the event it is not in compliance, that it will be able to obtain waivers of any such covenants. NationsBank has indicated that it does not intend to renew its credit agreement with Gargiulo beyond November 30, 1996. 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 for three consecutive years, 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 $274 million from inception in 1981 through June 30, 1996, including research and development expenses in excess of $200 million. The net loss for Calgene in the year ended June 30, 1996 ("Fiscal 1996") was $97.0 million, including in-process research and development expense and asset write-downs totaling $74.8 million primarily as a consequence of the Monsanto Transaction and the acquisition of Gargiulo. Calgene expects to incur a substantial net loss in the six month period ending December 31, 1996. 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 year-round 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 and year-round 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 ~ de 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 are affected by U.S. government agricultural policy, which imposes varying limitations on planting acreage as a criterion for farmers' eligibility to receive government subsidy payments and other benefits. 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(TM) cotton 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 and intends to supplement its opposition in the near future against such Agracetus patent. If these proceedings are not successful in limiting the scope of the claims of these patents and if Calgene is unable to obtain licenses from the respective patent holders 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 licenses 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(TM) cotton varieties and laurate canola. No assurance can be given that additional Calgene products will be exempted by the USDA. 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 155,000 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. Currently, the Company is in the process of constructing 27,000 square feet of additional warehouse space. 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 83,000 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 packing facility located in Naples, Florida; a research facility in Bonita Springs, Florida; tomato packing facilities in Palmetto, Florida; Quincy, Florida; Mappsville, Virginia; Santa Isabela, Puerto Rico; and Firebaugh, California; administrative offices in Watsonville, California; a sales office in Nogales, Arizona; and various owned and leased farmland. Gargiulo owns or leases farmland in and around Naples and Qunicy, Florida; Watsonville, Oxnard, Santa Maria and Firebaugh, California; Mappsville, Virginia; Santa Isabela, Puerto Rico; and Sinaloa State, Mexico. The majority of Gargiulo's land is leased pursuant to relatively short-term leases. Thus, the amount of farmland leased in any of the geographic areas in which Gargiulo operates can vary from growing season to growing season. With the acquisition of Collier Farms Gargiulo obtained four properties located in southwest Florida. These properties are the sites of the two packing houses, proposed seasonal labor housing and transplant nursery. In addition, Gargiulo obtained access to long-term property leases which are used in the growing operations. These areas have historically been used for vegetable production and total approximately 11,000 acres. These properties are subject to a master lease agreement which gives Garguilo certain rights to utilize these properties. Collier Farms leases two additional properties in central Florida. These farms are used for early fall and late spring production of tomatoes and other vegetables. Each location is approximately 200 net acres. The tomato and vegetable packing houses are located in Immokalee, Florida. 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. LEGAL PROCEEDINGS ----------------- 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 $5.8 million at June 30, 1996. Gargiulo is a defendant in two pending cases which involve personal injury claims relating to a 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, Alvertano Alberto Jiminez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vega; Robles Rios; Jesus Loza and Samuel Santiago Vasquez, and Jose Vasquez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vega; Robles Rios; Jesus Loza and Samuel Santiago Vazquez, were both filed on October 18, 1995, in the United States District Court for the Eastern District of California. The company hiring and transporting such farm workers was Pat Kreger, Inc., an independent contractor engaged by Dresick Farms, Inc. to arrange for migrant farm labor for the farm. The plaintiffs allege that the vehicle in question was in violation of one or more federal and state safety regulations governing farm labor vehicles. The plaintiffs are seeking 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. It has not yet been determined whether Gargiulo's insurance will be sufficient to cover these claims, if any. Gargiulo intends to vigorously defend itself against these claims and believes that the ultimate outcome will not have a material adverse effect on the Company's financial position on results of operations. 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. SUBMISSION OF MATTERS TO A VOTE OR SECURITY HOLDERS --------------------------------------------------- None. 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 1995 Quarter ended September 30, 1994 ...................12.375 8.625 Quarter ended December 31, 1994......................9.875 6.375 Quarter ended March 31, 1995.........................8.875 5.750 Quarter ending June 30, 1995.........................9.625 5.375 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 As of September 23, 1996, there were approximately 3,244 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. ITEM 6. SELECTED FINANCIAL DATA ----------------------- FIVE YEAR SELECTED FINANCIAL DATA (In thousands, except per share amounts)
1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- CONSOLIDATED STATEMENT OF OPERATIONS DATA (1): Revenues: --------- Product sales $ 95,723 $ 48,972 $ 35,408 $ 24,675 $ 18,211 Product development 9,272 6,459 3,025 2,562 3,666 --------- --------- --------- --------- --------- Total revenues $ 104,995 $ 55,431 $ 38,433 $ 27,237 $ 21,877 --------- --------- Loss from continuing operations $ (97,014) $ (30,602) $ (42,801) $ (25,223) $ (18,616) Net loss $ (97,014) $ (30,602) $ (42,801) $ (25,623) $ (19,916) Net loss per share (2): Loss from continuing operations $ (2.56) $ (1.04) $ (1.71) $ (1.11) $ (1.34) Net loss $ (2.56) $ (1.04) $ (1.71) $ (1.13) $ (1.42) --------- CONSOLIDATED BALANCE SHEET DATA: --------- Total assets $ 233,302 $ 89,231 $ 78,312 $ 88,401 $ 85,223 Long-term obligations $ 57,403 $ 15,421 $ 5,704 $ 3,694 $ 4,378 Preferred stock (3) $ -- $ -- $ -- $ -- $ 29,506 Common stock and additional paid-in capital $ 367,554 $ 223,191 $ 190,961 $ 169,506 $ 111,119 (1) As described elsewhere herein, acquisitions during 1993 and 1996 affect the comparability of the selected financial data. (2) Applicable to holders of common stock. (3) Includes additional paid-in capital allocable to Preferred Stock. Substantially all the Preferred Stock was converted to Common Stock in July 1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITIONS AND RESULTS OF OPERATIONS ------------------------------------ RESULTS OF OPERATIONS Overview of Gargiulo 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. Revenues Calgene's 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. As a result of the Gargiulo acquisition, sales of fresh market produce are expected to increase in the next fiscal year. 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 $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 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 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. Selling, general and administration expenses are expected to increase substantially primarily due the Gargiulo acquisition. 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 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 credits and long-term debt obligations, 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 of 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 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 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. The Company expects to continue to incur pre-tax losses in fiscal 1997. Provision for Income Taxes For federal income tax return purposes, as of June 30, 1996 the Company has a net operating loss carryover of approximately $193 million which expires between 1996 and 2011, and a general business tax credit carryover of approximately $4 million which expires between 1996 and 2011. In addition, as of June 30, 1996 the Company has a net operating loss carryover of approximately $129 million for state income tax purposes which expires between 1996 and 2011. 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 $91.5 million has been recognized at June 30, 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 June 30, 1996 Calgene had cash and equivalents and short term available-for-sale securities of approximately $ 28.6 million, excluding $1.0 million in securities pledged as collateral for certain obligations. This was an increase of $6.6 million from June 30, 1995. Sources of cash in fiscal 1996 included (i) $7 million in partial consideration for Monsanto's 49.9% equity interest in Calgene (excluding $23 million from the conversion of long-term debt into equity), (ii) the Company's May 1996 transaction with Monsanto whereby $10 million was advanced to help fund oilseed research and development, (iii) a $2.7 million loan from Monsanto, and (iv) a $10.3 million decrease in net operating assets and liabilities. Uses of cash include (i) Calgene's net loss, excluding non-cash expenses of $59.2 million for in-process research and development acquired, $15.6 million for the write-off of assets and $7.0 million in depreciation and amortization expense, (ii) the acquisition of $3.9 million in property, plant and equipment, (iii) the $1.5 million net decrease in notes payable and long-term debt and (iv) the $1.4 million purchase of product rights, patents and other intangible assets. The Company's investment policy is to invest excess cash in high quality, liquid, short-term fixed income securities. Inventories increased by $15.7 million in fiscal 1996 as compared to fiscal 1995 due to the inclusion of $18.5 million of inventory from the Gargiulo acquisition. The increase was partly offset by lower inventories at Calgene Fresh reflecting the wind-down and consolidation of operations into Gargiulo. Accounts receivable increased $19.4 million in fiscal 1996 as compared to the prior fiscal year due to the inclusion of $21.9 million of trade receivables from Gargiulo and higher cottonseed receivables. The increase was partly offset by the collection of receivables at Calgene Fresh. Current liabilities increased $54.5 million in fiscal 1996 as compared to fiscal 1995 largely due to a $21.4 million increase in current portion long term debt and a $9.0 million increase in notes payable. These increases reflects the inclusion of $21.6 million in current portion of long term debt and $16.3 million in notes payable from the acquisition of Gargiulo. In addition, trade payables increased by $13.6 million due to the inclusion of $17.5 million from Gargiulo, partly offset by lower trade payables at Calgene Fresh. Other current liabilities increased by $9.6 million in fiscal 1996 as compared to the prior year due to a $10.2 million increase from the inclusion of Gargiulo, partly offset by a reduction at Calgene Fresh. Net working capital decreased $12.3 million from $10.8 million at June 30, 1995 to negative $1.5 million at June 30, 1996 primarily due to a $54.5 million increase in current liabilities. This increase was partly offset by a $19.4 million increase in accounts receivable, a $18.5 million increase in inventories, and a $6.6 million increase in cash and equivalents and available for sale securities. 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 $7.6 million at June 30, 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 June 30, 1996, the amount of these unamortized costs was $5.8 million. In July 1996, Calgene announced that it and Monsanto Company entered into a letter of intent under which Monsanto will purchase an additional 6,250,000 shares of Calgene common stock at a price of $8 per share. If approved by Calgene's public shareholders, the purchase would bring Monsanto's equity ownership interest to approximately 54.6% and give Monsanto the right to designate five of the nine members of the Board. Also, 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 for a period of three years to Calgene ("Calgene Credit Facility"), although not more than $15 million may be outstanding thereunder at any one time. As of June 30, 1996, $24.8 million of the Gargiulo 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 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. At June 30, 1996, Calgene was in violation of certain financial covenants in the $40 million credit facility. Monsanto has agreed to waive such financial covenants until September 30, 1997. In order to comply with the financial covenants before the waiver period ends, it will be necessary for Calgene to consummate the pending equity purchase by Monsanto, or utilize the Calgene Credit Facility. Calgene currently has a $13 million line of credit with Harris Bank (the "Harris Credit Facility"). The Harris Credit Facility which was scheduled to expire on January 31, 1996, has been extended until December 31, 1996. The bank may require changes in the terms of the Calgene credit facility agreement with Monsanto and, if the required changes cannot be accommodated, there can be no assurance that such bank will continue to make these lines of credit available or, if such lines are not available, that Calgene will be able to obtain alternative bank financing on favorable terms, if at all. As of August 31, 1996, Calgene was not in compliance with certain financial covenants under its credit agreement with Harris Bank. While Calgene has obtained waivers of such defaults through December 31, 1996, there can be no assurance that it will be in compliance with such covenants in the future or, in the event it is not in compliance, that it will be able to obtain waivers of any such covenants. Gargiulo was not in compliance with certain financial covenants in its credit agreement with NationsBank. Gargiulo has received waivers under such covenants until November 30, 1996. There can be no assurance that Gargiulo will be in compliance with such covenants or other covenants in its credit agreement in the future or that, in the event it is not in compliance, that it will be able to obtain waivers of any such covenants. NationsBank has indicated that it does not intend to renew its credit agreement with Gargiulo beyond November 30, 1996. At June 30, 1996 the Company owed NationsBank $23.1 million. 