-----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, HzVTEdVgAEstjtLgGdbp4C0EdDCMLTvsCAgjD/LZN5Z+7PPM30x3vMokvjX8yyGt LF15QjcVe5yvxMTVYr01/A== 0001011134-97-000001.txt : 19991210 0001011134-97-000001.hdr.sgml : 19991210 ACCESSION NUMBER: 0001011134-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALGENE INC /DE/ CENTRAL INDEX KEY: 0001011134 STANDARD INDUSTRIAL CLASSIFICATION: 0100 IRS NUMBER: 680369863 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20641 FILM NUMBER: 97568422 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 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 (MarkOne) [ ] 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 [X] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from 7/1/96 to 12/31/96. For the Fiscal Period Ended Commission File Number December 31, 1996 0-14802 CALGENE, INC. (Registrant) Delaware 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 $222,161,000 as of January 31, 1997, 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. 66,729,861 shares of Common Stock were Issued and Outstanding as of February 28,1997. DOCUMENTS INCORPORATED BY REFERENCE None 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, packer, marketer and distributor of tomatoes, strawberries and other produce with operations in Florida, California, Mexico and Puerto Rico. In November 1996, Calgene and Monsanto closed a transaction whereby Monsanto purchased 6,250,000 shares of Calgene common stock for $50 million. The transaction brought Monsanto's equity investment in Calgene to approximately 54.6%. In January 1997, Calgene received an unsolicited proposal from Monsanto Company to acquire all of the outstanding shares of Calgene that Monsanto does not already own at a price of $7.25 per share. The proposal is under consideration by a special committee of three disinterested Directors. Fresh Produce. The Company is currently growing, packing, marketing and distributing traditionally developed tomatoes, strawberries and other fresh fruits and vegetables through its Gargiulo subsidiary. Calgene scientists are using genetic engineering and plant breeding techniques to develop tomato varieties with increased sweetness and delayed softening in order to market a premium quality product. Calgene scientists are also seeking to develop tomato varieties with higher yield and virus resistance in an effort to reduce production costs. In May 1994, after FDA action, Calgene began commercialization of the FLAVR SAVR tomato, the world's first genetically engineered whole food product. Calgene has also received regulatory clearance to commercialize the FLAVR SAVR tomato in Canada, Mexico and the United Kingdom. In fiscal 1995, Calgene curtailed production of the FLAVR SAVR tomato and began introducing the FLAVR SAVR gene into Gargiulo varieties using traditional plant breeding methods in an effort to develop agronomically suitable varieties. Calgene is also seeking to develop strawberry plants that resist diseases and produce berries with increased sweetness. Plant Oils. Calgene is developing genetically engineered canola oils with a broad range of food and industrial applications. Calgene scientists have genetically engineered canola varieties that produce substantial quantities of laurate, an important food ingredient and an ingredient in soap, detergent and personal care products. Laurate is not naturally present in canola or other non-tropical oil plants. To date, the Company has sold one million pounds of Laurical(TM) canola oil and is currently planning for approximately 70,000 acres of commercial production for harvest in 1997. The Company is also in field trials with canola plants that have been genetically engineered to produce oil with increased stearate levels, creating a potential substitute for hydrogenated oils in margarine, fluid shortening and confectionery products. The Company's subsidiary, Calgene Chemical, manufactures and distributes plant oil-based chemicals. Calgene is in the early stage of developing polyunsaturated fatty acids ("PUFAs") in canola plants to be sold to food ingredient and medical/nutritional markets based on health benefits. Cotton. The Company is currently selling genetically engineered BXN(R) cotton seed and traditionally developed cotton seed varieties through its subsidiary Stoneville Pedigreed Seed Company. Calgene's cotton genetic engineering program focuses on reducing farmers' growing costs through the development of cotton varieties that require less pesticides and cotton varieties that produce natural colors. Herbicide resistant and insect resistant cotton varieties have the potential to enable cotton farmers to significantly reduce the total volume of herbicides and insecticides applied, resulting in substantial savings in production costs, added flexibility in crop rotation, improved yields and benefits to the environment. The Company commercially sold its genetically engineered BXN cotton, which is resistant to the herbicide Bromoxynil(R) in 1995 and 1996 at a price premium in excess of 41% over Calgene's non-genetically engineered cotton seed. Calgene plans to commercially introduce cotton varieties genetically engineered to contain both the BXN gene and a Bt gene for resistance to Heliothis, the principal cotton insect pest, in 1998. Company scientists are in the early stages of a development program designed to create cotton varieties having natural fibers which may reduce or eliminate the need for dyeing and provide unique color-fastness. Calgene is seeking to produce identity-preserved genetically engineered cotton and sell premium-priced colored cotton fiber to the fabric, apparel and houseware manufacturers. Business Strategy Calgene's business strategy is to build and grow operating businesses in its three core crop areas to facilitate the market introduction of genetically engineered proprietary products and to maximize the long-term financial return from such products. Implementation of this strategy will provide the Company with direct access to markets where it will sell fresh and processed plant products having improved quality traits and/or cost of production advantages, and to markets where it will sell seed that has been engineered with value-added agronomic traits. Calgene has selected fresh produce (tomato and strawberry), edible and industrial plant oils (canola) and cotton as its core crops on the basis of the following criteria: o Calgene has efficiently transformed and regenerated these crops with proven plant transformation methods, thereby making the crops suitable candidates for genetic engineering. o These crops offer significant long-term profit opportunities for genetically engineered products in seed (input) or crop and product (output) markets, or both. o Market characteristics offer the Company a realistic opportunity to attain a leading market share in the input or output markets, or both. Calgene addresses its core crop opportunities through a combination of operating subsidiaries and commercial partnerships. The Company is developing genetically engineered, premium quality, fresh market tomatoes and strawberries through its Gargiulo subsidiary. In plant oils, the Company has developed and is growing genetically engineered laurate canola and is developing a portfolio of genetically engineered canola oils, some of which it intends to distribute and process through its Calgene Chemical subsidiary. Calgene Chemical currently distributes industrial and edible vegetable oils, and manufactures vegetable oil-based specialty chemicals. In certain market segments where the capital investment and other commitments required to serve the markets exceed Calgene's resources, the Company has established relationships with major corporations which have leading positions in the targeted segments. These arrangements provide for the other company to pay Calgene royalties based on genetically engineered product sales or usage, to purchase genetically engineered and nongenetically engineered plant-based raw materials from Calgene or to assist in Calgene's product and market development. In cotton, the Company is currently developing and marketing conventional seed varieties and genetically engineered herbicide resistant seed varieties through its Stoneville subsidiary and is developing and intends to market genetically engineered insect resistant cotton varieties. Products and Product Development The following table sets forth Calgene's primary genetically engineered products and products under development, the potential commercial applications for such products, and the development status of such products:
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 Plants are currently in field trials for certain RNA viruses.
Product Product Applications Development Status 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% expensive and more abundant source myristate in oil have been produced in the of raw materials for milder soaps greenhouse. and personal care products. Medium Chain Fatty Acids/ Less expensive source of raw Rapeseed plants with up to 28% medium Medium Chain Triglycerides materials for high performance chain fatty acids have been produced in lubricants, nutritional formulas the greenhouse. and 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 are conducted through Gargiulo Inc., which was contributed by Monsanto to Calgene in 1996 as part of the Monsanto Transaction. Gargiulo engages in the growing, packing, marketing and distribution of tomatoes and strawberries and, to a lesser extent, other fresh fruits and vegetables. Gargiulo also engages in breeding research with respect to tomatoes and, to a lesser extent, strawberries. Gargiulo's tomato producing operations are conducted principally in Florida, California, Mexico and Puerto Rico. Gargiulo's berry production operations are conducted principally in northern California. Tree fruits are grown in Chile, and potatoes, which Gargiulo began producing, packing and distributing for the first time in January 1995, are grown in southwest Florida. In order to diversify the product line, in the early 1980's Gargiulo's predecessor companies commenced an operation to grow, cool, market and distribute strawberries in northern California. In February 1996, Gargiulo acquired substantially all of the assets and certain specified liabilities of the produce business conducted by certain affiliates of Collier Enterprises under the trade name of "Collier Farms." Collier Farms is an agricultural producer of fresh tomatoes and other vegetables in southwest Florida, and engages in the packing, marketing and distribution of those products into the commodity markets. Gargiulo believes it has achieved recognition among the wholesalers, retailers, brokers and food service entities which it serves, as a reputable and reliable supplier of tomatoes and berries. Gargiulo intends to continue to concentrate its efforts in this business and to capitalize, whenever possible, on the opportunities to profit in the commodity fruit and vegetable business. With its vertically integrated structure, management, marketing and research capabilities and its established distribution channels, Gargiulo believes its is well positioned to take advantage of opportunities in the commodity fruit and vegetable markets. Calgene scientists have genetically engineered the patented FLAVR SAVR gene into flavorful tomato varieties to delay softening so that these varieties can remain on the vine longer to allow full flavor and texture to develop before harvest and be distributed with relatively low rates of spoilage. In view of the production scale-up difficulties that it has encountered, Calgene curtailed its FLAVR SAVR tomato growing operations in the Spring of 1996 until it is able to complete the development of varieties of FLAVR SAVR tomatoes that have enhanced commercial agronomic qualities. Calgene, through its Gargiulo subsidiary, intends to focus its tomato operations on plant breeding activities necessary to develop such enhanced varieties of its genetically-engineered tomatoes, but there can be no assurance that such efforts will be successful or will not be discontinued by Calgene. There can be no assurance that Calgene will be successful in developing genetically engineered tomatoes with the agronomic characteristics necessary for commercial production or that it will be successful in marketing a branded tomato line. See "Risk Factors - Risks Applicable to the Branded Tomato Strategy" and "Risk Factors - Risks Associated with Production of Genetically Engineered Tomatoes." Tomatoes. Gargiulo's principal product is fresh tomatoes. For the six month period ended December 31, 1996, Gargiulo packed and shipped approximately 150 million pounds of fresh tomatoes, which it produced through its own farming operations, through joint ventures or partnerships with other growers. For Gargiulo's and its predecessors' fiscal years ended June 30, 1994, 1995 and, 1996 and the six month period ended December 31, 1996, product revenues from Gargiulo's tomato operations were approximately $50.3 million, $60.1 million, $77.3 million and $32.1 million, respectively. Gargiulo's tomato operations are vertically integrated with seed research, production, packing, repacking, distribution, marketing, and sales capabilities. With production available year round from its various locations, Gargiulo believes it is well positioned for consistent year round supply of tomatoes to customers throughout the United States and Canada. Approximately 80% of the tomatoes produced by Gargiulo during calendar 1996 were harvested and processed as green tomatoes. Green tomatoes are typically packed into 25 pound boxes and then stored at 65(degree)F in the presence of ethylene gas for one to four days. This process allows the tomato to achieve a deep red color acceptable to the retail consumer and results in a sufficient shelf-life so that the tomato reaches the retail consumer in an acceptable condition. The vast majority of tomatoes produced in the United States are harvested green and processed in this manner. Gargiulo, through its participation in a joint venture with a Mexican partner, has the capability to produce tomatoes which are ripened on the vine, packed and then shipped. The Mexican climate allows for vine ripening which many retail consumer believe results in a better tasting tomato than tomatoes which are picked green and ripened off the vine. Pursuant to a plan approved by Calgene's Board of Directors in the quarter ended December 31, 1996, Gargiulo intends to significantly reduce its produce acreage in southwest Florida. The reduction in acreage is in response to increased competitive pressure from Mexico produce. Gargiulo intends to embark upon a branded tomato program to produce and market a premium tomato under the Gargiulo name. The success of the branded tomato strategy will depend in large measure on Gargiulo's ability (i) to induce customers to identify Gargiulo's premium tomato with the Gargiulo name, (ii) to induce consumers to pay a premium price for that superior tomato, and (iii) to be able to produce and deliver that tomato to customers on a consistent basis. Based on market research performed by Gargiulo and Calgene's experience with the FLAVR SAVR tomato, Gargiulo believes that there is a sufficient customer base willing to pay a premium price for a superior tomato to justify the significant amount of money that will be required for marketing and advertising necessary to promote the branded tomato. Ultimately, Gargiulo's branded tomato strategy is to provide advertising, marketing and promotional services directly to the major retail grocery chains. Gargiulo believes that retailers would embrace this service because it would contribute to their profit. It would benefit Gargiulo by providing a consistent source of sales for Gargiulo's tomatoes and by reducing Gargiulo's reliance on the commodity markets. As one of the few vertically integrated commercial fruit and vegetable growers in the industry, Gargiulo intends to use its plant research capabilities, year round supply capabilities, geographic and product line diversification and operational skill to enable it to produce tomatoes suitable for sale directly to the retail market. There can be no assurance that Gargiulo's efforts with the branded tomato will be successful. See "Risk Factors--Risks Associated with the Branded Tomato Strategy." Berries. During the six month period ended December 31, 1996, Gargiulo grew approximately 2.1 million flats of fresh strawberries and cooled approximately 500,000 flats of fresh strawberries through its own farming operations and pursuant to relationships with contract growers. On a smaller scale, Gargiulo also cools and markets raspberries, grown by itself and others, and blackberries and blueberries grown by others. For the fiscal years ended June 30, 1994, 1995 and 1996, and the six month period ended December 31, 1996, product revenues from Gargiulo's berry operations were approximately, $20.8 million, $23.4 million, $30.8 million, and $16.1 respectively. Other Produce. Gargiulo grows red potatoes in southwest Florida. Gargiulo's strategy is to position itself to produce and market high quality fresh red potatoes during the winter and to take advantage of market timing and potentially stronger prices in competition with potatoes obtained from storage by other producers. As part of its joint venture with a Mexican grower, Gargiulo produces and distributes red, yellow and green peppers from Mexico from January through May. Since the mid 1980's, Gargiulo and its predecessor companies have imported and sold during the winter in the United States, apricots, asparagus, grapes, nectarines, pears, plums and raspberries from Chile and other South and Central American countries. Gargiulo, through its Chilean subsidiary, has interests, together with its Chilean partners, in grape vineyards and nectarine orchards located in Chile. Gargiulo's focus is on importing and distributing high quality fruit during the winter months in the United States and Canada. Plant Oils The primary focus of Calgene plant oils business is the development of a specialty lipid food ingredient business that will leverage Calgene's unique genetically engineered oils. Initial efforts in this area are aimed at the commercialization of Calgene's cornerstone product, Laurical(R), a genetically engineered canola oil containing lauric acid. Calgene's secondary focus is the development and commercialization of oils that contain long chain polyunsaturated fatty acids for food ingredient and medical/nutrition markets. The final area of focus is the development and commercialization of oils for industrial markets, in particular, the oleochemical and oleochemical derivative markets. Specialty Food Ingredients In 1996 over 14.7 billion pounds of plant oils and oil based products with a value of $3.7 billion were used in U.S. food products and approximately 17 billion pounds with a value of $4.25 billion were used in Europe. The majority of oil markets are commodity based, with purchases driven almost exclusively by price. These markets are served primarily by soybean, sunflower, canola, palm and other commodity oils. At any given time, the prices for these oils seldom differ by more than $0.05 per pound, although the entire commodity oil complex rises and falls as a function of macro supply and demand conditions. Approximately 5% of the edible plant oils market consists of specialized applications where ingredients are selected principally to meet specific functional requirements. These specialty lipid markets are served primarily by fractionated oil products and formulated ingredients (emulsified oils processed to achieve specific physical properties). Each specialty lipid market is served by a spectrum of products. In contrast to commodity markets, there are significant price differences among these products, which can range from $0.50 to $2.00 per pound, but typically do not vary as much over time as do commodity prices. Functionality of the oil is important in these markets. Calgene is developing a series of structured triglyceride products with specific saturated fatty acids for the food industry. These products are unique because they produce combinations of fatty acids and triglyceride structure which are not available from either natural or cost effective synthetic sources. Calgene believes oils consisting of these triglycerides are, at their price points, functionally superior to current products in many cases. These functional advantages include better flavor release, mouthfeel, emulsifier functionality, light reflectance (allows reduced fat usage in opaque systems) and air retention in whipped products. Upon development of an oil prototype, Calgene intends to generate the applications data required for customers to derive full product benefits. These data, along with competitive product data, should allow the determination of optimum product formulation (crude oil, formulated ingredient, etc.) and positioning in each addressable market. Calgene's strategy is to become a fully integrated specialty lipid food ingredient supplier, either alone or in partnership with an existing food ingredient company. The specialty food ingredient products currently being developed and further described below include high laurate oil, high stearate oil, high myristate oil, and medium chain triglycerides. Polyunsaturated Fatty Acids Polyunsaturated fatty acids ("PUFA") are long chain fatty acids which are produced by a variety of organisms including algae and fungi. These fatty acids are also found in fish oil. Recent clinical studies have shown that certain PUFA have significant medical benefits, such as cholesterol control and infant nutrition. Existing commercial sources of PUFA are fish oils, which are costly, can contain toxins, and often cannot be used as food additives due to poor odor and taste. Calgene has begun a research program to clone the genes that it believes will allow canola plants to produce PUFA. If successful, Calgene intends to sell PUFA products to food ingredient and medical/nutritional markets based on the oil's health benefits. PUFA are currently available primarily from non-crop sources (fish oils and fermentation) but are very expensive. Plant produced PUFA will have a tremendous cost advantage. Also, the research required to develop PUFA oils has a high level of technical risk. Calgene has therefore chosen to work with strategic partners who will fund PUFA oil development and provide the necessary clinical and marketing capabilities required for commercialization. Industrial Oils Approximately 10% of the world's plant oil production is consumed by the oleochemical industry. In particular, coconut and palm kernel oils are key feedstocks because they contain laurate, a fatty acid which offers unique cleansing and foaming properties. Laurate based surfactants are a primary ingredient in the manufacture of soap, detergent and personal care products worldwide. The U.S. oleochemical industry consumed nearly 826 million pounds of lauric oils worth $350 million in 1995 and 1.4 billion pounds worth $550 million were consumed in Europe. All of these oils were imported because there are currently no non-tropical sources of laurate. Where applicable, the Company intends to market its genetically engineered oils to the oleochemical and oleochemical derivative industries using oils developed for Calgene's food ingredient products. In the U.S., Calgene's oleochemical subsidiary, Calgene Chemical, intends to develop oleochemical derivatives that leverage the unique fatty acid composition of the Company's engineered oils. Calgene Chemical develops, manufactures and markets a wide line of specialty esters, surfactants, ethoxylates and other oleochemicals for the food, cosmetic, soap and detergent, sugar, lubricant and textile markets. Industrial oil products developed or currently being developed and further described below include high laurate oil, high myristate oil and medium chain fatty acids. Genetically Engineered Oil Programs The discussion below describes the targets of Calgene's genetically modified oil programs and the estimated size of the current product markets for which Calgene's products, if developed, could serve as equivalents or substitutes. It should be recognized that Calgene's potential products might not be competitive with the entire market identified due to performance and pricing considerations. With the exception of the Company's initial laurate canola (Laurical(R)) product currently being commercialized, Calgene's genetically modified oil products are in various stages of development. These projects involve substantial technical challenges and some are still in the "proof of concept" phase. Most of Calgene's genetically engineered oil products are not expected to be commercially available for several years, and their availability will depend upon, among other things, achievement of certain technical objectives in the product development process. See "Research." Laurical(R). Calgene has developed and introduced Laurical(R), a novel high value structured triglyceride with broad application in food markets. Laurate-based fats are used in confectionery applications that are cost sensitive or require specialized melting properties. Laurate or C12 is also a key raw material for the soap, detergent, oleochemical, and personal care industries. Currently, commercial sources of laurate are limited to coconut and palm kernel oils, which are imported into the U.S. primarily from Southeast Asia. Calgene has isolated and patented a C12 thioesterase gene responsible for producing laurate. DNA constructs containing this thioesterase gene have been genetically engineered into canola plants, some of which have more than 40% laurate in the oil. The Company began commercial sales of its high laurate oil in 1995 and has sold the Laurical oil to one of the largest laurate oil consumers in the U.S. Calgene is currently evaluating the functional and commercial value of its laurate canola oil in edible applications. Using a different gene that they have cloned, Calgene scientists are also attempting to further elevate the percentage of laurate in canola oil to increase its commercial usefulness, particularly for industrial applications. High Stearate Oil. Margarines, shortenings and many fat-based food ingredients are currently manufactured from vegetable oils that are chemically processed by hydrogenation to increase the level of solid fat in the oil to provide suitable texture and consistency. Calgene has engineered genetic constructs into canola plants to increase the levels of the fatty acid stearate. These high stearate oils could have superior functionality with respect to melting point, taste and texture and other characteristics. In addition, Calgene's high stearate oils are free of the trans-fatty acids associated with hydrogenation, which some scientists believe promote the formation of cholesterol. The high level of stearate will also allow for the production of food products without chemical processing (hydrogenation). Calgene is evaluating these genetically engineered canola plants in both field trials and in greenhouses. Company scientists are currently attempting to increase the functionality of its high stearate oils for potential use in margarines, shortenings and food ingredients. The Company estimates that annual U.S. consumption of vegetable oils used in premium margarines and shortenings is in excess of several hundred million pounds. Calgene believes that it could capture a portion of that market by producing canola oil with elevated levels of stearate without the expense of hydrogenation and the resultant trans-fatty acids. High Myristate Oil. Myristate and its derivatives are potential raw materials for soaps and detergents because they show improved performance properties as compared to laurate in certain uses. Currently myristic acid is only available in limited quantities and is expensive compared to other fatty acids. Using a variety of thioesterase genes, Calgene scientists have genetically engineered canola plants that produce oil containing over 40% myristate. Efforts are underway to further elevate the level of myristate to commercial significance. Medium Chain Fatty Acids. Calgene has isolated and cloned a C8/C10 thioesterase gene responsible for producing Medium chain fatty acids ("MCFA"). DNA constructs containing this thioesterase gene have been genetically engineered into canola plants, some of which have up to 28% MCFA in the oil. Efforts are currently underway to further elevate the level of MCFA to commercial significance. Medium chain triglycerides ("MCT"), which are currently produced by resynthesizing MCFA into triglycerides, are used as nutritional supplements to treat dietary disorders and to provide a ready source of energy for hospital patients recovering from post-surgical trauma. MCT have also been incorporated into an increasing number of high-oleochemical feed stocks derived from genetically engineered canola. The Company estimates that world consumption of MCT are approximately 22 million pounds. Recent average prices for MCT are approximately $1.55 per pound. MCFAs are also components of high performance synthetic lubricant ingredients called polyolesters. Currently available MCFA are byproducts of splitting and fractionation of coconut and palm kernel oil for the production of other fatty acids, which limits the supply of MCFA. The limited supply and high cost of MCFA preclude the use of polyolesters in high volume applications such as automotive lubricants, for which petroleum derivatives are currently used, even though polyolesters often provide better functionality. The Company estimates that annual U.S. consumption of polyolesters and of similar products exceeds 200 million pounds. Recent average prices for MCFA are approximately $.90 per pound. Genetically Engineered Oil Production To ensure that it will be able to produce its transgenic oils cost effectively in the U.S., Calgene, is developing canola varieties adapted to U.S. growing regions. In addition to its own breeding program, the Company accesses advanced germplasm through joint breeding and commercial agreements with leading canola companies in Denmark, Germany, France, Canada and Australia. Over the past three years, farmers under contract to Calgene planted over 35,000 acres of genetically engineered Laurical Canola. Calgene contracted with third parties to collect and crush the canola crop and thereafter sold the resulting oil and meal. The objective of this program is to demonstrate the Company's ability eventually to produce identity-preserved genetically modified oils under contract at a reasonable cost compared with commodity oils. Calgene is currently growing 16,000 acres of Laurical Canola under identity-preserved contract production for harvest in 1997 and expects to contract for an additional 60,000 acres. In December 1996, Calgene and Saskatchewan Wheat Pool ("SWP") executed a broad agreement encompassing the development and production of value-added genetically engineered oil products in Canada. SWP will use its breeding program to develop Canadian adapted, specialty canola varieties by combining Calgene's genetically engineered oils traits with SWP's germplasm. SWP will then utilize its extensive distribution and crop-handling systems to produce crops in Canada for Calgene using these varieties. Monsanto Strategic Alliance In May 1996, Calgene and Monsanto executed a broad strategic cross licensing agreement encompassing the two companies' oilseed research programs. Under the agreement, Calgene received a royalty free license to current and future Monsanto agronomic technology for use in combination with Calgene's proprietary oils modification genes for use in developing specialty canola oil product. Monsanto received a royalty bearing license to Calgene technology to develop agronomically superior corn, soybean, canola and sunflower crops. In addition, Monsanto paid $7 million to Calgene and will pay royalties based on sales of insect resistant corn, soybean, canola and sunflower seed with increased oil content and modified meal composition utilizing Calgene technology. Also a part of the agreement Monsanto paid Calgene $10 million in cash to help fund oilseed research and development. In exchange, Monsanto will receive a portion of the future profits from Calgene's specialty oils business. Kelco Agreement In January 1997, Calgene and The Nutra Sweet Kelco Company ("Kelco") entered into an agreement to collaborate on the development of two specialty vegetable oil products. Kelco is a wholly owned subsidiary of Monsanto Company. As part of the agreement, Kelco purchased from Calgene a nonexclusive license to certain Calgene technology for use in research purposes, an option to expand the reserach license to include commercialization rights, and certain product distribution rights. Cotton Calgene's cotton genetic engineering program is focused on the development of herbicide resistant and insect resistant cotton varieties. The Company believes that such products will enable cotton farmers to significantly reduce the total quantities of herbicides and insecticides applied to cotton in the field. As a result, Calgene expects significant environmental benefits as well as substantial reductions in farmers' production costs and improved yields. Calgene believes that such cost savings to farmers will enable Calgene to price genetically engineered seed varieties at a premium to current cotton seed market prices. In addition, Company scientists are in the early stages of a development program designed to create cotton varieties that produce colored fiber. See "Research." Fourteen million acres of cotton were planted in the United States in 1996 making it the nation's fifth largest field crop. Of this total acreage, over eight million acres of "upland picker" cotton are planted in the southern, southeastern and southwestern U.S., the balance being lower value "stripper" cotton planted in the high plains of Texas and Oklahoma (approximately five million acres) and specialty "acala" and "pima" cotton grown in California and Arizona (one to one and one-half million acres). Calgene estimates that the U.S. cotton seed market exclusive of genetically engineered traits has a value in excess of approximately $100 million per year and produces cotton fiber having a value in excess of $5 billion per year at the farm level. Cotton production requires the most intensive use of agricultural chemicals of any major U.S. field crop. Cotton farmers spend over $200 million per year on herbicides and $225 to $400 million per year on insecticides. The majority of these herbicide and insecticide costs occur in areas planted with upland picker cotton. Despite these costs the U.S. Cotton Council estimates that U.S. cotton growers lose crop valued at over one billion dollars to weed and insect damage each year. Calgene has genetically engineered varieties of upland picker cotton to be resistant to the herbicide bromoxynil (BXN cotton). Rhone-Poulenc manufactures and sells bromoxynil under its Buctril(R) label. Farmers currently use Buctril for broadleaf weed control in growing corn and wheat which are naturally resistant to bromoxynil. However, cotton, a broadleaf plant, is not naturally resistant to bromoxynil and is killed by the doses of bromoxynil which are administered to control broadleaf weeds. Weed control in cotton fields is currently constrained by the lack of post-emergent broadleaf herbicides, such as bromoxynil, which are effective at low application rates. Cotton farmers are therefore limited to using other herbicides, at high application rates, often resulting in crop damage. Buctril is effective at low doses, and rapidly degrades in the environment in less than two weeks, depending on field conditions. In April 1995 the Company commercially introduced its first BXN cotton varieties, selling 225 tons of seed. Supply limited, in April 1996 the Company sold BXN cotton seed that was grown on over 50,000 acres. The BXN cotton seed was sold at a 41% premium over Calgene's non-genetically engineered cotton seed. Fiscal 1997 commercial seed sales are currently in progress with enough BXN cotton seed to supply up to 400,000 acres. Calgene has transformed certain of its proprietary cotton varieties with both a gene from a strain of the Bacillus thuringiensis ("Bt") and BXN. These plants produce a Bt toxin that has demonstrated the ability to achieve significant levels of control of Heliothis (the principal cotton insect pests) in laboratory, greenhouse and field tests. U.S. field trials with cotton containing the Bt genes have been conducted since 1994. Calgene plans to commercially introduce cotton varieties with both BXN and Bt traits in 1998. Calgene scientists are also genetically engineering cotton varieties that produce high quality cotton fiber having unique natural colors. If successfully developed, these fibers could reduce or eliminate the need for dyeing and provide unique color-fastness while retaining superior spinning qualities. The annual U.S. market for dyed cotton used in apparel and home furnishings is estimated to be in excess of $4 billion. If successfully developed, Calgene plans to market these cotton fibers directly to textile mills at a premium price over traditional cotton fiber. Stoneville, Calgene's cotton seed subsidiary with operations in Mississippi, Arizona and South Carolina, holds the second largest share of the U.S. upland picker cotton seed market with approximately 9.4% U.S. market share in 1996. See "Competition." Since it was acquired by Calgene in December 1986, Stoneville has expanded its cotton seed processing capacity by acquiring an Arizona based delinting and processing facility in 1987, and in 1989 by constructing a highly efficient delinting facility constructed at its Mississippi headquarters. In 1990, Stoneville acquired the cotton assets of Northrup King Co., which include the Coker Pedigreed Seed Company ("Coker") cotton seed label, the Coker cotton breeding program and Coker cotton sales accounts, located primarily in the southeastern U.S. and in Spain. Stoneville maintains a conventional cotton breeding program to develop new cotton varieties with improved yield, earliness, fiber characteristics, insect and disease resistance, and other important agronomic characteristics. Stoneville's newest variety ST 495, which was developed by Stoneville and introduced in 1995, combines excellent yield with "smooth leaf" traits that improve fiber grades. ST 474, which was introduced