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 for three consecutive years, 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 expects its current cash balances, together with the $50 million cash contribution to be made by Monsanto for the purchase of additional common stock under the Proposed Monsanto Transaction 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 Calgene's shareholders will approve the Monsanto equity investment, or 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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -------------------------------------------- Index to Consolidated Financial Statements and Supplementary Data Page Report of Independent Auditors..............................................34 Consolidated Balance Sheets - June 30, 1996 and 1995........................35 Consolidated Statements of Operations - Years ended June 30, 1996, 1995 and 1994................................................37 Consolidated Statements of Shareholders' Equity - Years ended June 30, 1996, 1995 and 1994....................................38 Consolidated Statements of Cash Flows - Years ended June 30, 1996, 1995 and 1994.........................................................39 Notes to Consolidated Financial Statements..................................40 Supplementary Data (Unaudited)..............................................58 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 June 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a)2. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 June 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for 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 schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Sacramento, California September 12, 1996 CALGENE, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1995 (DOLLARS IN THOUSANDS) ASSETS 1996 1995 ------ -------- -------- Current assets: Cash and equivalents $ 17,674 $ 11,753 Available-for-sale securities 10,919 10,283 Accounts receivable, primarily trade, net of allowance for doubtful accounts of $487 and $346 at June 30, 1996 and 1995, respectively 26,133 6,697 Inventories 23,865 8,148 Prepaid expenses and other current assets 2,174 1,699 -------- -------- Total current assets 80,765 38,580 Property, plant and equipment: Land 20,119 763 Buildings 22,357 3,743 Leasehold improvements 10,689 9,643 Furniture, fixtures and equipment 41,627 22,436 Construction in progress 1,676 1,459 -------- -------- 96,468 38,044 Less accumulated depreciation and amortization 16,481 15,524 -------- -------- Property, plant and equipment, net 79,987 22,520 Product rights, patents and other intangible assets, less accumulated amortization of $3,060 and $2,507 at June 30, 1996 and 1995, respectively 30,642 16,199 Costs in excess of fair values assigned to net assets acquired, less accumulated amortization of $4,612 and $4,145 at June 30, 1996 and 1995, respectively 36,219 10,025 Other non-current assets 5,689 1,907 -------- -------- $233,302 $ 89,231 ======== ======== See accompanying notes. CALGENE, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) JUNE 30, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 ------------------------------------ --------- --------- Current liabilities: Notes payable $ 16,789 $ 7,761 Accounts payable 20,111 6,487 Accrued payroll and related expenses 3,252 2,049 License contract payable 750 1,500 Amounts due customers 5,028 4,596 Other current liabilities 13,453 3,872 Current portion of long-term debt 22,850 1,494 --------- --------- Total current liabilities 82,233 27,759 License contract payable, long-term -- 750 Note payable to affiliate 24,760 -- Research and development advance from affiliate 10,000 -- Long-term debt 22,643 14,671 Commitments and contingencies (Note 10) Minority interest 266 -- Shareholders' equity: Preferred stock, $.001 par value; 5,000,000 authorized, no shares issued and outstanding -- -- Common stock, $.001 par value; 80,000,000 shares authorized, 60,443,115 and 30,244,226 shares issued and outstanding at June 30, 1996 and 1995, respectively 60 30 Additional paid-in capital 367,494 223,161 Accumulated deficit (274,154) (177,140) --------- --------- Total shareholders' equity 93,400 46,051 --------- --------- $ 233,302 $ 89,231 ========= ========= See accompanying notes. CALGENE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 ------------ ------------ ------------ Revenues: Product sales, net $ 95,723 $ 48,972 $ 35,408 Product development revenues 9,272 6,459 3,025 ------------ ------------ ------------ 104,995 55,431 38,433 Costs and expenses: Cost of goods sold 90,403 53,678 43,982 Research and development: Contract 4,222 3,436 2,721 Other 9,801 11,937 12,847 Selling, general and administrative 21,705 16,081 21,279 In-process research and development acquired 59,200 -- -- Write-off of assets 15,574 1,098 -- ------------ ------------ ------------ 200,905 86,230 80,829 Interest expense (3,428) (924) (729) Other income, net 2,345 1,136 389 ------------ ------------ ------------ Loss from operations before provision for income taxes (96,993) (30,587) (42,736) Provision for income taxes (21) (15) (65) ------------ ------------ ------------ Net loss $ (97,014) $ (30,602) $ (42,801) ============ ============ ============ Net loss per share $ (2.56) $ (1.04) $ (1.71) ============ ============ ============ Shares used in per share calculations 37,883,871 29,439,008 24,987,513 ============ ============ ============
See accompanying notes. CALGENE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended June 30, 1996, 1995, and 1994 (Dollars in thousands, except per share amounts)
Common stock Additional Total -------------------------- paid-in Accumulated shareholders' Shares Amount capital deficit equity ---------- ---------- ---------- ---------- ---------- Balance at June 30, 1993 24,411,782 $ 24 $ 169,482 ($ 103,737) $ 65,769 Net loss -- -- -- (42,801) (42,801) Sale of common stock, net of expenses 1,845,000 2 19,150 -- 19,152 Options exercised 249,530 1 1,605 -- 1,606 Stock compensation -- -- 697 -- 697 ---------- ---------- ---------- ---------- ---------- Balance at June 30, 1994 26,506,312 27 190,934 (146,538) 44,423 Net loss -- -- -- (30,602) (30,602) Sale of common stock, net of expenses 3,683,262 3 31,419 -- 31,422 Options exercised 54,652 -- 340 -- 340 Stock compensation -- -- 452 -- 452 Unrealized gain on available-for-sale securities -- -- 16 -- 16 ---------- ---------- ---------- ---------- ---------- Balance at June 30, 1995 30,244,226 30 223,161 (177,140) 46,051 Net loss -- -- -- (97,014) (97,014) Sale of common stock, net of expenses 30,192,707 30 144,343 -- 144,373 Options exercised 6,182 -- 40 -- 40 Unrealized loss on available-for-sale securities -- -- (50) -- (50) ---------- ---------- ---------- ---------- ---------- Balance at June 30, 1996 60,443,115 $ 60 $ 367,494 ($ 274,154) $ 93,400 ========== ========== ========== ========== ==========
See accompanying notes. CALGENE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1996, 1995 AND 1994 INCREASE (DECREASE) IN CASH AND EQUIVALENTS (DOLLARS IN THOUSANDS)
1996 1995 1994 --------------- --------------- --------------- Cash flows from operating activities: Net loss $(97,014) $(30,602) $(42,801) Adjustments to reconcile net loss to net cash used in operating activities: Minority interest in net loss (787) (116) (46) Depreciation and amortization 6,989 4,957 4,099 In-process research and development acquired 59,200 -- -- Write-off of assets 15,574 1,098 -- Equity in net loss of affiliate 1 213 583 Stock compensation -- 452 697 Net changes in operating assets and liabilities, excluding effect of acquisition of subsidiaries: Accounts receivable 8,912 (1,992) (1,658) Allowance for doubtful accounts 141 173 (78) Inventories 6,455 (2,003) 1,320 Prepaid expenses and other current assets 1,447 (303) 34 Accounts payable (1,903) (1,429) 2,589 Accrued payroll and related expenses 784 246 241 Amounts due customers 432 1,268 1,740 Other current liabilities (6,227) 612 1,637 Other 242 30 82 --------------- --------------- --------------- Net cash used in operating activities (5,754) (27,396) (31,561) --------------- --------------- --------------- Cash flows from investing activities: Proceeds from sales of securities 11,787 22,904 24,904 Purchase of securities (12,473) (17,714) (15,588) Collection of notes receivable -- -- 1,709 Investment in affiliate 19 (73) (579) Capital expenditures for property, plant and equipment (3,887) (5,649) (4,437) Payment for purchase of subsidiaries, net of cash and equivalents acquired (1,436) (90) (12) Purchases of product rights, patents and other intangible assets (1,397) (4,782) (4,843) Proceeds from sale of assets 489 38 69 --------------- --------------- --------------- Net cash provided by (used in) investing activities (6,898) (5,366) 1,223 --------------- --------------- --------------- Cash flows from financing activities: Proceeds from notes payable 8,453 19,398 14,214 Payments on notes payable (19,489) (20,322) (13,161) Decrease in securities-pledged 214 159 136 Increase in borrowings of long-term debt 25,057 10,000 -- Principal payments on long-term debt (15,549) (1,768) (1,332) Sale of common stock 7,207 31,762 20,758 Proceeds on notes payable to affiliate 2,680 -- -- Research and development advance from affiliate 10,000 -- -- --------------- --------------- --------------- Net cash provided by financing activities 18,573 39,229 20,615 --------------- --------------- --------------- Net increase (decrease) in cash and equivalents 5,921 6,467 (9,723) Cash and equivalents at beginning of year 11,753 5,286 15,009 --------------- --------------- --------------- Cash and equivalents at end of year $17,674 $11,753 $5,286 =============== =============== ===============
See accompanying notes. CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 securities at June 30, 1996, is $28,288,00, 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 June 30, 1996, are as follows: $23,894,000 in fiscal 1997, $1,509,000 in fiscal 1998, $1,831,000 in fiscal 1999 and $1,054,000 in fiscal 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 $3,042,000 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 $7,908,000 and $8,372,000 at 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. 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 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 fiscal 1996, 1995 and 1994, the Company paid cash for interest and income taxes as follows: (In thousands) 1996 1995 1994 ---- ---- ---- Interest $1,619 $895 $621 Income taxes 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 Stock Based Compensation --------------------------------------- The Company accounts for its stock option plans and its employee stock purchase plan in accordance with the provision 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 any 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 in 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 fluxtuations for the Company's products, and adverse weather conditions which my 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 fiscal 1996 financial statements. 2. RECEIVABLES ----------- Receivables consist of the following:
(In thousands) ----------------------------------------- June 30, 1996 June 30, 1995 ------------------------ ------------- Trade Related Party Trade -------- ------------- ----- Customer $ 18,808 $ -- $ 6,708 Grower advances 5,917 -- -- Other 923 972 335 -------- -------- -------- Total 25,648 972 7,043 Less allowance for doubtful amounts (487) -- (346) -------- -------- -------- Total $ 25,161 $ 972 $ 6,697