in 1994, continues to produce superior yields and exceptional yield stability across different growing regions. In 1993, Stoneville introduced varieties ST 132 and LA 887 (licensed from Louisiana State University), which have demonstrated excellent agronomic performance and superior fiber characteristics. Research Overview Calgene believes that it has one of the world's leading research programs in the application of recombinant DNA technology to plants. Over the past ten years, some of the most significant advances in plant biotechnology have been reported by Calgene's science team, which at December 31, 1996, was comprised of 168 research and product development scientists and support personnel. The expertise of the Company's research scientists covers cell biology, molecular biology, biochemistry, plant physiology, plant pathology, plant breeding and microbiology. Calgene currently holds 47 issued U.S. utility patents and 20 foreign utility patents and has over 187 utility patent applications currently pending in the U.S. and abroad. See "Patents and Trade Secrets." Total research and development expenses for the six month period ended December 31, 1996, and for fiscal years ended June 30, 1996, 1995 and 1994, were approximately $8.4 million, $14.0 million, $15.4 million and $15.6 million, respectively. Research and development expenses incurred under contract with others for the six month period ended December 31, 1996, and for fiscal years ended June 30, 1996, 1995 and 1994, were $1.7 million, $4.2 million, $3.4 million and $2.7 million, respectively. Calgene's research strategy has been to establish itself as a recognized world leader in the application of recombinant DNA technology to plants by concentrating its research efforts and resources on (i) developing broad-based expertise in modification of the plant oils biosynthesis pathway and in fruit and vegetable postharvest physiology; (ii) building a portfolio of potentially useful agronomic genes from both internal discovery and external licensing; (iii) developing the most effective and efficient plant transformation and regeneration systems and gene expression systems applicable to targeted core crops; and (iv) being the most proficient at integrating molecular techniques with conventional plant breeding. The plant genetic engineering process can generally be divided into five major phases: (i) identification and isolation (cloning) of genes and gene promoters (sequences of DNA that regulate gene expression); (ii) transfer and integration of a gene or genes into the chromosomes of the recipient cell (transformation); (iii) selection and regeneration of the transformed cells into whole plants using cell culture methods; (iv) verification that the expressed genes confer the desired trait (phenotype); and (v) genetic analysis to determine that successive generations consistently inherit and express the desired trait. Calgene scientists have developed efficient plant transformation and regeneration systems for tomato, strawberries, cotton and canola. Calgene has received patents on promoters which selectively express plant genes in the tissue of ripening tomatoes and promoters which selectively express plant genes in the seeds of canola plants. These technical tools are necessary to assure the proper expression of recombinant genes. The Company believes that patents on these promoters may provide Calgene with a competitive advantage. Calgene is investigating a novel method of plant transformation, termed "plastid transformation." This method allows a high number of foreign gene copies to be introduced into plant cells resulting in a high level of foreign gene expression. Such high protein levels are desired for a diverse array of potential applications in transgenic plants, including the enhancement of agronomic traits. One advantage of this technology derives from the fact that plastid-borne genes are inherited exclusively from the maternal parent, and thus there is no pollen transmission. This eliminates any possibility of outcrossing of inserted genes, and thereby facilitates hybrid breeding strategies. Researchers at Calgene have used this technology to obtain foreign protein expression levels that constitute 40% of the total soluble protein in the leaves of transgenic plants. Although plastid transformation generally results in plants containing the foreign gene in every plant cell, Calgene scientists have developed a method to selectively express foreign plastid-borne genes. Such selective gene expression permits the use of this technology with a greater range of gene candidates. Opportunities in each of Calgene's core crops for the plastid transformation method have been identified. In August 1996, Calgene was granted two patents for plastid transformation in plants. The first patent provides a method for enhancing expression of a gene in a plastid by using a gene sequence preferred by the plant plastid. The second patent is co-owned by Calgene and Rutger's University which covers expression of Bt insecticidal protein in chloroplasts. In December 1996, Calgene was granted a third U.S. patent for the system for the expression of foreign genes introduced in plastids, and describes expression levels higher than those previously achieved. Fresh Produce Calgene has identified and cloned or acquired rights to a portfolio of genes which influence the ripening and post harvest physiology of many fruits and vegetables. Calgene scientists were among the first to demonstrate the ability to repress endogenous plant genes using antisense technology. Specifically, they have achieved up to a 99% reduction of polygalacturonase ("PG"), a naturally-occurring enzyme involved in the softening of tomatoes, resulting in tomatoes with delayed degradation and spoilage properties. Calgene's efforts in this area have resulted in the issuance of a U.S. patent covering antisense PG in tomatoes as well as a U.S. patent covering the broad use of antisense technology in plants. See "Risk Factors--Patents and Trade Secrets." Under a research collaboration with scientists from Rousell-Uclaf, S.A., Calgene scientists have cloned a high activity gene for sucrose phosphate synthase, which is believed to play a major role in the production and transfer of photosynthate (sugar) in plant leaves to storage in the fruit, tubers or roots. This gene is being applied to alter the amount and quality of stored sugars in tomato, and is applicable to a broad range of crops. In addition, Calgene has entered into research agreements with several Universities to genetically engineer tomato plants to be resistant to a wide range of viral diseases. Viral diseases are a major cause of low tomato crop yield and poor fruit quality. Gargiulo began investing in research and development in the early 1980's. At its inception, the primary focus of the reserach and development effort was the seed development program, designed to increase tomato yield and increase fruit size. Research efforts remain concentrated on obtaining better yield per acre, and producing a tomato with attributes such as better taste, texture and color. Other tomato research goals include the development of tomatoes which are resistant to insects, fungal and bacterial disease, which have high temperature fruit set and which have improved flavor, firmness and color, and the development of seeds designed to grow best in the diverse climatic areas in which Gargiulo operates. The research program has produced varieties that are grown by Gargiulo and which Gargiulo believes have resulted in higher yields per acre than varieties available from competing seed companies. Gargiulo believes that one of the competitive strengths of its tomato research effort lies in the ownership of its own seed production facility in Chile and its tight linkage to its commercial operations. This affords Gargiulo the opportunity to screen large numbers of potential commercial varieties in commercial field trials with direct feedback from the market. Calgene is conducting a research program to genetically engineer strawberry plants to resist Botrytis, a fungal disease which reduces crop yields and resist verticillium and phytopthora to reduce the current reliance on soil fumigation. Calgene scientists are also working to genetically engineer strawberries with increased sweetness. Plant Oils Calgene believes that it has a leading research program to modify plant oil composition. Calgene has allocated the largest percentage of its research and development expenditures to develop a portfolio of genetically modified canola oils. Calgene selected canola because of its efficient oil producing capability and its adaptability to a broad range of North American and European growing regions. Canola also has certain biological characteristics that make it a good candidate for genetic engineering. The primary focus of Calgene's oils reserach effort is the manipulation and control of plant oil biosynthesis through identification, isolation and use of the genes necessary for specific changes in plant oil composition. These genes can be used in a variety of oilseed crops. For certain products, soybean is currently being evaluated as an alternative to canola. It is anticipated that Calgene will leverage Monsanto's capabilities in these other crops. Calgene's oils research are working in three areas - modification of saturate levels, modification of fatty acid chain length and control of triglyceride structure. To cost effectively produce its modified oil products, Calgene uses plant breeding to convert the plant prototypes developed by the research group into agronomically competitive cultivars. The plant breeding strategy calls for the coordination of Calgene's own plant breeding program with leading plant breeding programs in target production geographies. Calgene's internal plant breeding program focuses on using research prototypes to produce breeding lines for use in final variety development. In this process, Calgene's plant breeders fine tune the chemical composition of the oil, stabilize the oil trait, and ensure that the breeding lines have no gross agronomic deficiencies. Calgene's breeding partners then use these breeding lines to develop agronomically competitive cultivars for the targeted geographies. Calgene also has royalty free access to Monsanto's agronomic technology for use in developing specialty oil varieties, and will utilize this technology on a broad basis in its product development programs. In 1990, Calgene cloned a gene for stearoyl-ACP desaturase, a key enzyme in the formation of plant oils used in both food and industrial applications. The Company has introduced the stearoyl-ACP desaturase gene into canola in an antisense orientation and increased the level of the saturated fat stearate in the oil by more than ten times. This was the first reported modification of vegetable oil by genetic engineering. Calgene is currently conducting field trials to evaluate genetically engineered canola plants with elevated levels of stearates. Trials have been conducted in Michigan, Georgia, South Carolina, Alabama and California, as well as in Canada and Scotland. Rapeseed oil with higher levels of stearates could be a potential substitute for hydrogenated oils in margarine, shortening and confectionery products. In 1991, Calgene cloned the gene for lauroyl-ACP thioesterase, an enzyme that plays an important role in the synthesis of laurate, a medium chain C12 fatty acid used in food industries and in soap, detergent, oleochemical, personal care. Oil containing laurate is naturally produced by coconut and oil palm trees, but is absent in major European and North American oilseed crops such as canola and soybean. Calgene has genetically engineered the lauroyl-ACP thioesterase gene into canola and developed plants that produce oil containing over 40% laurate. This was the first reported development of an oilseed plant producing a fatty acid not naturally present in the seed. Calgene received a U.S. patent on the lauroyl-ACP thioesterase gene in March 1994. An additional U.S. patent was granted to Calgene in May 1996 that expands the coverage of the thioesterase gene. Calgene is currently working to further elevate the laurate level in canola oil and increase the commercial usefulness. In February 1993, Calgene was granted a U.S. patent to genetically engineered Brassica cells and in August 1993 to genetically engineered Brassica cells in Europe. Brassica is the genus name for a family of plants which includes canola, broccoli, cauliflower, cabbage and brussel sprouts. These patents cover the most efficient transformation method for Brassica species in the industry and is a key technology of Calgene's proprietary vegetable oils. Calgene has sold licenses to other companies for use of this transformation method in areas outside the Company's core crop areas. The European patent is currently being challenged in opposition proceedings. In June 1994, Calgene scientists announced the cloning of a gene encoding a ketoacyl-CoA synthase which was used to convert canola rapeseed to rapeseed producing a high erucic oil. Calgene believes that this and similar genes can be used to develop oilseed varieties enriched in long chain fatty acids which have value for industrial and edible applications. In June 1994, Calgene scientists announced the purification and cloning of the coconut gene lysophosphatidic acid acyl transferases ("LPAAT"). This enzyme is efficient at placing short chain saturated fatty acids into the middle position of triacylglycerol molecules during their biosynthesis. Most oilseeds including canola, soybean, sunflower and others cannot build triacylglycerol molecules with saturated fatty acids in the middle position. Calgene anticipates that use of the LPAAT gene could result in the development of oilseeds with levels of laurate, myristate, and medium chain fatty acids at levels as high as 75%. In October 1996 Calgene was granted a U.S. patent that covers medium chain LPAAT. Using a variety of thioesterase genes, Calgene scientists have genetically engineered canola plants that produce oil containing over 40% myristate, a medium chain C14 fatty acid. Myristate and its derivatives are potential raw materials for soaps and detergents. In October 1995, Calgene was granted a patent covering the myristol thioesterase gene which is potentially useful for the development of plants rich in myristate. Calgene has isolated and cloned a C8/C10 thioesterase gene responsible for producing MCFA. DNA constructs containing this thioesterase gene have been genetically engineered into canola plants, some of which have up to 28% MCFA in the oil. MCFA are components of high performance synthetic lubricants. Efforts are underway to further elevate the level of MCFA to commercial significance. In May 1996 Calgene was granted patents encompassing synthase genes which may be responsible for increasing the production of C8/C10. In May 1995, Calgene was granted a patent covering the seed specific promoter napin, which is a key element in many of the Company's genetically engineered plant oils products. Seed specific promoter technology is relevant to almost every genetically modified oil and meal product by allowing specific control of genes introduced into plant cells by genetic engineering. In the case of oil modification, seed specific promoters ensure that only plant storage oils are effected by transgenic oils genes, without otherwise affecting the plant. Because of the timing and strength of expression, the napin promoter is the most common promoter used in plant oils genetic engineering research. In July 1996 Calgene was granted a U.S. patent covering the seed specific promoter BCE4. The BCE4 gene was isolated to take advantage of its ability to express genes early in canola seed development. Cotton Under a research collaboration with Rhone-Poulenc, in 1986 Calgene scientists cloned the BXN gene which encodes an enzyme that degrades bromoxynil, a broadleaf herbicide produced and sold by Rhone Poulenc. For cotton farmers, broadleaf weed control is currently inefficient and costly because post-emergent broadleaf herbicides such as bromoxynil, which are effective at low application rates, are lethal to cotton, a broadleaf plant. Cotton farmers are therefore limited to using other herbicides at high application rates, often resulting in crop damage. Calgene proprietary cotton varieties engineered with the BXN gene show no adverse effects when bromoxynil is applied at up to ten times expected field rates. By using BXN cotton seed and bromoxynil, Calgene believes cotton farmers will reduce herbicide usage and crop damage and have more effective weed control. Rhone-Poulenc owns the BXN gene patent, which is licensed exclusively to Calgene for use in cotton. Stoneville, Calgene's cotton seed subsidiary, commercially introduced its first BXN cotton varieties to U.S. growers in April 1995. Calgene has transformed certain of its proprietary cotton varieties with a BXN gene linked to a gene from a strain of Bt. These plants produce a toxin that has demonstrated the ability to achieve significant levels of control of Heliothis, the principal cotton insect pests. Cotton plants containing both BXN and Bt were developed by Calgene in 1990 and first field tested in 1991. Patents covering Bt technology have been applied for by other companies, two of which have granted Calgene the right to obtain licenses to their technology. Calgene is also conducting a research program to genetically engineer cotton plants to produce fiber with improved or unique characteristics. Research targets include developing colored cotton fibers that require little or no dye while maintaining its quality spinning characteristics. Calgene scientists have demonstrated from initial test results that they have altered the color of cotton fiber. Further research is focusing on enhancing the shade of color. In July 1996, Calgene was granted a patent covering a gene construct for expression of the pigmentation gene, melanin, in cotton fiber. Patents and Trade Secrets Calgene currently holds 47 issued U.S. utility patents and 20 foreign utility patents, three of which have been assigned to contract partners. Calgene has 187 utility patent applications currently pending in the U.S. and abroad and will continue to file patent applications in order to obtain proprietary protection of certain genes, gene constructs, uses of genes in specific applications and methods for genetic engineering of plants. There is no assurance that patents can be obtained in a timely fashion, or if issued, will afford Calgene any significant protections. In April 1992, Calgene was granted a U.S. patent covering the use of antisense technology in plants. Calgene is involved in litigation with Enzo, the licensee of other patents intending to cover the use of antisense technology in all cells. Calgene and the other company have each challenged the validity of the other's patents. See "Legal Proceedings." In Europe, a patent intending to cover antisense in all cells has been granted to Enzo. Calgene has filed an opposition to the grant of that patent. Agracetus has been granted a European patent with claims intending to cover the use of antisense in all plants. Calgene has filed an opposition to the grant of that patent. In May 1996, Monsanto Company purchased the plant biotechnology assets of Agracetus along with related intellectual property. Also related to antisense technology, Calgene is a licensee under the patent rights held by the Fred Hutchinson Cancer Research Center ("FHCRC"). The patent application is pending and is seeking to provoke an interference with the issued Enzo U.S. patent. As part of its agreement with the FHCRC, Calgene has agreed to indemnify certain patent and litigation costs incurred by FHCRC. Calgene's research efforts resulted in the issuance of a U.S. patent covering the PG gene which Calgene refers to as the FLAVR SAVR gene. In August 1991, Campbell licensed to Calgene the exclusive North American rights to produce and sell fresh market tomatoes containing the FLAVR SAVR gene. In February 1994, Calgene, Campbell and Zeneca A.V.P., another company using PG gene technology, entered into an agreement under which Calgene acquired exclusive worldwide rights to produce and sell fresh market tomatoes with the FLAVR SAVR gene. In November, 1986, Calgene licensed to Kirin Brewery Co., Ltd. exclusive commercial rights to the FLAVR SAVR gene in fresh market tomatoes for Japan, Korea and Taiwan. In April 1993, Calgene announced the signing of several cross licensing agreements with Monsanto Company. The agreements resolved several current and potential patent conflicts between the two companies. Under the agreements, Calgene received licenses to Monsanto's patent and patent applications pending in the areas of plant transformation technologies, and selectable markers; and the right to obtain certain licenses to Monsanto's Bt insect resistance technology for use in cotton. Monsanto received licenses to Calgene's patents and patents pending in the areas of plant transformation of certain plants and antisense RNA technology. Calgene and Monsanto granted each other licenses to certain of their respective patents pending in the area of ethylene repression, and settled an interference proceeding at the U.S. Patent and Trademark Office directed toward CaMV promoters which are broadly used by agricultural biotechnology companies to control gene expression in genetically engineered plants. In January 1994, Calgene acquired rights to obtain a license to Bt technology owned by Plant Genetic Systems N.V. In September 1995, Calgene and Monsanto entered into an agreement whereby Calgene will participate in Monsanto's direct licensing program for Bt cotton in the U.S., subject to the issuance of a patent to Monsanto which covers the Bt gene currently used by Calgene in its product development efforts. If one or more patents issue to a party other than Monsanto covering use of the Bt gene(s) used in Calgene's Bt products, it may be necessary for either Calgene and/or Monsanto to obtain a license in order for Calgene to commercialize its Bt products. There is no assurance that it will be possible to obtain licenses under such third party patents on commercially reasonable terms, if at all. Other patent applications filed by Calgene competitors and others could, if patents are issued, preclude Calgene from using, without a license, technology and techniques basic to genetic engineering and to areas of particular importance to Calgene. The extent to which Calgene may be required to license such patents and the cost and availability of such licenses are currently unknown. Some of the Company's product development contracts require Calgene to transfer intellectual property rights, including patents, to the contract sponsors, and for Calgene to receive certain license rights. Plant varieties may also be protected under USDA's Plant Variety Protection ("PVP") program. Calgene has several PVP certificates issued and additional PVP applications pending. Calgene also seeks to strengthen its intellectual property position by licensing technology developed at universities and other corporations. In some instances, such licenses are necessary to enable the practice of fundamental DNA technology. In other instances, licenses are used to obtain a competitive or proprietary position or to enhance Calgene's technology. In addition to patents, the Company seeks to protect its proprietary know-how as trade secrets. Although Calgene takes precautionary measures to maintain the confidentiality of its trade secrets, there is no assurance that competitors will not gain access to Calgene's know-how or independently develop substantially equivalent know-how. Competition The plant biotechnology industry is highly competitive. Competitors include independent companies that specialize in biotechnology; chemical, pharmaceutical and food companies that have biotechnology laboratories; universities; and public and private research organizations. Some of these companies and organizations have greater financial, technical and marketing resources than Calgene. Calgene believes that maintaining its leadership position in plant biotechnology will require achieving and retaining technological superiority, attracting and retaining qualified personnel, developing production and marketing expertise and developing proprietary products or processes. Other companies are developing and seeking to commercialize premium-quality, fresh market tomatoes developed with recombinant DNA or other technologies. DNA Plant Technology Corporation, a competing biotechnology company has developed a vine-ripened tomato using one such other technology, somoclonal variation, which it is currently selling. Competition in the fresh tomato market is expected to intensify as additional companies introduce tomatoes developed through biotechnology and as existing "gas green" tomato producers react to competitive pressures by growing and marketing traditionally developed vine-ripe tomatoes. The tomato and berry markets in which Calgene competes are highly competitive. In addition to competition from other domestic growers many of whom have greater resources and are able to produce at lower costs than Calgene, there is increasing competition from foreign producers, particularly Mexican growers who are able to compete both on the basis of quality and price. The more arid climates in which the Mexican tomatoes are grown are conducive to vine ripening. By contrast, the wetter climates in which tomatoes are grown in the southeastern United States require that they be picked while still green and exposed to ethylene gas to promote ripening. Many retail consumers perceive vine ripened tomatoes to have better flavor than standard "gas green" tomatoes. Accordingly, vine ripened tomatoes produced in Mexico may be able to compete effectively against gas green tomatoes which are the predominant product of Gargiulo. Although Calgene produces vine ripened tomatoes in Mexico and Irvine, California, such tomatoes represented only approximately 20% of Gargiulo's total tomatoes produced during calendar 1996. In addition, Gargiulo believes that certain provisions in the North American Free Trade Agreement, coupled with the sharp devaluation of the Mexican peso, are primarily responsible for the below production-cost prices that Florida tomato growers received for their tomatoes during the 1995/1996 winter season in the United States. Although Gargiulo is not able to predict the financial effect which the surge of Mexican tomatoes into the U.S. will have on its revenues, it expects that the large supply, combined with the vine-ripening characteristics that some consumers find more attractive than gas green tomatoes, will continue to have a significant adverse impact on the revenues of Florida tomato growers, including Gargiulo. Furthermore, in the event the branded tomato strategy is successful, there can be no assurance that Calgene's competitors, many of whom have greater resources, will not be able to duplicate such strategy and produce branded tomatoes for sale at premium prices. In such event, the success of Calgene's branded tomato strategy may he adversely affected. See "Risk Factors --Potential Inability to Successfully Produce or Market the Branded Tomato." Stoneville sells upland picker cotton seed which is grown in the southern, southeastern and southwestern U.S., areas which constitute approximately one-half of the U.S. cotton acreage. Stoneville's primary competitor is Delta and Pine Land Company, which the Company believes has a market share of approximately 65%. Stoneville has the second largest market share. Other competitors have smaller market shares. Calgene believes that a farmer's decision to purchase a particular variety of cotton seed has traditionally been based upon both price and performance criteria, including yield, fiber length, strength and maturity. Calgene expects that the herbicide and insecticide resistant characteristics of its BXN and Bt cotton varieties will also be important factors in the farmer's decision. Calgene Chemical manufactures and markets specialty oleochemicals and surfactants and food ingredient products which are price sensitive. The market for such products is highly competitive. Government Regulation Regulation by federal, state and local government authorities in the U.S. and by foreign governmental authorities will be a significant factor in the future production and marketing of Calgene's genetically engineered plants and plant products. The federal government has implemented a coordinated policy for the regulation of biotechnology research and products. The USDA has primary federal authority for the regulation of specific research, product development and commercial applications of certain genetically engineered plants. The FDA has principal jurisdiction over plant products that are used for human or animal food. The EPA has jurisdiction over the field testing and commercial application of plants genetically engineered to contain pesticides. Other federal agencies have jurisdiction over certain other classes of products or laboratory research. The USDA regulates the growing and transportation of most genetically engineered plants and plant products. In October 1992 following a request from Calgene, the USDA issued a determination that allows the growing and shipping of the initial varieties of the FLAVR SAVR tomato anywhere in the U.S. in the same manner as conventionally developed tomato. Laurate canola was de-regulated by the USDA in October 1994. In February 1994, the USDA deregulated Calgene's herbicide resistant (BXN) cotton, allowing the Company to grow and ship seed of these varieties in the same manner as conventionally developed cotton. The Company intends to commercialize cotton with both BXN and Bt in 1998. Three federal agencies have authority over this product in the U.S., the Environmental Protection Agency, the Department of Agriculture and the Food and Drug Administration. The Company expects to complete the review process with these agencies prior to the 1998 season. Certain Calgene products will require international approvals as such products are either imported from the U.S. or grown and produced in specific countries. Europe, through the European Union (EU), Japan and Australia are the three regions with defined regulatory processes for genetically engineered products. Calgene is working with the regulatory agencies in these countries in an effort to gain approval for its current genetically engineered products. In May 1992, the FDA announced its policy on foods developed through genetic engineering (the "FDA Policy"). The FDA Policy provides that the FDA will apply the same regulatory standards to foods developed through genetic engineering as applied to foods developed through traditional plant breeding. Under the FDA Policy, the FDA will not ordinarily require premarket review of genetically engineered plant varieties of traditional foods unless their characteristics raise significant safety questions, such as elevated levels of toxicants, or the presence of allergens, or they are deemed to contain a food additive. In May 1994, the FDA announced its determination, based on its review of extensive data submitted by Calgene, that the FLAVR SAVR tomato has not been significantly altered with respect to safety or nutritive value when compared to conventional tomatoes. The FDA also issued a food additive regulation permitting the use of the kanr selectable marker gene, which encodes for the enzyme APH(3')11 in genetically engineered tomatoes, cotton and canola. Calgene has completed its consultation with the FDA on issues of safety concerning BXN cotton and laurate canola. The FDA Policy does not require the submission of data supporting the safety of a genetically engineered product, but does require that the developing company ensure the safety of the product guided by the FDA Policy and consultation with the FDA. The generation of data supporting both products' safety has been completed. The FDA Policy does not require that genetically engineered products be labeled as such, provided that such products are as safe and have the same nutritional characteristics as conventionally developed products. There can be no assurance that the FDA will not reconsider its position, or that local and state authorities will not enact labeling requirements, either of which could have a material adverse effect on marketing of some future products. In June 1994, Calgene filed a request with Health Canada for permission to sell FLAVR SAVR tomatoes in Canada. The request was filed pursuant to a proposed Health Canada review process in which Health Canada is notified of Calgene's intention to sell and to advertise for sale FLAVR SAVR tomatoes in Canada. Canada notified Calgene in February 1995 that it has no objections to the importation and sale of the FLAVR SAVR tomato. Calgene also received approval from Agriculture and Agri-Foods Canada in February 1996 and from Health Canada in April 1996 which allows the growing and commercialization of Laurate canola in Canada. Calgene has received permission from the Mexican Health and Agriculture authorities to grow and sell the FLAVR SAVR tomato in Mexico. In March 1996, Calgene received approval from the United Kingdom Ministry of Agriculture, Fisheries and Food that ten different lines of fresh tomatoes containing the FLAVR SAVR gene are safe for consumption. This was the first clearance of an unprocessed genetically modified food anywhere in Europe. Commercialization of BXN cotton required clearance from the EPA to allow use of the herbicide bromoxynil on cotton plants. Bromoxynil is produced and sold by Calgene's strategic partner, Rhone Poulenc. These clearances were received by Rhone-Poulenc on May 5, 1995. Calgene's activities will be subject to general FDA food regulations and are, or may be, subject to regulation under various other laws and regulations including, among others, the Occupational Safety and Health Act, the Toxic Substances Control Act, the National Environmental Policy Act, other Federal water air and environmental quality statutes, export control legislation, antitrust and other laws. At the present time. most states are generally deferring to federal agencies (USDA or EPA) for the approval of field trials, although all states are provided a review period prior to the issuance of a field trial permit. Failure to comply with applicable regulatory requirements could result in enforcement action, including withdrawal of marketing approval, seizure or recall of products, injunction or criminal prosecution. The federal regulatory agencies most involved in the predominant business of Gargiulo--the production and marketing of fresh fruit and vegetables--are the USDA and the FDA. The USDA sets standards for raw produce and governs its inspection and certification. Under the Perishable Agricultural and Commodities Act ("PACA"), the USDA exercises broad control over the marketing of produce in domestic and foreign commerce, sets standards of fair conduct as to representations, sales, delivery, shipment and payment for goods and regulates the licensing of produce merchants and brokers. Gargiulo's growing operations are also subject to substantial oversight by the Environmental Protection Agency (the "EPA") in matters ranging from the use of fertilizers and pesticides to the condition of farmland and wetlands protection. Of particular concern in this regard is the current investigation by the EPA and other environmental regulators into the possible harmful effects on the ozone layer of methyl bromide, a chemical widely used by Gargiulo and other agricultural producers. The USDA also has specific authority, under the Federal Seed Act, to oversee the quality and labeling of commercial seed products, such as those developed by Gargiulo. Through its extensive use of farm labor in its growing operations, Gargiulo is subject to supervision by the United States Department of Labor, under both the Fair Labor Standards Act and the Occupational Safety and Health Act; and the prevalence of foreign workers in this sector of Gargiulo's work force necessarily involves oversight by the Immigration and Naturalization Service. Almost every aspect of federal regulation is accompanied by regulation on the state level, in each jurisdiction where Gargiulo has growing and/or research operations. In particular in Florida, the South Florida Water Management District regulates surface water management and irrigation water withdrawals. Gargiulo must also, in its Mexican operation, comply with the requirements of Mexican law, most importantly Mexico's environmental protection law. Human Resources At December 31, 1996 Calgene employed a total of 745 regular employees, of whom 168 were research and product development scientists and support personnel, 366 were production, farm and packing house employees, 44 were sales and marketing personnel and 167 were in administrative and general management positions. In addition Calgene employed approximately 1,809 seasonal workers. None of Calgene's work force is presently unionized, although there is no assurance that unions, especially for farm workers, may not unionize Calgene's workers in the future. Calgene believes its relations with its employees are good. Executive Officers The executive officers of the Company are as follows:
Name Age Position Since ---- --- -------- ----- Lloyd M. Kunimoto........43 Acting Chief Executive Officer.....................................1996 Richard J. Stonard.......42 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 William Higgins..........57 Vice President of Human Resources..................................1994 Thomas Hughes............38 President, Stoneville Pedigreed Seed Co............................1992 Michael J. Motroni.......41 Vice President of Finance and Secretary............................1992 Jeffrey D. Gargiulo......45 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. Higgins joined Calgene in January 1994 as Human Resources Director and was elected Vice President of Human Resources in May 1994. Prior to joining Calgene, Mr. Higgins served as Vice President of Human resources for Tenera, L.P. from January 1992 through December 1993. From April 1988 through December 1991 Mr. Higgins was President of Consultants in Managing Change. From February 1982 through March 1988 he served as Vice President of Human Resources for Genetech, Inc. Mr. Hughes joined Stoneville Pedigreed Seed Co. in 1988 as Plant Operations Manager and became President in 1992. Mr. Hughes is Director of the Mississippi Seedmen's Association, President of the Mississippi Seed Improvement Association and is an active member of the Delta Council, Cotton Foundation (National Cotton Council), and the American Seed Trade Association. Mr. Motroni joined the Company in August 1983 and became Controller in July 1986. He was elected Vice President of Finance and Secretary in May 1992. Mr. Gargiulo has been Chairman and Chief Executive Officer of Gargiulo L.P. since 1981 and since March 1996 Chief Executive Officer of Gargiulo, Inc., the successor company to Gargiulo L.P. Risk Factors Management and Coordination of Operations. In March 1996, Calgene and Monsanto consummated a transaction under which Monsanto contributed Gargiulo, $30 million and certain oils and produce related technology in exchange for a 49.9% interest in Calgene. In November 1996, Monsanto purchased an additional 6,250,000 shares of Calgene common stock at a price of $8 per share. The transaction increased Monsanto's equity ownership interest to approximately 54.6%. The achievement of the anticipated benefits of the Monsanto Transaction will depend in part upon whether the businesses of Calgene and Gargiulo can be managed and coordinated in an efficient and effective manner, and there can be no assurance that this will occur. The difficulties of managing and coordinating the businesses of Calgene and Gargiulo may be increased by the geographic separation of the organizations and their decentralized managements. Significant Influence by Monsanto and Possible Conflicts of Interest. Monsanto owns 54.6% of the outstanding shares of Common Stock and has the right to designate five of the nine members of the Calgene Board under a Stockholders Agreement. Monsanto has the right to designate additional directors if and when its percentage ownership of Calgene Common Stock increases. In addition, certain actions may not be taken by Calgene without the approval of Monsanto. Also, Monsanto is obligated, subject to certain terms and conditions, to lend up to $40 million to Gargiulo, and up to $15 million annually for the two year period ended September 30, 1998, although not more than $15 million may be outstanding thereunder at any one time. As of December 31, 1996, $24.8 million of the $40 million credit facility was outstanding. The credit facility agreements each contain various covenants precluding Calgene and its subsidiaries from taking certain actions without the approval of Monsanto. Also, in the event of a default by Calgene under the Calgene credit facility agreements, Monsanto has certain rights to convert the outstanding principal and interest under such agreements into additional shares of Calgene Common Stock at the then market value of the Calgene Common Stock, and any such conversion could substantially dilute the ownership interests of other Calgene stockholders. It is possible that Monsanto's interest as a stockholder of Calgene may differ from its interest as a lender, and there can be no assurance that actions taken by Monsanto pursuant to the exercise of its various rights under the Stockholders Agreement, and the credit facility agreements will be in the best interests of all other stockholders of Calgene. Possible Need for Additional Financing. Calgene expects its current cash balances and the proceeds of the credit facility agreements and other bank lines of credit expected to be available to Calgene, will be sufficient to fund its operations for the foreseeable future. However, such expectation is based in part on the achievement of the operating plans of Calgene and there can be no assurance such operating plans will be achieved. Also, there can be no assurance that all of Calgene's expected sources of funds will be available. On February 28, 1997, the Company replaced a $13 million line of credit with Harris Bank with a $20 million line of credit with Bank of America ("B of A"). The B of A facility expires on December 1, 1999. Credit increases to $30 million after December 31, 1997 and to $40 million after December 31, 1998, are available. While Monsanto has agreed to make a $40 million loan available to Gargiulo, further advances under such loan are subject to the achievement of certain milestones, and are to be used solely to fund the branded tomato strategy and are repayable out of specified portions of the cumulative free cash flow of Gargiulo. While Monsanto has agreed to advance up to $15 million annually to Calgene until September 30, 1998, not more than $15 million may be outstanding thereunder at any one time. Except as described above, Monsanto has no obligation to loan or otherwise contribute additional cash to Calgene. For all the foregoing reasons, there can be no assurance that Calgene will be able to obtain any future required financing on favorable terms, if at all. History of Losses; Uncertainty of Future Financial Results. Calgene has incurred aggregate net losses of approximately $338 million from inception in 1981 through December 31, 1996, including research and development expenses in excess of $208 million. The net loss for Calgene in the six month period ended December 31, 1996 was $63.9 million, including asset write-downs and reserves totaling $32.6 million pursuant to a plan approved by Calgene's Board of Directors to significantly reduce Gargiulo's produce acreage in Southwest Florida. The reduction in acreage is in response to increased competitive pressure from Mexico produce. Calgene expects to incur a net loss in the fiscal year ended December 31, 1997. There is no assurance that some or all of the factors which caused these historical losses will not be present in future periods or that Calgene will be able to overcome these or other problems and achieve profitability in the highly unpredictable and volatile fresh produce business. Potential Inability to Successfully Produce or Market the Branded Tomato. Calgene intends to market a premium quality branded tomato under the Gargiulo brand name, as part of its branded tomato strategy. A branded tomato program requires the production of a tomato which consistently and uniformly combine the characteristics and attributes retail consumers generally look for in the tomatoes they purchase, such as pleasing flavor, tempting color, and good size, shape and firmness. Calgene believes that such tomatoes, if successfully produced and marketed, would gain brand recognition and that a sufficient number of retail consumers would be willing to pay a premium price for such tomatoes. However, to date, no grower or shipper has successfully produced and supplied a branded tomato on a nationwide basis. While Calgene believes the development of a successful branded tomato program is achievable, it recognizes that such development will take a significant amount of time, effort and capital. Even if Calgene is able to produce tomatoes suitable for a branded program, there can be no assurance that retail consumers will be willing to consistently pay premium prices for such tomatoes. Because Gargiulo has been principally engaged in the commodity tomato business, and has little experience in the fresh tomato business, Calgene will have little or no marketing experience of the type required for a branded tomato program. There can be no assurance that Calgene' s marketing efforts will be successful. Funding of Branded Tomato Strategy. Upon the terms and conditions of the Gargiulo Credit Facility Agreement, Monsanto has made available to Calgene a revolving credit facility of up to $40 million. The proceeds of loans under the Gargiulo Credit Facility Agreement are to be used solely to support the branded tomato strategy (other than amounts used to finance $10 million of borrowings made by Gargiulo to finance the Collier Transaction and to allow Gargiulo to make an approximate $2 million payment to Monsanto pursuant to the Development Agreement). In order to obtain an advance from Monsanto under the Gargiulo Credit Facility Agreement, Calgene must provide reasonably acceptable documentation to Monsanto verifying that certain milestones have been reached and certain goals have been achieved, all as set forth in the Gargiulo Credit Facility Agreement. In the event such milestones and goals are not achieved, Monsanto will have no obligation to make advances under the Gargiulo Credit Facility Agreement and Calgene will likely be unable to obtain sufficient capital to support the implementation or expansion of the branded tomato program. Risks Associated with Production of Genetically-Engineered Tomatoes. Calgene has experienced difficulties in scaling-up production of its genetically-engineered tomatoes and has temporarily curtailed its tomato growing operations until it is able to complete its development of varieties with suitable agronomic characteristics. There can be no assurance that Calgene will be able to accomplish such development or production scale-up of genetically-engineered tomatoes. Unless and until such time as Calgene develops genetically-engineered tomatoes with agronomic characteristics which it deems sufficient for cost-effective commercial production, it will be dependent upon the sale of tomatoes into the commodity markets. Agribusiness Risks. A variety of agribusiness risks affect all of the fresh produce sold by Calgene, including, without limitation, the following: Supply and Demand. The fresh produce business is particularly sensitive to fluctuation in supply and demand. When the supply of tomatoes and berries in the market exceeds the demand for such products the market price for fresh produce may be driven down significantly, in some instances below the cost of harvesting and packing. In such situations it may be uneconomical to harvest a crop, resulting in a total loss of the costs incurred in growing such crop. Even when market prices are sufficient to permit recovery of direct harvesting and packing costs, prices may not be high enough to permit recovery of growing costs and/or overhead and other indirect costs. In addition, oversupply can also affect the prices obtained for premium quality produce. See "--Risks Associated with the Branded Tomato Strategy." Limited Barriers to Entry. The relatively low capital requirements for farming permit relatively easy entrance into the fresh produce business, which in turn can result in over-supply. Weather. Weather conditions greatly affect the amount of fresh produce that is brought to market. and accordingly, the prices received for such produce. Storms, frosts, droughts, and particularly floods. can destroy crop and less severe weather conditions, such as excess precipitation, cold weather and heat, can kill or damage significant portions of a crop, rendering much of it unpackable and unsalable. Crop Disease and Pestilence. Crop disease and pestilence can be unpredictable and can have a devastating effect on crops, rendering them unsalable and resulting in the loss of all or a major portion of the crop for that harvest season. Even when only a portion of the crop is damaged, the profits a grower could have made on the crop will be severely disrupted because the costs to plant and cultivate the entire crop will have been incurred although only a portion of it can be sold. While some crop diseases and pestilence are preventable or treatable. the costs of prevention or treatment may be high. Calgene is attempting to develop insect and disease resistant strains of tomatoes, other produce and cotton. However, there can be no assurance that these efforts will be successful. Labor Shortages and Union Activity. The production of fresh produce is heavily dependent upon the availability of a large migrant labor force in order to harvest crops. The turnover rate among the migrant labor force is high due to the strenuous work, long hours, necessary relocation and relatively low pay. Further the pool of such workers willing and able to do such unskilled manual labor is shrinking. To the extent it becomes necessary to pay more to attract unskilled labor to migrant farm work, labor costs can be expected to increase. In addition, compliance with more stringent immigration laws has increased and is likely to continue to increase migrant labor costs. The migrant worker work force has not been unionized for the most part, though significant efforts to form collective bargaining units or to have existing ones recognized has occurred in the past, particularly in California and to a lesser extent, Southwest Florida. There can be no assurance that such union organizing activities will not occur in the future. If such organizing efforts were to occur and be successful on a large scale labor costs would likely increase and there could be work stoppages, which would be particularly damaging in an industry where harvesting crops at peak times and getting them to market on a timely basis is critical. The majority of fresh produce is shipped by truck and is therefore susceptible to labor disturbances in the trucking industry. Labor disturbances in the trucking industry can limit the ability to get fresh produce to market before it spoils. Although Gargiulo has never been affected by a nationwide truckers strike, it has been affected by regional strikes and there can be no assurance that Calgene will not be affected by national or regional labor disruptions in the trucking industry in the future. Availability of Farmland in Florida and California. Calgene intends to lease the majority of the land on which it grows its crops, particularly tomatoes. These leases are generally short term, and as a result, Calgene will likely be required to renegotiate many of its leases on an annual basis, thereby subjecting itself to the possibility of increased rental payments. In addition, a significant amount of the available land in Florida is classified as "wetlands" and subject to significant restrictions on use. While Calgene believes that the acquisition of Collier Farms by Gargiulo reduces this risk in part, there can be no assurance that Calgene will enjoy the benefits it anticipates as a result of the Collier Transaction. Risks similar to those set forth above are associated with the continued leasing of farmland for the growing of strawberries in California. Additionally, farmland along the California coast is subject to the problem of salt water intrusion which would be adverse to the growing of strawberries. Seed Sales. Seed sales can be affected by U.S. government agricultural policy. There is no assurance that current or future U.S. government agricultural policies will not have a material adverse effect on Calgene's financial results. Technological Change. The application of recombinant DNA and related technologies to plants is complex and subject to rapid change. A number of companies are engaged in research related to plant biotechnology including companies that rely on the use of recombinant DNA as a principal scientific strategy and companies that rely on other technologies. Technological advances by others could render Calgene products less competitive. Many of these companies, as well as competitors that supply non-genetically engineered products have substantially greater resources than Calgene. Other companies are developing and seeking to commercialize premium quality, fresh market tomatoes developed with recombinant DNA or other technologies. One of Calgene's competitors. a biotechnology company, has developed a vine-ripened tomato using one such other technology, somoclonal variation, which it is currently selling. Product Development Uncertainties. Although Calgene has completed the genetic engineering of BXN cotton, BXN cotton with Bt, and laurate canola, Calgene's other genetically engineered products are at various stages of development. There are difficult scientific objectives to he achieved in certain product development programs before the technological feasibility of such products can be demonstrated. Even the more advanced programs could encounter technological problems that could significantly delay or prevent product development or product introduction. Patents and Trade Secrets. Since 1992, Calgene has been engaged in litigation with Enzo Biochem ("Enzo") a company licensed under three related U.S. patents and counterpart foreign patents (the "Enzo Patents") which purport to cover the use of antisense technology in all cells, including plant cells. Some of Calgene's products, including the FLAVR SAVR tomato, use antisense technology. Enzo claimed that Calgene infringed the Enzo Patents. Calgene denied infringement and challenged the validity of the Enzo Patents. On February 2, 1996, the District Court ruled that the Enzo Patents are invalid. In addition, the validity of a patent owned by Calgene directed to the use of antisense in plant cells was upheld by the District Court. Meanwhile, Calgene subsequently requested that the court clarify certain aspects of the infringement portion of its decision and the court has agreed to reconsider on this basis. Enzo has indicated that it intends to appeal the decision. If on reconsideration or as a result of an appeal a court were to determine that one or more of the Enzo Patents validly covers plant cells and that such patents are infringed by Calgene's sales of products incorporating such antisense technology, Calgene could he held liable for significant damages and could be precluded from producing and selling the FLAVR SAVR tomato, as well as other products currently under development. There is no assurance that a license, if necessary, could be obtained by Calgene on commercially acceptable terms, if at all. See "Item 3 - Legal Proceedings." The European Patent Office (the "EPO") has granted a patent to Enzo with respect to claims which are intended to cover the use of antisense in all cells, including plant cells. The EPO has also granted a patent to Agracetus, Inc., a plant biotechnology company ("Agracetus"), with claims which are intended to cover the use of antisense technology in all plants. A preliminary decision from the EPO indicates that Calgene's opposition to Enzo's patent should be rejected. Calgene has filed supplemental arguments with the EPO responding to the EPO's reasoning and providing additional grounds for invalidation based upon evidence which surfaced during the course of the U.S. litigation. If these proceedings are not successful in limiting the scope of the claims of the Enzo patent and if Calgene is unable to obtain a license to use such antisense technology, Calgene could be prevented from expanding some of Calgene's genetically engineered products, including tomatoes engineered with the FLAVR SAVR gene, into Europe. There is no assurance that a license could be obtained on commercially reasonable terms, if at all. In May 1996, Monsanto Company purchased the plant biotechnology assets of Agracetus along with related intellectual property. Other companies have applied for patents covering Bt technology. If patents were to be issued to other companies, Calgene would be required to obtain a license to employ the Bt gene in commercial products. There is no assurance that such 1icenses could be obtained on commercially reasonable terms, if at all. Calgene has rights to obtain certain licenses to Monsanto's Bt technology and has licensed Plant Genetics systems issued Bt patent. U.S. patents have been issued to Agracetus for the transformation of cotton. Calgene has obtained a license from Agracetus for non-fiber uses. The patents are now in reexamination before the U.S. Patent Office and some claims have been indicated as allowable by the Examiner. Once the reexamination is completed, Calgene may determine that a license under these patents is needed for its genetically engineered cotton fiber products. There is no assurance that such a license could be obtained on commercially reasonable terms if at all. In May 1996, Monsanto Company acquired from Agracetus its technology for cotton fiber improvement. A U.S. patent has been issued to a competitor for a genetic component which is currently used in Calgene FLAVR SAVR tomato. Although alternatives are available, in the event Calgene would be prevented from utilizing this genetic element, it would cause disruption in the production of FLAVR SAVR tomatoes. Analysis of this patent is currently underway. In the event that it is determined that a license is necessary, there is no assurance that a license can be obtained on commercially reasonable terms, if at all. Patent applications filed in the United States are not publicly available for examination. Patent applications filed outside of the United States may be available for examination, but may not accurately reflect the applications filed in the United States on the same claimed inventions. Patent application filed or to be filed in the future by Calgene's competitors or others could, if patents are issued, preclude Calgene from using. in the patent issuing countries, technology and techniques basic to genetic engineering and to areas of particular importance to Calgene. If Calgene is unable to obtain licenses to use such technology, there could be a delay in the introduction of some of Calgene's genetically engineered products in those countries. Whether such patents will be issued, the extent to which Calgene would be required to license such patents and the availability and cost of such licenses are currently unknown. Calgene has received U.S. and foreign utility patents and has filed and will continue to file patent applications in order to obtain proprietary protection of certain genes, gene constructs, uses of genes in specific applications and methods for genetic engineering of plants. There is no assurance that future patents call he obtained in a timely fashion or, if issued, will afford Calgene significant protection. In addition to patents, Calgene seeks to protect its proprietary know-how as trade secrets. Although Calgene takes precautionary measures to maintain the confidentiality of its trade secrets, there is no assurance that competitors will not gain access to Calgene's know-how or independently develop substantially equivalent know-how. Public Acceptance of Genetically Engineered Products. The commercial success of Calgene's genetically engineered products will depend in part on public acceptance of the cultivation and consumption of genetically engineered plants and plant products. Public attitudes may be influenced by claims that genetically engineered plant products are unsafe for consumption or pose a danger to the environment. There is no assurance that Calgene's genetically engineered products will gain public acceptance. Government Regulation. The field testing, production and marketing of genetically engineered plants and plant products by Calgene is subject to federal, state, local and foreign governmental regulation. There is no assurance that regulatory agencies administering existing or future regulations or legislation will allow Calgene to produce and market its genetically engineered products in a timely manner or under technically or commercially feasible conditions. In addition, regulatory action or private litigation could result in expenses, delays or other impediments to Calgene's product development programs or the commercialization of resulting products. Although the U.S. Food and Drug Administration (the "FDA") has announced in a policy statement that it will apply the same regulatory standards to foods developed through genetic engineering as applied to foods developed through traditional plant breeding, genetically engineered food products will be subject to premarket review if they raise safety questions or are deemed to be food additives. Calgene has completed the safety assessment of its FLAVR SAVR tomato, BXN(TM) cotton and laurate canola products in accordance with the FDA policy. There is no assurance that future Calgene products will not be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise safety questions or are deemed to be food additive. The FDA has announced in a policy statement that it will not require that genetically engineered products he labeled as such, provided that such products are as safe, and have the same nutritional characteristics as conventionally developed products. There can be no assurance that the FDA will not reconsider its position, or that local and state authorities will not enact labeling requirements, either of which could have a material adverse effect on Calgene. International regulatory requirements for genetically engineered plants and plant products are only partially in place. Consequently, there can be no assurance that additional data, labeling or other requirements will not be required in countries where Calgene intends to grow and/or commercialize its genetically engineered products. Foreign regulatory agencies could require Calgene to conduct further safety assessments and potentially delay product development programs or commercialization of resulting products. In addition the Mexican health and agriculture authorities and Health Canada could reconsider their respective positions regarding the marketing of the FLAVR SAVR tomato and laurate canola. The United States Department of Agriculture (the "USDA") prohibits genetically engineered plants from being grown and transported except pursuant to a deregulation, or under controls so burdensome as to render commercialization impracticable. The only Calgene plants currently exempted by the USDA are Calgene's initial tomato varieties engineered with the FLAVR SAVR gene, the BXN cotton varieties and laurate canola. No assurance can be given that additional Calgene products will be exempted by the USDA. ITEM 2. PROPERTIES Calgene's principal research and development, executive and administrative offices are located in three adjacent buildings in Davis, California, totaling approximately 71,000 square feet. Each of the buildings is leased. Including options to extend, the leases expire on 57,000 square feet in the year 2015 and on 14,000 square feet in the year 2003. The company owns a 24,000 square foot greenhouse facility located on ten acres near its main facility. An additional 54,000 square feet of greenhouse space is leased near Galt, California. Including options to extend, the two leases in Galt expire in November 1997 and July 1998, respectively. In Georgia, the Company leases approximately 9,300 square feet of office and laboratory space. With options to extend, the lease expires in March 2002. A 3,000 square foot greenhouse was constructed in 1994 by the Company. At Stoneville, Mississippi, the Company owns approximately 182,000 square feet of production and warehouse space, including a 16,000 square foot seed delinting production facility. In addition, the Company also owns approximately 47,450 square feet of administrative and research and development facilities, and 123 acres of research land. The Company's Arizona operations are located on 15 acres of leased land which, including options to extend, expire in the year 2018. The Company owns 107,000 square feet of production and warehouse space on this leased land. The Company's Stoneville and Arizona facilities have the capacity to process up to 20,000 tons of bulk cotton seed. At its Calgene Chemical facility in Illinois, the Company leases office, production, laboratory and warehouse space located on approximately 4.5 acres. Including options to extend, the lease expires in 2017. Gargiulo's principal properties presently consist of its executive offices and sales offices and related tomato packing facility located in Naples, Florida; a research facility in Bonita Springs, Florida; a transplant nursery in Immokalee, Florida; tomato packing facilities in Quincy, Florida; Santa Isabela, Puerto Rico; and Firebaugh, California; a sales office in Nogales, Arizona; and various owned and leased farmland. Gargiulo owns or leases farmland in and around Naples and Quincy, Florida; Watsonville, Oxnard, Santa Maria, Irvine, and Firebaugh, California; Santa Isabela, Puerto Rico. The majority of Gargiulo's land is leased. The Company's facilities are suitable for their respective uses and are, in general, adequate for its needs, at least through 1997. The research and development, executive and administrative offices at the Davis facility will accommodate planned growth beyond 1997. ITEM 3. LEGAL PROCEEDINGS On or about January 29, 1997, Hanna Obstfeld filed suit in Delaware Chancery Court against the Company and certain of its directors alleging unfairness in connection with the proposed acquisition by Monsanto Company of those shares of the Company's common stock which Monsanto does not own. After Ms. Obstfeld brought her suit, other essentially identical actions followed, none of which have as yet been served upon the Company. It is anticipated that the complaints will shortly be consolidated and the Company has no obligation to answer, move or otherwise plead until such time as a consolidated complaint has been filed and served. No discovery has occurred to date in this action. The Company believes it has meritorious defenses to the allegations set forth in the pending complaints. On February 11, 1997, three named Plaintiffs filed a Class Action Complaint against Gargiulo, Inc. in the United States District Court for the Northern District of California, San Jose Division. The Complaint arose from the employment relationship between the named and unnamed Plaintiffs and Gargiulo, Inc. The Plaintiffs allege certain violations of the Migrant and Seasonal Agricultural Worker Protection Act ("MSPA"), California's IWC Wage Order, the California Labor Code and the California Business and Professions Code; and Breach of Contract. The Plaintiffs seek damages including all unpaid wages, statutory damages under the California Labor Code; a declaration that Gargiulo violated MSPA, monetary damages pursuant to MSPA; and for an order enjoining Gargiulo, Inc. from violations of MSPA. Gargiulo's insurance carriers were contacted regarding this lawsuit. As of March 27, 1997, Gargiulo has answered the Class Action Complaint, and is initiating discovery regarding class certificaiton. Gargiulo, Inc. is also waiting for the response from its insurance carrier. While the results of the Class Action Complaint cannot be predicted, the Company believes that the ultimate outcome will not have a material adverse effect on the Company's consolidated financial position or results of operations. From 1992 through early 1996, Calgene was engaged in a litigation with Enzo Biochem, Inc. ("Enzo") a company licensed under three related U.S. patents and counterpart foreign patents (the "Enzo Patents") which purported to cover the use of antisense technology in all cells, including plant cells. Some of Calgene's products, including the FLAVR SAVR tomato, use antisense technology. Enzo had claimed that Calgene infringed the Enzo Patents. Calgene denied infringement and challenged the validity of the Enzo Patents. On February 2, 1996, the District Court ruled that the Enzo Patents are invalid. In addition, the validity of a patent owned by Calgene directed to the use of antisense in plant cells was upheld by the District Court. Calgene subsequently requested that the court clarify certain aspects of the infringement portion of its decision, and the court has agreed to reconsider on this basis. There is no indication that the court would reverse any aspect of its original ruling. Meanwhile, Enzo has indicated that it intends to appeal the decision. Although the trial court has the option of altering any aspect of its decision upon reconsideration, and Enzo may appeal the decision after its publication, Calgene believes that further proceedings will not have a materially adverse effect on its consolidated financial position or results of operations, based on the trial court's determination that the SUNY/Enzo Patents are invalid and not infringed by Calgene and that the Calgene Antisense Patent is valid. Nevertheless, if on reconsideration or as a result of an appeal a court were to determine that one or more of the Enzo Patents validly covers plant cells and that such patents are infringed by Calgene's sales of products incorporating such antisense technology, Calgene could be held liable for significant damages and could be precluded from producing and selling the FLAVR SAVR tomato, as well as other products currently under development. There is no assurance that a license, if necessary, could be obtained by Calgene on commercially acceptable terms, if at all. If the court were to determine that the Calgene Antisense Patent is invalid or unenforceable, Calgene would be deprived of the competitive and licensing advantages afforded by its patent. Moreover, the Company would have to expense the capitalized legal fees related to the defense of the Calgene's Antisense Patent, which amounted to approximately $5.7 million at December 31, 1996. On October 18, 1995, two groups of Plaintiffs filed separate complaints against various Defendants including Gargiulo & Associates in the United StatesDistrict Court for the Eastern District of California. Both complaints arose from the same set of facts and allege the same three theories of recovery. These actions were consolidated. The cases involve personal injury claims relating to vehicle accident in which numerous migrant labor workers being transported to the farm of Gargiulo & Dresick Associates (which was being farmed under contract by Dresick Farms, Inc.) were killed or injured. The two cases, Albertano Alberto Jimenez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vegas; Robles Rios; Jesus Loza and Samuel Santiago Vasquez, and Jose Vasquez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vegas; Robles Rios; Jesus Loza and Samuel Santiago Vasquez, were both filed on October 18, 1995. The plaintiffs sought general damages, including compensation for pain and suffering; special damages, including past, present and future medical expenses; compensation for the loss of past and future income; and punitive damages in an unspecified amount. Gargiulo's insurance carriers have been contacted regarding these lawsuits. As of March 12, 1997, Gargiulo was granted its Motion for Summary Judgment as to all of the claims against it. This matter is now subject to appeal which must be filed by no later than 30 days from entry of judgment which will not occur for a few weeks. The Company is party to other pending litigation incidental to its business and has from time to time been notified of various claims that are not the subject of pending litigation. While the results of litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of all such other litigation matters and claims will not have a materially adverse effect on its consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders was held on November 12, 1996. The following table shows voting information for each item voted upon: Nominees for Election as Directors For Withheld --- -------- Patrick J. Fortune 56,946,111 1,435,104 Robert T. Fraley 56,936,666 1,444,549 Michael R. Hogan 56,947,316 1,433,899 Lloyd M. Kunimoto 56,974,189 1,407,026 Howard D. Palefsky 56,929,176 1,452,039 John E. Robson 56,978,916 1,402,299 Roger H. Salquist 56,800,715 1,580,500 Allen J. Vangelos 56,979,186 1,402,029 Hendrick A. Verfaillie 56,962,636 1,422,216 With respect to the approval of the Stock Purchase Agreement dated as of September 27, 1996 ("Stock Purchase Agreement") between Calgene and Monsanto Company, a Delaware Company ("Monsanto"), pursuant to which (i) Calgene would issue 6,250,000 shares of Common Stock to Monsanto for $8.00 per share for an aggregate purchase price of $50 million, thereby increasing Monsanto's ownership interest in shares of Calgene Common Stock from 49.9% to approximately 54.6% (without giving effect to the exercise of outstanding options), (ii) Monsanto and Calgene would enter into a Restated Stockholders Agreement ("Restated Stockholders Agreement") amending and restating the Stockholders Agreement dated March 31, 1996 ("Stockholders Agreement") and (iii) the Company's Restated Certificate of Incorporation would be amended to reflect the amendments to the Stockholders Agreement contemplated by the Restated Stockholders Agreement, the vote was: For, 44,639,801; Against; 1,283,791; Abstain, 410,793; Broker Non-Vote, 12,049,830. With respect to the approval of an increase in the authorized number of shares of Common Stock from 80,000,000 to 100,000,000, the vote was: For, 54,814,037; Against, 2,323,281; Abstain, 222,158; Broker Non-Vote, 1,021,739. To confirm the appointment of Ernst & Young LLP as the Company's independent auditors, the vote was: For, 57,989,243; Against, 237,423; Abstain, 154,549. ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS Calgene's Common Stock is traded over-the-counter on the NASDAQ National Market under the symbol CGNE. The following table sets forth for the periods indicated the high and low sale prices of the Common Stock as reported by NASDAQ. High Low ---- --- Fiscal 1996 Quarter ended September 30, 1995 ....................8.125 6.625 Quarter ended December 31, 1995......................7.250 4.250 Quarter ended March 31, 1996.........................7.375 4.500 Quarter ending June 30, 1996.........................6.875 5.375 Six Months Ended December 31, 1996 Quarter ended September 30, 1996 ....................6.875 4.250 Quarter ended December 31, 1996......................6.000 4.375 As of March 10, 1997, there were approximately 2,989 holders of record of the Calgene Common Stock. Calgene believes that the number of beneficial owners of Calgene Common Stock is in excess of 31,000. All stockholders of Calgene are urged to obtain a current market quotation for the Calgene Common Stock. Calgene has never declared or paid cash dividends and does not intend to pay cash dividends in the foreseeable future. Future cash dividends, if any, will be determined by the Calgene Board and will be based upon Calgene's future earnings, capital requirements, financial condition and other factors deemed relevant by the Calgene Board. In addition, the ability of Calgene to pay dividends would be restricted by the terms of certain indebtedness of Calgene as well as the terms of the Calgene Credit Facility Agreement and the Gargiulo Credit Facility Agreement the Company has with Monsanto Company. Recent Sales of Unregistered Securities On November 12, 1996, Calgene issued to the Monsanto Company an aggregate of 6,250,000 shares of Calgene's Common Stock at a price of $8 per share. The shares were issued in reliance upon the exemption from registration set forth in Section 4(2) under the Securities Act of 1933, as amended. ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA (In thousands, except per share amounts) Six Months Ended(4) Fiscal Year Ended June 30 ---------------------- ------------------------------------------------------------- December 31, December 31, 1996 1995 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- Consolidated statement of operations data (1): Revenues: Product sales $ 69,780 $ 19,940 $ 95,723 $ 48,972 $ 35,408 $ 24,675 $ 18,211 Product development 729 850 9,272 6,459 3,025 2,562 3,666 --------- --------- --------- --------- --------- --------- --------- Total revenues $ 70,509 $ 20,790 $ 104,995 $ 55,431 $ 38,433 $ 27,237 $ 21,877 Loss from continuing operations $ (63,934) $ (16,104) $ (97,014) $ (30,602) $ (42,801) $ (25,223) $ (18,616) Net loss $ (63,934) $ (16,104) $ (97,014) $ (30,602) $ (42,801) $ (25,623) $ (19,916) Net loss per share (2): Loss from continuing operations $ (1.03) $ (.53) $ (2.56) $ (1.04) $ (1.71) $ (1.11) $ (1.34) Net loss $ (1.03) $ (.53) $ (2.56) $ (1.04) $ (1.71) $ (1.13) $ (1.42) Consolidated balance sheet data: Total assets $ 173,880 $ 78,960 $ 233,302 $ 89,231 $ 78,312 $ 88,401 $ 85,223 Long-term obligations $ 54,727 $ 23,853 $ 57,912 $ 15,421 $ 5,704 $ 3,694 $ 4,378 Preferred stock (3) $ -- $ -- $ -- $ -- $ -- $ -- $ 29,506 Common stock and additional paid-in capital $ 417,648 $ 223,329 $ 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. (4) Effective January 1, 1997, the Company changed its fiscal year end from June 30 to December 31.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Overview On March 31, 1996, Calgene and Monsanto Company ("Monsanto") entered into a transaction under which Monsanto contributed Gargiulo Inc. ("Gargiulo"), $30 million cash and certain oils and produce related technology in exchange for a 49.9% equity interest in Calgene. Gargiulo is a grower, packer, marketer and distributor of tomatoes, strawberries and other produce. Gargiulo tomato producing operations are conducted principally in Florida, California, Puerto Rico and Mexico. Gargiulo berry production operations are conducted principally in northern California. On February 29, 1996, Gargiulo and Collier Enterprises consummated an asset purchase agreement whereby Gargiulo acquired substantially all the assets subject to the assumption of certain specified liabilities of the produce business conducted by certain affiliates of Collier Enterprises under the trade name Collier Farms ("Collier"). Collier is an agricultural producer of tomatoes and other vegetables in Florida, and engages in the packaging, marketing and distribution of those products in the commodity markets. The Company's tomato operations consist of the combined business of Calgene Fresh, which was organized in 1992 to develop and produce genetically engineered premium tomatoes, and Gargiulo. Effective January 1, 1997, Calgene changed its fiscal year from June 30 to December 31. Accordingly, the financial presentation in this report for 1996 is for the six month period from July 1, 1996, to December 31, 1996. Prior fiscal year's operations are as previously reported and cover twelve month periods ended June 30, 1996, 1995 and 1994. Revenues Calgene's product sales in the six month period ended December 31, 1996 increased 250% to $69.8 million from $19.9 million in the comparable period of the prior year. The increase is due to the inclusion of Gargiulo's operations which resulted in higher fresh market produce sales of $50.4 million. Product sales in fiscal 1996 increased 95.5% to $95.7 million from $49.0 million in fiscal 1995. The increase resulted from the inclusion of Gargiulo's product sales of $48.3 million in the fourth quarter of fiscal 1996. Product sales in fiscal 1995 increased 38.3% to $49.0 million from $35.4 million in fiscal 1994. The increase reflects $6.8 million higher tomato sales, $4.2 million higher cotton seed sales, and $2.3 million higher specialty oleochemical sales. Product development revenues in the six month period ended December 31, 1996 decreased by 14.2% to $729,000 from $850,000 in the corresponding period of the prior year due to the conclusion of several research contracts and a $125,000 benchmark milestone payment which was recognized in the prior year. This decrease was partly offset by the addition of several new research contracts. Product development revenues in fiscal 1996 increased by 43.6% to $9.3 million from $6.5 million in the prior fiscal year. The increase was due to a $3.3 million increase in technology license sales reflecting the net impact of non-recurring sales of $7.0 million and $3.8 million in fiscal 1996 and 1995, respectively. Product development revenues in fiscal 1995 increased by 113.5% to $6.5 million from $3.0 million in the prior fiscal year. The increase was primarily due to a $3.4 million increase in technology license sales. Gross Profit Calgene's gross profit on net product sales was negative $2.3 million in the six month period ended December 31, 1996 as compared to a negative gross profit of $2.2 million in the comparable period of the prior year primarily due to the Company's produce operations. Tomato production yields were reduced due to adverse weather conditions in several growing regions, and gross profit on strawberry production was negatively impacted by exceptionally low prices experienced by the industry. Calgene's gross profit on net product sales was $5.3 million in fiscal 1996 as compared to a negative gross profit of $4.7 million in fiscal 1995. The $10.0 million improvement is attributable to a $10.4 million reduction of negative gross profit at Calgene Fresh, and the inclusion of Gargiulo fourth quarter gross profit of $2.1 million. This improvement was partly offset by a $2.1 million decrease in gross profit from cotton operations primarily due to surplus inventory write downs and higher product costs. Gross profit in fiscal 1995 was negative $4.7 million as compared to a negative gross profit of $8.6 million in fiscal 1994. The negative gross profit is attributable to the Company's fresh market tomato operations. The positive gross profit variance of $3.9 million in fiscal 1995 is largely due to a gross profit increase of $2.3 million in cotton operations primarily reflecting increased domestic seed sales. In addition, tomato sales incurred a negative gross profit of $14.9 million in fiscal 1995, compared with a negative gross profit of $16.4 million in fiscal 1994. Research and Development Expenses Research and development expenses increased by $1.9 million or 29.2% in the six month period ended December 31, 1996 as compared to the corresponding period of the prior year. The increase was primarily due to the inclusion of $1.3 million of Gargiulo variety development expenses, and higher costs incurred for expanded research programs in the areas of produce and modified canola oils. Research and development expenses decreased by $1.4 million or 8.8% to $14.0 million in fiscal 1996 as compared to fiscal 1995. The decrease primarily reflects the full year impact of the Company's third quarter fiscal 1995 implementation of a program to reduce ongoing research expenses. This program included staff reductions of approximately 10% of the Company's 320 regular full time employees, and reflected a shift in resources from research into product development to focus on commercialization of the Company's genetically engineered products. In addition, the decrease reflects lower expenses for licensing activities. The lower research and development expense was partly offset from the inclusion of Gargiulo research and development expenses in the fourth quarter. Research and development expenses decreased $195,000 in fiscal 1995 to $15.4 million as compared to $15.6 million in fiscal 1994 primarily due to lower distribution testing, consulting and product development expenses in the Company's tomato operations. These decreases were partly offset by higher expenses for licensing activities and higher product development expenses for genetically modified canola oils. Selling, General and Administrative Expenses Calgene's selling, general and administrative expenses increased by $12.2 million or 162% to $19.7 million in the six month period ended December 31, 1996 as compared to the corresponding period of the prior year. The increase reflects $9.6 million in higher expenses for the Company's fresh market produce operations attributable to the inclusion of Gargiulo. The increase also reflects a corporate severance expense of $905,000, higher cotton selling expenses, higher marketing and application development expenses for genetically engineered plant oils, and higher general corporate expenses. Selling, general and administration expenses increased by $5.6 million or 35.0% to $21.7 million in fiscal 1996 as compared to fiscal 1995. The increase reflects $5.3 million in higher expenses for the Company's fresh market produce operations attributable to the inclusion of Gargiulo expenses in the fourth quarter. Selling, general and administration expenses decreased by $5.2 million or 24.4% to $16.1 million in fiscal 1995 as compared to fiscal 1994. The decrease primarily reflects lower sales and marketing expenses and lower payroll and consulting expenses in the Company's tomato operations. In addition, fiscal 1994 reflects a $1.0 million scale-back charge attributable to the reduction of non-genetically engineered tomato marketing operations. The fiscal 1995 decrease was partly offset by higher general corporate expenses which include a $483,000 write-off of costs associated with Calgene's decision to conclude discussions with a potential strategic partner. In-process Research & Development Acquired In connection with Calgene's transaction with Monsanto, Calgene engaged an independent appraiser to provide the Company with recommendations of value for certain assets acquired from Monsanto, including Gargiulo. Based on the valuation analysis, Calgene assigned $59.2 million of the purchase price to in-process research and development. Because the technological feasibility of the acquired in-process research and development has not been established and has no alternative future uses, it was expensed in the third quarter of fiscal 1996. Although the Company is in the process of evaluating its research and development projects, it is expected that future expenditures of over $20 million will be necessary to develop the acquired in-process technology into commercial products. Write-off of Assets and Restructure Expenses Pursuant to a plan approved by Calgene's Board of Directors in the quarter ended December 31, 1996, Gargiulo intends to significantly reduce its produce acreage in Southwest Florida. The reduction in acreage is in response to increased competitive pressure from Mexico produce and is expected to be accomplished over the next two to three years. As a consequence, during the quarter ended December 31, 1996, the Company recorded a charge of approximately $32.6 million for the write-off of assets, and other reserves. The write-offs include $9.4 million for the write-down of tomato germplasm, an $8.3 million asset impairment charge due to further consolidation of the Company's tomato packing facilities, and a $10.4 million charge related to the excess purchase price of net assets acquired allocated to the asset write-downs. The Company is actively seeking buyers for the packing facilities. In addition, a reserve of $4.5 million relating to other restructuring costs was recorded. During fiscal 1996 the Company recorded a charge of $15.6 million for the write-off of assets as compared to $1.1 million in the prior fiscal year. The write-off for fiscal year 1996 includes $10.4 million primarily related to the merger of Calgene's tomato operations into Gargiulo. The write-off of tomato assets primarily reflects a $5.4 million asset impairment charge due to the consolidation of facilities and equipment and a $2.5 million write-off of obsolete technology licenses. The Company also recorded $1.5 million for the write-off of its investment in a majority owned potato joint venture (before minority interest), and $1.0 million for the write-off of a technology license option the Company does not intend to exercise. As a consequence of the Company's decision in the third quarter of fiscal 1996 to reduce its emphasis on commodity distribution products at Calgene Chemical, the excess purchase price of net assets acquired associated with the commodity distribution business was written-down to net realizable value resulting in a $1.2 million expense. The $1.1 million expense in fiscal 1995 reflects the write-off of obsolete assets by Calgene Fresh. Interest Expense Interest expense, which reflects the Company's borrowings on its bank line of credit, Monsanto credit facilities, and long-term debt obligations, increased by $2.5 million to $3.8 million in the six month period ended December 31, 1996 as compared to $1.3 million in the corresponding period of the prior year. The increase was due to interest of $3.2 million attributable to Gargiulo's debt obligations. This increase was partly offset by a lower borrowings on the Company's credit facility with Monsanto, and lower borrowings on its bank line of credit. Interest expense increased $2.5 million to $3.4 million in fiscal 1996 as compared to $924,000 in fiscal 1995. The increase was primarily due to interest expense of $1.7 million attributable to Gargiulo's debt obligations. In addition, the increase includes higher interest expense incurred due to a $23 million loan made by Monsanto in the form of a subordinated convertible note. The note was converted into equity on March 31, 1996 pursuant to the terms of the Reorganization Agreement (see Note 4 to the consolidated financial statements). Interest expense increased $195,000 to $924,000 in fiscal 1995 as compared to $729,000 in the prior fiscal year. The increase was primarily due to higher interest rates and higher borrowings on the Company's bank line of credit used to finance inventories and receivables. Other Income (Expense), Net Other income in the six month period ended December 31, 1996 increased $1.6 million to $2.2 million as compared to $541,000 in the corresponding period of the prior year. The increase is primarily due to a $1.5 million gain resulting from the Company's sale of assets. This gain included $1.2 million realized from the sale of a leased asset with a net book value of $2.9 million for a gross sales price of $4.1 million. Commensurate with the sale, the Company paid off a capitalized lease obligation of $3.1 million. Other income in fiscal 1996 was $2.3 million as compared to $1.1 million in fiscal 1995. The increase reflects a $595,000 increase in the minority partner's interest share of the higher net losses from a potato joint venture as a consequence of management's decision to cease its operation and sell remaining assets. In addition, the increase reflects a $238,000 gain realized from an insured casualty loss. In fiscal 1995 other income increased $747,000 as compared to the prior fiscal year. The increase was primarily due to a $370,000 reduction in the net loss of an affiliate, and $352,000 in higher interest income. Pre-Tax Losses from Operations During the six month period ended December 31, 1996, Calgene incurred a pre-tax loss of $63.9 million as compared to a pre-tax loss of $16.1 million in the corresponding period of the prior year. The increased six month pre-tax loss of $47.8 million reflects non-cash asset write-downs and other restructuring expenses totaling $32.6 million at Gargiulo. In addition, the higher pre-tax loss reflects higher selling, general and administrative expenses, higher interest expense, and higher research expenses, primarily due to the inclusion of Gargiulo. These factors were partly offset by an increase in other income due primarily to a gain realized on sale of assets. In fiscal 1996, Calgene incurred a pre-tax loss of $97.0 million as compared to a pre-tax loss of $30.6 million in the prior fiscal year. The increased fiscal 1996 pre-tax loss of $66.4 million reflects non-recurring charges associated with closing the Reorganization Agreement including $59.2 million for the purchase of in-process research and development, and $15.6 million for the write-off of assets. In addition, the higher loss reflects higher selling, general, and administrative expenses and higher interest expense due the to inclusion of Gargiulo operations. These factors were partly offset by a gross profit improvement from net product sales, higher product development revenues, an increase in other income, and lower research and development expenses. In fiscal 1995, Calgene incurred a pre-tax loss of $30.6 million as compared to a pre-tax loss of $42.7 million in the prior fiscal year. The decreased fiscal 1995 pre-tax loss is primarily attributable to lower selling, general and administration expenses at Calgene Fresh and higher product development revenues. In addition, the decreased pre-tax losses reflect increases in gross profits on net product sales from cotton seed and oleochemical sales, and a reduction in gross losses on net product sales at Calgene Fresh. These factors were partly offset by higher selling, general and administrative expenses for general corporate purposes, and the loss on disposition of obsolete assets. Provision for Income Taxes For federal income tax return purposes, as of December 31, 1996 the Company has a net operating loss carryover of approximately $234 million which expires between 1997 and 2012, and a general business tax credit carryover of approximately $4 million which expires between 1997 and 2012. In addition, as of December 31, 1996 the Company has a net operating loss carryover of approximately $143 million for state income tax purposes which expires between 1997 and 2012. Approximately $20 million and $3 million of the federal and state net operating loss carryovers, respectively, and $700,000 of the general business tax credit carryover, are available only to offset the separate federal and state taxable income, if any, of Calgene Fresh. For financial reporting purposes, a valuation allowance of approximately $118.4 million has been recognized at December 31, 1996 to offset the deferred tax assets related to all of the aforementioned carryforwards. Because of the "change in ownership" provisions of the Tax Reform Act of 1986, a portion of the Company's federal net operating loss and tax credit carryovers will be subject to an annual limitation regarding their utilization against taxable income in future periods. The Company expects that the annual limitation will not have a material adverse effect on the Company's ability to utilize the net operating loss and credit carryovers prior to the expiration of the carryover periods. Seasonality Tomato prices are generally higher and unit volume lower during winter months due to adverse weather conditions. The opposite effects occur in the summer months. Sales of planting seed are seasonal, causing significant fluctuations in product sales and working capital requirements. Cotton seed sales are concentrated in the quarters ending March 31 and June 30. Strawberry sales occur predominantly in the quarters ended June 30 and September 30. Specialty oleochemical sales are generally not seasonal. Litigation See "Legal Proceedings." Government Farm Legislation Cotton seed sales are affected by changes in U.S. government agricultural policy, which may impose limitations on planting acreage as a criterion for farmers' eligibility to receive government subsidy payments and other benefits. An increase in the acreage set-aside for a subsidized crop will generally reduce farmer demand for seed for that crop, and a decrease in the set-aside will generally increase demand for the seed. In situations where growing conditions give farmers the alternative of planting either of two crops, an increase in the set-aside for one crop will tend to increase farmer demand for the seed of the competing crop. Inflation and Price Fluctuations The market price for fresh produce can experience substantial fluctuations in short periods. When the supply of tomatoes and berries on the market exceeds the demand for such products, the market price may be driven down significantly, in some instances below the cost of harvesting and packing. In such situations it may be uneconomical to harvest a crop, resulting in a total loss of the costs incurred in growing such crop. Even when market prices are sufficient to permit recovery of direct harvesting and packing costs, prices may not be high enough to permit recovery of growing costs and/or overhead and other indirect costs. Calgene's plant oil and cotton operations can also be affected by changes in prices of commodity plant oil and cottonseed oil and meal. The effects of general inflation have not had a material impact on Calgene's consolidated results of operations. Liquidity and Capital Resources At December 31, 1996 Calgene had cash and equivalents and short term available-for-sale securities of approximately $3.3 million, excluding $878,000 in securities pledged as collateral for certain obligations. This was a decrease of $25.3 million from June 30, 1996. Uses of cash in the six month period ended December 31, 1996 include financing the Company's net loss (excluding non-cash expenses of $28.0 for the write-off of assets and $6.4 million in depreciation and amortization expense); payments of $26.6 million on long-term debt; a $12.9 million decrease in operating liabilities; a $7.4 million net decrease in notes payable; the acquisition of $3.8 million in property, plant and equipment; and a $3.2 million increase in operating assets. Sources of cash include the Company's November 1996 offering of common stock to Monsanto which contributed $50 million in net proceeds and $7.1 million received in proceeds for the sale of assets. The Company's investment policy is to invest excess cash in high quality, liquid, short-term fixed income securities. Inventories at December 31, 1996 increased by $13.4 million as compared to June 30, 1996 primarily due to seasonal buildup of bulk cottonseed and higher tomato growing costs. Accounts receivable decreased by $9.4 million due to the seasonality of sales at Gargiulo, and a $1.1 million reduction in receivables for research contracts and corporate reimbursements. Current liabilities decreased $42.4 million in the six month period ended December 31, 1996 as compared to June 30, 1996 largely due to a $17.7 million decrease in current portion of long term debt; a $7.4 million decrease in notes payable; a $6.2 million decrease in trade accounts payable; a $4.7 million decrease in amounts due customers; a $3.4 million decrease in other current liabilities; and a $3.2 million decrease in accrued restructure expenses. The decreases in current portion of long-term debt and notes payable reflect the repayment by Gargiulo of a line of credit and four mortgage loans due NationsBank which totaled $23.1 million at June 30, 1996. The decrease of $4.7 million in amounts due customers reflects seasonal cotton seed returns consistent with industry practice. Net working capital increased $20.3 million from a negative $959,000 at June 30, 1996 to a positive $19.3 million at December 31, 1996 primarily due to a $42.4 million decrease in current liabilities and a $13.4 million increase in inventories. This increase was partly offset by a $25.3 million decrease in cash and equivalents and available for sale securities, and a $9.4 million decrease in accounts receivable. In the normal course of business, the Company enters into various grower contracts with third party growers. Pursuant to these contracts, the Company contracts with growers to purchase their crop, subject to certain quality standards, at the end of the growing cycle which is generally less than one year. The amount of outstanding grower contract commitments was approximately $4.4 million at December 31, 1996. The Company has capitalized the legal fees incurred in its lawsuit with Enzo Biochem, Inc. related to Calgene's defense of its antisense patent. On February 2, 1996, the court ruled on behalf of the Company and held that Calgene's patent was valid. If the defense of Calgene's patent is unsuccessful as a result of potential appeals, the Company would have to expense all of these unamortized legal costs. At December 31, 1996, the amount of these unamortized costs was $5.7 million. On November 12, 1996, Calgene and Monsanto Company consummated a transaction whereby Monsanto purchased 6,250,000 shares of Calgene Common Stock at a price of $50 million or $8 per share. The transaction increased Monsanto's equity ownership interest in Calgene to approximately 54.6% and gave Monsanto the right to designate five of the nine members of the Board. Monsanto is obligated, subject to certain terms and conditions, to lend up to $40 million to Gargiulo ("Gargiulo Credit Facility"), and up to $15 million annually to Calgene until September 30, 1998 ("Calgene Credit Facility"), although not more than $15 million may be outstanding thereunder at any one time. As of December 31, 1996, $24.8 million of the Gargiulo Credit Facility was outstanding. In addition, $1.9 million in interest payable under this credit facility has been accrued. The credit facility agreements each contain various covenants precluding Calgene and its subsidiaries from taking certain actions without the approval of Monsanto. Also, in the event of a default by Calgene under the Garguilo Credit Facility and the Calgene Credit Facility, Monsanto has certain rights to convert the outstanding principal and interest under such agreements into additional shares of Calgene Common Stock at the then market value of the Calgene Common Stock, and any such conversion could substantially dilute the ownership interests of other Calgene stockholders. During the six month period ended December 31, 1996, and the fiscal year ended June 30, 1996, Calgene had a $13 million line of credit with Harris Bank (the "Harris Credit Facility") which expired on February 28, 1997. Borrowings under the line of credit bore interest at the greater of one half percent over the bank's prime rate or two and one half percent over the federal funds rate. On December 31, 1996 the bank's prime rate was 8.25% and the federal funds rate was 6.26% The effective annual interest rates for the line of credit were 8.62% and 8.90% for the six month period ended December 31, 1996 and the fiscal year ended 1996, respectively. As of December 31, 1996, $6.5 million of indebtedness was outstanding of the bank line of credit. Subsequent to December 31, 1996, the Company replaced this line of credit with a $20 million working capital line of credit with Bank of America ("B of A"). The B of A facility expires on December 1, 1999. Available credit increases to $30 million after December 31, 1997 and to $40 million after December 31, 1998. A $3.5 million line of credit with a bank is used to finance working capital requirements at Gargiulo's Puerto Rico operations. Borrowings under the line bear interest at prime. The credit line expires on September 30, 1997. On December 31, 1996, the bank's prime rate was 8.25%. As of December 31, 1996, there was $2.5 million outstanding on the line of credit. While Monsanto has agreed to make a $40 million loan available to Gargiulo, further advances under such loan are subject to the achievement of certain milestones, and are to be used solely to fund the branded tomato strategy and are repayable out of specified portions of the cumulative free cash flow of Gargiulo. While Monsanto has agreed to advance up to $15 million annually to Calgene until September 30, 1998, not more than $15 million may be outstanding thereunder at any one time. Except as described above, Monsanto has no obligation to loan or otherwise contribute additional cash to Calgene. Calgene believes its current cash balances together with the proceeds of the credit facility agreements and other bank lines of credit expected to be available to Calgene, will be sufficient to fund its operations for at least the next twelve months. However, such expectation is based in part on the achievement of the operating plans of Calgene and there can be no assurance such operating plans will be achieved. Also, there can be no assurance that all of Calgene's expected sources of funds will be available. Accordingly, there can be no assurance that Calgene will not be required to obtain additional sources of financing or that any future required financing will be available on favorable terms, if at all. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Consolidated Financial Statements and Supplementary Data Page Report of Independent Auditors.............................................33 Consolidated Balance Sheets - December 31, 1996 and June 30, 1996 and 1995.....................................................34 Consolidated Statements of Operations - Six months ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994..............................................................36 Consolidated Statements of Shareholders' Equity - Six months ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994...............................................37 Consolidated Statements of Cash Flows - Six months ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994..............................................................38 Notes to Consolidated Financial Statements.................................39 Supplementary Data (Unaudited).............................................60 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Calgene, Inc. We have audited the accompanying consolidated balance sheets of Calgene, Inc. as of December 31, 1996, June 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the six months ended December 31, 1996, and each of the three years in the period ended June 30, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Calgene, Inc. at December 31, 1996, June 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for the six months ended December 31, 1996, and each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to be the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Sacramento, California February 24, 1997 CALGENE, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
ASSETS December 31, June 30, June 30, ------ 1996 1996 1995 ----------- ----------- ----------- Current assets: Cash and equivalents $ 1,908 $ 17,674 $ 11,753 Available-for-sale securities 1,382 10,919 10,283 Accounts receivable, primarily trade, net of allowance for doubtful accounts of $707, $487 and $346 at December 31, 1996 and June 30, 1996 and 1995, respectively 16,748 26,133 6,697 Inventories 37,272 23,865 8,148 Prepaid expenses and other current assets 1,327 2,174 1,699 ----------- ----------- ----------- Total current assets 58,637 80,765 38,580 Property, plant and equipment: Land 18,258 22,755 763 Buildings 18,418 23,083 3,743 Leasehold improvements 8,330 8,556 9,643 Furniture, fixtures and equipment 33,971 40,398 22,436 Construction in progress 1,411 1,676 1,459 ----------- ----------- ----------- 80,388 96,468 38,044 Less accumulated depreciation and amortization 19,642 16,481 15,524 ----------- ----------- ----------- Property, plant and equipment, net 60,746 79,987 22,520 Product rights, patents and other intangible assets, less accumulated amortization of $4,046, $3,060 and $2,507 at December 31, 1996 and June 30, 1996 and 1995, respectively 20,461 30,642 16,199 Costs in excess of fair values assigned to net assets acquired, less accumulated amortization of $5,440, $4,612 and $4,145 at December 31, 1996 and June 30, 1996 and 1995, respectively 25,680 36,219 10,025 Assets held for sale 5,185 963 -- Other non-current assets 3,171 4,726 1,907 ----------- ----------- ----------- $ 173,880 $ 233,302 $ 89,231 =========== =========== ===========
See accompanying notes. CALGENE, INC. CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands, except per share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, June 30, June 30, - - ------------------------------------ 1996 1996 1995 ----------- ----------- ----------- Current liabilities: Notes payable $ 9,402 $ 16,789 $ 7,761 Accounts payable 13,920 20,111 6,487 Accrued payroll and related expenses 3,470 3,252 2,049 License contract payable -- 750 1,500 Accrued grower payments 1,364 615 942 Amounts due customers 317 5,028 4,596 Accrued restructure expenses 2,525 5,770 -- Other current liabilities 3,193 6,559 2,930 Current portion of long-term debt 5,139 22,850 1,494 ----------- ----------- ----------- Total current liabilities 39,330 81,724 27,759 License contract payable, long-term -- -- 750 Research and development advance from affiliate 10,000 10,000 -- Note payable to affiliate 24,760 24,760 -- Interest payable to affiliate 1,912 509 -- Accrued restructure expenses, long-term 3,860 -- -- Long-term debt 14,195 22,643 14,671 Commitments and contingencies (Note 9) Minority interest 263 266 -- Shareholders' equity: Preferred stock, $.001 par value; 5,000,000 authorized, no shares issued and outstanding -- -- -- Common stock, $.001 par value; 100,000,000 shares authorized, 66,714,636, 60,443,115 and 30,244,226 shares issued and outstanding at December 31, 1996 and June 30, 1996 and 1995, respectively 67 60 30 Additional paid-in capital 417,581 367,494 223,161 Accumulated deficit (338,088) (274,154) (177,140) ------------ ------------ ------------ Total shareholders' equity 79,560 93,400 46,051 ----------- ----------- ----------- $ 173,880 $ 233,302 $ 89,231 =========== =========== ===========
See accompanying notes. CALGENE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
Six Months Years Ended June 30, Ended ---------------------------------------------------- December 31, 1996 1996 1995 1994 ---------------- --------------- ---------------- ------------ Revenues: Product sales, net $ 69,780 $ 95,723 $ 48,972 $ 35,408 Product development revenues 729 9,272 6,459 3,025 ------------ ------------ ------------ ------------ 70,509 104,995 55,431 38,433 Costs and expenses: Cost of goods sold 72,042 90,403 53,678 43,982 Research and development: Contract 1,672 4,222 3,436 2,721 Other 6,743 9,801 11,937 12,847 Selling, general and administrative 19,677 21,705 16,081 21,279 In-process research and development acquired -- 59,200 -- -- Write-off of assets and restructure expenses 32,605 15,574 1,098 -- ------------ ------------ ------------ ------------ 132,739 200,905 86,230 80,829 Interest expense (3,822) (3,428) (924) (729) Other income, net 2,163 2,345 1,136 389 ------------ ------------ ------------ ------------ Loss from operations before provision for income taxes (63,889) (96,993) (30,587) (42,736) Provision for income taxes (45) (21) (15) (65) ------------ ------------ ------------ ------------ Net loss $ (63,934) $ (97,014) $ (30,602) $ (42,801) ============ ============ ============ ============ Net loss per share $ (1.03) $ (2.56) $ (1.04) $ (1.71) ============ ============ ============ ============ Shares used in per share calculations 62,155,384 37,883,871 29,439,008 24,987,513
See accompanying notes.
CALGENE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Six months ended December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994 (Dollars in thousands) 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, primarily for acquisition of Gargiulo 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 Net loss -- -- -- (63,934) (63,934) Sale of common stock, net of expenses 6,271,521 7 50,071 -- 50,078 Unrealized gain on available-for-sale securities -- -- 16 -- 16 ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996 66,714,636 $ 67 $ 417,581 ($ 338,088) $ 79,560 ========== ========== ========== ========== ========== See accompanying notes.
CALGENE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Equivalents (Dollars in thousands) Years Ended June 30, Six Months Ended -------------------------------------------------- December 31, 1996 1996 1995 1994 ------------------ ---------------- ---------------- ---------------- Cash flows from operating activities: Net loss $(63,934) $(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 6,371 6,989 4,957 4,099 In-process research and development acquired -- 59,200 -- -- Gain on sale of assets (1,536) -- -- -- Write-off of assets and restructure expenses 28,039 15,574 1,098 -- Equity in net (gain) loss of affiliate (3) 1 213 583 Stock compensation -- -- 452 697 Net changes in operating assets and liabilities, excluding effect of acquisition of subsidiaries: Accounts receivable 9,165 8,912 (1,992) (1,658) Inventories (13,407) 6,455 (2,003) 1,320 Accounts payable (6,191) (1,903) (1,429) 2,589 Amounts due customers (4,711) 432 1,268 1,740 Accrued restructure expenses 1,949 -- -- -- Other accrued liabilities (3,366) (6,736) 612 1,637 Interest payable to affiliate 1,403 509 -- -- Other 1,284 2,614 146 279 --------- -------- -------- -------- Net cash used in operating activities (44,937) (5,754) (27,396) (31,561) --------- --------- --------- --------- Cash flows from investing activities: Proceeds from sales of available-for-sale securities 10,515 11,787 22,904 24,904 Purchase of available-for-sale securities (955) (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 (3,800) (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 (1,343) (1,397) (4,782) (4,843) Proceeds from sale of assets 7,136 489 38 69 Other noncurrent assets 1,366 -- -- -- -------- -------- -------- -------- Net cash provided by (used in) investing activities 12,919 (6,898) (5,366) 1,223 -------- --------- --------- -------- Cash flows from financing activities: Proceeds from notes payable 36,364 8,453 19,398 14,214 Payments on notes payable (43,751) (19,489) (20,322) (13,161) Decrease in securities-pledged 164 214 159 136 Increase in borrowings of long-term debt -- 25,057 10,000 -- Principal payments on long-term debt (26,603) (15,549) (1,768) (1,332) Proceeds on notes payable to affiliate 15,000 2,680 -- -- Payments on notes payable to affiliate (15,000) -- -- -- Sale of common stock 50,078 7,207 31,762 20,758 Research and development advance from affiliate -- 10,000 -- -- -------- -------- -------- -------- Net cash provided financing activities 16,252 18,573 39,229 20,615 -------- -------- -------- -------- Net increase (decrease) in cash and equivalents (15,766) 5,921 6,467 (9,723) Cash and equivalents at beginning of year 17,674 11,753 5,286 15,009 -------- -------- -------- -------- Cash and equivalents at end of year $ 1,908 $ 17,674 $ 11,753 $ 5,286 ======== ======== ======== ======== See accompanying notes.
CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 1. Summary of Significant Accounting Policies Change in fiscal year The Company has changed its fiscal year end from June 30 to December 31, beginning with the period ended December 31, 1996 to conform with the fiscal year end of the Monsanto Company which holds an equity ownership in Calgene of approximately 54.6% (Note 13). Accordingly, the financial presentation in this report for 1996 is for the six month period from July 1, 1996 to December 31, 1996. Prior fiscal year's operations are as previously reported and cover twelve month periods ended June 30. Unaudited comparative information for the six months ended December 31, 1995, is as follows (in thousands, except per share amounts): Revenues $ 20,790 Gross profit (loss) (1,309) Net loss (16,104) Net loss per share (0.53) Organization and Business Calgene is a biotechnology company that is developing a portfolio of genetically engineered plants and plant products for the food, seed and oleochemical industries. The Company's research and business efforts are focused in three core crop areas--fresh produce (tomato and strawberry), edible and industrial plant oils (canola) and cotton--where Calgene believes biotechnology can provide substantial added commercial value in consumer, industrial and seed markets. Consolidation and Equity Accounting The consolidated financial statements include the accounts of Calgene, its wholly-owned subsidiaries and its majority owned joint venture (together the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Calgene uses the equity method to account for its investments in its 50 percent or less owned joint ventures. Under the equity method, Calgene recognizes its proportionate share of the net income or loss of these joint ventures currently, rather than when realized through dividends or disposal. Cash Equivalents and Available-for-sale Securities Cash equivalents and available-for-sale securities, consisting principally of certificates of deposit, bankers acceptances, commercial paper, U.S. treasury and agency securities, and money market funds, are stated at fair market value, and are adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. Unrealized gains and losses, net of tax, on available-for-sale securities are reported in shareholders' equity. Gross realized gains and losses on available-for-sale securities were not material during the periods presented. The aggregate fair market value of available-for-sale CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 1. Summary of Significant Accounting Policies (continued) Cash Equivalents and Available-for-sale Securities (continued) securities at December 31, 1996 is $1,960,000 of which $578,000 is included in cash and equivalents. The aggregate fair market value of available-for-sale securities at June 30, 1996 is $28,288,000 of which $17,369,000 is included in cash and equivalents. The aggregate fair market value of available-for-sale securities at June 30, 1995 is $20,276,000 of which $9,993,000 is included in cash and equivalents. The contractual maturities of available-for-sale securities at December 31, 1996 are as follows: $1,409,000 in 1997, $313,000 in 1998, and $238,000 in 2002. Inventories Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market value. Property, Plant and Equipment Property, plant and equipment are stated at cost and depreciated or amortized on a straight-line basis over the estimated useful lives of the assets or the capital lease term, whichever is less. The estimated useful lives range from 3 to 30 years. Product Rights, Patents and Other Intangible Assets Product rights of approximately $3,939,000 at December 31, 1996; $3,042,000 at June 30, 1996 and $7,827,000 at June 30, 1995 are stated at cost and are amortized on a straight-line basis over the lesser of their contractual lives or their estimated useful lives (generally 10 to 20 years). External costs incurred in obtaining patents are capitalized. The costs of successful patent applications are amortized on a straight-line basis over the lesser of their statutory lives or their estimated useful lives (generally 17 years). External costs incurred in defense of patents are capitalized and amortized on a straight-line basis over the remaining life of the patent. The costs of unsuccessful patent applications or patent defense are charged to expense in the period in which the patent applications are denied or the patent defense is unsuccessful. The net book value of capitalized patent related costs is $7,950,000, $7,908,000 and $8,372,000 at December 31, 1996 and June 30, 1996 and 1995, respectively. Other intangible assets consist primarily of the seed library acquired in connection with the acquisition of Gargiulo (Note 4), which is being amortized over its estimated useful life of 15 years. See write-off of other intangible assets in Note 7. Costs in excess of fair values assigned to net assets acquired are capitalized and amortized on a straight-line basis over periods of 10 to 25 years. Revenue Recognition and Product Development Arrangements Revenue from product sales is recognized primarily at the time of shipment net of estimated product returns. The Company performs research under contracts for the development of certain products for other entities. Revenue from product development contracts is recognized according to the percentage of completion CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 1. Summary of Significant Accounting Policies (continued) Revenue Recognition and Product Development Arrangements (continued) method. Funding received in advance of research performed under these contracts is recorded as deferred revenue. Related contract expenses are charged to expense as incurred. Income Taxes The liability method is used to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. General business tax credits will be accounted for as a reduction of federal income taxes payable under the flow-through method. Net Loss Per Share Net loss per share has been computed by dividing the net loss by the weighted average number of common shares outstanding during each period. Common equivalent shares related to stock options have been excluded from the computation of net loss per share since their inclusion would be antidilutive. Statement of Cash Flows For purposes of the consolidated statement of cash flows, the Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. During the six month period ended December 31, 1996 and fiscal year 1996, 1995 and 1994, the Company paid cash for interest and income taxes as follows: (In thousands) 1996 1996 1995 1994 ---- ---- ---- ---- (six months) Interest $3,282 $1,619 $895 $621 Income taxes 17 83 91 53 The Company maintains its cash and equivalents and short-term investments in several different instruments. This diversification of risk is consistent with the Company's policy to maintain liquidity and ensure the safety of principal. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of During the quarter ended September 30, 1996, the Company adopted the provisions of the Financial Accounting Standards Board Statement of Financial Accounting No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires impairment losses to be recognized for long-lived assets and identifiable intangibles used in operations when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 1. Summary of Significant Accounting Policies (continued) Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (continued) its carrying amount. Costs in excess of fair values assigned to net assets acquired in purchase business combinations are included in impairment evaluations when events or circumstances exist that indicate the carrying amount of the acquired assets may not be recoverable. SFAS 121 also requires that assets held for disposal be valued at the lower of carrying amount or fair value less cost to sell. Accounting for Stock Based Compensation The Company accounts for its stock option plans and its employee stock purchase plan in accordance with the provisions of the Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based Compensation." SFAS 123 provides an alternative to APB 25 and is effective for fiscal years beginning after December 15, 1995. The Company expects to continue to account for its stock plans in accordance with APB 25. Accordingly, SFAS 123 is not expected to have a material impact on the Company's financial position or results of operations. Fair Values of Financial Instruments The carrying amounts reported in the balance sheet for cash and equivalents and available-for-sale securities approximates their respective fair values. The carrying amounts of the Company's borrowings under its debt agreements approximate their fair value. The fair values of the Company's long-term debt are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Use of Estimates and Certain Risks The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported to the financial statements and accompanying notes. Actual results could differ from those estimates. Among other things, the Company is subject to risks from changes in farm legislation, market price fluctuations for the Company's products, and adverse weather conditions which may effect the ultimate realization of certain of its inventories. Reclassifications Certain amounts reported for prior years have been reclassified to conform with the presentation of the December 31, 1996 financial statements. CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 2. Receivables Receivables consist of the following:
(In thousands) December 31, 1996 June 30, 1996 June 30, 1995 --------------------------------- --------------------------------- ------------------ Trade Related Party Trade Related Party Trade ---------------- --------------- ---------------- --------------- ------------------ Customer $ 13,771 $ -- $ 18,808 $ -- $ 6,708 Grower advances 2,993 -- 5,917 -- -- Other 452 239 923 972 335 -------- ------- -------- ------- -------- Total 17,216 239 25,648 972 7,043 Less allowance for doubtful amounts (707) -- (487) -- (346) --------- ------- --------- ------- -------- Total $ 16,509 $ 239 $ 25,161 $ 972 $ 6,697 ======== ======= ======== ======= ========
3. Inventories Inventories consist of the following at December 31, 1996 and June 30, 1996 and 1995:
(In thousands) December 31, 1996 June 30, 1996 June 30, 1995 ----------------- ------------- ------------- Growing crops $17,958 $11,208 $2,368 Supplies and seeds inventories 5,836 10,136 1,123 Finished goods 5,689 1,415 1,942 Work in progress 2,631 596 2,245 Raw materials 5,158 510 470 -------- -------- ------- $37,272 $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: CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 4. Strategic Alliance (continued) (In thousands) 30,161,114 shares of common stock $ 144,206 Acquisition costs, consisting primarily of financial advisory, legal and accounting fees 1,530 Less cash received (30,000) ----------- $ 115,736 =========== A summary of the purchase price allocation is as follows: (In thousands) Net assets acquired $ 11,506 Identified intangible assets 21,680 Excess purchase price over net assets acquired 23,350 In-process research and development 59,200 ----------- $ 115,736 =========== Intangible assets include completed technology, assembled workforce and costs in excess of fair values assigned to net assets acquired. The estimated useful lives are expected to range from 5 to 15 years. Because the technological feasibility of the acquired in-process research and development has not been established and has no alternative future uses, the $59.2 million allocated to in-process research and development has been expensed. Between June 29, 1995 and March 19, 1996 Calgene received $23 million in advances toward the $30 million proceeds in the form of a subordinated promissory note. The subordinated note was converted to equity upon consummation of the transaction. The additional $7 million was received on April 1, 1996. On November 12, 1996, the Company entered into a Stock Purchase Agreement with Monsanto (the "Stock Purchase Agreement"), pursuant to which (i) the Company sold and issued to Monsanto, and Monsanto purchased 6,250,000 shares of Common Stock of the Company (the "Additional Shares"), at $8.00 per share, for an aggregate purchase price of $50 million, thereby increasing Monsanto's ownership interest in shares of Calgene Common Stock from 49.9% to approximately 54.6% (without giving effect to the exercise of outstanding options and warrants), (ii) Monsanto and Calgene agreed to enter into a Restated Stockholders Agreement ("Restated Stockholders Agreement") amending and restating the Stockholders Agreement dated March 31, 1996 ("Stockholders Agreement"), and (iii) the Restated Certificate of Incorporation was amended to reflect the amendments to the Stockholders Agreement contemplated by the Restated Stockholders Agreement. As a consequence of the transaction, Monsanto owned approximately 36,396,114 shares of Common Stock of the Company, representing approximately 54.6% of the issued and outstanding shares of Common Stock of the Company. CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 4. Strategic Alliance (continued) Acquisition of Collier Farms On February 29, 1996, Gargiulo and Collier Enterprises consummated an asset purchase agreement whereby Gargiulo acquired substantially all the assets, subject to the assumption of certain specified liabilities, of the produce business conducted by certain affiliates of Collier Enterprises under the trade name Collier Farms ("Collier"). Collier is an agricultural producer of tomatoes and other vegetables in Florida, and engages in the packaging, marketing and distribution of those products in the commodity markets. The purchase price consists of $10 million in cash and a $10 million promissory note, plus an earn-out payment based upon achieving certain earnings of the combined operations of Gargiulo and Collier in Southwest Florida. Gargiulo also acquired Collier's 1995-1996 crop and assumed liabilities related thereto, and committed to lease certain farmland from affiliates of Collier. The acquisition was accounted for as a purchase. The purchase price consists of the following: (In thousands) Cash $10,000 Promissory note 10,000 Investment in 1995-1996 crop 12,127 Acquisition costs, consisting primarily of financial advisory, legal and accounting fees 200 ------- $32,327 ======= A summary of the purchase price allocation is as follows: (In thousands) Net assets acquired $23,500 Excess purchase price over net assets acquired 8,827 ------- $32,327 ======= Unaudited Proforma Combined Results of Operations Unaudited proforma combined results of operations for the year ended June 30, 1996, giving effect to certain adjustments as if the Gargiulo and Collier acquisitions occurred on July 1, 1995 are displayed in the following table. These unaudited proforma combined results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition been in effect on July 1, 1995 or which may result in the future. (In thousands, except per share amounts) Revenue $182,041 Net loss $(128,115) Net loss per share $(2.12) CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 5. Oilseed Cross Licensing Agreement In May 1996, the Company entered into a broad cross licensing agreement with Monsanto encompassing the two companies' oilseed research programs. The agreement has an initial term of 15 years. Under the agreement Calgene received a royalty free license to current and future Monsanto agronomic technology for use in combination with Calgene's proprietary oils modification genes for development of specialty canola oil products. Calgene also received $10 million from Monsanto for best-efforts research and development activities to be performed by Calgene over a three year period relating to further development of plant expression or oil modification technologies. In exchange for the above, Calgene will pay royalties to Monsanto based on a portion of the net profits of Calgene's oils division. The Company recorded the $10 million research and development funding as a long-term liability in the accompanying balance sheet. Royalties payable to Monsanto as described above will be charged against the liability in the period incurred. In the event the aggregate royalties to Monsanto exceeds $10 million, such amounts will be charged to expense as incurred. In exchange for a $7 million non-refundable license fee paid to Calgene, Monsanto received a royalty bearing license to Calgene technology to develop agronomically superior corn, soybean, canola and sunflower crops. The license fee was recorded as product development revenue in the accompanying Statement of Operations. 6. PGI-Kirin Partnership In March 1990 the Company and Kirin Brewery Co., Ltd. established PGI-Kirin Partnership ("PGK"), a joint venture to develop and commercialize new potato varieties. In January 1996 management decided to cease PGK operations and sell its remaining assets. Consequently, Calgene recorded an estimated net write-off of its investment in PGK of $982,000 in the third fiscal quarter of fiscal 1996. PGK's revenues in fiscal 1996 and fiscal 1995 were $1.6 million and $1.5, respectively. 7. Write-off of Assets and Restructuring Expenses During the fiscal year ended June 30, 1996, the Company recorded a charge of approximately $15.6 million for the write-off of assets, including $10.4 million primarily related to the merger of Calgene's tomato operations into Gargiulo. The write-off of tomato assets primarily reflects a $5.4 million asset impairment charge due to the consolidation of facilities and equipment and a $2.5 million write-off of obsolete technology licenses. The Company also recorded $1.5 million for the write-off of its investment in PG-K (before minority interest), and $1.0 million for the write-off of an option to a technology license the Company does not intend to exercise. As a consequence of the Company's decision in the third quarter of fiscal 1996 to reduce its emphasis on commodity distribution products at Calgene Chemical, the excess purchase price of net assets acquired associated with the commodity distribution business was written-down to net realizable value resulting in a $1.2 million expense. Pursuant to a plan approved by Calgene's Board of Directors in the quarter ended December 31, 1996, Gargiulo intends to significantly reduce its produce acreage in Southwest Florida. The reduction in acreage is in response to increased competitive pressure from Mexico produce and is expected to be accomplished over the next two to three years. As a consequence, during the quarter ended December 31, 1996, the Company recorded a charge of approximately $32.6 million for the write-off of assets, and other reserves. The write-offs include $9.4 million for the write-down of tomato germplasm, an $8.3 million asset impairment charge due to further consolidation of the Company's tomato packing facilities, and a $10.4 million charge related to the excess purchase price of net assets acquired allocated to the asset write-downs. The Company is actively seeking buyers for the packing facilities. In addition, a reserve of $4.5 million relating to other restructuring costs was recorded. CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 8. Long-term Debt and Notes Payable Long-term debt consists of the following at December 31, 1996 and June 30, 1996 and 1995:
(In thousands) December 31, June 30, June 30, 1996 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 $220,000 certificate of deposit and guaranteed by the Small Business Administration. $ 213 $ 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 $531,400 at December 31, 1996. 255 280 377 Capitalized lease obligations; due in monthly installments of approximately $86,000 including interest imputed at 5.4% to 11% per annum, through 2001; secured by equipment with a net book value of approximately $2,710,000 at December 31, 1996 and supported by a $150,000 which is secured by a $150,000 certificate ofdeposit. 2,581 6,030 2,960 Note payable to the former owner of an acquired business; due in an annual installment of $338,000 at July 17, 1997; plus interest on the unpaid principal balance at the prime rate (8.25% at December 31, 1996) over the term of the loan; secured by a $338,000 certificate of deposit. 338 592 705 Non-interest bearing note payable to the former owner of an acquired business; due in monthly installments of $14,083 through June 30, 1997. 84 169 338 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 December 31, 1996. 506 506 506
CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 8. Long-term Debt and Notes Payable (continued)
(In thousands) December 31, June 30, June 30, 1996 1996 1995 ------------ -------- -------- 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 $195,500 at December 31, 1996. $ 137 $ 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 December 31, 1996) per annum, through 2005, secured by buildings and equipment with a net book value of approximately $2,372,000 at December 31, 1996. 1,566 1,644 -- 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 December 31, 1996) through February 28, 2001, secured by assets with a net book value of approximately $11,537,000 at December 31, 1996 4,688 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 December 31, 1996) through February 28, 2001, secured by assets with a net book value of approximately $11,537,000 at December 31, 1996 3,724 4,162 -- Mortgage loan, payable in monthly principal and interest installments of $9,595 with interest at prime (8.25% at December 31, 1996), secured by assets with a net book value of approximately $753,000 at December 31, 1996 1,108 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 December 31, 1996), secured by assets with a net book value of approximately $1,184,000 at December 31, 1996 1,175 1,377 --
CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 8. Long-term Debt and Notes Payable (continued)
(In thousands) December 31, June 30, June 30, 1996 1996 1995 ------------ -------- -------- Term loan payable to former partner in acquired business, monthly principal and interest payments of $37,981, with interest at 10% $ 975 $ 1,149 $ -- Note payable to a corporate lender, due in monthly installments of $25,550 including interest at 10.38% per annum, through 1999, secured by assets with a net book value of approximately $481,000 at December 31, 1996 267 417 673 Various term loans payable with interest at rates that range from 8% to 12%. Maturity dates ranging from June 1998 through November 2001, secured by assets with a net book value of approximately $541,000 at December 31, 1996 1,717 1,794 -- 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 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% -- 9,070 -- Mortgage loan, payable in annual principal installments of $1,000,000 through August 1999, with interest at prime -- 4,000 -- Mortgage loan, payable in annual principal installments of $175,000, balance due November 30, 1996 -- 3,325 -- Mortgage loan, payable in annual principal installments of $153,333, balance due November 30, 1996 -- 2,147 -- Mortgage loan, payable in annual principal installments of $273,200, balance due on November 30, 1996 -- 1,658 -- Convertible note payable to a corporate lender; converted to equity on March 31, 1996 (Note 4). -- -- 10,000
CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 8. Long-term Debt and Notes Payable (continued)
(In thousands) December 31, June 30, June 30, 1996 1996 1995 ------------ -------- -------- 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 December 31, 1996) $24,760 $24,760 $ -- ------- ------- ------- 44,094 70,253 16,165 Less note payable to affiliate 24,760 24,760 -- Less amount due within one year 5,139 22,850 1,494 ------- ------- ------- Long-term debt $14,195 $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 December 31, 1996 aggregate future principal payments by year on long-term debt and note payable to affiliate are due as follows: (In thousands) 1997 $5,139 1998 3,848 1999 4,580 2000 27,795 2001 797 Thereafter 1,935 -------- $44,094 Notes Payable A $13 million bank line of credit is used to help finance working capital requirements for Calgene's subsidiaries, excluding Gargiulo. Borrowings under the line bear interest at the greater of one quarter percent over the bank's prime rate or two and one half percent over the federal funds rate. On December 31, 1996 the bank's prime rate was 8.25% and the federal funds rate was 6.26%. The weighted average annual interest rate under the line of credit was 8.62%, 8.90%, and 8.92% for the six month period ended December 31, 1996 and for the fiscal year ended June 30, 1996, and 1995, respectively. Borrowings are subject to certain financial covenants which include prohibiting the Company from paying cash dividends on its CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 8. Long-term Debt and Notes Payable (continued) Notes Payable (continued) common stock. Borrowings are secured by qualifying accounts receivable and inventory and must be repaid on a monthly basis to the extent they exceed qualifying accounts receivable and inventory. As of December 31, 1996, and June 30, 1995 there was $6,500,000 and $5,973,000, respectively, outstanding on the line of credit. During fiscal year 1996 the Company entered into a credit facility agreement with Monsanto. Monsanto is obligated, subject to certain terms and conditions, to lend up to $15 million annually for a period of three years to Calgene, although not more than $15 million may be outstanding at any one time. The credit facility agreement contains various covenants precluding Calgene and its subsidiaries from taking certain actions without the approval of Monsanto. Also, in the event of a default by Calgene, Monsanto has certain rights to convert the outstanding principal and interest under such agreement into additional shares of Calgene Common Stock, not to exceed 3,000,000 shares. The outstanding balance of this credit facility shall bear interest at two percent above the prime rate (aggregating 10.25% at December 31, 1996). This credit facility expires on September 30, 1998. As of December 31, 1996, the Company's advances under this credit facility had been paid in full. A $3.5 million line of credit with a bank is used to finance working capital requirements at Gargiulo's Puerto Rico operations. Borrowings under the line bear interest at prime. The credit line expires on September 30, 1997. On December 31, 1996, the bank's prime rate was 8.25%. As of December 31, 1996, there was $2,500,000 outstanding on the line of credit. 9. Commitments and Contingencies Leasing Arrangements The Company leases certain research and office equipment as well as office and research space. These leases are accounted for as follows in the accompanying consolidated financial statements: Capital Leases The following amounts are included in property, plant and equipment as assets recorded under capital leases: (In thousands) December 31, 1996 June 30, 1996 June 30, 1995 ----------------- ------------- ------------- Cost $4,235 $6,847 $4,192 Less accumulated depreciation 1,525 1,245 1,113 ------- ------- ------- $2,710 $5,602 $3,079 ====== ====== ====== Depreciation expense charged to operations pursuant to these capital leases amounted to approximately $294,000, $482,000, $537,000 and $462,000 during the six month period ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994 respectively. CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 9. Commitments and Contingencies (continued) Capital Leases (continued) During the six month period ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994, the Company capitalized equipment of approximately $334,000, $489,000, $1,506,000 and $773,000, respectively which represents the present value of the net minimum lease payments of capital lease obligations entered into during such fiscal periods. The future minimum lease payments by fiscal year under capital leases, together with the present value of the net minimum lease payments are as follows at December 31, 1996: (In thousands) 1997 $1,322 1998 621 1999 445 2000 555 2001 71 ------- 3,014 Less amount representing interest 433 Present value of net minimum lease payments (Note 8) $2,581 ====== Operating Leases Future minimum payments by fiscal year under non-cancelable operating leases are as follows at December 31, 1996: (In thousands) 1997 $ 6,379 1998 3,732 1999 3,153 2000 2,815 2001 1,436 Thereafter 637 -------- $ 18,152 ======== Rental expense charged to operations for all operating leases was approximately $3,445,000, $3,971,000, $3,259,000 and $1,761,000 for the six month period ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994, respectively. Rent expense related to leases with related parties was approximately $202,000 for the six month period ended December 31, 1996 and $143,000 for the year ended June 30, 1996. CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 9. Commitments and Contingencies (continued) Inventory Purchase Commitments In the normal course of business, the Company has entered into various grower contracts with third party growers. Pursuant to these contracts, the Company has agreed to purchase the resulting crop, subject to certain quality standards, at the end of the growing cycle which is generally less than one year. The amount of outstanding grower contract commitments is approximately $4.4 million at December 31, 1996. Patents Certain institutions and companies have been issued patents, have patent applications pending or have otherwise obtained proprietary rights to technology necessary or potentially useful to Calgene. These patents or patent applications, if patents are issued, could delay product introduction or preclude Calgene from using this technology without a license. The extent to which Calgene would be required to license such patents and cost and availability of such licenses are currently unknown. Legal Proceedings and Other Contingencies On or about January 29, 1997, Hanna Obstfeld filed suit in Delaware Chancery Court against the Company and certain of its directors alleging unfairness in connection with the proposed acquisition by Monsanto Company of those shares of the Company's common stock which Monsanto does not own. After Ms. Obstfeld brought her suit, other essentially identical actions followed, none of which have as yet been served upon the Company. It is anticipated that the complaints will shortly be consolidated and the Company has no obligation to answer, move or otherwise plead until such time as a consolidated complaint has been filed and served. No discovery has occurred to date in this action. The Company believes it has meritorious defenses to the allegations set forth in the pending complaints. On February 11, 1997, three named Plaintiffs filed a Class Action Complaint against Gargiulo, Inc. in the United States District Court for the Northern District of California, San Jose Division. The Complaint arose from the employment relationship between the named and unnamed Plaintiffs and Gargiulo, Inc. The Plaintiffs allege certain violations of the Migrant and Seasonal Agricultural Worker Protection Act ("MSPA"), California's IWC Wage Order, the California Labor Code and the California Business and Professions Code; and Breach of Contract. The Plaintiffs seek damages including all unpaid wages, statutory damages under the California Labor Code; a declaration that Gargiulo violated MSPA, monetary damages pursuant to MSPA; and for an order enjoining Gargiulo, Inc. from violations of MSPA. Gargiulo's insurance carriers were contacted regarding this lawsuit. As of March 27, 1997, Gargiulo has answered the Class Action Complaint, and is initiating discovery regarding class certificaiton. Gargiulo, Inc. is also waiting for the response from its insurance carrier. While the results of the Class Action Complaint cannot be predicted, the Company believes that the ultimate outcome will not have a material adverse effect on the Company's consolidated financial position or results of operations. From 1992 through early 1996, Calgene was engaged in a litigation with Enzo Biochem, Inc. ("Enzo") a company licensed under three related U.S. patents and counterpart foreign patents (the "Enzo Patents") which purported to cover the use of antisense technology in all cells, including plant cells. Some of Calgene's products, including the FLAVR SAVR tomato, use antisense technology. Enzo had claimed that Calgene infringed the Enzo Patents. Calgene denied infringement and challenged the validity of the Enzo Patents. On February 2, 1996, the District Court ruled that the Enzo Patents are invalid. In addition, the validity of a patent owned by Calgene directed to the use of antisense in plant cells was upheld by the District Court. Calgene subsequently requested that the court clarify certain aspects of the infringement portion of its decision, and the court has agreed to reconsider on this basis. There is no indication that the court would reverse any aspect of its original ruling. Meanwhile, Enzo has indicated that it intends to appeal the decision. Although the trial court has the option of altering any aspect of its decision upon reconsideration, and Enzo may appeal the decision after its publication, Calgene believes that further proceedings will not have a materially adverse effect on its consolidated financial position or results of operations, based on the trial court's determination that the SUNY/Enzo Patents are invalid and not infringed by Calgene and that the Calgene Antisense Patent is valid. Nevertheless, if on reconsideration or as a result of an appeal a court were to determine that one or more of the Enzo Patents validly covers plant cells and that such patents are infringed by Calgene's sales of products incorporating such antisense technology, Calgene could be held liable for significant damages and could be precluded from producing and selling the FLAVR SAVR tomato, as well as other products currently under development. There is no assurance that a license, if necessary, could be obtained by Calgene on commercially acceptable terms, if at all. If the court were to determine that the Calgene Antisense Patent is invalid or unenforceable, Calgene would be deprived of the competitive and licensing advantages afforded by its patent. Moreover, the Company would have to expense the capitalized legal fees related to the defense of the Calgene's Antisense Patent, which amounted to approximately $5.7 million at December 31, 1996. On October 18, 1995, two groups of Plaintiffs filed separate complaints against various Defendants including Gargiulo & Associates in the United States District Court for the Eastern District of California. Both complaints arose from the same set of facts and allege the same three theories of recovery. These actions were consolidated. The cases involve personal injury claims relating to vehicle accident in which numerous migrant labor workers being transported to the farm of Gargiulo & Dresick Associates (which was being farmed under contract by Dresick Farms, Inc.) were killed or injured. The two cases, Albertano Alberto Jimenez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vegas; Robles Rios; Jesus Loza and Samuel Santiago Vasquez, and Jose Vasquez; et al. v. Gargiulo & Associates; Pat Kreger, Inc., Manuel Vegas; Robles Rios; Jesus Loza and Samuel Santiago Vasquez, were both filed on October 18, 1995. The plaintiffs sought general damages, including compensation for pain and suffering; special damages, including past, present and future medical expenses; compensation for the loss of past and future income; and punitive damages in an unspecified amount. Gargiulo's insurance carriers have been contacted regarding these lawsuits. As of March 12, 1997, Gargiulo was granted its Motion for Summary Judgment as to all of the claims against it. This matter is now subject to appeal which must be filed by no later than 30 days from entry of judgment which will not occur for a few weeks. The Company is party to other pending litigation incidental to its business and has from time to time been notified of various claims that are not the subject of pending litigation. While the results of litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of all such other litigation matters and claims will not have a materially adverse effect on its consolidated financial position or results of operations. Employment Agreements Calgene has various employment and consulting agreements with certain key individuals. The aggregate fixed commitment under these agreements is $2,125,000. In addition, one employment agreement provides for additional compensation based on a percentage of the net profit of Gargiulo. 10. Shareholders' Equity Stock Options At December 31, 1996, the Company has three stock-based compensation plans, which are described below. The Company applies APB 25 and related interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing the stock options. Under APB 25, because the CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 10. Shareholders' Equity (continued) Stock Options (continued) exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company established stock option plans in June 1991 (the "1991 Plan") and March 1996 (the "1996 Plan"), under which all officers, employees and directors of the Company may participate. Either incentive stock options or non-qualified stock options can be granted under both plans. 2,500,000 and 5,000,000 shares of the Company's common stock have been reserved for issuance under the 1991 Plan, and the 1996 Plan, respectively. Options granted under the plans generally have a term of ten years from the date of grant. The exercise price of incentive stock options granted under the plans may not be less that 100% of the fair market value of Calgene's common stock on the date of grant. The administrative committee of the option plans has the authority to provide that options issued may be exercised by either (1) cash, (2) surrender by the optionee of other shares of common stock of the Company of a value equal to the exercise price of the shares as to which the option is being exercised, or (3) the optionee's issuance of an interest-bearing, full-recourse promissory note. The Company also has a 1981 Stock Option Plan having terms generally similar to the 1991 Plan. The 1981 Plan has been terminated subject to the rights of holders of outstanding options. Pro forma information regarding net loss and net loss per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to June 30, 1995 under the fair value method of that Statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the year ended June 30, 1996, and the six month period ended December 31, 1996: dividend yield of 0; volatility factors of the expected market price of the Company's common stock of .44; risk-free interest rate of 6.6%; and a weighted-average expected life of the options of 3.5 years for certain option holders and five years for all other option holders. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information, which includes the stock option plans and the Employee Stock Purchase Plan, follows (in thousands except for net loss per share information): Six Months Ended Year Ended December 31, 1996 June 30, 1996 ----------------- ------------- Net loss - actual $ (63,934) $ (97,014) Net loss - pro forma (65,085) (97,564) Net loss per share - actual (1.03) (2.56) Net loss per share - pro forma (1.05) (2.58) CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 10. Shareholders' Equity (continued) Stock Options (continued) Because SFAS 123 is applicable only to options granted subsequent to June 30, 1995, its pro forma effect will not be fully reflected until 1999. A summary of the status of the Company's stock option plans and changes during the periods is presented below:
Options --------- 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) Weighted-Average Exercised (at $5.875 to $12.375) (61,457) Exercise Price ----------- -------------- Outstanding at June 30, 1995 2,265,278 $ 7.57 Granted 2,000,929 5.72 Canceled (567,502) 7.47 Exercised (at $6.50) (6,182) 6.50 ----------- Outstanding at June 30, 1996 3,692,523 6.56 Granted 1,386,350 5.25 Canceled (135,327) 6.63 --------- Outstanding at December 31, 1996 4,943,546 6.18 =========
The weighted-average fair value of options granted during the six month period ended December 31, 1996, and the year ended June 30, 1996, was $2.37 and $2.54, respectively. The following table summarizes information about the stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ----------------------------------------------- ------------------------------ Weighted- Weighted- Weighted- Average Average Average Number of Contractual Exercise Number of Exercise Range of Exercise Prices Options Life Price Options Price ------------------------- ----------------- ------------- ------------- --------------- ------------- $4.63 - $5.49 1,645,587 9.37 $5.23 225,147 $5.22 5.50 - 5.99 1,647,082 9.31 5.76 311,044 5.75 6.00 - 6.99 304,973 5.35 6.67 212,403 6.76 7.00 - 7.99 1,187,586 6.91 7.50 710,719 7.51 8.00-15.25 158,318 6.50 9.65 124,558 9.92 ---------- -------- 4,943,546 6.18 1,583,871 6.93 ========= =========
CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 10. Shareholders' Equity (continued) Stock Options (continued) At June 30, 1995, 814,421 options were exercisable at prices ranging from $5.25 to $15.25 per share. At June 30, 1996, 1,088,775 options were exercisable at prices ranging from $4.75 to $15.25 per share. At December 31, 1996, there are 404,917 shares and 2,138,072 shares available for grant under the 1991 plan and 1996 plan, respectively. Of the options outstanding at December 31, 1996, options to purchase 1,583,871 shares were immediately exercisable at prices ranging from $4.75 to $15.25 per share on dates ranging from 1996 to 2006. In November 1994, the Board of Directors approved an amendment to all outstanding options held by employees of the Company under the 1991 plan with exercise prices in excess of $7.50 per share. The amendment allowed employees to elect to reduce the option exercise price to $7.50 per share in exchange for an extended vesting period. A total of 1,268,081 options with option prices ranging from $7.75 to $16.00 were repriced. Employee Stock Purchase Plan The Company established a stock purchase plan in March 1990 (the "1990 Plan") under which most employees of the Company may participate. A total of 500,000 shares of the Company's common stock have been reserved for issuance under the 1990 Plan. The 1990 Plan is administered by the Board of Directors or by a committee appointed by the Board of Directors. Employees can elect to have from two to ten percent of their monthly gross salary deducted during each offering period and applied to the purchase of stock. The purchase price is an amount equal to 85% of the fair market value of a share of common stock of the Company on the enrollment date or on the purchase date, whichever is lower. During the fiscal years ended December 31, 1996, June 30, 1996, 1995 and 1994, the Company sold 21,521 shares of common stock for $91,464, 31,593 shares of common stock for $166,183, 31,462 shares of common stock for $216,179, and 23,045 shares of common stock for $223,144, respectively. For purposes of calculating the pro forma disclosures required by SFAS 123, the fair value of the employees' purchase rights was estimated using the Black-Scholes option pricing model with the following assumptions for the six month period ended December 31, 1996 and the year ended June 30, 1996: dividend yield of 0; expected life of 6 months; expected volatility of .33; and risk-free interest rate of 5.81%. The weighted-average fair value of those purchase rights granted during the six month period ended December 31, 1996 and the year ended June 30, 1996, was $1.60 and $1.97, respectively. 11. Income Taxes The income tax provision for the six month period ended December 31, 1996 and years ended June 30, 1996, and 1995 is comprised of state franchise taxes. Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes are as follows: CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 11. Income Taxes (continued)
(In thousands) --------------------------------------------------- December 31, June 30, June 30, 1996 1996 1995 ---------------- --------------- ---------------- Deferred tax assets: Net operating loss carryforwards $ 85,200 $ 70,600 $ 66,200 Research and other credits 3,800 3,800 3,800 Capitalized research and development 400 400 400 Inventory reserves and allowances 1,000 1,500 -- Facility writedowns and restructuring 9,400 6,400 300 Development fee 4,000 4,000 -- Capitalized license fees 400 600 700 Increase in tax value of net assets from business acquisition 15,000 4,200 -- Other, net 800 1,800 1,600 -------- -------- -------- Total deferred tax assets 120,000 93,300 73,000 Valuation allowance for deferred tax assets (118,400) (91,500) (72,800) --------- --------- --------- Net deferred tax assets $ 1,600 $ 1,800 $ 200 ======== ======== ======== Deferred tax liabilities: Depreciation $ 1,600 $ 1,800 $ -- Other, net -- -- 200 -------- -------- -------- Total deferred tax liabilities $ 1,600 $ 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 December 31, 1996, the Company has a net operating loss carryover of approximately $234 million which expires between 1997 and 2012 and a general business tax credit carryover of approximately $4 million which expires between 1997 and 2012. In addition, as of December 31, 1996, the Company has a net operating loss carryover of approximately $143 million for state income tax purposes which expires between 1997 and 2012. Approximately $20 million and $3 million of the federal and state net operating loss carryovers, respectively, and $700,000 of the general business tax credit carryover, were generated by Plant Genetics prior to its merger with Calgene. Such net operating loss and general business tax credit carryovers are available only to offset the separate federal and state taxable income, if any, of Calgene Fresh (Plant Genetics was renamed Calgene Fresh in January, 1992). For financial reporting purposes, a valuation allowance of approximately $118.4 million has been recognized to offset the deferred tax assets related to all of the aforementioned carryforwards. CALGENE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and June 30, 1996, 1995 and 1994 11. Income Taxes (continued) Because of "change in ownership" provisions of the Tax Reform Act of 1986, a portion of the Company's federal net operating loss and credit carryovers will be subject to an annual limitation regarding their utilization against taxable income in future periods. The Company expects that this annual limitation will not have a material adverse effect on the Company's ability to utilize the net operating loss and credit carryovers prior to the expiration of the carryover periods. 12. Tax Deferred Investment Plan Substantially all full-time employees of the Company are eligible to participate in a tax deferred investment plan (the "401(k) Plan"). The 401(k) Plan permits each employee to contribute 2% to 15% of compensation on a pre-tax basis, to a maximum amount per calendar year. For the six month period ended December 31, 1996 and the years ended June 30, 1996, 1995 and 1994, matching contributions by the Company were $118,000, $227,000, $179,000 and $151,000, respectively. 13. Subsequent Events In January 1997, the Company received an unsolicited proposal from Monsanto to acquire all of the outstanding shares of the Company's stock that Monsanto does not already own at a price of $7.25 per share. Monsanto currently owns approximately 54.6% of the Company's outstanding shares. The proposal is under consideration by a special committee of three disinterested Calgene Directors. In February 1997, the Company replaced its $13 million bank line of credit with a $20 million bank line of credit with a different bank. The bank line is used to help finance working capital requirements for Calgene. Borrowings are secured by accounts receivable, inventory and equipment. The line of credit expires on December 1, 1999. Available credit increases to $30 million after December 31, 1997 and to $40 million after December 31, 1998.