3. INVENTORIES ----------- Inventories consist of the following at June 30, 1996 and 1995: (In thousands) 1996 1995 ---- ---- Growing crops $ 11,208 $2,368 Supplies and seeds inventories 10,136 1,123 Finished goods 1,415 1,942 Work in progress 596 2,245 Raw materials 510 470 -------- ------- $23,865 $8,148 ======= ====== 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: (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. 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 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) 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. PENDING MONSANTO EQUITY INVESTMENT ---------------------------------- On July 30, 1996, Calgene and Monsanto entered into a letter of intent under which Monsanto will purchase an additional 6,250,000 shares of Calgene Common Stock. The gross proceeds from the transaction will be $50 million or $8 per share. This purchase would increase Monsanto's equity ownership in Calgene to 54.6% and would cause a shift in the composition of the Calgene Board of Directors to provide for four independent directors, the CEO of Calgene, and four Monsanto nominees. Of the four independent directors, three will be nominated by Calgene and one will be nominated by Monsanto. The closing of the transaction is subject to the execution of a definitive written agreement and Calgene shareholder approval. 7. 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. 8. WRITE-OFF OF ASSETS ------------------- During fiscal 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. 9. LONG-TERM DEBT AND NOTES PAYABLE -------------------------------- Long-term debt consists of the following at June 30, 1996 and 1995:
(In thousands) 1996 1995 ---------- ----------- Note payable to bank; due in monthly installments of approximately $3,000 including interest at 11.8% per annum, through 2004; secured by a $300,000 certificate of deposit and guaranteed by the Small Business Administration. $221 $235 Mortgage notes payable; due in quarterly installments of approximately $31,000 including interest at 8.5% per annum, through 1998; secured by land and buildings with a net book value of approximately $572,200 at June 30, 1996. 280 377 Capitalized lease obligations; due in monthly installments of approximately $150,000 including interest imputed at 5.4% to 11% per annum, through 2001; secured by equipment with a net book value of approximately $5,602,000 at June 30, 1996 and supported by a $150,000 irrevocable letter of credit issued by a bank which is secured by a $150,000 certificate of deposit. 6,030 2,960 Note payable to the former owner of an acquired business; due in annual installments of $253,500 and $338,000 at July 17, 1996 and 1997, respectively; plus interest on the unpaid principal balance at the prime rate (8.25% at June 30, 1996) over the term of the loan; secured by a $591,500 certificate of deposit. 592 705 Non-interest bearing note payable to the former owner of an acquired business; due in monthly installments of $14,083 through June 30, 1997. 169 338 Mortgage note payable; interest only payable in monthly installments of approximately $3,800, current interest at 9.0% per annum. Interest is adjustable effective each November 1 to prime plus 1%, rate not to exceed 9% or be lower than 6% during the term of the note. Final payment of $506,000 plus unpaid interest due November 1, 1999; secured by land with a net book value of approximately $605,000 at June 30, 1996. 506 506 Note payable to a corporate lender, due in quarterly installments of $30,938 including interest imputed at 22.29% per annum, through June 1, 1998. 279 371 Convertible note payable to a corporate lender; converted to equity on March 31, 1996 (Note 4). -- 10,000 Note payable to a bank; due in monthly installments of approximately $2,200 including interest at 8.59% per annum, through 2000; secured by equipment with a net book value of approximately $200,300 at June 30, 1996 144 -- Note payable to a bank; due in monthly installments of approximately $22,500 monthly including interest at prime plus 1.25% (aggregating 9.50% at June 30, 1996) per annum, through 2005, secured by buildings and equipment with a net book value of approximately $2,467,000 at June 30, 1996. 1,644 -- A significant portion of the net tangible assets of Gargiulo (approximately $110,000,000 at June 30, 1996) has been pledged as collateral for the following debt and lease obligations: Note payable to former owner of an acquired business for the purchase of growing crops, principal due upon collection of crop receivable, plus interest at 7%; subsequent to June 30, 1996 this note was paid in full 9,070 -- Mortgage loan payable to former owner of an acquired business, payable in quarterly principal installments of $280,966 plus interest at prime (8.25% at June 30, 1996) through February 28, 2001 5,338 -- Mortgage loan payable to former owner of an acquired business, payable in quarterly principal installments of $219,034 plus interest at prime (8.25% at June 30, 1996) through February 28, 2001 4,162 -- Mortgage loan, payable in annual principal installments of $1,000,000 through August 1999, with interest at prime (8.25% at June 30, 1996) 4,000 -- Mortgage loan, payable in annual principal installments of $175,000, balance due November 30, 1996 with interest at prime plus .85% (aggregating 9.10% at June 30, 1996) 3,325 -- Mortgage loan, payable in annual principal installments of $153,333, balance due November 30, 1996 with interest at prime plus .85% (aggregating 9.10% at June 30, 1996) 2,147 -- Mortgage loan, payable in annual principal installments of $273,200, balance due on November 30, 1996 with interest at prime plus .85% (aggregating 9.10% at June 30, 1996) 1,658 -- Mortgage loans, payable in annual principal and interest installments of $184,041 with interest ranging from prime to 9% 1,191 -- Mortgage loans payable in monthly principal and interest installments of $40,237 with interest ranging from 6.63% to prime (8.25% at June 30, 1996) 1,377 -- Term loan payable to former partner in acquired business, monthly principal and interest payments of $37,981, with interest at 10% 1,149 -- Note payable to a corporate lender, due in monthly installments of $25,550 including interest at 10.38% per annum, through 1999 417 673 Various term loans payable with interest at rates that range from 8% to 12%. Maturity dates ranging from June 1998 through November 2001. 1,794 -- Note payable to affiliate consists of the following: Advances under a $40,000,000 convertible term loan with a balloon payment due March 31, 2000 interest at prime plus 2% (aggregating 10.25% at June 30, 1996) 24,760 -- ---------- ----------- 70,253 16,165 Less note payable to affiliate 24,760 -- Less amount due within one year 22,850 1,494 ---------- ----------- Long-term debt $22,643 $14,671 ========== ===========
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 June 30, 1996 aggregate future principal payments by fiscal year on long-term debt and note payable to affiliate are due as follows: (In thousands) 1997 $22,850 1998 6,272 1999 5,268 2000 30,421 2001 3,369 Thereafter 2,073 ------- $70,253 ======= 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 June 30, 1996 the bank's prime rate was 8.25% and the federal funds rate was 5.48%. The weighted average annual interest rate under the line of credit was 8.90% and 8.92% 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 common stock. The Company is not in compliance with certain line of credit financial covenants and conditions at August 31, 1996. However, the Company has obtained waivers from the bank extending through December 31, 1996. The Company anticipates being in compliance with such covenants and conditions prior to the expiration of the waiver. 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 June 30, 1996, the line of credit had been paid in full. As of June 30, 1995, there was $5,973,400 outstanding on the line of credit. A $17.5 million line of credit with another bank is used to help finance working capital requirements at Gargiulo. Borrowings under the line bear interest at prime plus .85%. On June 30, 1996, the bank's prime rate was 8.25%. Borrowings are subject to certain financial covenants, some of which Gargiulo is not in compliance with at June 30, 1996. However, Gargiulo has obtained waivers from the bank through November 30, 1996. Borrowings are secured by Gargiulo's accounts receivable, inventory and crops and cash and non-cash proceeds therefrom, and certain Gargiulo real estate and other personal property. The bank has indicated that it does not intend to renew its credit agreement with Gargiulo beyond November 30, 1996. At June 30, 1996 there was $12,775,000 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 June 30, 1996). This credit facility expires on September 30, 1998. As of June 30, 1996, the Company had not requested any advances under this credit facility. 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, 1996. On June 30, 1996, the bank's prime rate was 8.25%. As of June 30, 1996, there was $3,500,000 outstanding on the line of credit. 10. 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) 1996 1995 ---- ---- Cost $6,847 $4,192 Less accumulated depreciation 1,245 1,113 ------ ------ $5,602 $3,079 ====== ====== Depreciation expense charged to operations pursuant to these capital leases amounted to approximately $482,000, $537,000 and $462,000 during fiscal 1996, 1995 and 1994, respectively. During fiscal 1996, 1995, and 1994, the Company capitalized equipment of approximately $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 June 30, 1996: (In thousands) 1997 $1,803 1998 1,591 1999 1,335 2000 1,069 2001 1,578 ----- 7,376 Less amount representing interest 1,346 ----- Present value of net minimum lease payments (Note 9) $6,030 ====== Operating Leases ---------------- Future minimum payments by fiscal year under non-cancelable operating leases are as follows at June 30, 1996: (In thousands) 1997 $ 6,211 1998 4,482 1999 3,912 2000 3,069 2001 2,326 Thereafter 570 ------- $20,570 ======= Rental expense charged to operations for all operating leases was approximately $3,971,000, $3,259,000 and $1,761,000 for fiscal 1996, 1995 and 1994, respectively. Rent expense related to leases with related parties was approximately $143,000 for fiscal 1996. 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. Including discontinued operations, the amount of outstanding grower contract commitments is approximately $7.6 million at June 30, 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 ----------------------------------------- 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 material 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 $5.8 million at June 30, 1996. Gargiulo is a defendant in two pending cases which involve personal injury claims relating to a 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, Alvertano Alberto Jiminez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vega; Robles Rios; Jesus Loza and Samuel Santiago Vasquez, and Jose Vasquez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vega; Robles Rios; Jesus Loza and Samuel Santiago Vazquez, were both filed on October 18, 1995, in the United States District Court for the Eastern District of California. The company hiring and transporting such farm workers was Pat Kreger, Inc., an independent contractor engaged by Dresick Farms, Inc. to arrange for migrant farm labor for the farm. The plaintiffs allege that the vehicle in question was in violation of one or more federal and state safety regulations governing farm labor vehicles. The plaintiffs are seeking 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. It has not yet been determined whether Gargiulo's insurance will be sufficient to cover these claims, if any. Gargiulo intends to vigorously defend itself against these claims and believes that the ultimate outcome will not have a material adverse effect on the Company's financial position on results of operations. 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 $5,335,000. In addition, two employment agreements provide for additional compensation based on a percentage of the net profit of Gargiulo and a third agreement is based on the amount of seed sold by Gargiulo to certain entities. 11. SHAREHOLDERS' EQUITY -------------------- Stock Option Plans ------------------ The Company established stock option plans in June 1991 (the "1991 Plan") and in 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 than 100% of the fair market value of Calgene's common stock on the date of grant. The administrative committee of the option plans have 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. During fiscal 1996, employees did not exercise options from either plan. 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. During fiscal 1996, employees exercised 6,182 options issued under the 1981 Plan. The following is a summary of the activity, including the range of per share exercise prices, in the 1981 Plan, the 1991 Plan and the 1996 Plan: Outstanding at June 30, 1993 1,461,025 Granted 499,000 Canceled (13,759) Exercised (at $5.25 to $12.375) (268,588) ---------- Outstanding at June 30, 1994 1,677,678 Granted 769,025 Canceled (119,968) Exercised (at $5.875 to $12.375) (61,457) ---------- Outstanding at June 30, 1995 2,265,278 Granted 2,000,929 Canceled (567,502) Exercised (at $6.50) (6,182) ---------- Outstanding at June 30, 1996 3,692,523 ========== Of the options outstanding at June 30, 1996, options to purchase 1,088,775 shares were immediately exercisable at prices ranging from $4.75 to $15.25 per share on dates ranging from 1996 to 2006. At June 30, 1995, 814,421 options were exercisable at prices ranging from $5.25 to $15.25 per share. At June 30, 1996, there are 349,436 shares and 3,454,445 shares available for grant under the 1991 plan and 1996 plan, respectively. 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. 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 June 30, 1996, 1995 and 1994 the Company sold 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. 12. INCOME TAXES ------------ The income tax provision for the years ended June 30, 1996, 1995 and 1994 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:
(In thousands) June 30, --------------------- 1996 1995 -------- -------- Deferred tax assets: Net operating loss carryforwards $ 70,600 $ 66,200 Research and other credits 3,800 3,800 Capitalized research and development 400 400 Inventory reserves and allowances 1,500 -- Facility writedowns and restructuring 6,400 300 Depreciation -- 100 Development fee 4,000 -- Capitalized license fees 600 700 Increase in tax value of net assets from business acquisition 4,200 -- Other, net 1,800 1,500 -------- ------- Total deferred tax assets 93,300 73,000 Valuation allowance for deferred tax assets (91,500) (72,800) -------- ------- Net deferred tax assets $ 1,800 $ 200 ======== ======= Deferred tax liabilities: Depreciation $ 1,800 $ -- Other, net -- 200 -------- ------- Total deferred tax liabilities $ 1,800 $ 200 ======== =======
At June 30, 1994 the valuation allowance for deferred tax assets was $61.1 million. For federal income tax return purposes, as of June 30, 1996, the Company has a net operating loss carryover of approximately $193 million which expires between 1996 and 2011 and a general business tax credit carryover of approximately $4 million which expires between 1996 and 2011. In addition, as of June 30, 1996, the Company has a net operating loss carryover of approximately $129 million for state income tax purposes which expires between 1996 and 2011. 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 the Calgene Fresh (Plant Genetics was renamed Calgene Fresh in January, 1992). For financial reporting purposes, a valuation allowance of approximately $91.5 million has been recognized to offset the deferred tax assets related to all of the aforementioned carryforwards. 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. 13. 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 years ended June 30, 1996, 1995 and 1994 matching contributions by the Company were $227,000, $179,000 and $151,000, respectively. 14. SUBSEQUENT EVENT ---------------- In July 1996, the Company's Virginia facilities and operations suffered damage caused by a hurricane. The Company estimates the loss, which occurred primarily to growing crops, at $2,000,000. CALGENE, INC. SELECTED QUARTERLY FINANCIAL DATA Unaudited
Fiscal 1996 - ---------------------------------------- (In thousands, except per share amounts) Quarter Ended ------------------------------------------------------------------------- Sep 30 Dec 31 Mar 31 June 30 -------------- -------------- -------------- --------------- Revenues: Product sales $ 8,812 $ 11,128 $ 17,326 $ 58,457 Product development 300 550 225 8,197 -------------- -------------- -------------- -------------- Total revenues $ 9,112 $ 11,678 $ 17,551 $ 66,654 Cost of goods sold $ 12,141 $ 9,958 $ 13,173 $ 55,131 Net loss $ (10,374) $ (5,730) $ (76,955) $ (3,955) Net loss per share $ (.34) $ (.19) $ (2.52) $ (0.07) Fiscal 1995 - ---------------------------------------- (In thousands, except per share amounts) Quarter Ended ------------------------------------------------------------------------- Sep 30 Dec 31 Mar 31 June 30 -------------- -------------- -------------- --------------- Revenues: Product sales $ 6,263 $ 8,850 $ 18,399 $ 15,460 Product development 267 4,166 797 1,229 -------------- -------------- -------------- -------------- Total revenues $ 6,530 $ 13,016 $ 19,196 $ 16,689 Cost of goods sold $ 8,719 $ 10,336 $ 15,039 $ 19,584 Net loss $ (9,538) $ (5,648) $ (4,459) $ (10,957) Net loss per share $ (.35) $ (.19) $ (.15) $ (.36)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE. ------------------------------------ Not applicable. PART III Certain information required by Part III is omitted from this report in that the registrant will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its annual meeting of shareholders to be held approximately in November 1996 and the information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. --------------------------------------------------- The information required by this Item is incorporated by reference to the information under the caption "Election of Directors", and "Filing of Reports by Directors and Officers" in the Company's Proxy Statement. The information concerning executive officers is contained in Item 1 under the caption "Executive Officers" ITEM 11. EXECUTIVE COMPENSATION ---------------------- The information required by this Item is incorporated by reference to the captions "Executive Compensation," and "Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. --------------------------------------------------------------- The information required by this Item is incorporated by reference to the caption "Stock Ownership" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ----------------------------------------------- The information required by this Item is incorporated by reference to the information under the caption "Certain Transactions" in the Company's Proxy Statement. PART IV 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 -- June 30, 1996 and 1995. Consolidated Statements of Operations -- Years ended June 30, 1996, 1995 and 1994. Consolidated Statements of Shareholders' Equity -- Years ended June 30, 1996, 1995 and 1994. Consolidated Statements of Cash Flows -- 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 years ended June 30, 1996, 1995 and 1994: Schedule Page II Valuation and Qualifying Accounts.............................61 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: Form 8-K dated May 7, 1996, announcing that the Company's Board of Directors approved a change in the fiscal year of the corporation and its consolidated subsidiaries from June 30 to December 31. (c) Separate Financial Statements of Fifty Percent or Less Owned Persons: None. CALGENE, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Years ended June 30 1996, 1995 and 1994 (In thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------- --------------- ------------------------------- --------------- --------------- Additions ------------------------------- Balance at Charged to Charged to Balance at beginning of costs and other end of Description period expenses accounts Deductions (1) period ----------- --------------- --------------- --------------- --------------- --------------- Year ended June 30, 1996 - ------------------------ Allowance for doubtful accounts $346 $146 $540(2) $(545) $487 Year ended June 30, 1995 - ------------------------ Allowance for doubtful accounts $173 $249 - $(76) $346 Year ended June 30, 1994 - ------------------------ Allowance for doubtful accounts $221 $42 - $(90) $173 (1) Represents accounts recovered or written-off. (2) Represents the allowance for doubtful accounts acquired in connection with the acquisition of Gargiulo, Inc. in March 1996.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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: /c/ Christian Leleu ------------------------------ Chief Financial Officer Dated: September 30, 1996 (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) September 27, 1996 - ------------------------- /s/ Christian Leleu Chief Financial Officer Christian Leleu (Principal Financial and September 27, 1996 Accounting Officer) - ------------------------- /s/ Robert Fraley Robert Fraley Director September 27, 1996 - ------------------------- /s/ John E. Robson John E. Robson Director September 27, 1996 - ------------------------- /s/ Hendrik A. Verfaillie Hendrik A. Verfaillie Director September 27, 1996 - ------------------------- /s/ Howard D. Palefsky Howard D. Palefsky Director September 27, 1996 - ------------------------- /s/ Allen J. Vangelos Allen J. Vangelos Director September 27, 1996 - ------------------------- /s/ Robert E. Baker Robert E. Baker Director September 27, 1996 - ------------------------- /s/ Roger H. Salquist Roger H. Salquist Director September 27, 1996 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) 3.1 Certificate of Incorporation of the Registrant............................................(P) 3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant...............(P) 3.3 By-Laws of the Registrant.................................................................(P) 10.0 Form of Stockholders Agreement between the Registrant and Monsanto Company................(P) 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) 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 GargiuloMexico, 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) 10.32 Commercial Lease dated August 22, 1983, as amended, covering property in Yolo 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 among Calgene, Inc. and Harris Trust and Savings Bank dated December 29, 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) 10.49 Letter of Intent with Monsanto Company....................................................(L) **10.50 Oilseed Development Agreement between Registrant and Monsanto Company dated May 8, 1996................................................................................68 10.51 1981 Stock Option Plan as amended.........................................................(B) 10.52 1991 Stock Option Plan....................................................................(J) 10.53 1996 Stock Option Plan....................................................................(P) 21.1 Subsidiaries of Registrant................................................................(I) 23.1 Consent of Independent Auditors............................................................96 27 Article 5 of Financial Data Schedule for Fiscal Year Ended June 30, 1996.......................................................................................97 (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 * Confidential treatment of certain portions of these documents has been granted ** Confidential treatment has been requested as to portions thereof
EX-10.50 2 EXHIBIT TO CALGENE, INC. 10-K FOR 1996 CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. OILSEED DEVELOPMENT AGREEMENT This Agreement is made and entered into effective as of this 8th day of May, 1996, by and between Calgene, Inc. and Monsanto Company. Based upon the mutual consideration between the Parties recited below, the Parties do hereby agree as follows: ARTICLE 1. BACKGROUND AND PARTIES 1.01 Calgene, Inc., ("Calgene") is a Delaware corporation, having a principal place of business at 1920 Fifth Street, Davis, California 95616. 1.02 Monsanto Company ("Monsanto") is a Delaware corporation, having a principal place of business at 800 North Lindbergh Boulevard, St. Louis, Missouri 63167. 1.03 Calgene owns certain technology useful in manipulating seed oil composition, and other technology applicable to the expression of traits in plants which can be used to express genes for oil modification, meal modification or the introduction of useful agronomic traits into oilseed crops. 1.04 Calgene is willing to grant, and Monsanto desires to obtain, a license under such Calgene technology to manufacture, have manufactured, use and sell oilseed products in accordance with the terms and conditions set forth herein. 1.05 Monsanto has proprietary rights to certain technology applicable to the engineering of plants and in plant expression, as well as technology for introducing agronomic traits, which is useful in the improvement of oilseeds and in modifying oil composition. 1.06 Monsanto is willing to grant, and Calgene desires to obtain, a license under such Monsanto technology to manufacture, have manufactured, use and sell oilseed products in accordance with the terms and conditions set forth herein. ARTICLE 2. DEFINITIONS For the purposes of this Agreement, the following words and phrases shall have the following meanings: 2.01 "Affiliates" shall mean a Calgene Affiliate or a Monsanto Affiliate. -1- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. 2.02 "Agronomic Genes" shall mean genes encoding for disease resistance, herbicide tolerance, cold tolerance, shatter resistance, yield improvement, earliness, insect tolerance, drought resistance and heat resistance and other genes that reduce the net unit cost of production of agricultural crop plants. 2.03 "Calgene Affiliate" shall mean any company or other legal entity which controls, or is controlled by, or is under common control with Calgene, control meaning the holding , directly or indirectly, of more than twenty percent (20%) of (i) the capital and/or (ii) the voting rights and/or (iii) the right to elect or appoint directors; provided, however, that this Paragraph 2.03 shall not include Monsanto or any Monsanto Affiliates. 2.04 "Calgene Chemical, Inc." shall mean the wholly owned subsidiary of Calgene located at 7247 North Central Park Drive, Skokie, IL 60076. 2.05 "Calgene Patent Rights" shall mean the patent applications listed in Exhibit D as well as any and all patents maturing from the respective applications or maturing from applications that are divisionals, continuations, continuations-in-part of these applications and any and all reissues or extensions of any of the foregoing, and as added from time to time per Paragraph 3.04 herein. 2.06 *************************** shall mean each of: (a) ********************* which produce *********** which produces: (i) *** which (A) is within the ***************** described in Exhibit B hereto for such **** and (B) does not ************************** ***************************************************************** and (ii) *** which is a *********************************************** **** of the following *********** from the ***************** of such ****: (A) ********************************************************* or (B) ********************************************* or (C) ********* ************************* of any ********* that is ******************* in the *************************************************; (b) ******************************** described in (a) above; and (c) ******************************** described in (b) above. 