CALGENE, INC. SELECTED QUARTERLY FINANCIAL DATA Unaudited Six Month Period Ended December 31, 1996 - - -------------------------------------------- (In thousands, except per share amounts) Quarter Ended ---------------------------------- Sep 30 Dec 31 -------------- --------------- Revenues: Product sales $ 36,821 $ 32,959 Product development 359 370 --------- --------- Total revenues $ 37,180 $ 33,329 Cost of goods sold $ 38,883 $ 33,159 Net loss $ (17,854) $ (46,080) Net loss per share $ (.30) $ (.72) 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 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Board of Directors of Calgene, Inc. (the "Company") is as follows:
Name Age Principal Occupation Director Since Patrick J. Fortune.........49 Chief Information Officer of Monsanto Company 1996 Robert T. Fraley...........43 President of Ceregen (a business unit of Monsanto Company) 1996 Michael R. Hogan...........43 Vice President and Corporate Controller of Monsanto Company 1996 Lloyd M. Kunimoto..........43 President and Acting Chief Executive Officer of the Company 1996 Howard D. Palefsky.........49 Chairman of Collagen Corporation 1986 John E. Robson.............66 Senior Advisory of Robertson, Stephens & Company 1996 Roger H. Salquist 55 Principal of the Craves Group; Former Chairman and Chief Executive Officer of the Company 1981 Allen J. Vangelos..........64 President and Chief Executive Officer of Calavo Growers of 1994 California Hendrik A. Verfaillie......51 Executive Vice President of Monsanto Company 1996
There is no family relationship between any director and any other director or executive officer of the Company. Mr. Fortune was appointed Corporate Vice President, Information Technology and Chief Information Officer of Monsanto Company in October 1995. From August 1994 to August 1995, Mr. Fortune was president and Chief Operating Officer of Coram-Healthcare Corporation, whose business is home infusion therapy for cancer and AIDS patients. From 1991 to 1994, Mr. Fortune was Corporate Vice President, Information Management for Bristol-Meyers Squibb. From 1989 to 1991, Mr. Fortune was Senior Vice President and General Manager of Packaging Corporation of America, prior to which he served as Vice President, Information Services and Corporate Vice President of the Parenterals Group of Baxter International. He is also a member of the Board of Directors of Parexel Corporation, a clinical research organization, and serves on the Board of Visitors of the School of Physical Sciences at the University of Chicago. Mr. Fraley was named President of Ceregen, a business unit of Monsanto, in 1995. From 1993 to 1995, Mr. Fraley was Vice President, New Products Division, of the Monsanto Agricultural Products Group. From 1990 to 1993, Mr. Fraley was Vice President, Research and Development, New Products Division, of the Monsanto Agricultural Products Group. Mr. Fraley is a director of Dekalb Genetics Corp., an agricultural products company. Mr. Hogan was appointed Corporate Vice President and Corporate Controller of Monsanto Company in January 1996. From 1986 to 1995, Mr. Hogan was Executive Vice President of General American Life and while holding such position also served as president and Director of Gencare Health Systems, Inc. and its predecessor organization from 1990 through 1994. Mr. Kunimoto has been the President and Acting Chief Executive Officer of the Company since July 1996. From June 1995 to July 1996, Mr. Kunimoto served as Vice President of Strategic Planning and Business Development. From November 1983 to June 1995, Mr. Kunimoto served in several senior management positions with the Company. Mr. Palefsky has been Chairman of Collagen Corporation, a medical products company, since 1995. Mr. Palefsky was Chief Executive Officer of Collagen Corporation, from 1978 to 1997 and served as president from 1978 to 1995. He is also a director of Target Therapeutics, Inc. and Innovasive Devices, Inc., both medical products companies. Mr. Robson has been a Senior Advisor of Robertson, Stephens & Company since 1993. From 1989 to 1992, Mr. Robson was Deputy Secretary of the United States Treasury. Mr. Robson is also a director of Monsanto Company, a chemicals, pharmaceuticals and agricultural products company, Northrop Grumman Corporation, an aerospace and defense company, and Security Capital Industrial Trust, a real estate investment trust. Mr. Salquist has been a principal of the Craves Group, a private merchant bank since February 1997. Mr. Salquist had previously served as an executive officer of the Company since September 1983 and its Chief Executive Officer since November 1985. Mr. Salquist is a director of Collagen Corporation, a medical products company. Mr. Vangelos has been the President and Chief Executive Officer of Calavo Growers of California since September 1986, prior to which he held management positions at Castle & Cooke, including Vice President and General Manager of Processed Products and President of International Diversified Business and Fresh Marketing. From 1980 to 1984, he was the Chief Executive Office of Impact corporate Group, a food brokerage company. Mr. Vangelos was the 1993 Chairman of the Board of Directors of the Agricultural Council of California and a past Chairman of the United Fresh Fruit and Vegetable Association. Mr. Verfaillie was appointed an Executive Vice President of Monsanto Company in July 1995. Prior to this he served as President of The Agricultural Group, Vice President and Advisory Director--Monsanto Company from 1993 to 1995, Vice President and General Manager, Roundup Division--The Agricultural Group from 1990 to 1993, and Vice President-Commercial Development--Monsanto Agricultural Company from 1986 to 1990. Board Meetings, Committees and Director Compensation The Board of Directors of the Company (the "Board") held five meetings during the six month fiscal period ended December 31, 1996. No nominee attended fewer than 75% of the meetings of the Board of Directors and of the committee of the Board on which he served that were held during the period of the director's service. The Board has an Audit Committee, a Human Resources Committee and a Replacement/Retention Committee. From time to time, the Board has created various ad hoc committees for special purposes. The Audit Committee consists of Messrs. Salquist, Fortune, Fraley, and Hogan. The Audit Committee held three meetings in the last fiscal period. The Audit Committee recommends engagement of the Company's independent auditors and is primarily responsible for approving the services performed by the Company's independent auditors and for reviewing and evaluating the Company's accounting principles and its system of internal accounting controls. The Human Resources Committee consists of Messrs. Vangelos, Verfaillie, Palefsky and Robson. The Human Resources Committee held two meetings during the fiscal period. The Human Resources Committee considers and makes recommendations to the Calgene Board of Directors concerning general compensation policies and employee benefit plans and specifically recommends salary levels and bonus awards for certain senior executive officers, including the Chief Executive Officer. The Human Resources Committee also administers Calgene's stock option plans and has sole authority to grant options to officers. The Retention/Replacement Committee consists of Messrs. Palefsky, Verfaillie and Robson. The Retention/Replacement Committee is responsible for the retention and/or replacement of all of the executive officers of the Company. Under the terms of the Restated Stockholders Agreement, the Retention/Replacement Committee was eliminated, thus leaving the Calgene Board of Directors thereafter responsible for the retention and/or replacement of all of the executive officers of the Company. Directors who are not also employees of the Company or Monsanto or their subsidiaries receive a fee of $1,000 per meeting ($250 per telephone meeting) attended, $500 per Board committee meeting attended (unless held on the same day as a Board meeting) and a monthly retainer of $1,000, plus out-of-pocket travel expenses. Prior to April 1, 1996 directors received an annual retainer of $3,000 (accruing and payable $250 per month). Under the 1996 Stock Option Plan, non-employee directors (excluding directors employed by Monsanto) receive an option to purchase 10,000 shares of Common Stock at the time of their initial election to the Board, and receive annually thereafter options to purchase 3,000 shares of Common Stock. These automatically granted options have terms of five years (subject to continued service on the Board), become exercisable in equal monthly increments over the twelve months following the respective grant dates and have exercise prices equal to the fair market value of the Common Stock on their dates of grants. On March 25, 1996, annual options were automatically granted to each of the nonemployee directors then serving (excluding directors employed by Monsanto) at an exercise price of $6.00 per share. There we no consulting fees paid to directors in the six month fiscal period ended December 31, 1996. In addition to the fees listed above, Monsanto Company transferred to Mr. Robson 15,000 shares of Common Stock of the Company pursuant to the terms of a letter agreement dated May 6, 1996 between John E. Robson and Monsanto Company. Such shares are subject to a three-year vesting period, under which 33 1/3% of the total number of shares originally granted become non-forfeitable on each March 31 commencing March 31, 1997. ITEM 11. EXECUTIVE COMPENSATION Summary of Cash and Other Compensation The following table provides certain summary information concerning compensation earned during the last two fiscal years and the six month fiscal period ended December 31, 1996 by the Company's Chief Executive Officer and each of the four other most highly compensated executive officers of the Company who were serving at December 31, 1996 (the "named executive officers"). The table also includes such information for one former executive officer who at December 31, 1996 was no longer employed by the Company or a subsidiary of the Company. SUMMARY COMPENSATION TABLE
Long-Term Compensation Compensation (1) Awards ----------------------------------------- ---------------- Other Annual Securities All Other Fiscal Salary Bonus Compensation Underlying Compensation Name and Principal Position Period (7) ($) ($) ($) Options (#) $(2) --------------------------- -------------- ------------ --------- ---------------- ---------------- ----------------- Roger H. Salquist (3)(4) Transition 61,346 -- 905,000 -- 423 Former Chairman of the 1996 275,577 -- -- -- 3,596 Board and Chief Executive 1995 242,404 -- -- 100,000 1,212 Officer 1994 225,865 -- -- 104,762 -- Andrew M. Baum Transition 81,231 -- -- -- 738 Vice President 1996 160,046 -- -- 40,000 3,280 1995 162,600 10,000 -- 25,000 840 1994 154,592 -- -- -- -- Jeffrey D. Gargiulo Transition 165,125 -- -- -- -- Chief Executive Officer 1996 75,000 -- -- 100,000 -- Gargiulo, Inc. Lloyd M. Kunimoto (5) Transition 97,615 -- -- -- 985 Chief Executive Officer 1996 140,000 50,000 -- 50,000 2,800 1995 140,538 10,000 -- 25,000 754 1994 135,519 4,808 -- -- -- Christian Leleu (6) Transition 73,673 -- 23,321 -- 1,227 Chief Financial Officer 1996 35,000 -- 90,834 100,000 -- Richard Stonard Transition 76,154 -- -- -- 1,500 Chief Technical Officer 1996 37,500 -- -- 100,000 --
(1) Includes amounts earned in the fiscal year even if paid in the subsequent fiscal year or deferred pursuant to the Company's 401(k) savings plan. Excludes amounts paid during the fiscal year that were earned in a prior year. (2) Amounts reported as "All Other Compensation" represent the Company's matching contributions under its 401(k) savings plan. (3) The options shown in the table as granted to Mr. Salquist in fiscal 1994 were originally granted in 1987 for a six-year term and extended for four additional years in fiscal 1994. (4) In August 1996, Mr. Salquist resigned as Chairman of the Board and Chief Executive Officer. Mr. Salquist remains as a member of the Board and has also become a consultant to the Company. See "Executive Compensation--Change of Control Employment Agreements." (5) Since the resignation of Mr. Salquist, Mr. Kunimoto served as Acting Chief Executive Officer. (6) Mr. Leleu's "other annual compensation" in the transition period and fiscal 1996 consisted of reimbursement of relocation expenses. (7) The "Transition" fiscal period is for the six month period ended December 31, 1996. Change of Control Employment Agreements Mr. Salquist entered into a Change of Control Employment Agreement, dated as of July 19, 1995, with the Company. The agreement became effective only upon a Change of Control (as defined) of the Company and provides that, if the employment of the officer is terminated by the Company without Cause (as defined) or by the officer for Good Reason (as defined) within the three-year term of the agreement or if he resigns upon the six-month of three-year anniversaries of the effective date of the agreement, the officer shall receive severance benefits that include a payment equal to 2.99 times his base salary and average bonus for the prior three fiscal years. For purposes of such agreements, a Change of Control included the closing of the transaction on March 31, 1996 pursuant to which Monsanto Company acquired a 49.9% equity interest in the Company. In connection with his resignation in August 1996, Mr. Salquist and the Company entered into an amendment to his Change of Control Employment Agreement pursuant to which Mr. Salquist agreed that payments required to be made to him under such agreement would be paid over a 13 month period rather than in a lump sum. The amended agreement provided for the payment of $315,000 upon Mr. Salquist's resignation and monthly payments of $25,000 during a 12 month consulting period and an additional payment of $290,000 at the end of the 12 month period. On May 31, 1996, Mr. Motroni and the Company entered into an amendment to his Change of Control Employment Agreement pursuant to which Mr. Motroni agreed to remain in the employ of the Company until the earlier of (i) May 31, 1997, or (ii) the occurrence, after May 31, 1996, of any event that constitutes Good Reason (as defined) in consideration of the Company's payment to Mr. Motroni or $100,000. In addition, the amended agreement provides for the payment to Mr. Motroni of $335,000 upon the earliest of (i) the cessation of his employment for any reason after May 31, 1997, (ii) the termination of his employment without Cause (as defined) or by reason of death, or (iii) his resignation as a result of the occurrence of any event that constitutes Good Reason. Stock Option Tables No stock options were granted in the six month fiscal period ended December 31, 1996 to the named executive officers in the Summary Compensation Table. Options Exercises and Fiscal Period-End Values The following table shows stock options exercised by the named executive officers in the Summary Compensation Table during the six month fiscal period ended December 31, 1996, the aggregate value of gains on the dates of exercise, the number of shares covered by both exercisable and non-exercisable stock options as of fiscal year-end, and the year-end values for such options.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values Number of Shares Underlying Value of Unexercised Unexercised Options at In-the-Money Options at December 31, 1996 (#) December 31, 1996 ($)(1) ------------------------------ ------------------------------- Shares Value Acquired on Realized Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable -------------- ------------- ------------- --------------- ------------- ---------------- Roger Salquist -- -- 217,262 77,500 -- -- Andrew M. Baum -- -- 45,098 54,902 -- -- Jeffrey Gargiulo -- -- 11,667 88,333 -- -- Lloyd M. Kunimoto -- -- 35,848 64,152 -- -- Christian Leleu -- -- 6,667 93,333 -- -- Richard Stonard -- -- 18,333 81,667 930 3,720
(1) Value is based on market value of the Common Stock at exercise date (for value realized), or at December 31, 1996 (for value of unexercised options), minus the option exercise price. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth the beneficial ownership of Common Stock of the Company as of February 28, 1997, by each director, by each executive officer shown in the Summary Compensation Table (see "Executive Compensation"), by all directors and executive officers as a group and by each person known by the Company to be a beneficial owner of more than 5% of the shares outstanding.
Shares Beneficially Approximate Owned (1) Percent Owned (2) --------------------- ------------------- Andrew M. Baum .................................................. 57,780 * Patrick J. Fortune .............................................. -- -- Robert T. Fraley ................................................ -- -- Jeffrey D. Gargiulo ............................................. 16,667 * Michael R. Hogan ................................................ -- -- Lloyd M. Kunimoto ............................................... 42,226 * Christian Leleu ................................................. 30,833 * Howard D. Palefsky .............................................. 17,000 * John E. Robson .................................................. 30,000 * Roger H. Salquist ............................................... 248,340 * Richard Stonard ................................................. 23,333 * Allen J. Vangelos ............................................... 21,600 * Hendrik A. Verfaillie ........................................... -- -- All executive officers and directors as a group (16 persons) .... 598,654 * Monsanto Company................................................. 36,396,114 54.5% 800 North Lindbergh Boulevard St. Louis, MO 63137 Travelers Group Inc.............................................. 4,076,654 6.1% 388 Greenwich Street New York, NY 10013(3)
* Less than 1%. (1) The Company believes that all beneficial owners named in the table have sole voting and investment power with respect to the shares they beneficially own. The shares shown in the table to be beneficially owned include any shares that the person has the right to acquire within 60 days of January 31, 1997, by exercise of any stock option for which the Company has knowledge. The shares subject to such options are as follows: Mr. Baum; 49,079: Mr. Gargiulo; 16,667: Mr. Leleu; 20,833: Mr. Stonard; 23,333: Mr. Kunimoto; 35,329: Mr. Palefsky; 17,000: Mr. Robson; 15,000: Mr. Salquist; 224,762: Mr. Vangelos; 21,000: and all executive officers and directors as a group; 531,804. (2) Percent of the 66,729,861 outstanding shares of Common Stock, counting as outstanding for each named person all shares issuable to such person on exercise of options that are included in the first column. (3) Based on a Schedule 13G filed on January 22, 1997, with respect to beneficial ownership as of December 31, 1996. The total includes 4,076,654 shares beneficially owned by Smith Barney Holdings Inc. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Agreements with Monsanto Reorganization Agreement. On October 13, 1995, the Company and Monsanto entered into an Agreement and Plan of Reorganization ("Reorganization Agreement") and certain other agreements whereby Monsanto contributed all of the outstanding shares of capital stock of Tomato Investment Associates, Inc., a wholly-owned subsidiary of Monsanto ("TIA"), whose principal asset was the entire equity interest in Gargiulo, L.P., $30 million in cash and certain technology licenses in exchange for a 49.9% equity interest in the Company. In connection with the Reorganization Agreement, a total of 30,146,114 shares of Common Stock of the Company were issued to Monsanto. The Reorganization Agreement was approved by the stockholders of the Company on March 25, 1996. On March 31, 1996 (the "Effective Time"), the Company and Monsanto consummated the transactions contemplated by the Reorganization Agreement which included entering into the agreements discussed below. Subsequent to the Effective Date, Gargiulo L.P. was merged into TIA and TIA changed its name to "Gargiulo, Inc." Stock Purchase Agreement. On September 27, 1996, the Company entered into a Stock Purchase Agreement with Monsanto (the "Stock Purchase Agreement"), pursuant to which (i) the Company sold and issued to Monsanto, and Monsanto purchased 6,250,000 shares of Common Stock of the Company (the "Additional Shares"), at $8.00 per share, for an aggregate purchase price of $50 million, thereby increasing Monsanto's ownership interest in shares of Calgene Common Stock from 49.9% to approximately 54.6% (without giving effect to the exercise of outstanding options and warrants), (ii) Monsanto and Calgene agreed to enter into a Restated Stockholders Agreement ("Restated Stockholders Agreement") amending and restating the Stockholders Agreement dated March 31, 1996 ("Stockholders Agreement"), and (iii) the Restated Certificate of Incorporation was amended to reflect the amendments to the Stockholders Agreement contemplated by the Restated Stockholders Agreement. As a consequence of the transaction, Monsanto owned approximately 36,396,114 shares of Common Stock of the Company, representing approximately 54.6% of the issued and outstanding shares of Common Stock of the Company. Stockholders Agreement and Restated Stockholders Agreement. On March 31, 1996, the Company and Monsanto entered into a Stockholders Agreement. On November 12, 1996, Calgene and Monsanto entered into the Restated Stockholders Agreement which amends and restates the existing Stockholders Agreement. The following is a summary of the Stockholders Agreement as amended by the Restated Stockholders Agreement ("the Stockholders Agreement"). Composition of the Calgene Board. Composition of the Calgene Board and the manner of selecting members thereof shall be as follows: (a) Until otherwise changed in accordance with the Restated Stockholders Agreement, the Board of Directors of Calgene shall be comprised of nine Directors consisting of one Company Management Director, three Independent Directors and five Directors designated by Monsanto, at least one of which shall be an Independent Director. (b) At any time that Monsanto's Percentage Interest is at least seventy percent (70%), Calgene shall nominate (i) six directors designated by Monsanto which shall consist of one Company Management Director and five Monsanto directors (including at least one Independent Director) and (ii) three Independent Directors. At such time as Monsanto's Percentage Interest is at least ninety-nine percent (99%), Calgene shall nominate nine directors designated by Monsanto. If an when Monsanto's Percentage Interest is less than 40%, 20%, 10% or 5%, the number of directors designated by Monsanto is reduced to three, two, one and zero, respectively. The Stockholders Agreement also provides that the Board of Directors, by unanimous action, may increase the number of directors comprising the Board and may elect, or nominate for election, the director(s) to fill the vacancy or vacancies created by such increase. Registration Rights. The Stockholders Agreement provides Monsanto and certain assignees may, subject to certain conditions and limitations, require Calgene, whether or not Calgene proposes to register its Common Stock for sale, to register with the Securities and Exchange Commission all or part of the shares held by Monsanto. The Restated Stockholders Agreement provides that the Additional Shares acquired by Monsanto pursuant to the Stock Purchase Agreement shall also be entitled to these registration rights. Calgene is not required to effect such a registration prior to September 30, 1998, unless an event of default has occurred and is continuing under the Credit Agreements. See "Certain Transactions--Credit Agreements." Anti-Dilution Rights. If at any time Calgene agrees to sell shares of Calgene Common Stock or other securities having the right to vote generally in any election of directors of Calgene (collectively, "Calgene Securities") in a private or public offering (other than pursuant to Calgene stock option plans), Monsanto is entitled to notice of such proposed sale and has the right, but not the obligation, to acquire all or any portion of the Calgene Securities to be offered for sale sufficient for Monsanto to maintain, after the consummation of the proposed offering, the same percentage of ownership of Calgene Securities as Monsanto possessed immediately prior to such offering. With respect to shares of Calgene Securities issued pursuant to Calgene's stock option plans, Monsanto shall have the right to maintain its percentage ownership of issued and outstanding Calgene Securities by making open market purchases in accordance with the Stockholders Agreement. This provision is unchanged by the Restated Stockholders Agreement. Limitations on Monsanto's Ownership of Calgene Securities. The Stockholders Agreement provides that until September 30, 1998 Monsanto may not increase its Percentage Interest above 54.6% except in limited circumstances such as: (a) conversion of principal and/or interest under the Credit Agreements; (b) issuance of Calgene Securities in an asset sale by Monsanto to Calgene; (c) A tender offer for 100% of the publicly held shares, provided that the price must be approved by disinterested directors and supported by a fairness opinion by an investment banking firm. Limitations on Monsanto's Resale of Calgene Securities. Monsanto shall not, directly or indirectly, sell any Calgene Securities (other than to an affiliate) except as follows: (a) on and after March 31, 1997, Monsanto may sell Calgene Securities (i) as part of a joint venture, merger or sale of all or substantially all of its current Crop Protection business unit, as such business may be subsequently renamed or reorganized, or (ii) pursuant to a tender offer by a third party to the stockholders of Calgene; (b) after September 30, 1998, in addition to the rights set forth in (a) above, Monsanto may sell Calgene Securities (ii) in a registered public offering pursuant to the registration rights granted to Monsanto under the Stockholders Agreement; (ii) through sales pursuant to Rule 144 under the Securities Act of 1933 (the "Securities Act"); (iii) through sales of not more than 10% of the total issued and outstanding Calgene Securities to a Non-Financial Purchaser (as defined in the Stockholders Agreement); or (iv) through sales to a Financial Purchaser (as defined in the Stockholders Agreement); (c) after September 30, 1999, in addition to the rights set forth in (a) and (b) above, Monsanto may sell Calgene Securities through a private sale of 35% or more of the total issued and outstanding Calgene Securities to a Non-financial Purchaser under circumstances where such third party assumes the applicable and proportionate rights and obligations of Monsanto under the Stockholders Agreement and the other transaction agreements; and (d) notwithstanding the foregoing, at any time, Monsanto may sell Calgene Securities issued to Monsanto upon conversion by Monsanto of principal or accrued interest under the Credit Agreements after the occurrence of an event of default (see "Certain Transactions--Credit Agreements" ). Approval Required for Certain Actions. The Restated Stockholder Agreement provides that: (a) Until the earlier of (i) March 31, 1999 or (ii) such time as Monsanto's Percentage Interest is at least seventy percent (70%), a majority of the Calgene Board, including at least two Company Directors, shall be required to approve any of the following: (i) the entry by the Company or any of its Affiliates into any merger or consolidation or the acquisition by the Company or any of its Affiliates of any business or assets that would constitute more than 10% of the Company's total assets determined on a consolidated basis (a "Substantial Part"); (ii) the sale, pledge, grant of security interest in transfer, retirement or other disposal of a Substantial Part of the Company, except pursuant to a security interest granted in connection with borrowings permitted under the Restated Stockholders Agreement or the pledge or granting of a security interest in certain intangible property as further described in the Restated Stockholders Agreement; (iii) the establishment of any new committees of the Calgene Board or new or revised delegations of Calgene Board authority to any Calgene Board committee or changes or revisions to general delegations of authority to officers or other persons for categories of expenditures; (iv) the election, appointment or removal of the Chief Executive Officer, Chief Operating Officer or Chief Financial Officer of the Company and its successors and the establishment of its annual or long-term compensation level and benefits (other than agreements in effect at the Effective Time); provided, however, that Monsanto shall have the right to select the Chief Technical Officer of the Company and a controller reporting to the Chief Financial Officer of the Company; (v) approval of the Operating Plan and Strategic Plan of the Company and its Affiliates, as well as the annual operating plan and long-term strategic plan for the Gargiulo business, to be submitted to the Calgene Board annually for approval, and any material changes thereto; (vi) any modification of the Transaction Agreements; or (vii) any transaction between the Company (and its Affiliates) and Monsanto or any Affiliate of Monsanto. (b) From and after March 31, 1999, and until Monsanto's Percentage Interest is at least 99%, neither Monsanto nor any of the Affiliates shall enter into any transaction with Calgene or any of its Affiliates without the approval of at least two Company Directors. Credit Agreements Calgene Credit Facility Agreement On March 31, 1996, Monsanto and Calgene entered into the Calgene Credit Facility Agreement pursuant to which Monsanto shall, during the Commitment Period (as hereinafter defined), and subject to the terms and conditions contained therein, make, at the request of Calgene, three consecutive one-year loans of up to $15 million each (each a "Calgene Loan" and together the "Calgene Loans"), collectively totaling not more than $45,000,000. At no time shall the outstanding principal of all Calgene Loans exceed $15 million. Prior to the occurrence of an Event of Default (as defined in the Calgene Credit Facility Agreement), Calgene may borrow, repay and reborrow under each Calgene Loan, each such borrowing or reborrowing being an "Advance." The "Commitment Period" began on March 31, 1996 and ends on the earlier of September 30, 1998, or such earlier time that Monsanto terminates its obligations to make further Advances under the Calgene Credit Facility Agreement. The Calgene Loans made pursuant to the Calgene Credit Facility Agreement are to be secured by the joint and several guaranty of the subsidiaries of Calgene. Prior to the occurrence of an Event of Default, the Calgene Loans bear interest at the per annum rate equal to 2.00% above Citibank's published prime rate (the "Calgene Base Rate"), and following an Event of Default at the per annum rate equal to 3.00% above the Calgene Base Rate. During the continuance of an Event of Default, Calgene shall have no right to obtain any new Advances under this Agreement. The Calgene Loans may be prepaid in whole or in part at any time after giving at least three days prior written notice to Monsanto. In lieu of repayment of outstanding principal and accrued interest on each Calgene Loan, Calgene, subject to Monsanto's right to require Calgene to sell shares and pay cash, as provided below, may elect to convert all or any portion of the principal and accrued interest due under the applicable Calgene Loan (the "Conversion Amount") into shares of Calgene Common Stock at the average of the closing market price for such shares during the thirty trading days immediately preceding the applicable maturity date for such Calgene Loan. Monsanto may, in its sole discretion and within five business days after its receipt of notice from Calgene that Calgene intends to exercise Calgene's rights to convert the Conversion Amount, give written notice to Calgene stating that (i) all or any part of the Conversion Amount shall be payable in cash (the "Alternative Conversion Amount"), (ii) Calgene shall, at its expense, sell publicly such number of shares of its common stock as Monsanto would have received if the Alternative Conversion Amount had been converted as described above and (iii) the net proceeds of such sale shall be paid by Calgene to Monsanto in full payment and satisfaction of such Alternative Conversion Amount. Upon any such conversion, the Conversion Amount shall first be applied to reduce the accrued interest due on the applicable Calgene Loan as of the applicable maturity date, and any remaining portion of the Conversion Amount shall be applied to reduce the principal due on such Calgene Loan. In any event, on each annual Maturity Date (as defined in the Calgene Credit Facility Agreement), all outstanding principal and accrued interest not converted by Calgene into shares of Calgene Common Stock shall be repaid in full to Monsanto. Upon the occurrence and during the continuation of an Event of Default, for a period of thirty (30) days from the occurrence of the Event of Default, Calgene, subject to Monsanto's right to require Calgene to sell shares and pay cash, as described above, may similarly elect to convert all or any portion of the principal and accrued interest under any outstanding Calgene Loan into shares of Calgene Common Stock. If Calgene does not elect to exercise its conversion rights upon such an Event of Default, Monsanto may, in addition to its other remedies, elect to convert all or a portion of the remaining principal and accrued interest under such Calgene Loan into shares of Calgene Common Stock at the average of the closing market prices for such shares during the thirty days preceding such Event of Default. In no event, however, shall Monsanto elect to convert principal and accrued interest into more than 3,000,000 shares of Calgene Common Stock (as such number is adjusted for stock dividends, stock splits and similar events affecting holders of Calgene's common stock). The obligation of Monsanto to provide Advances is subject to the fulfillment of certain conditions, including, among others: (i) the continued accuracy of all representations and warranties made by Calgene and its subsidiaries; (ii) the compliance with all covenants contained in the Calgene Credit Facility Agreement; (iii) no event shall have occurred which would constitute an Event of Default or Potential Event of Default (as defined in the Calgene Credit Facility Agreement); or (iv) there shall not have occurred any circumstance which could reasonably be expected to have a material adverse effect on (A) the business, assets, operations or financial condition of Calgene and its subsidiaries, taken as a whole, or (B) the ability of the Company and its subsidiaries to perform their obligations under the Calgene Credit Facility Agreement. The covenants contained in the Calgene Credit Facility Agreement require Calgene to maintain a minimum consolidated net worth of not less than $10 million and a minimum consolidated working capital of not less than $5 million. The Calgene Credit Facility Agreement also requires that Calgene and its subsidiaries meet certain specified financial ratios, including a ratio of total long-term liabilities to net worth and a current ratio. In addition, the Calgene Credit Facility Agreement imposes a number of limitations on Calgene with respect to future acquisitions, liens, mergers and the sale of assets, loans and investments, guaranties, capital expenditures, the payment of dividends and the incurrence of indebtedness. The existence of these covenants could limit Calgene's ability to finance the growth of its existing operations if cash flows were to decrease substantially or if expenses were to increase substantially. These covenants would also limit Calgene's ability to engage in additional acquisitions that would significantly increase the ratio of long-term indebtedness to net worth following such acquisitions. The failure of Calgene to satisfy these covenants would cause an Event of Default which could have a material adverse effect on its business and results of operations. All of the Calgene Loans shall be subordinated and subject in right of payment to the prior payment in full of a certain senior indebtedness of Calgene as more fully described in the Calgene Credit Facility Agreement. No payment on account of principal or interest on the Calgene Loans shall be made if at the time of such payment or immediately after giving the effect thereto: (i) there shall exist a default in any payment with respect to any such senior indebtedness or (ii) there shall have occurred an event of default (other than a default in the payment of amounts due thereon) with respect to any such senior indebtedness. As of December 31, 1996, there was no outstanding balance of principal and interest under the Calgene Credit Facility Agreement. Gargiulo Credit Facility Agreement On March 31, 1996, Monsanto and Calgene entered into the Gargiulo Credit Facility Agreement pursuant to which Monsanto shall, during the Commitment Period (as hereinafter defined), and subject to the terms and conditions contained therein, make available to Calgene a revolving credit facility of up to $40 million (the "Gargiulo Loan"). The Gargiulo Loan has been used to acquire Collier Farms and to support the branded tomato strategy of Gargiulo as determined by the Gargiulo Board of Directors (other than amounts used to finance the acquisition of Collier Farms). Prior to the occurrence of an Event of Default (as defined in the Gargiulo Credit Facility Agreement), Gargiulo may borrow, repay and reborrow, each such borrowing or reborrowing being an " Advance." In order to obtain an Advance from Monsanto under the Gargiulo Credit Facility Agreement, Gargiulo must provide documentation reasonably acceptable to Monsanto verifying that Gargiulo has reached certain milestones and achieved certain goals as set forth therein. The maximum amount of each Advance is subject to certain limitations based upon such milestones and goals. The "Commitment Period" began on March 31, 1996 and ends on the earlier of the fourth anniversary or such earlier time that Monsanto terminates its obligations to make further Advances. The Gargiulo Loan is secured by the joint and several guaranty of the subsidiaries of Calgene. Prior to the occurrence of an Event of Default, the Gargiulo Loan shall bear interest at the per annum rate equal to 2.00% above Citibank's published prime rate (the "Gargiulo Base Rate"), and following an Event of Default at the per annum rate equal to 3.00% above the Gargiulo Base Rate. During the continuance of an Event of Default, Calgene shall have no right to obtain any new Advances. The Gargiulo Loan may be prepaid in whole or in part at any time after giving at least three days prior written notice to Monsanto. The Gargiulo Loan is payable, unless extended as described below, in one payment on the fourth anniversary of the Effective Time (the "Maturity Date") in an amount equal to the lesser of (i) the Repayment Portion of the Cumulative Free Cash Flow (as defined in the Gargiulo Credit Facility Agreement) of Gargiulo from the Effective Time to the Maturity Date and (ii) the amount of the outstanding principal and accrued interest on the Gargiulo Loan. "Repayment Portion" means the sum of 20% of the first $10 million of Cumulative Free Cash Flow, 50% of the next $10 million and 80% of the remaining balance. In the event that the Repayment Portion is not sufficient to pay all of the then outstanding principal and accrued interest at the Maturity Date, the maturity date with respect to the unpaid amount of outstanding principal and interest shall be extended to the sixth anniversary of the Effective Time (the "Extended Maturity Date"). In the event the Repayment Portion of the Cumulative Free Cash Flow (less amounts previously paid) is not sufficient to pay the then outstanding principal and accrued interest at the Extended Maturity Date, Calgene shall pay Monsanto such lesser amount and Monsanto, at its sole option, may do any one or combination of the following: (i) convert all or any portion of the then outstanding principal and accrued interest into shares of Calgene Common Stock at the average of the closing market prices for such shares during the thirty trading days immediately preceding the date of such conversion, (ii) further extend the Final Maturity Date (as defined in the Gargiulo Credit Facility Agreement) upon the same terms as are contained in the Gargiulo Credit Facility Agreement, or (iii) as to any unpaid amount which is not converted under clause (i) or for which payment is not extended pursuant to clause (ii), cause Calgene to sell publicly that number of shares of Calgene Common Stock as Monsanto would have received if such amount has been converted under clause (i) above with the net proceeds of such sale being delivered to Monsanto in full payment and satisfaction of such amount. Upon the occurrence and during the continuation of an Event of Default, Monsanto may, in addition to its other remedies, similarly elect to convert all or any portion of the principal and accrued interest under the Gargiulo Loan (the "Gargiulo Conversion Amount") into shares of Calgene Common Stock at the average of the closing market prices for such shares during the thirty days preceding such Event of Default. In no event, however, shall Monsanto elect to convert principal and accrued interest into more than 8,000,000 shares of Calgene Common Stock (as such number is adjusted for stock dividends, stock splits and similar events affecting holders of Calgene's common stock). Upon any such conversion, the Gargiulo Conversion Amount shall first be applied to reduce the accrued interest due on the Gargiulo Loan, and any remaining portion of the Gargiulo Conversion Amount shall be applied to reduce the principal due on such Gargiulo Loan. The obligation of Monsanto to provide Advances is subject to the fulfillment of certain conditions, including, among others: (i) the continued accuracy of all representations and warranties made by Calgene and its subsidiaries; (ii) the compliance with all covenants contained in the Gargiulo Credit Facility Agreement; (iii) no event shall have occurred which would constitute an Event of Default or Potential Event of Default (as defined in the Gargiulo Credit Facility Agreement); or (iv) there shall not have occurred any circumstance which could reasonably be expected to have a material adverse effect on (A) the business, assets, operations or financial condition of Calgene and its subsidiaries, taken as a whole or (B) the ability of the Company and its subsidiaries to perform their obligations under the Gargiulo Credit Facility Agreement. The covenants contained in the Gargiulo Credit Facility Agreement require Calgene to maintain a minimum consolidated net worth of not less than $ 10 million and a minimum consolidated working capital of not less than $5 million. The Gargiulo Credit Facility Agreement also requires that Calgene and its subsidiaries meet certain specified financial ratios, including a ratio of total long-term liabilities to net worth and a current ratio. In addition, the Gargiulo Credit Facility Agreement imposes a number of limitations on Calgene and each of its subsidiaries with respect to future acquisitions, liens, mergers and the sale of assets, loans and investments, guaranties, capital expenditures, the payment of dividends and the incurrence of indebtedness. The existence of these covenants could limit Calgene's ability to finance the growth of its existing operations if cash flows were to decrease substantially or if expenses were to increase substantially. These covenants would also limit Calgene's ability to engage in additional acquisitions that would significantly increase the ratio of long-term indebtedness to net worth following such acquisitions. The failure of Calgene to satisfy these covenants would cause an Event of Default which could have a material adverse effect on its business and results of operations. The Gargiulo Loan is to be subordinated and subject in right of payment to the prior payment in full of certain senior indebtedness of Calgene as more fully described in the Gargiulo Credit Facility Agreement. No payment on account of principal or interest on the Gargiulo Loan shall be made if at the time of such payment or immediately after giving the effect thereto, (i) there shall exist a default in any payment with respect to any such senior indebtedness or (ii) there shall have occurred an event of default (other than a default in the payment of amounts due thereon) with respect to any such senior indebtedness. As of December 31, 1996, the outstanding balance of principal and interest under the Gargiulo Credit Facility Agreement was $24.8 million. License Agreements As part of the Initial Monsanto Transaction in March 1996, Monsanto contributed certain technology licenses to Calgene pursuant to various license agreements and letter agreements. The technologies underlying the License Agreements are summarized below. ACC Synthase and ACC Deaminase. ACC is a precursor of ethylene, a plant growth regulator that induces ripening in certain fruits. By reducing the amount of ACC available for conversion into ethylene, the ripening process can be delayed. Control of the ripening process may enable Calgene to improve the efficiency of its tomato production operations. Calgene will be granted non-exclusive, perpetual, royalty-free rights to the ACC synthase and ACC deaminase genes for use in certain produce crops and shall be able to practice under Monsanto's ACC Synthase license from the USDA. Fruit-specific Promoters. Promoters control the expression of genes in each plant cell. In order for certain genes to function in a beneficial manner, expression of these genes must be restricted to certain parts of the plant. Fruit-specific promoters provide a means of limiting gene expression to the fruit. For example, these promoters may be useful in regulating carbohydrate metabolism (e.g., sugar content) in ripening fruits such as tomatoes and strawberries. Calgene has been granted non-exclusive, perpetual, royalty-free rights to certain fruit-specific promoters for use in certain produce crops. Virus Resistance Genes. Virus infection is known to significantly reduce the yields of certain crops, including tomatoes. Monsanto has developed methods of interfering with viral replication in engineered plants, which slows the rate and degree of infection, and reduces the yield loss resulting from the infection. Calgene has been granted non-exclusive, perpetual, royalty-free or royalty-bearing rights to certain aspects of Monsanto's patent estate related to the engineering of virus resistance into certain produce crops. FAD 3 Gene. The FAD 3 gene controls the relative amount of polyunsaturated fatty acids found in plant oils, including canola oil. Calgene believes that reducing the expression of the FAD 3 gene in engineered canola plants may result in an oil with reduced linoleic and linolenic acid content. Such an oil would be a superior cooking oil, as well as a superior raw material for the production of margarine and shortening. Calgene has been granted exclusive, perpetual, royalty-bearing rights to the FAD 3 gene for use in certain oilseed crops. Insect Resistance Gene. Monsanto has modified genes from a soil microorganism called Bacillus thurengiensis ("B.t.") the encode proteins that are toxic to certain insects. Use of insecticides to control insects is a major cost in the production of tomatoes. Calgene has been granted non-exclusive, perpetual, royalty-free rights to Monsanto's B.t. patent estate for use in certain produce crops. ADP Glucose Pyrophosphorylase("ADP GPP")Gene. The ADP GPP gene is a bacterial gene involved in starch biosynthesis. By expression of this gene in plants, the starch and/or sugar content of plants can be increased. This may improve the flavor or sweetness of produce crops such as tomatoes or strawberries. Calgene has been granted non-exclusive, perpetual, royalty-free rights to Monsanto's patent estate related to ADP GPP for use in certain produce crops. Monsanto and Calgene are parties to an interference at the United States Patent and Trademark Office relating to the ADP GPP gene. Oil Modification Technology. Monsanto has certain patent rights and know-how related to the production of plants with altered oil compositions. By modifying oil composition it may be possible to provide temperate sources of certain tropical oils and the production of novel oil compositions. The Monsanto oil modification genes include sucrose phosphorylase, cytochrome b5 and PEP carboxylase. Calgene has been granted nonexclusive, perpetual, royalty-free rights under Monsanto's patents and know-how for use in certain oilseed crops. Insect Protected Cotton Direct Grower Licensing Agreement Calgene has entered into an agreement with Monsanto under which Calgene will participate in the direct licensing of Monsanto's B.t. technology to cotton growers. Under the terms of this agreement, Monsanto has granted to Calgene a non-exclusive, royalty-free U.S. license to use Monsanto's B.t. technology in Calgene's cottonseed products. Subject to the issuance of a Monsanto patent that covers the B.t. gene that is currently being utilized in Calgene's cottonseed product development program, Calgene would be obligated under applicable patent law to end use of its current B.t. gene and is permitted under such agreement to incorporate Monsanto's B.t. gene into its product development program over a four-year period. Monsanto intends to enter into license agreements directly with cotton growers. Under the terms of these agreements, cotton growers would obtain a one-time right to purchase a specified number of units of cottonseed containing Monsanto's B.t. gene in return for the payment of a license fee. Monsanto has agreed to pay to Calgene a specified percentage of the net license fees received from licensed growers who subsequently purchase Calgene's cottonseed products containing Monsanto's B.t. gene. The material terms of Calgene's agreement shall be modified to reflect any more favorable terms that may be granted to any other cottonseed company that may participate in the direct licensing program. Oilseed Development Agreement In May 1996, Calgene and Monsanto executed a broad strategic cross-licensing agreement encompassing the two companies' oilseed research programs. Under the agreement, Calgene received a royalty free license to current and future Monsanto agronomic technology for use in combination with Calgene's proprietary oils modification genes for use in developing specialty canola oil product. Monsanto received a royalty bearing license to Calgene technology to develop agronomically superior corn, soybean, canola and sunflower crops. In addition, Monsanto paid $7 million to Calgene and will pay royalties based on sales of insect resistant corn, soybean, canola and sunflower seed with increased oil content and modified meal composition utilizing Calgene technology. Also as part of the agreement, Monsanto paid Calgene $10 million in cash to help fund oilseed research and development. In exchange, Monsanto will receive a portion of the future profits from Calgene's specialty oils business. Kelco Agreement In January 1997, Calgene and The Nutra Sweet Kelco Company ("Kelco") entered into an agreement to collaborate on the development of two specialty vegetable oil products. Kelco is a wholly owned subsidiary of Monsanto Company. As part of the agreement, Kelco purchased from Calgene a nonexclusive license to certain Calgene technology for use in research purposes, an option to expand the reserach license to include commercialization rights, and certain product distribution rights. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The following Consolidated Financial Statements and Report of Independent Auditors are included in Part II, Item 8, of this Report: Report of Independent Auditors. Consolidated Balance Sheets -- December 31, 1996 and June 30, 1996 and 1995. Consolidated Statements of Operations -- Six month period ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994. Consolidated Statements of Shareholders' Equity -- Six month period ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994. Consolidated Statements of Cash Flows -- Six month period ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994. 2. Financial Statement Schedules. The following financial statement schedule of Calgene, Inc. is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Calgene, Inc. Schedule for the six month period ended December 31, 1996 and years ended June 30, 1996, 1995 and 1994: Schedule Page II Valuation and Qualifying Accounts...........................75 All other schedules have been omitted because they are not applicable or because the required information is disclosed in the consolidated financial statements and notes thereto. 3. Exhibits See index to exhibits. (b) Reports on Form 8-K: None (c) Separate Financial Statements of Fifty Percent or Less Owned Persons: None.
CALGENE, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Six Months Ended December 31, 1996 and 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 ----------- --------------- --------------- --------------- --------------- --------------- Six months ended December 31, 1996 - - ---------------------------------- Allowance for doubtful accounts $487 $356 - $(136) $707 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 Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CALGENE, INC. By: /s/Christian Leleu ------------------------------ Chief Financial Officer Dated: March 31, 1997 (Principal Financial and Accounting -------------- Officer) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lloyd M. Kunimoto and Christian Leleu, substitution, for him in any and all capacities, to sign any amendments to other documents in connection therewith, with the securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date Director and Acting Chief /s/ Lloyd M. Kunimoto Executive Officer (Principal Lloyd M. Kunimoto Executive Officer) March 31, 1997 /s/ Christian Leleu Chief Financial Officer Christian Leleu (Principal Financial and March 31, 1997 Accounting Officer) Robert Fraley Director March 31, 1997 /s/ John E. Robson John E. Robson Director March 31, 1997 /s/ Hendrik A. Verfaillie Hendrik A. Verfaillie Director March 31, 1997 /s/ Howard D. Palefsky Howard D. Palefsky Director March 31, 1997 /s/ Allen J. Vangelos Allen J. Vangelos Director March 31, 1997 Patrick Fortune Director March 31, 1997 /s/ Roger H. Salquist Roger H. Salquist Director March 31, 1997 /s/ Michael Hogan Michael Hogan Director March 31, 1997 INDEX TO EXHIBITS Exhibits Page -------- ---- 2.1 Agreement and Plan of Reorganization Between Calgene, Inc. and Monsanto Company dated as of October 13, 1995.........................................(P) 2.2 Stock Purchase Agreement dated as of September 27, 1996, between Calgene, Inc. and Monsanto Company...................................................82 3.1 Restated Certificate of Incorporation of the Registrant, as amended....................................92 3.3 By-Laws of the Registrant................................(P) 10.0 Amended and Restated Stockholders Agreement between the Registrant and Monsanto Company..............129 10.1 Form of Credit Facility Agreement between the Registrant and Monsanto Company..........................(P) 10.2 Form of Gargiulo Credit Facility Agreement between the Registrant and Monsanto Company..............(P) 10.3 Form of ACC Deaminase License Agreement between the Registrant and Monsanto Company......................(P) 10.4 Form of ADPGPP License Agreement between the Registrant and Monsanto Company..........................(P) 10.5 Form of CMV License Agreement between the Registrant and Monsanto Company..........................(P) *10.6 Form of FAD 3 License Agreement between the Registrant and Monsanto Company..........................(P) 10.7 Form of Fruit Specific Promoter License Agreement between the Registrant and Monsanto Company..............(P) 10.8 Form of Gemini Virus License Agreement between the Registrant and Monsanto Company......................(P) 10.9 Form of Insect Resistance License Agreement between the Registrant and Monsanto Company..............(P) 10.10 Form of Oil License Agreement between the Registrant and Monsanto Company..........................(P) 10.11 Form of Letter Agreement between Calgene, Inc. and Monsanto Company with respect to license of Recombinant ACC Synthase.................................(P) 10.12 Form of Insect-Protected Cotton License and Seed Services Agreement between Calgene, Inc. and Monsanto Company.....................................(P) 10.13 Second Amended and Restated Employment Agreement dated October 16, 1995 between Gargiulo, L.P. and Jeffrey D. Gargiulo...................(P) 10.14 Joint Venture Agreement dated as of December 15, 1992 between Gargiulo, L.P. and Dresick Farms, as amended June 1, 1993..................................(P) Exhibits Page 10.15 Joint Venture Agreement dated as of January 1, 1981 between Gargiulo L.P. and Harllee-Gargiulo, Inc., as amended October 31, 1989 and October 31, 1994.....................................................(P) 10.16 Joint Venture Agreement dated as of October 31, 1994 between Gargiulo Mexico, L.L.C. and Hermanos Ley......................................................(P) 10.17 Marketing Agreement dated as of September 1, 1988 between Gargiulo, Inc. and Harllee-Gargiulo, Inc....(P) 10.18 Change of Control Employment Agreement dated as of July 19, 1995, between Calgene, Inc. and Roger H. Salquist....................................(P) 10.19 Change of Control Employment Agreement dated as of July 19, 1995 between Calgene, Inc. and Roderick N. Stacey...................................(P) 10.20 Change of Control Employment Agreement dated as of July 19, 1995 between Calgene, Inc. and Michael J. Motroni...................................(P) 10.21 Asset Purchase Agreement dated as of December 29, 1995 between Gargiulo, L.P. and Collier Enterprises..............................................(P) *10.22 Partnership Agreement dated January 31, 1986 between Registrant and Rhone-Poulenc Agrochimie, together with Reserach Agreement dated March 15, 1984 and Amendment thereto dated January 31, 1985........(A) *10.23 Amendment One to the Partnership Agreement dated January 31, 1986 between Registrant and Rhone-Poulenc Agrochimie dated September 30, 1989........(B) *10.24 License Agreement between Registrant and Rhone-Poulenc Agrochimie dated October 1, 1989...........(B) *10.25 Agreements dated March 21, 1985 between Registrant and Roussel-Uclaf S.A....................................(A) *10.26 Agreement dated April 1, 1988 between Registrant and Roussel-Uclaf S.A. which amend the Agreements dated March 21, 1985 between Registrant and Roussel-Uclaf S.A........................................(B) *10.27 Agreement dated August 1, 1984 and Agreement dated August 26, 1985 amending the prior Agreement between Registrant and Campbell Soup Company.............(A) *10.28 Tomato Research Agreement 1988 to 1990 between Campbell Soup Company and Registrant effective as of August 1, 1988 which supersedes the Agreements of August 1, 1984 and August 26, 1985 between Campbell Soup Company and the Registrant.................(B) *10.29 Agreement dated March 20, 1986 between Registrant and The Procter and Gamble Company ......................(A) 10.30 Commercial Lease dated August 17, 1987, as amended, covering property located at 1910 and 1920 Fifth Street, Davis, California.............(C) 10.31 Commercial Lease dated August 31, 1983, as amended, covering property located at 1970 Fifth Street, Davis, California..........................(A) Exhibits Page 10.32 Commercial Lease dated August 22, 1983, as amended, covering property inYolo County.................(A) 10.33 Commercial Lease dated May 21, 1987, as amended, covering property located at 1950 Fifth Street, Davis, California........................................(C) 10.34 Form of Directors and Officers Indemnification Agreement................................................(C) 10.35 401 (k) Tax Deferred Investment Plan.....................(D) 10.36 Secured Revolving Credit Agreement Among Registrant and Harris Trust and Savings Bank and Caisse Nationale De Credit Agricole Dated April 26, 1990.....................................(G) 10.37 First Amendment to Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Registrant and Harris Trust and Savings Bank dated January 31, 1992..............................(E) 10.38 Second Amendment to Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Registrant and Harris Trust and Savings Bank Dated January 31, 1993...................................(I) 10.39 Third Amendment to Secured Revolving Credit Agreement Among Registrant and Harris Trust and Savings Bank Dated August 26,1993........................(O) 10.40 Fourth Amendment to Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Registrant and Harris Trust and Savings Bank Dated February 26, 1994.............................(O) 10.41 Fifth Amendment to Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Registrant and Harris Trust and Savings Bank Dated March 15, 1995................................(O) 10.42 Sixth Amendment to Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Registrant and Harris Trust and Savings Bank Dated August 8, 1995................................(O) 10.43 Seventh Amendment to the Secured Revolving Credit Agreement and Waiver 1995.........................(M) 10.44 Eighth Amendment to the Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Calgene, Inc. and Harris Trust and Savings Bank dated January 23,1996.......................(M) 10.45 Ninth Amendment to the Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Calgene, Inc. and Harris Trust and Savings Bank dated March 28, 1996........................(N) 10.46 1989 Employee Stock Purchase Plan........................(G) 10.47 Joint Venture and Partnership Agreement by and between Kirin Brewery Co. Ltd. and Registrant dated March 14, 1990..........................(G) *10.48 License Agreement between Registrant and Campbell Soup Company dated August 9, 1991...............(J) Exhibits Page **10.50 Oilseed Development Agreement between Registrant and Monsanto Company dated May 8, 1996...................(Q) 10.51 1981 Stock Option Plan as amended........................(B) 10.52 1991 Stock Option Plan...................................(J) 10.53 1996 Stock Option Plan...................................(P) 10.54 Tenth Amendment to the Secured Revolving Credit Agreement and Secured Revolving Credit Note Among Calgene, Inc. and Harris Trust and Savings Bank dated September 30, 1996................(R) 10.57 Bank of America Revolver.................................168 21.1 Subsidiaries of Registrant...............................(I) 23.1 Consent of Independent Auditors..........................204 27 Article 5 of Financial Data Schedule for the Six Month Period ended December 31, 1996.................205 (A) Incorporated by reference to Registrant's Form S-1 Registration No. 33-5921 (B) Incorporated by reference to Registrant's Form 10-K dated September 30, 1989 (C) Incorporated by reference to Registrant's Form 10-K dated September 30, 1987 (D) Incorporated by reference to Registrant's Form 10-K dated September 30, 1988 (E) Incorporated by reference to Registrant's Form 10-K dated June 30, 1992 (F) Intentionally omitted (G) Incorporated by reference to Registrant's Form 10-K dated June 30, 1990 (H) Intentionally omitted (I) Incorporated by reference to Registrant's Form 10-K dated June 30, 1993, as amended (J) Incorporated by reference to Registrant's Form 10-K dated June 30, 1991 (K) Intentionally omitted (L) Incorporated by reference to Registrant's Form 8-K dated June 28, 1995 (M) Incorporated by reference to Registrant's Form 10-Q dated December 31, 1995 (N) Incorporated by reference to Registrant's Form 10-Q dated March 31, 1996 (O) Incorporated by reference to Registrant's Form 10-K/A dated October 30, 1995 (P) Incorporated by reference to Registrant's Registration Statement on Form S-4 dated February 6, 1996 (Q) Incorporated by reference to Registrant's Form 10-K dated June 30, 1996 (R) Incorporated by reference to Registrant's Form 10-Q dated September 30, 1996 * Confidential treatment of certain portions of these documents has been granted ** Confidential treatment has been requested as to portions thereof EX-27 2
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. 1,000 6-MOS DEC-31-1996 JUL-01-1996 DEC-31-1996 1,908 1,382 17,455 707 37,272 58,637 80,388 19,642 173,880 39,330 14,195 0 0 67 79,493 173,880 69,780 70,509 72,042 80,457 32,605 0 3,822 (63,889) 45 (63,934) 0 0 0 (63,934) (1.03) 0 TOTAL COST INCLUDES EXPENSES FOR BOTH FUNDED AND UNFUNDED R&D PROJECTS.