2.07 ***************************************** shall mean ***** *********************** that *************************************** *********. -2- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. 2.08 **************************** shall mean each of: (a) ************************************************************** which produce: (i) ***** which (A) is within ********************* described in Exhibit A hereto for such ****; and (B) does not ****************** ********************************* from the ***************** of such **** and (ii) **** which is a ***************** of the ************* **** or with one or more of the ********************* from the ******************************** (A) ******************************* ************************** or (B) ********************************** ********** or (C) ********************************** of any ******** that is ******************* in the ********************************* **************** or (D) ******************************************** the ************************ that are *********************** in the *************************** provided that the ********************** *************************** than the ***** in the ****************** for the ***** provided, however, that with respect to paragraphs 2.08 (a) (ii), (A), (B), (C), and (D) above, Monsanto and Calgene shall both be ************************************ should ************ have ********************************* and should ************************ be in the interest of both Parties; (b) ******************************** described in (a) above; and (c) ******************************** described in (b) above. 2.09 "Cost of Goods Sold" shall mean a Party's direct and indirect costs, which are reasonable and necessary, incurred by Monsanto or a Monsanto Affiliate in producing a Licensed Product or incurred by the Oils Division in producing all products, as the case may be, in accordance with general accepted accounting principles consistently applied and with general industry practices, but excluding amounts included in Overhead Allocation, Research Expenses or Selling, Administration and General Expenses. 2.10 "Effective Date" shall mean the date first above written. 2.11 ******************************* shall mean each of: (a) ********************* which produce *********** which produce: (i) **** which (A) is within the ***************** described in Exhibit C hereto ************* and (B) does not ************************** ************************* from the ****************************** and (ii) **** which is a ******************************** or with one or more of the following ************************************** of such ***** (A) ********************************************************* or (B) ********************************************* (b) ******************************** described in (a) above; and (c) ******************************** described in (b) above. -3- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. 2.12 "Licensed Method" shall mean any method whose use or practice would, in the absence of a license, infringe one or more claims of a patent application or an unexpired patent included in the Calgene Patent Rights or Monsanto Patent Rights, respectively, which has not been finally adjudicated to be invalid by a court of competent jurisdiction. 2.13 "Licensed Products" shall mean materials, or materials produced by a Licensed Method, including but not limited to vectors, bacterial cells, plant cells, plants or seeds, in each case containing a transgene or otherwise modified by genetic engineering, or products of such transgenic materials, plant cells, plants or seeds which in the course of their manufacture, use or sale would, in the absence of a license, infringe one or more claims of an unexpired patent included in the Calgene Patent Rights, which has not been finally adjudicated to be invalid by a court of competent jurisdiction. 2.14 ************************************ shall mean, through ******************** either: (a) ********************************** ******************************************* or (b) ********** the ********************** which is ************************************ ****************************************** Any such *************** ******************************************************** are specifically excluded from this definition. 2.15 "Monsanto Affiliate" shall mean any company or other legal entity which controls, or is controlled by, or is under common control with Monsanto, control meaning the holding, directly or indirectly, of more than twenty percent (20%) of (i) the capital and/or (ii) the voting rights and/or (iii) the right to elect or appoint directors; provided, however, that this Paragraph 2.15 shall not include Calgene or any Calgene Affiliates. 2.16 "Monsanto Patent Rights" shall mean the patent applications listed in Exhibit E as well as any and all patents maturing from the respective applications or maturing from applications that are divisionals, continuations, continuations-in- part of these applications and any and all reissues or extensions of any of the foregoing, and as added from time to time per Paragraph 3.04 herein. 2.17 "Net Profits for Licensed Products" shall mean, for each Licensed Product, (a) the Net Sales of such Licensed Product minus (b) with respect to such Licensed Product, the sum of : (i) Cost of Goods Sold; (ii) the Selling, Administration and General Expenses; (iii) -4- the Overhead Allocation; (iv) interest expenses; and (v) other expenses, all determined under generally accepted accounting principles consistently applied. 2.18 "Net Profits of the Oils Division" shall mean, for all of its products, (a) the Net Sales of such products minus (b) with respect to such products, the sum of : (i) Cost of Goods Sold; (ii) the Research Expenses; (iii) Selling, Administration and General Expenses; (iv) the Overhead Allocation; (v) interest expenses; and (vi) other expenses, all determined under generally accepted accounting principles consistently applied. 2.19 "Net Sales" shall mean the gross invoiced sales price charged by a Party, its Affiliates and sublicensees for all Licensed Products in the case of Monsanto and for all products in the case of the Oils Division, after deduction of the following items, provided and to the extent such items are incurred and do not exceed reasonable and customary amounts in the market in which such sale occurred: (i) trade and quantity discounts and rebates; (ii) credits or allowances given or made for rejection or return of previously sold Licensed Products or products as the case may be; (iii) any tax or government charge (other than an income tax or value added tax) levied on the sale; and (iv) any charges for freight or insurance. Net Sales shall include all revenues earned by the Oils Division from Third Parties which are directly attributable to: (A) contracted research; or (B) royalties and licensing fees. Other revenues not collected directly by Monsanto from seed company licensees and any grower license revenues shall not be included within Net Sales. For example, if Monsanto collects grower license fees from a farmer and royalty revenues from a seed company, Calgene shall receive the benefit of direct profits attributable only from the royalty charged to the seed company. If any gross invoiced sales price of a Licensed Product or a product, as the case may be, is not determined on an arm's length basis, then such gross invoiced sales price shall, for the purposes of this Agreement, be deemed to be equal to the most recent gross invoiced sales price of such Licensed Product or product to a Third Party on an arms length basis. 2.20 "Oils Division" shall mean that portion of Calgene's business operations having responsibility for research, development and/or commercialization of improved oilseed crops or modified oil, and/or selling of oilseed, oil or derivative oil products. Such business operations shall include, without limitation, Calgene Chemical, Inc. -5- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. 2.21 "Overhead Allocation" shall mean the actual costs (without markup) reasonably allocated from a Party's corporate overhead to the business of Monsanto in making, using or selling Licensed Products or to the Oils Division in making, using or selling its products, for such expenses as: (a) facilities; (b) utilities, maintenance and depreciation; (c) regulatory services; (d) patent filing and prosecution and legal services; (e) royalties on expensed technology licenses; (f) human resource services; (g) financial, accounting, risk and treasury management services; (h) use of office and laboratory space, equipment and supplies at such locations which Calgene may maintain from time to time; (i) laboratory supplies and procurement services; (j) greenhouse and growth chamber facilities, services and supplies; and (k) other services reasonably charged by Monsanto or Calgene (including without limitation library services, laboratory services, information system and telecommunication services). Overhead Allocation shall exclude amounts included in Cost of Goods Sold, Research Expenses, or Selling, Administration and General Expenses. 2.22 "Party" shall mean Monsanto or Calgene; "Parties" shall mean both Monsanto and Calgene. 2.23 "Patent Rights" shall mean the Calgene Patent Rights and the Monsanto Patent Rights. 2.24 "Research Expenses" shall mean research and development expenses determined in accordance with general accepted accounting principles consistently applied and with general industry practices, for the development of all of the products of the Oils Division, but excluding amounts included in either Overhead Allocation or Cost of Goods Sold. 2.25 "Selling, Administration and General Expenses" shall mean selling, marketing, administrative and general expenses determined in accordance with general accepted accounting principles consistently applied and with general industry practices, for the commercialization of the Licensed Products for Monsanto and of all of the products of the Oils Division, but excluding amounts included in either Overhead Allocation or Cost of Goods Sold. 2.26 *************************** shall mean ******************* **** that are ******************************************************** ******* and which have been ************************************ of a *************************************************************** from *********** that are *********************************************** *********** provided, however, that Monsanto and Calgene shall both *************************************** should either Party have a -6- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. ******************************* and should ************************* in the interest of both Parties. ********************************* ******************* are specifically excluded from this definition. 2.27 ************************************ shall be ********** that has the composition of Exhibit C and that has a *************** ******************************************************************** ******************************************* 2.28 ***************************************** shall mean **** ************************ that contain ******************************* ***** 2.29 "Technical Information" shall mean all trade secrets, know-how, knowledge, technology, means, methods, processes, practices, formulas, techniques, procedures, technical assistance, data, specifications, biological materials and other valuable information and materials of whatever nature, whether confidential or not, and whether proprietary or not, which is now in (or hereafter during the term of this Agreement comes into) the possession of the licensing Party and which is relevant to the development of any Licensed Product or products of the Oils Division, as the case may be. 2.30 Third Party shall mean any person, corporation or other business entity other than Calgene, Monsanto and their respective Affiliates. 2.31 "Valid Claim" means a claim of any unexpired patent or patent application in any country in the world, which shall not have been withdrawn, canceled or disclaimed, nor held invalid by a court of competent jurisdiction in an unappealed or unappealable decision. ARTICLE 3. RIGHTS & OBLIGATIONS 3.01 Grant to Monsanto. Subject to the terms and conditions of this Agreement, Calgene grants to Monsanto during the term of this Agreement: (a) a worldwide, ********************************** **************************************************************** **************************************************************** ************ royalty bearing (in accordance with Paragraph 4.02) license to make, have made, use and sell ************************** using Calgene Patent Rights, with rights to sublicense pursuant to Paragraph 3.01(e); (b) a worldwide, ************* royalty bearing (in accordance with Paragraph 4.02) license to make, have made, use and sell (i) any ************************* and (ii) subject to Calgene obtaining -7- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. ******************************************************************* ****************************** so long as the products described in (i) and (ii) ****************************************** using Calgene Patent Rights, with rights to sublicense pursuant to Paragraph 3.01(e); (c) a worldwide, ************ with Calgene ******************* ************************************************************** ************************************************************** ************ royalty bearing (in accordance with Paragraph 4.02) license to make, have made, use and sell (i) ***************** and (ii) subject to Calgene obtaining ************************ ************************************************************** so long as the products described in (i) and (ii) ************ *********************** using Calgene Patent Rights, with rights to sublicense pursuant to Paragraph 3.01(e); and (d) a worldwide, ************* royalty free license, with no right to sublicense, to make, have made and use, for research purposes only, oilseed products other than ************************************* *********************************************************** using Calgene Patent Rights; (e) For ********************************************************** ************ the limited right to sublicense only transgenic plant germplasm produced by Monsanto (with the right to develop, use and sell new varieties and/or hybrids produced therefrom by traditional plant breeding) containing genes developed or in-licensed by Monsanto to any Third Party or any Monsanto Affiliate, provided that Monsanto shall not be permitted to in-license or otherwise acquire a gene from a Third Party and ************ license to that Third Party or an affiliate of that Third Party transgenic plant germplasm containing said gene falling within the scope of the Licensed Patents, and provided further that Monsanto shall provide notice of such sublicense to Calgene within a reasonable period before entering into such sublicense with a Third Party. 3.02 Grant to Calgene. Subject to the terms and conditions of this Agreement, Monsanto grants to Calgene during the term of this Agreement: (a) a worldwide, ************************************* ****************************************************************** ****************************************************************** *************** and (ii) other agreements or options which are not limited as to field of use and which are signed as of the effective date hereof), royalty bearing (in accordance with Paragraph 4.03) license to make, have made, use and sell ************************* *************************************** using Monsanto Patent Rights, with rights to sublicense pursuant to Paragraph 3.02(d); -8- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. (b) a worldwide, ************** royalty bearing (in accordance with Paragraph 4.03) license to make, have made, use and sell ********** ********************************************************** using Monsanto Patent Rights, without the right to sublicense (unless such sublicense was granted before such product became a **************** *************************************************** (c) a worldwide, ************* royalty bearing (in accordance with Paragraph 4.03) license, with no right to sublicense, to make, have made and use, for research purposes only, oilseed products other than ******************************************************************* ******************************************************************* using Monsanto Patent Rights; (d) for ************************************************************ ********* the limited right to sublicense only transgenic plant germplasm produced by Calgene (with the right to develop, use and sell new varieties and/or hybrids produced therefrom by traditional plant breeding) containing genes developed or in-licensed by Calgene to any Third Party or Calgene Affiliate, provided that Calgene shall not be permitted to in-license or otherwise acquire a gene from a Third Party and *********** license to that Third Party or affiliate of that Third Party transgenic plant germplasm containing said gene falling within the scope of the Licensed Patents, and provided further that Calgene shall provide notice of such sublicense to Monsanto within a reasonable period before entering into such sublicense with a Third Party; (e) Any licenses granted herein and any sublicensees granted a sublicense under Paragraph 3.02 to any **************** shall be required by Calgene to ********************************************* *********************************** including but not limited to **************************************************************** **************************************************************** ******************* covering such **************** and (f) No license is granted herein to commercialize an ************** in any country in which *********************************** said *************** 3.03 ************************************ With respect to the rights granted under Paragraph 3.01 (c), Calgene shall not grant any additional licenses or sublicenses to Third Parties under Calgene Patent Rights for ********************************************* *********************** that *********************************** -9- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. 3.04 Other Rights and Obligations (a) Calgene and Monsanto shall consult from time to time regarding Monsanto and Calgene technology, patents and patent applications, which shall be ******************* ****** on the following basis: (i) US patents or applications and their foreign counterparts shall be ******************************* ********* shall include ******************************************* ****** (to the extent that such technology can be ***********), that are applicable to the development of *************************** ********************************************************************* and (ii) US patents or applications and their foreign counterparts shall be ************************************* and shall include *************************************************** (to the extent that such technology can be ***********), that are applicable to the development of *************************************************** ****************************************************************** ***************** (b) With respect to the research rights granted under Paragraphs 3.01 (d) and 3.02 (c), each Party agrees to consider granting licenses covering additional products in the event that the other Party develops a commercially useful application; (c) Each Party grants to the other Party a ************* right during the term of this Agreement to use the Technical Information in connection with such Party's exercise of its rights and licenses granted hereunder. If a Party reasonably requests, the other Party shall provide to the requesting Party free of charge (other than reimbursement for reasonable out-of-pocket costs) all of the Technical Information. 3.05 No Other Rights. Except as expressly provided herein, no other license, right or license is granted by this Agreement (by implication or otherwise) by either Party to the other Party to any other patent rights. ARTICLE 4. CONSIDERATION, PAYMENTS & RECORDS 4.01 Monsanto Fees. Except as provided for in Paragraph 10.13, in consideration for the licenses to Calgene Patent Rights granted hereunder, Monsanto shall pay to Calgene the following: (a) a *** ******, non-refundable licensing fee for licenses under Calgene Patent Rights granted under this Agreement, due upon signing of this agreement; (b) a *********** funded research and development payment to further the development of plant expression or oil modification technologies which may be added to Exhibit D under Paragraph 3.04, due upon signing of this agreement, such payment to be used by Calgene to fund research and development during the 3 year period beginning from -10- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. the effective date of this Agreement; and (c) for any lump-sum license fee received on sublicenses granted by Monsanto under Paragraph 3.01(e) of this Agreement, **** of any such fees to Calgene at the time the fees are collected. 4.02 Monsanto Royalties Due. (a) Except as provided for in Paragraph 10.13, in further consideration for the licenses to Calgene Patent Rights granted hereunder, Monsanto shall pay to Calgene a royalty equal to **** of the Net Profits for each Licensed Product calculated for such Licensed Product sold by Monsanto and Monsanto Affiliates; provided, however, that (i) Monsanto shall use reasonable efforts to obtain information as to Net Profits for each Licensed Product sold by Monsanto Affiliates, but Calgene recognizes that, for some Monsanto Affiliates, such information will not be available to Monsanto; and (ii) where such information is not available, Calgene and Monsanto shall negotiate in good faith on an alternative methodology to determine the compensation due to Calgene on such Net Profits; (b) Except as provided for in Paragraph 10.13, for Net Sales of Licensed Products by sublicensees of Monsanto or a Monsanto Affiliate, further consideration for the licenses to Calgene Patent Rights granted hereunder shall be paid to Calgene based on the greater of: (i) **** of any net license fees, royalties or other income received by Monsanto or a Monsanto Affiliate resulting from Third Party sales of Commodity Oilseed Products, Commodity Canola Products and Commodity High Stearate Canola Products that utilize Calgene Patent Rights under sublicenses granted by Monsanto or a Monsanto Affiliate. In no event will the definition of Net Profits of Licensed Products include items in this subparagraph; (ii) either: (A) **** of net sales of such sublicensees, provided that Monsanto's direct grower license revenues (or other revenues not collected from seed company licensees) are at least **** of such net sales; or (B) **** of Monsanto's direct grower license revenues (or other revenues not collected from seed company licensees) in the event that such revenues are less than **** of such net sales. In no event will the definition of Net Profits of Licensed Products include items in this subparagraph; (c) Earned royalties shall accrue to Calgene, subject to the provisions of Paragraph 4.06, when Licensed Products are invoiced, or if not invoiced, when delivered to a Third Party; (d) If a Licensed Product and several other items are sold and invoiced together, the discount on such sale shall be computed as a fraction, the numerator of which is the gross invoiced sales price of such Licensed Product and items as a bundle and the denominator of which is the sum of the then-current list prices of Monsanto, the -11- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. Monsanto Affiliate or their respective sublicensee, as the case may be, for such Licensed Product and items. Upon the invoicing or delivery of such bundle, the gross invoiced sales price for such Licensed Product shall be deemed to be: (i) the then-current list price of Monsanto, the Monsanto Affiliate or their respective sublicensee, as the case may be, for such Licensed Product; multiplied by (ii) the discount, as computed above. 4.03 Calgene Royalties Due. In consideration for paying to Calgene the amount described in Paragraph 4.01(b) above, the licenses of Paragraph 3.02 and sharing Technical Information as provided in Paragraph 3.04(c), Calgene shall pay to Monsanto **** of the positive Net Profits of the Oils Division. If the Oils Division acquires new business operations, facilities, technologies and/or license rights after the Effective Date, then Monsanto shall have the option either: (i) to contribute **** of the amounts paid by the Oils Division for such acquisition; or (ii) to not contribute any such amount, in which case Monsanto's **** share of the positive Net Profits of the Oils Division shall be reduced accordingly. 4.04 First Commercial Sale. (a) Monsanto shall promptly advise Calgene in writing of the first commercial sale of Licensed Products in each country. (b) The earned royalties described in Paragraph 4.02 shall be deemed to be payable for Licensed Products invoiced or delivered in each country of the world so long as the Calgene Patent Rights covering such Licensed Products have not expired or have not been declared invalid in such country. 4.05 Royalty Reports (a) Beginning December 31, 1996, and annually thereafter, Monsanto shall submit to Calgene a progress report covering the activities related to the development and testing of all Licensed Products and the obtaining of the governmental approvals necessary for marketing them. These progress reports shall be made for each Licensed Product until the first commercial sale of that Licensed Product occurs in the United States.(b) After the first commercial sale of a Licensed Product anywhere in the world, Monsanto will make annual royalty reports to Calgene on or before February 28th of each year. Each such royalty report will cover the most recently completed calendar year and will show: (i) the gross sales and Net Profits for each Licensed Product; (ii) the number of each type of Licensed Product sold; (iii) the royalties, in U.S. dollars, payable hereunder with respect to such sales; (iv) the method used to calculate the royalty; and (v) the exchange rates used.(c) For each calendar year (commencing with calendar year 1997), Calgene will make annual reports to Monsanto on or before February 28th following each such year. Each such report will cover the most recently completed calendar year and will show: (i) the gross sales and Net Profits of -12- the Oils Division; (ii) the number of each type of product sold by the Oils Division; (iii) the payments, in U.S. dollars, payable hereunder with respect to such sales; (iv) the method used to calculate the payments; and (v) the exchange rates used. (d) If no sales have been made during any calendar year, a statement to this effect shall be required. 4.06 Manner of Payment (a) Concurrent with the submission of reports pursuant to Paragraph 4.05, Monsanto shall make the earned royalty payments then due and Calgene shall make the payments then due pursuant to Paragraph 4.03. All payments hereunder shall be made by deposit of United States Dollars in the requisite amount to such bank account in the United States as the receiving Party may from time to time designate by notice to the other. As to the royalty payments payable to Calgene, amounts shall first be calculated in the currency in which the sale of a Licensed Product took place and then converted to U.S. Dollars at the closing buying rate for the last business day of the calendar year for which such payment is due, as set by Chase Manhattan Bank of New York. Payments shall be without set off and free and clear of any taxes, duties, fees or charges other than withholding taxes, if any.(b) If at any time legal restrictions prevent the prompt remittance of part or all royalties by Monsanto with respect to any country where a Licensed Product is sold, Monsanto shall have the right and option to make such payments by depositing the amount thereof in local currency to Calgene's account in a bank or other depository in such country. If, after one year, these legal restrictions still exist, Monsanto shall pay the royalties owed to Calgene in interest from its source of funds in the U.S. 4.07 No Non-Monetary Consideration for Sales. Neither Party shall accept or solicit any non-monetary consideration in the sale of any Licensed Product or products, other than as would be reflected in the calculation of Net Sales. The use by a Party of commercially reasonable amounts of Licensed Products or products for promotional sampling shall not violate this prohibition. 4.08 Records Retention. (a) Monsanto agrees to keep, and shall cause Monsanto Affiliates and sublicensees to keep, records showing all Licensed Products manufactured, used and/or sold and licensing of all Licensed Products in sufficient detail to permit Calgene to confirm the accuracy of Monsanto's earned royalty calculations. Calgene agrees to keep, and shall cause Calgene Affiliates and sublicensees to keep, records showing all products manufactured, used and/or sold by the Oils Division and licensing of all products by the Oils Division in sufficient detail to permit Monsanto to confirm the accuracy of Calgene's payment calculations. All determinations related to royalties and payments due under this Agreement shall be -13- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. made in accordance with generally accepted accounting principles as is normal industry practice. (b) At the request of a Party, the other Party shall permit an independent, certified public accountant appointed by the requesting Party and reasonably acceptable to such other Party to examine, upon reasonable notice, and at reasonably times, records solely to the extent necessary to verify the other Party's calculations. Such records shall be kept and examination thereof shall be limited to a period of time no more than two (2) calendar years.(c) Prompt adjustment shall be made by the Parties to reflect the results of any such audit. The audit of a Party's records shall be at the auditing Party's expense provided that if a net aggregate discrepancy in the audited Party's favor of more than five percent (5%) is found, then the audited Party shall be obligated to reimburse the auditing Party for the cost of the audit. (d) The Parties agree that any dispute arising from an audit of a Party's records and which can not be resolved by the Parties shall be subject to the following arbitration procedure; (i) the Parties shall first have their respective CEO's meet to review the issues raised by the audit, provided that, in the event that Monsanto has acquired a majority of the outstanding Calgene stock, an independent director of the Calgene board shall stand in for the Calgene CEO in such audit review; and (ii) should the procedure in 4.08(d)(i) fail to resolve the dispute, the parties shall appoint an outside arbitrator which is acceptable to both parties, with authority to resolve the dispute. 4.09 Late Payment. Notwithstanding any other remedy available to either Party under the provisions of this Agreement, if any sum of money owned to a Party hereunder is not paid when due, the unpaid amount shall bear interest at the lesser of: (a) a rate of 10% per annum or (b) maximum interest rate under applicable law, calculated from the date payment was due until actually received by such Party. 4.10 ********************************. If the ************** ***************************************************************** to be ***************************** which becomes ********************* ***************************************************************** or ****************************** or through *********************** ****************************** (hereinafter referred to as an **********************), then *************************************** ************ which shall ******************************************** ********************* would have been ******************************* ***** pursuant to this Agreement, *********************************. -14- ARTICLE 5. REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION 5.01 Representations and Warranties. (a) Calgene represents and warrants that: (i) it has the right to grant the licenses described herein; (ii) it has not previously granted (except for agreements with Third Parties described in Paragraph 3.01(a)), and will not grant to any Third Party during the term of this Agreement, any rights and licenses under the Calgene Patent Rights that are inconsistent with the rights granted to Monsanto herein; and (iii) it has full power, right and authority to enter into and carry out its obligations under this Agreement; (b) Monsanto represents and warrants that: (i) it has the right to grant the licenses described herein; (ii) it has not previously granted (except for agreements with Third Parties described in Paragraph 3.01(b)), and will not grant to any Third Party during the term of this Agreement, any rights and licenses under the Monsanto Patent Rights that are inconsistent with the rights granted to Calgene herein; and (iii) it has full power, right and authority to enter into and carry out its obligations under this Agreement; (c) The Parties, upon execution of this Agreement, shall diligently proceed with their respective development, manufacture and sale of Licensed Products or products, as the case may be, and shall earnestly and diligently endeavor to market the same within a reasonable time after execution of this Agreement and in quantities sufficient to meet the market demands therefore; and (d) The Parties and their respective Affiliates and sublicensees shall respectively endeavor to obtain all necessary government approval for the manufacture, use and sale of Licensed Products or products that a Party or its respective sublicensees plan to sell. 5.02 No Warranties. EXCEPT FOR THE EXPRESS WARRANTIES IN PARAGRAPH 5.01, NEITHER PARTY MAKES ANY WARRANTIES TO THE OTHER REGARDING THE PATENT RIGHTS (INCLUDING, WITHOUT LIMITATION, THE VALIDITY OR SCOPE OF THE PATENT RIGHTS) OR THE LICENSED PRODUCTS OR PRODUCT (INCLUDING, WITHOUT LIMITATION, THE NONINFRINGEMENT OF THE LICENSED PRODUCTS OR PRODUCTS ON THIRD PARTY PATENT RIGHTS) OR OTHERWISE, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW. 5.03 Indemnification. (a) Except to the extent caused by the other Party's gross negligence or willful misconduct, each Party (the "Indemnifying Party's ) shall defend and indemnify against, and hold the other Party (the "indemnitee") and its employees, directors, officers and agents harmless from, any loss, cost, liability or expense (including court costs and reasonable fees of attorneys and -15- other professionals) incurred from a claim (other than a claim of infringement of a patent right) arising or alleged to arise out of the manufacture, use, distribution or sale of, where Monsanto is the indemnifying Party, any Licensed Product by Monsanto or any Monsanto Affiliate or sublicensee of Monsanto, and where Calgene is the indemnifying Party, any product by the Oils Division or any sublicensee of the Oils Division; provided, however, that (i) the indemnifying Party shall have sole control of such defense, and (ii) the indemnitee shall provide notice promptly to the indemnifying Party of any actual or threatened claim of which the indemnitee becomes aware.(b) Calgene indemnifies Monsanto and holds Monsanto harmless for and against any claims arising out of a breach of the representation and warranty made in Paragraph 5.01(a).(c) Monsanto indemnifies Calgene and holds Calgene harmless for and against any claims arising out of a breach of the representation and warranty made in Paragraph 5.01(b). ARTICLE 6. CONFIDENTIALITY 6.01 Confidential Information. It is anticipated that it will be necessary, in connection with their obligations under this Agreement, for Monsanto and Calgene to disclose to each other confidential propriety business and/or technical information ("Confidential Information") relating to their respective business, products and technologies. The Confidential Information shall include information disclosed in writing or other tangible form, including electronic transmissions and samples of materials. If disclosed orally, the Confidential Information shall be summarized in written form within thirty (30) days by the disclosing Party and a copy provided to the recipient. 6.02 Confidentiality and Limited Use.(a) With respect to all Confidential Information, both Monsanto and Calgene agree as follows, it being understood that "recipient" indicates the Party receiving the Confidential Information from the other "disclosing" Party. Confidential Information disclosed to the recipient shall remain the property of the disclosing Party and shall be maintained in confidence by the recipient and shall not be disclosed to third parties by the recipient and, further, shall not be used by the recipient except for purposes contemplated in this Agreement. All confidentiality and limited use obligations with respect to the Confidential Information shall terminate ten (10) years after the disclosure of such Confidential Information.(b) Notwithstanding any provision to the contrary, a Party may disclose Confidential Information of the other: (i) in connection with the order of a court or other governmental body or as required by or in compliance with laws or regulations; (ii) in confidence, to attorneys, accountants, banks and financing sources and -16- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. their advisors; or (iii) in confidence, in connection with a proposed sublicense, merger or acquisition, or the like, so long as, in each case, the entity to which disclosure is made binds itself to confidentiality on terms consistent with those set forth herein, in an agreement in which the Party whose Confidential Information is to be disclosed is expressly named as a third party beneficiary. 6.03 Exceptions. The obligations of confidentiality and limited use shall not apply to any of the Confidential Information which: (a) is publicly available by publication or other documented means or later becomes likewise publicly available through no act or fault of recipient; or (b) is already known to recipient before receipt from the disclosing Party, as demonstrated by recipient's written records; or (c) is made known to recipient by a third party who did not breach confidentiality obligations to the disclosing Party and which third party does not obligate recipient to hold it in confidence.Specific information should not be deemed to be within any of these exclusions merely because it is embraced by more general information falling within these exclusions. 6.04 Disclosures to Personnel. Recipient agrees to advise those of its officers, directors, stockholders, employees, associates, agents, consultants, Affiliates, and sublicensees who become aware of the Confidential Information, of these confidentiality and limited use obligations and agrees, prior to any disclosure of Confidential Information to such individuals or entities, to make them bound (by written agreement or otherwise) by obligations of confidentiality and limited use of the same stringency as those contained in this Agreement. 6.05 Confidential Status of Agreement. The terms of this Agreement including the royalty rate shall be deemed to be Confidential Information and shall be dealt with according to the confidentiality requirements of this Article 6. Both Parties agree furthermore, that neither Party will make public disclosures concerning other specific terms of this Agreement without obtaining the prior written consent of the other Party, which consent shall not be unreasonably withheld, except to the extent required by law or regulation. ARTICLE 7. PATENT PROSECUTION, ENFORCEMENT AND INFRINGEMENT 7.01 Patent Prosecution. (a) Calgene shall have the ********* ********************************************************************* ******************************** (b) Monsanto shall have the ********************************************************************* *****************************************. -17- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. 7.02 Patent Enforcement. (a) Calgene and Monsanto shall each give prompt notice to the other of any infringement of the Patent Rights which may come to its attention; (b) The Party holding such Patent Rights shall ************************************************* ********************************************************************* of a ************* and to ************************************* as it may deem appropriate. The Party holding such Patent Rights shall ********************************************************* to this Paragraph 7.02; (c) If the infringing activities of the Third Party result in a ************************************************** relating to ***************** and at the *************** from the ***************** by such Party of such infringement, the Third Party *************************************************************** ********* which are an infringement of the Patent Rights, and the Party which owns and/or controls the involved Patent Rights ******* ******************************************************************* ************************ (i) when such affected Party is Monsanto, it ************************************************************* hereunder with ************************************************** ***************************************************************** *****************and (ii) when such affected Party is Calgene, Calgene ******************************************************************** ************** in the ********************************************** ******************************************************************** ********************************************************************. ************************* as the case may be, ************ shall arise ******************************************************************** ********************************************** and shall *********** **************************************************************** and to so ******** with the Licensed Products; (d) Neither Party shall **************************************************************** **************************************************************** licensed hereunder *****************************. 7.03 Infringement. In the event of any claim or suit against Calgene or Monsanto for infringement of any intellectual property right of any Third Party as the result of the manufacture, use or sale of the Licensed Products or products by a Party or distributors, agents or customers of such Party, the Parties shall cooperate in good faith in determining how to respond to such claim or suit. ARTICLE 8. TERM 8.01 Term. The term of this Agreement shall commence on the Effective Date and, shall continue for fifteen (15) years, which term is automatically extended until the expiration of any patent listed on Exhibits D and E hereto. -18- 8.02 No Right to Terminate for Breach. In the event of a breach or default of any of the provisions hereof by either Party, the non-breaching non-defaulting Party may seek to recover monetary damages against the breaching or defaulting Party (after giving such Party written notice and a reasonable opportunity to cure) or to seek specific performance, injunctive or other equitable relief, other than termination of this Agreement. The non-breaching non-defaulting Party shall not have the right to terminate this Agreement. ARTICLE 9. PATENT MARKING/USE OF NAMES/TRADEMARKS 9.01 The Parties agree to mark all Licensed Products and products, as the case may be, made, used or sold under the terms of this Agreement, or their containers, in accordance with the applicable patent marking laws. 9.02 Nothing contained in this Agreement shall be construed as conferring any right to use in advertising, publicity, or other promotional activities any name, trade name, trademark, service mark or other designation of either Party hereto (including contraction, abbreviation or simulation of any of the foregoing). ARTICLE 10. GENERAL PROVISIONS 10.01 Notices. All notices and other communications required or permitted under this Agreement shall be deemed to be properly given when in writing and sent by registered or certified mail, postage prepaid or by reputable courier service or by telefax with receipt confirmation, to the other Party at the address set forth below, or at such other address as either Party may be in writing designate from time to time for these purposes. If to CALGENE: Calgene, Inc. 1920 Fifth Street, Davis, CA 95616 Attention: Roger Salquist, Chief Executive Officer Copy to: Calgene, Inc., 1920 Fifth Street, Davis, CA 95616 Attention: Lloyd Kunimoto, Vice President If to MONSANTO: Monsanto Company 700 Chesterfield Parkway North, St. Louis, MO 63198 Attention: President Ceregen Copy to: Monsanto Company, 800 North Lindbergh Blvd., St. Louis, MO 63167 Attention: Group Patent Counsel The Agricultural Group -19- CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. 10.02 Assignability. The rights and obligations acquired herein by either Party ****************************************************** ******************************************************************* ************** of the other Party. ************************** of the other Party, which ******************************************* a Party ***************************************** under this Agreement in ********************************************************** ******************************* to which this Agreement pertains to a ******************** provided that the ***************** shall agree ***************************************************************** of this Agreement. ********************************************** ********* in violation of this Paragraph 10.02 shall be void and of no effect. 10.03 Entire Agreement; Amendments; Waiver. This Agreement constitutes the full understanding of the Parties, and supersedes any and all prior agreements as they may relate to licenses granted herein, with the exception that for sales of Glyphosate tolerant products by Monsanto the agreements between the Parties regarding Glyphosate tolerant genes, dated December 20, 1994, (Settlement Agreement ) and transgenic technologies, dated April 22, 1993, (Transgenic Plants Agreement ) shall be treated in accordance with paragraph 10.13 (b) hereto. Except as otherwise specifically provided in this Agreement, no conditions, understanding or agreement purporting to modify, vary, explain or supplement the terms or conditions of this Agreement shall be binding unless hereafter made in writing and signed by the Party to be bound and no modification shall be effected by the acknowledgment or acceptance of documents containing terms or conditions at variance with or in addition to those set forth in this Agreement. No waiver by any Party with respect to any breach or default or of any right or remedy and no course of dealing or performance, shall be deemed to constitute a continuing waiver of any other breach or default or of any right or remedy, unless such waiver be expressed in writing signed by the Party to be bound. Failure of a Party to exercise any right shall not be deemed a waiver of such right or rights in the future. 10.04 Severability. In case any one or more of the provisions contained in this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, but this Agreement shall be construed as if such invalid or illegal or unenforceable provisions had never been contained herein. 10.05 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original with the same effect as if the signatures thereto and hereto were upon the same instrument. -20- 10.06 Headings. Headings as to the contents of particular Articles and Paragraphs are for convenience only and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular Articles and Paragraphs to which they refer. 10.07 Agreement References. All paragraphs and subparagraphs referred to herein are paragraphs and subparagraphs of this Agreement. 10.08 Exhibits. The appended Exhibits form an integral part of this Agreement. 10.09 Choice of Law. IT IS THE INTENTION OF THE PARTIES HERETO THAT ALL QUESTIONS WITH RESPECT TO THE CONSTRUCTION OF THIS AGREEMENT AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO BUSINESS ARRANGEMENTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK. 10.10 Export Control. Notwithstanding any other provisions of this Agreement, each Party agrees to make no disclosure or use of any information or technology of the other Party furnished or made known to such Party pursuant to this Agreement, except in compliance with the laws and regulations promulgated by the Office of Export Administration, International Trade Administration, United States Department of Commerce; and in particular, the Parties agree not to export, directly or indirectly, either: (a) the technical data or technical information furnished or made known to either Party by the other pursuant to this Agreement; or (b) the "direct product" thereof or (c) any commodity produced using such technical data to any country or countries unless a general or validated license is first obtained pursuant to the Export Administration Regulations. The term "direct product", as used above, is defined to mean the immediate product (including process and services) produced directly by the use of the technical data. 10.11 Force Majeure (a) Except for payments of money, neither of the Parties shall be liable for any default or delay in performance of any obligation under this Agreement caused by any of the following: Act of God, war, riot, fire, explosion, accident, flood, sabotage, compliance with governmental requests, laws, regulations, orders or actions, national defense requirements or any other event beyond the reasonable control of such part; or labor trouble, strike, lockout or injunction (provided that neither of the Parties shall be required to settle a labor dispute against its own best judgment);(b) The Party invoking this Paragraph 10.11 shall give the other Party notice and full particulars of each force majeure event by telephone, telegram, telex or telecopier as soon as possible after the occurrences of the -21- cause upon which said Party is relying. Telephone, telegram, telex and telecopier notices shall be confirmed in writing by the sending Party within 5 days. 10.12 Negation of Agency. It is agreed and understood by the Parties hereto that each of Monsanto and Calgene, in its performance of its obligations and responsibilities under this Agreement, is an independent contractor and that nothing herein contained shall be deemed to create an agency, partnership, joint venture or like relationships between the Parties. The manner in which each of Monsanto and Calgene carry out its performance under this Agreement is within each of Monsanto's and Calgene's sole discretion and control. 10.13 Existing Agreements. Subject to the provisions of this paragraph, to the extent that rights provided under existing agreements between the Parties are not in conflict with this Agreement, this Agreement shall not terminate rights under such existing agreements.(a) For any Licensed Product, other than sales of Glyphosate tolerant canola by Monsanto, if a Party would have an obligation to pay royalties to the other Party both under this Agreement and under a prior agreement between the parties, the payment due the other Party shall be determined only under this Agreement.(b) Royalties and fees for a Glyphosate tolerant canola Licensed Product produced by Monsanto shall be determined as follows:(i) if all necessary Calgene Patent Rights utilized by Monsanto in conferring glyphosate tolerance to such Licensed Product is covered by the Settlement Agreement and/or the Transgenic Plants Agreement, the royalties payable to Calgene shall be determined pursuant to such Settlement Agreement and/or Transgenic Plants Agreement, as the case may be;(ii) if such Licensed Product incorporates a Calgene Patent Right for any purpose other than conferring glyphosate tolerance to such Licensed Product the royalties payable to Calgene shall be determined pursuant to this Agreement.For example: if Monsanto sells glyphosate tolerant genetically transformed canola with a non- genetically engineered oil composition the royalties would be those called for in the Transgenic Plants Agreement; if Monsanto sells Glyphosate tolerant canola which also produces an oil which has been modified using Calgene Technology licensed under this agreement, the royalty payable to Calgene for such Licensed Product shall be determined pursuant to this Agreement. -22- IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their respective duly authorized officers as of the day and year first above written. CALGENE, INC. MONSANTO COMPANY By: /s/Roger H. Salquist By: /s/H.A. Verfaillie Print Name Roger H. Salquist Print Name H.A. Verfaillie Title: Chmn and CEO Title: Executive VP -23- Exhibit A EXHIBIT A CONTAINS CONFIDENTIAL MATERIALS WHICH HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -24- Exhibit B EXHIBIT B CONTAINS CONFIDENTIAL MATERIALS WHICH HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -25- Exhibit C EXHIBIT C CONTAINS CONFIDENTIAL MATERIALS WHICH HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -26- Exhibit D EXHIBIT D CONTAINS CONFIDENTIAL MATERIALS WHICH HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -27- Exhibit E EXHIBIT E CONTAINS CONFIDENTIAL MATERIALS WHICH HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -28- EX-23.1 3 EXHIBIT TO CALGENE, INC. 10-K FOR 1996 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-06591) pertaining to the 1981 Stock Option Plan, 1990 Employee Stock Purchase Plan, 1991 Stock Option Plan, and 1996 Stock Option Plan of Calgene, Inc. of our report dated September 12, 1996, with respect to the consolidated financial statements and schedules of Calgene, Inc. included in the Annual Report (Form 10-K) for the year ended June 30, 1996. ERNST & YOUNG LLP Sacramento, California September 23, 1996 EX-27 4 FDS 10-K 1996 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1011134 1,000 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 1 11,674 10,919 26,620 487 23,865 80,765 96,468 16,481 233,302 82,233 22,643 0 0 60 93,340 233,302 95,723 104,995 90,403 104,426 74,774 0 3,428 (96,993) 21 (97,014) 0 0 0 (97,014) (2.56) 0 TOTAL COSTS INCLUDE EXPENSES FOR BOTH FUNDED AND UNFUNDED R&D PROJECTS.
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