EX-23.1 3 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 February 24, 1997, with respect to the consolidated financial statements and schedule of Calgene, Inc. included in the Annual Report (Form 10-K) for the six months ended December 31, 1996. ERNST & YOUNG LLP Sacramento, California March 26, 1997 EX-3.1 4 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF CALGENE, INC. Pursuant to Section 242 of the Corporation Law of the State of Delaware Calgene, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: At a meeting of the Board of Directors of the Corporation held on September 20, 1996, a resolution was duly adopted, pursuant to Section 242 of the General Corporation Law of the State of Delaware, setting forth an amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment in accordance with Sections 211 and 222 of the General Corporation Law of the State of Delaware at a meeting of stockholders on November 12, 1996. The resolution authorizing the amendment is as follows: RESOLVED: That Article FIFTH of the Certificate of Incorporation of the Corporation be and hereby is amended as follows: 1. Section A of Article FIFTH shall be amended as follows: (a) The following definitions shall be deleted: "Gargiulo, G.P." and "Gargiulo, L.P." (b) The definition of "Gargiulo" shall be amended to read in its entirety as follows: "'Gargiulo' means Gargiulo, Inc. formerly known as Tomato Investment Associates, Inc." (c) The definition of "Governance Agreement" shall be amended and restated to read in its entirety as follows: "'Governance Agreement' means the Amended and Restated Stockholders Agreement dated as of November 12, 1996 by and between the Corporation and Monsanto." (d) The following sentence shall be added at the end of the definition of "Independent Director": "Without limiting the foregoing, Roger H. Salquist shall qualify as an Independent Director so long as he continues to qualify under clauses (iv) and (v) of such definition. Roger H. Salquist shall not fail to qualify under clause (iv) above as a result of his Change in Control Employment Agreement dated July 19, 1995, as modified, or Consulting Agreement dated September 16, 1996 with the Corporation. Any of the above restrictions may be waived by unanimous action of the Board of Directors." (e) The following definition shall be added: "'Stock Purchase Agreement' means the Stock Purchase Agreement dated as of September 27, 1996 between the Corporation and Monsanto." (f) The definition of "Trigger Event" shall be amended and restated to read in its entirety as follows: "'Trigger Event' means the earliest of (i) any time that Monsanto's Percentage Interest is at least fifty-five percent (55%), (ii) the Corporation elects to convert borrowings made from Monsanto into Equity Securities and Monsanto's Percentage Interest is at least fifty percent (50%) after such conversion, or (iii) the closing of Monsanto's purchase of additional shares of Common Stock pursuant to the Stock Purchase Agreement." (g) The definition of "Registrable Securities" shall be amended and restated to read in its entirety as follows: "'Registrable Securities' means shares of Common Stock issued or issuable to Monsanto pursuant to the Transaction Agreements and the Prior Stockholders Agreement (as defined in the Governance Agreement) and the Stock Purchase Agreement whether owned by Monsanto or a permitted transferee of Monsanto and all such other securities of the Corporation acquired by Monsanto or any Affiliate of Monsanto in accordance herewith." 2. Section C of Article FIFTH shall be amended and restated to read in its entirety as follows: "C. THE BOARD OF DIRECTORS; COMMITTEES During the term of the Governance Agreement (i) the number of directors and the manner of nominating and removing members thereof shall be set forth in Section C(1), below, and (ii) the Board of Directors shall establish, empower, and maintain committees as set forth in Section C(2), below. 1. Board of Directors. The number of Directors and manner of nominating Directors shall be as follows: (a) The number of Directors comprising the Board of Directors shall initially be fixed at nine (9) Directors. (b) Until changed in accordance with the Governance Agreement, the Board of Directors shall be comprised of nine (9) Directors, and the Corporation shall nominate for election as Directors: (i) one (1) Corporation Management Director, (ii) three (3) Corporation Directors, and (iii) five (5) Directors designated by Monsanto, at least one (1) of which shall be an Independent Director. (c) [This section intentionally left blank] (d) At any time that Monsanto's Percentage Interest is at least seventy percent (70%), (i) the Corporation shall nominate: (i) six (6) Directors designated by Monsanto, which shall consist of the one (1) Corporation Management Director and five (5) other Monsanto Directors (including at least one (1) Independent Director) and (ii) three (3) Independent Directors. At such time as Monsanto's Percentage Interest is at least ninety-nine percent (99%), the Corporation shall nominate nine (9) Directors designated by Monsanto. (e) Notwithstanding anything in the foregoing paragraphs (b) and (d) to the contrary, (i) at any time Monsanto's Percentage Interest is less than forty percent (40%) but at least twenty percent (20%), the Corporation shall nominate three (3) Directors designated by Monsanto, (ii) at any time Monsanto's Percentage Interest is less than twenty percent (20%) but at least ten percent (10%), the Corporation shall nominate two (2) Directors designated by Monsanto and (iii) at any time Monsanto's Percentage Interest is less than ten percent (10%) but at least five percent (5%), the Corporation shall nominate one (1) Director designated by Monsanto. If, at any time, Monsanto's Percentage Interest is less than five percent (5%), the Corporation shall not be obligated to nominate any Director designated by Monsanto. At any such time, all other Directors, other than the Corporation Management Directors, shall be nominated by the Corporation. (f) The Independent Directors to be nominated by the Corporation from time to time shall be nominated by action of a majority of Corporation Directors then in office. The Corporation Directors shall consult with the other Independent Directors as to the nomination of any Corporation Director, and in the event a majority of the Corporation Directors are unable to agree upon any Corporation Director nominee, then the majority of all the Independent Directors shall nominate such nominee. In the event that no Corporation Directors are in office at the time of any nomination of a Corporation Director, such Corporation Directors shall be nominated by a majority of the Independent Directors then in office; provided, however, that the holders of a majority of the outstanding Voting Stock held by Unaffiliated Equity Holders shall be entitled to nominate and elect Corporation Directors in lieu of any individuals so nominated to be such Corporation Directors by a majority of the Independent Directors. (g) The Corporation and Monsanto, respectively, shall have the right to nominate any replacement for a Director nominated in accordance with this Section C(1) by the Corporation or Monsanto, respectively, upon the death, resignation, retirement, disqualification or removal from office for cause of such Director. Such replacement for any Independent Director shall also be an Independent Director unless, in the case of a replacement of a Monsanto Director, the Monsanto Directors include more than the required number of Independent Directors. The Board of Directors shall elect each person so nominated by Monsanto or the Corporation pursuant to this paragraph (g). In addition, the Board of Directors shall nominate the Corporation's Chief Executive Officer to replace such officer's predecessor in office as a Corporation Management Director. (h) In the event that the number of Monsanto Directors on the Board of Directors differs from the number that Monsanto has the right (and wishes) to designate for nomination pursuant to this Section C(1), (i) if the number of Monsanto Directors exceeds such number, Monsanto shall promptly take all appropriate action to cause to resign that number of Monsanto Directors as is required to make the remaining number of such Monsanto Directors conform to this Section C(1) or (ii) if the number of Monsanto Directors otherwise is less than such number, the Corporation shall promptly take all necessary action to create sufficient vacancies on the Board of Directors to permit Monsanto to designate the full number of Monsanto Directors which it is entitled (and wishes) to nominate pursuant to this Section C(1) (such action to include seeking the resignation or removal of Directors or, at the request of Monsanto, calling a special meeting of the stockholders of the Corporation for the purpose of removing Directors to create such vacancies to the extent permitted by applicable law). Upon the creation of any vacancy pursuant to the preceding sentence, Monsanto shall nominate the person to fill such vacancy in accordance with this Section C(1) and the Board of Directors shall elect each person so nominated. Notwithstanding the foregoing, at each annual meeting of the stockholders of the Corporation, the Corporation shall nominate such number of Directors as Monsanto is otherwise entitled to designate under this Section C(1). (i) Notwithstanding anything herein to the contrary, no individual who is an officer, director, employee, agent, partner or principal stockholder of any competitor of the Corporation or any of its Affiliates (other than Monsanto and its Affiliates) or any competitor of Monsanto or any of its Affiliates (other than the Corporation) shall serve as a Director without the unanimous consent of the Board of Directors. (j) In the event that Monsanto desires to remove any Monsanto Director with or without cause and Monsanto is unable to procure the resignation of such Monsanto Director, then, upon the request of Monsanto, the Board of Directors shall promptly call a special meeting of stockholders of the Corporation for purposes of removing such Monsanto Director. In the event that the Corporation desires to remove any Corporation Director with or without cause and the Corporation is unable to procure the resignation of such Corporation Director, then, upon the request of a majority of all of the Independent Directors then in office, the Board of Directors shall promptly call a special meeting of stockholders of the Corporation for purposes of removing such Corporation Director. In the event that the Chief Executive Officer's employment with the Corporation is terminated for any reason, then upon the request of either Monsanto or a majority of all of the Independent Directors then in office, the Board of Directors shall promptly call a special meeting of stockholders of the Corporation for the purpose of removing such person as a Corporation Management Director. (k) Notwithstanding anything to the contrary herein, the Board of Directors, by unanimous action of all members of the Board of Directors, may increase the number of directors comprising the Board of Directors and may elect, or nominate for election, the director(s) to fill the vacancy or vacancies created by such increase. 2. Committees. (a) The Board of Directors shall establish, empower and maintain the committees of the Board of Directors contemplated by this Section C(2). (b) The following committees shall be established, empowered and maintained by the Board of Directors at all times during the term of the Governance Agreement: (i) an Audit Committee, consisting of at least three (3) of the Corporation's Independent Directors, which committee shall be authorized and empowered to cause an audit to be performed of the Corporation and each of its Subsidiaries; (ii) [This section intentionally left blank] (iii) a Compensation Committee, responsible, among other things, for recommending to the Board of Directors, for approval by a majority of the Board of Directors, (a) the adoption and amendment of all employee benefit plans and arrangements, (b) the engagement of, terms of any employment agreements and arrangements with, and termination of, all persons designated by the Corporation as "officers" for purposes of Section 16 of the Exchange Act ("Section 16 Officers"), and (c) the policies, limitations and procedures under which the Stock Option Plan Administration Committee shall operate; and (iv) such other committees as the Board of Directors deems necessary or desirable; provided, however, that such committees are established in compliance with Section D(a)(vi) below, if applicable. (c) Except as otherwise provided in Section C(2)(b) above or as agreed by a majority of the Monsanto Management Directors, the number of Monsanto Directors on each committee of the Board of Directors shall be the same proportion (but not less than one (1)) of the total membership of such committee as the number of Monsanto Directors, as the case may be, is of the entire Board of Directors. Except as otherwise provided in Section C(2)(b) above, the Monsanto Directors on each committee of the Board of Directors shall be determined by a majority of the Monsanto Management Directors. (d) No action by any committee of the Board of Directors shall be valid unless taken by unanimous written consent as provided in the Corporation's By-laws or taken at a meeting for which adequate notice has been duly given or waived by the members of such committee. Such notice shall include a description of the general nature of the business to be transacted at the meeting, and no other business may be transacted at such meeting unless all members of the committee are present and consent to the consideration of such other business. Any committee member unable to participate in person at any meeting shall be given the opportunity to participate by telephone. The Board of Directors or the remaining committee members shall designate an Independent Director or Corporation Management Director to replace any absent or disqualified Independent Director member or Corporation Management Director member, respectively, of any committee and a majority of the Monsanto Management Directors shall designate a Monsanto Director to replace any absent or disqualified Monsanto Director member of any committee. Each of the committees established by the Board of Directors pursuant to this Section C(2) shall establish such other rules and procedures for its operation and governance (consistent with the terms of the Governance Agreement) as it shall see fit and may seek such consultation and advice as to matters within its purview as it shall require." 3. Section D of Article FIFTH shall be amended and restated to read in its entirety as follows: "D. APPROVAL REQUIRED FOR CERTAIN ACTIONS (a) Until the earlier of a Trigger Event or such date on which Monsanto's Percentage Interest is less than twenty-five (25%), a majority of the Board, including at least one (1) Corporation Director and one (1) Monsanto Management Director, shall be required to approve any of the following: (i) the entry by the Corporation or any of its Affiliates into any merger or consolidation or the acquisition by the Corporation or any of its Affiliates of any business or assets that would constitute a Substantial Part of the Corporation (determined on a consolidated basis) whether such acquisition be by merger or consolidation or the purchase of stock or assets or otherwise; (ii) the sale, pledge, grant of security interest in, transfer, retirement or other disposal of (A) a Substantial Part of the Corporation (determined on a consolidated basis), except pursuant to a security interest granted in connection with borrowings permitted under subsection (iv) below or (B) the pledge or granting of a security interest in any intangible property set forth in Exhibit B attached to the Monsanto Disclosure Letter; (iii) any dividend by or return of capital by the Corporation or Gargiulo (other than such distributions by Gargiulo to the Corporation as are necessary for the Corporation to timely perform its obligations under Sections 1.02 and 5.02(c) of the Gargiulo Credit Facility); (iv) any incurrence or assumption, in the aggregate, by the Corporation, any of its Affiliates or any combination thereof, of any indebtedness for borrowed money at any time outstanding exceeding in the aggregate (determined on a consolidated basis) the greater of (i) fifteen million dollars ($15,000,000), increasing by five million dollars ($5,000,000) on each July 1 commencing July 1, 1996, plus amounts secured by inventory and/or receivables for seasonal working capital lines and indebtedness incurred to acquire property, plant or equipment and secured by the acquired asset, minus amounts outstanding under the Corporation Credit Facility, or (ii) the amounts set forth in the Corporation's Operating Plan, provided that loans under the Gargiulo Credit Facility shall not be counted in this limitation; (v) the repurchase or redemption of any Equity Securities of the Corporation, other than from employees upon termination of employment or service; (vi) the establishment of any new committees of the Board or new or revised delegation(s) of Board authority to any Board committee or changes or revisions to general delegations of authority to officers or other Persons for categories of expenditures; (vii) the adoption of or amendment to any benefit or incentive plans of the Corporation or any of its Affiliates which would increase the annual cost thereof by more than fifteen percent (15%) from the prior fiscal year or any adoption of, or amendment to, any stock option plan; (viii) the election, appointment or removal of the Chief Executive Officer, Chief Operating Officer or Chief Financial Officer of the Corporation and Calgene and their successors and the establishment of their annual or long term compensation level and benefits and basis for awards (other than agreements in effect on the Effective Date); provided, however, that Monsanto shall have the right to select the Chief Technical Officer of the Corporation and a controller reporting to the Chief Financial Officer of the Corporation; (ix) approval of the annual operating plan ("Operating Plan") and long-term strategic plan ("Strategic Plan") of the Corporation and its Affiliates, as well as the annual operating plan and long-term strategic plan for the Gargiulo Business, to be submitted to the Board annually for approval, and any material changes thereto; (x) any transaction between the Corporation (and its Affiliates), on the one hand, and its (their) directors, officers or employees, on the other hand, which is not in the normal course of business; (xi) any modification of the Transaction Agreements; (xii) any amendment of the By-laws or certificate of incorporation of the Corporation, Calgene or Gargiulo by the respective Boards of Directors thereof; (xiii) the issuance of any warrants for the purchase of Equity Securities or the issuance of additional Equity Securities (other than warrants for the purchase of Equity Securities) in excess of four million (4,000,000) shares of Common Stock in any two (2)-year period to a third party, other than pursuant to plans referred to in subsection (vii) above; (xiv) the sale or licensing by the Corporation or any of its Affiliates of (A) any intangible property set forth in Exhibit B attached to the Monsanto Disclosure Letter or (B) any other intangible property for consideration (other than royalties contingent on future sales) exceeding five million dollars ($5,000,000) in the aggregate (determined on a consolidated basis) per transaction or per series of related transactions; (xv) new fixed capital investments, capital leases or noncancellable operating leases by the Corporation and its Affiliates having annual payments in the aggregate (determined on a consolidated basis) exceeding the aggregate amount set forth in the Operating Plan; (xvi)[This section intentionally left blank] (xvii) any press release which mentions or directly or indirectly refers to Monsanto, except as required by law and where Board approval cannot be obtained in a timely manner; (xviii) the initiation, settlement or termination of any suit or proceeding concerning intellectual property, any other matter which could have an adverse public affairs effect upon Monsanto or the filing of any insolvency or bankruptcy proceeding by or on behalf of the Corporation or any of its Affiliates; or (xix) the removal or election of the directors of Gargiulo. (b) After a Trigger Event and until March 31, 1999 or Monsanto's Percentage Interest is at least seventy percent (70%), a majority of the Board, including at least two (2) Corporation Directors, shall be required to approve any of the following: (i) the matters set forth in subsections (i), (ii), (vi), (viii), (ix) and (xi) of paragraph (a) above; or (ii) any transaction between the Corporation (and its Affiliates) and Monsanto or any Affiliate of Monsanto. (c) From and after the occurrence of both (i) a Trigger Event and (ii) March 31, 1999 and until Monsanto's Percentage Interest is at least ninety-nine percent (99%), neither Monsanto nor any of its Affiliates shall enter into any transaction with the Corporation or any of its Affiliates without the approval of at least two (2) Corporation Directors." IN WITNESS WHEREOF, the Corporation has caused this Amendment to be signed by its President on this 12th day of November, 1996. CALGENE, INC. BY:/s/ Lloyd M. Kunimoto Lloyd M. Kunimoto President CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF CALGENE, INC. Pursuant to Section 242 of the General Corporation Law of the State of Delaware CALGENE, INC. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: At a meeting of the Board of Directors of the Corporation held on September 20, 1996, a resolution was duly adopted, pursuant to Section 242 of the General Corporation Law of the State of Delaware, setting forth an amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment in accordance with Section 211 and 222 of the General Corporation Law of the State of Delaware at a meeting of stockholders on November 12, 1996. The resolution authorizing the amendment is as follows: RESOLVED: That the first paragraph of Article FOURTH of the Restated Certificate of Incorporation of the Corporation be and hereby is deleted and the following paragraph is inserted in lieu thereof: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 110,000,000 shares, consisting of 100,000,000 shares of Common Stock, $.001 par value per share (the "Common Stock"), and 10,000,000 shares of Preferred Stock, $.001 par value per share (the "Preferred Stock"). IN WITNESS WHEREOF, the Corporation has caused this Amendment to be signed by its President this 13th day of March, 1997. CALGENE, INC. BY: /s/ Lloyd M. Kunimoto Lloyd M. Kunimoto President RESTATED CERTIFICATE OF INCORPORATION OF CALGENE II, INC. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware Calgene II, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies as follows: (a) The name of the Corporation is Calgene II, Inc., which is its original name. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on November 21, 1995. (b) This Restated Certificate of Incorporation restates, integrates and further amends the provisions of the Certificate of Incorporation of the Corporation, as heretofore amended, and was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. (c) The text of the Certificate of Incorporation, as heretofore amended, is hereby restated, integrated, and further amended to read in its entirety as follows: FIRST. The name of the corporation is Calgene, Inc. (the "Corporation"). SECOND. The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The nature of the business or purposes to be conducted or promoted by the Corporation is as follows: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the "General Corporation Law"). FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 90,000,000 shares, consisting of 80,000,000 shares of Common Stock, $.001 par - 1- value per share (the "Common Stock"), and 10,000,000 shares of Preferred Stock, $.001 par value per share (the "Preferred Stock"). The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation. A. COMMON STOCK. 1. General. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of the Preferred Stock of any series. 2. Voting. Except as otherwise provided in Article FIFTH, the holders of the Common Stock are entitled to one vote for each share held on all matters voted upon by the stockholders. 3. Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding shares of Preferred Stock. 4. Liquidation. Upon the dissolution, liquidation or winding-up of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding shares of Preferred Stock. B. PREFERRED STOCK. Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided. - 2- Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior to or rank on a parity with or be junior to the Preferred Stock of any other series to the extent permitted by law. Except as otherwise provided in this Restated Certificate of Incorporation, no vote of the holders of the Preferred Stock or Common Stock shall be a prerequisite to the designation or issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of this Restated Certificate of Incorporation. Part A. SERIES A REDEEMABLE, NON-VOTING PREFERRED STOCK A.1 Designation and Amount. The designation of this series of capital stock shall be Series A Redeemable, Non-Voting Preferred Stock (the "Series A Stock"). The number of shares, powers, terms, conditions, designations, preferences and privileges, relative, participating, optional and other special rights and qualifications, limitations and restrictions, if any, of the Series A Stock shall be as set forth herein. The number of authorized shares of Series A Stock is 1,000. A.2 Voting Rights. The Series A Stock shall have no voting rights, except as otherwise required by law. A.3 Redemption. The Series A Stock may be redeemed by the Corporation at any time on or prior to December 31, 1999 for $1.00 per share. In the event of any redemption of only a part of the then outstanding Series A Stock, the Corporation shall effect such redemption pro rata among the holders thereof based on the number of shares of Series A Stock held by such holders on the date that notice of redemption is given by the Corporation. At least 30 days prior to the date fixed for any redemption of Series A Preferred Stock (a "Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to each holder of record of Series A Stock to be redeemed, at his or its address last shown on the records of the Corporation, notifying such - 3- holder of the election of the Corporation to redeem such shares and specifying the Redemption Date. Any failure to give the notice of redemption, or any defect in the giving of such notice, pursuant to the preceding sentence shall not affect the validity of the redemption of shares of Series A Stock which otherwise comply with the provisions of this Section A.3. On or prior to the Redemption Date, each holder of shares of Series A Stock to be redeemed shall surrender his or its certificate or certificates representing such shares to the Corporation in the manner and at the place designated in the notice of redemption, and thereupon the redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owners thereof, and each surrendered certificate shall be cancelled. From and after the Redemption Date, all rights of the holders of Series A Stock designated for redemption in the notice of redemption as holders of Series A Stock (except to receive the redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be deemed to be outstanding for any purpose whatsoever. A.4 Conversion. The Series A Stock may not be converted into shares of Common Stock or any other class or series of capital stock of the Corporation. A.5 Liquidation. In the event of any liquidation, dissolution or winding-up of the Corporation (collectively, a "Liquidation"), the holders of shares of Series A Stock shall be entitled to receive out of the assets of the Corporation legally available for distribution to stockholders, whether from capital, earnings or surplus, before payment shall be made to the holders of Common Stock or any class or series of stock ranking on Liquidation junior to such Series A Stock, $1.00 per share. A.6 Dividends. Dividends may be declared and paid on the Series A Stock from funds lawfully available therefor, as and when determined by the Board of Directors. FIFTH. In furtherance of and not in limitation of powers conferred by statute, it is further provided: A. CERTAIN DEFINITIONS As used in this Article FIFTH, the following terms shall have the following respective meanings (all terms defined in this Section A or in other provisions of this Article FIFTH in the singular shall have the same meaning when used in the plural and vice versa): - 4- "Affiliate" has the same meaning as in Rule 12b-2 promulgated under the Exchange Act. "Associate" has the same meaning as in Rule 12b-2 promulgated under the Exchange Act. "Board" or "Board of Directors" means the Board of Directors of the Corporation except where the context otherwise requires. "Calgene" means Calgene, Inc., a Delaware corporation, as the entity existed prior to the Effective Date. "Calgene Board" means the Board of Directors of Calgene. "Calgene Director" means a member of the Calgene Board. "Common Stock" means the Common Stock, $.001 par value, of the Corporation. "Corporation Director" means an Independent Director who is nominated for such position by the Corporation in accordance with Section C(1) hereof. "Corporation Management Directors" means the Chief Executive Officer of the Corporation (or, if there is none at any time, a Director nominated by a majority of the Corporation Directors) and a second Director who shall be nominated by a majority of the Corporation Directors. "Director" means a member of the Board of Directors of the Corporation. "Effective Date" means March 31, 1996. "Equity Security" means (i) any Common Stock or other Voting Stock (ii), any securities of the Corporation convertible into or exchangeable for Common Stock or other Voting Stock or (iii) any options, rights or warrants (or any similar securities) issued by the Corporation to acquire Common Stock or other Voting Stock. "Exchange Act" means the Securities Exchange Act of 1934, as amended. - 5- "Gargiulo" means Gargiulo, G.P. and Gargiulo, L.P., as such entities existed prior to the Effective Date. "Gargiulo Business" means the business transacted by Tomato Associates after the Effective Date, which business was transacted by Gargiulo prior to the Effective Date. "Gargiulo Credit Facility" means the Gargiulo Credit Facility Agreement dated as of March 31, 1996 by and between the Corporation and Monsanto. "Gargiulo G.P." means Gargiulo G.P., Inc., a Delaware corporation. "Gargiulo L.P." means Gargiulo, L.P., a Delaware limited partnership. "Governance Agreement" means the Stockholders Agreement dated as of March 31, 1996 by and between the Corporation and Monsanto. "hereto", "hereunder", "herein", "hereof" and the like mean and refer to this Article FIFTH as a whole and not merely to the specific article, section, paragraph or clause in which the respective word appears. "Holder" means Monsanto and any subsequent holder of outstanding Registrable Securities. "Independent Director" means a Director or Calgene Director (i) who is not and has never been an officer or employee of Calgene, the Corporation, any Affiliate or Associate of Calgene or the Corporation or of a Person that derived five percent (5%) or more of its revenues or earnings in its most recent fiscal year from transactions involving Calgene, the Corporation or any Affiliate or Associate of Calgene or the Corporation; (ii) who is not and has never been an officer or employee of Monsanto, any Affiliate or Associate of Monsanto or of a Person that derived more than five percent (5%) of its revenues or earnings in its most recent fiscal year from transactions involving Monsanto or any Affiliate or Associate of Monsanto, (iii) who is not and never has been an officer or employee of Gargiulo, any Affiliate or Associate of Gargiulo or of a Person that derived more than five percent (5%) of its revenues or earnings in its most recent fiscal year from transactions involving Gargiulo or any Affiliate or Associate of Gargiulo, (iv) who has no affiliation, compensation, consulting or contracting arrangement with Calgene, the Corporation, Monsanto, Gargiulo or any of their respective Affiliates or Associates or any other Person such that a reasonable person would regard such Director as likely to be unduly - 6- influenced by management of Calgene, the Corporation or Monsanto, respectively (provided, however, that no Person shall be regarded as being unduly influenced by the management of Monsanto merely because such Person serves or previously served as a director of Monsanto or any Affiliate or Associate of Monsanto), and (v) who has an outstanding reputation for personal integrity and distinguished achievement in areas relevant to the Corporation. Notwithstanding the foregoing, no member of the immediate family of any Person who does not qualify to be an Independent Director by reason of clause (i), (ii), (iii) or (iv) above shall be considered an Independent Director. For purposes of the preceding sentence, the term "immediate family" shall have the same meaning as set forth in Item 404(a) of Regulation S-K. "Monsanto" means Monsanto Company, a Delaware corporation. "Monsanto Director" means a Director or Calgene Director, including any Monsanto Management Director, who is nominated for such position by Monsanto in accordance with Section C(1) hereof. "Monsanto Disclosure Letter" means the disclosure letter from Monsanto to Calgene dated June 27, 1995. "Monsanto Management Director" means a Director or Calgene Director who is nominated for such position by Monsanto in accordance with Section C(1) hereof and who is or was an employee of Monsanto. "Operating Plan" has the meaning set forth in Section D(1)(a)(ix) hereof. "Percentage Interest" means the percentage of outstanding Voting Stock that is controlled directly or indirectly by Monsanto and its Affiliates. "Person" means a corporation, association, partnership, joint venture, limited liability company, individual, trust, unincorporated organization, a government agency or political subdivision thereof and any other entity. "Registrable Securities" means shares of Common Stock issued or issuable pursuant to the Transaction Agreements and all such other securities of the Corporation acquired by a Holder. "Reorganization Agreement" means the Agreement and Plan of Reorganization dated as of October 13, 1995 between Calgene and Monsanto. - 7- "Section 16 Officers" has the meaning set forth in Section C(2)(b)(iii) hereof. "Securities Act" means the Securities Act of 1933, as amended. "Strategic Plan" has the meaning set forth in Section D(1)(a)(ix) hereof. "Subsidiary" has the same meaning as in Rule 12b-2 promulgated under the Exchange Act. "Substantial Part" means more than ten percent (10%) of the total consolidated assets of the Corporation as shown on the Corporation's consolidated balance sheet as of the end of the most recent fiscal quarter ending prior to the time the determination is made. "Tomato Associates" means Tomato Investment Associates, Inc., a Delaware corporation. "Transaction Agreements" has the meaning set forth in the Reorganization Agreement. "Trigger Event" means the earlier of any time that (i) Monsanto's Percentage Interest is at least fifty-five percent (55%) or (ii) the Corporation elects to convert borrowings made from Monsanto into Equity Securities and Monsanto's Percentage Interest is as least fifty percent (50%) after such conversion. "Unaffiliated Equity Holders" means holders of Equity Securities other than Monsanto or any of its Affiliates. "Voting Stock" means securities having the right to vote generally in any election of Directors of the Corporation (other than solely by reason of the occurrence of an event). B. DIRECTOR ELECTIONS; BY-LAWS; BOOKS AND RECORDS 1. Election of directors need not be by written ballot. 2. The Board of Directors is expressly authorized to adopt, amend or repeal the By-laws of the Corporation. 3. The books of the Corporation may be kept at such place within or without the State of Delaware as the By-laws of the Corporation may provide or as may be designated by the Board of Directors. - 8- 4. At all elections of directors of the Corporation, each holder of stock or of any class or classes or of a series thereof shall be entitled to as many votes as shall equal the number of votes which (except for this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected, and he may cast all of such votes for a single candidate or may distribute them among such number to be elected, or for any two or more of them as he may see fit. C. THE BOARD OF DIRECTORS; COMMITTEES During the term of the Governance Agreement (i) the number of directors and the manner of nominating and removing members thereof shall be as set forth in Section C(1), below, and (ii) the Board of Directors shall establish, empower and maintain committees as set forth in Section C(2), below. 1. Board of Directors. The number of Directors and manner of nominating Directors shall be as follows: (a) The number of Directors comprising the Board of Directors shall initially be fixed at nine (9) Directors. The number of such Directors may be increased only in accordance with Section C(1)(c) or Section D(1)(a)(xii) below. (b) Until the occurrence of a Trigger Event, the Corporation shall nominate for election as Directors: (i) two (2) Corporation Management Directors, (ii) three (3) Corporation Directors, and (iii) four (4) Directors designated by Monsanto, at least one (1) of which shall be an Independent Director. (c) At and after the occurrence of a Trigger Event, the Board of Directors shall be comprised of eleven (11) Directors and the Corporation shall nominate, subject to paragraph (d) below, two (2) additional Directors designated by Monsanto, for a total of six (6) nominees to be designated by Monsanto. (d) At any time that Monsanto's Percentage Interest is at least seventy percent (70%), the Corporation shall nominate: (i) eight (8) Directors designated by Monsanto, which shall consist of the two (2) Corporation Management Directors and six (6) other Monsanto Directors (including at least one (1) Independent Director) and (ii) three (3) Independent Directors. At such time as Monsanto's Percentage Interest is at least ninety-nine percent (99%), the Company shall nominate eleven (11) Directors designated by Monsanto. - 9- (e) Notwithstanding anything in the foregoing paragraphs (b), (c) and (d) to the contrary, (i) at any time Monsanto's Percentage Interest is less than forty percent (40%) but at least twenty percent (20%), the Corporation shall nominate three (3) Directors designated by Monsanto, (ii) at any time Monsanto's Percentage Interest is less than twenty percent (20%) but at least ten percent (10%), the Corporation shall nominate two (2) Directors designated by Monsanto, and (iii) at any time Monsanto's Percentage Interest is less than ten percent (10%) but at least five percent (5%), the Corporation shall nominate one (1) Director designated by Monsanto. If, at any time, Monsanto's Percentage Interest is less than five percent (5%), the Corporation shall not be obligated to nominate any Director designated by Monsanto. At any such time, all other Directors, other than the Corporation Management Directors, shall be nominated by the Corporation. (f) The Independent Directors to be nominated by the Corporation from time to time shall be nominated by action of a majority of the Corporation Directors then in office. In the event that no Corporation Directors are in office at such time, such Independent Directors shall be nominated by a majority of the Independent Directors then in office; provided, however, that the holders of a majority of the outstanding Voting Stock held by Unaffiliated Equity Holders shall be entitled to nominate and elect Corporation Directors in lieu of any individuals so nominated to be such Corporation Directors by a majority of the Corporation Directors. (g) The Corporation and Monsanto, respectively, shall have the right to nominate any replacement for a Director nominated in accordance with this Section C(1) by the Corporation or Monsanto, respectively, upon the death, resignation, retirement, disqualification or removal from office for cause of such Director. Such replacement for any Independent Director shall also be an Independent Director unless, in the case of a replacement of a Monsanto Director, the Monsanto Directors include more than the required number of Independent Directors. The Board of Directors shall elect each person so nominated by Monsanto or the Corporation pursuant to this paragraph (g). In addition, the Board of Directors shall nominate the Corporation's Chief Executive Officer to replace such officer's predecessor in office as a Corporation Management Director. - 10- (h) In the event that the number of Monsanto Directors on the Board of Directors differs from the number that Monsanto has the right (and wishes) to designate for nomination pursuant to this Section C(1), (i) if the number of Monsanto Directors exceeds such number, Monsanto shall promptly take all appropriate action to cause to resign that number of Monsanto Directors as is required to make the remaining number of such Monsanto Directors conform to this Section C(1) or (ii) if the number of Monsanto Directors otherwise is less than such number, the Corporation shall promptly take all necessary action to create sufficient vacancies on the Board of Directors to permit Monsanto to designate the full number of Monsanto Directors which it is entitled (and wishes) to nominate pursuant to this Section C(1) (such action to include seeking the resignation or removal of Directors or, at the request of Monsanto, calling a special meeting of the stockholders of the Corporation for the purpose of removing Directors to create such vacancies to the extent permitted by applicable law). Upon the creation of any vacancy pursuant to the preceding sentence, Monsanto shall nominate the person to fill such vacancy in accordance with this Section C(1) and the Board of Directors shall elect each person so nominated. Notwithstanding the foregoing, at each annual meeting of the stockholders of the Corporation, the Corporation shall nominate such number of Directors as Monsanto is otherwise entitled to designate under this Section C(1). (i) Notwithstanding anything herein to the contrary, no individual who is an officer, director, employee, agent, partner or principal stockholder of any competitor of the Corporation or any of its Affiliates (other than Monsanto and its Affiliates) or any competitor of Monsanto or any of its Affiliates (other than the Corporation) shall serve as a Director without the unanimous consent of the Board of Directors. (j) In the event that Monsanto desires to remove any Monsanto Director with or without cause and Monsanto is unable to procure the resignation of such Monsanto Director, then, upon the request of Monsanto, the Board of Directors shall promptly call a special meeting of stockholders of the Corporation for purposes of removing such Monsanto Director. In the event that the Corporation desires to remove any Corporation Director with or without cause and the Corporation is unable to procure the resignation of such Corporation Director, then, upon the request of a majority of the Corporation Directors then in office (or, in the event no Corporation Directors are then in office, upon the request of a majority of the Independent Directors then in office), the Board of Directors shall promptly call a special meeting of stockholders of the Corporation for purposes of removing such Corporation Director. In the event that the Chief Executive Officer's employment with the Corporation is terminated - 11- for any reason, then upon the request of either Monsanto or a majority of the Corporation Directors then in office (or, in the event no Corporation Directors are then in office, upon the request of a majority of the Independent Directors then in office), the Board of Directors shall promptly call a special meeting of stockholders of the Corporation for the purpose of removing such person as a Corporation Management Director. 2. Committees. (a) The Board of Directors shall establish, empower and maintain the committees of the Board of Directors contemplated by this Section C(2). (b) The following committees shall be established, empowered and maintained by the Board of Directors at all times during the term of the Governance Agreement: (i) an Audit Committee, consisting of at least three (3) of the Corporation's Independent Directors, which committee shall be authorized and empowered to cause an audit to be performed of the Corporation and each of its Subsidiaries; (ii) until the occurrence of a Trigger Event, a Retention/Replacement Committee, consisting of the Independent Directors then serving on the Board, responsible for the retention and/or replacement of all of the executive officers of the Corporation, to be based on the financial and behavioral criteria established by the Retention/Replacement Committee; in the event that such committee decides to replace any executive officer, Monsanto shall have the right to nominate a replacement for such executive officer for consideration by the committee along with any other candidates identified by such committee; the rights of the Retention/Replacement Committee shall be subject to the provisions set forth in Section D(1)(a)(viii), below; (iii)a Compensation Committee, responsible, among other things, for recommending to the Board of Directors, for approval by a majority of the Board of Directors, (a) the adoption and amendment of all employee benefit plans and arrangements, (b) the engagement of, terms of any employment agreements and arrangements with, and termination of, all persons designated by the Corporation as "officers" for purposes of - 12- Section 16 of the Exchange Act ("Section 16 Officers"), (c) the policies, limitations and procedures under which the Stock Option Plan Administration Committee shall operate and (d) the granting under the Corporation's employee benefit plans of stock options and other equity rights to Section 16 Officers, and consisting solely of the Independent Directors then serving on the Board of Directors provided each such Independent Director is (A) a disinterested person (as such term is defined in Rule 16b-3(d) under the Exchange Act) and (B) an "independent director" for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended; and (iv) such other committees as the Board of Directors deems necessary or desirable; provided, however, that such committees are established in compliance with Section D(1)(a)(vi), below. For purposes of clause (ii) above, "executive officers" shall have the same meaning as in Rule 3b-7 promulgated under the Exchange Act. (c) Except as otherwise provided in Section C(2)(b), above, or as agreed by a majority of the Monsanto Management Directors, the number of Monsanto Directors on each committee of the Board of Directors shall be the same proportion (but not less than one (1)) of the total membership of such committee as the number of Monsanto Directors, as the case may be, is of the entire Board of Directors. Except as otherwise provided in Section C(2)(b) above, the Monsanto Directors on each committee of the Board of Directors shall be determined by a majority of the Monsanto Management Directors. (d) No action by any committee of the Board of Directors shall be valid unless taken by unanimous written consent as provided in the Corporation's By-laws or taken at a meeting for which adequate notice has been duly given or waived by the members of such committee. Such notice shall include a description of the general nature of the business to be transacted at the meeting, and no other business may be transacted at such meeting unless all members of the committee are present and consent to the consideration of such other business. Any committee member unable to participate in person at any meeting shall be given the opportunity to participate by telephone. The Board of Directors or the remaining committee members shall designate an Independent Director or Corporation Management Director to replace any absent or disqualified - 13- Independent Director member or Corporation Management Director member, respectively, of any committee and a majority of the Monsanto Management Directors shall designate a Monsanto Director to replace any absent or disqualified Monsanto Director member of any committee. Each of the committees established by the Board of Directors pursuant to this Section C(2) shall establish such other rules and procedures for its operation and governance (consistent with the terms of the Governance Agreement) as it shall see fit and may seek such consultation and advice as to matters within its purview as it shall require. D. APPROVAL REQUIRED FOR CERTAIN ACTIONS 1. Approvals Required (a) Until the earlier of a Trigger Event or such date on which Monsanto's Percentage Interest is less than twenty-five percent (25%), a majority of the Board, including at least one (1) Corporation Director and one (1) Monsanto Management Director, shall be required to approve any of the following: (i) the entry by the Corporation or any of its Affiliates into any merger or consolidation or the acquisition by the Corporation or any of its Affiliates of any business or assets that would constitute a Substantial Part of the Corporation (determined on a consolidated basis) whether such acquisition be by merger or consolidation or the purchase of stock or assets or otherwise; (ii) the sale, pledge, grant of security interest in, transfer, retirement or other disposal of (A) a Substantial Part of the Corporation (determined on a consolidated basis), except pursuant to a security interest granted in connection with borrowings permitted under subsection (iv) below or (B) the pledge or granting of a security interest in any intangible property set forth in Exhibit B to the Monsanto Disclosure Letter. (iii)any dividend by or return of capital by the Corporation or Tomato Associates (other than such distributions by Tomato Associates to the Corporation as are necessary for the Corporation to timely perform its obligations under Sections 1.02 and 5.02(c) of the Gargiulo Credit Facility); -14- (iv) any incurrence or assumption, in the aggregate, by the Corporation, any of its Affiliates or any combination thereof, of any indebtedness for borrowed money at any time outstanding exceeding in the aggregate (determined on a consolidated basis) the greater of (i) Fifteen Million Dollars ($15,000,000), increasing by Five Million Dollars ($5,000,000) on each July 1 commencing July 1, 1996, plus amounts secured by inventory and/or receivables for seasonal working capital lines and indebtedness incurred to acquire property, plant or equipment and secured by the acquired asset, minus amounts outstanding under the Corporation Credit Facility, or (ii) the amounts set forth in the Corporation's Operating Plan, provided that loans under the Gargiulo Credit Facility shall not be counted in this limitation; (v) the repurchase or redemption of any Equity Securities of the Corporation, other than from employees upon termination of employment or service; (vi) the establishment of any new committees of the Board or new or revised delegation(s) of Board authority to any Board committee or changes or revisions to general delegations of authority to officers or other Persons for categories of expenditures; (vii)the adoption of or amendment to any benefit or incentive plans of the Corporation or any of its Affiliates which would increase the annual cost thereof by more than fifteen percent (15%) from the prior fiscal year or any adoption of, or amendment to, any stock option plan; (viii) the election, appointment or removal of the Chief Executive Officer, Chief Operating Officer or Chief Financial Officer of the Corporation and their successors and the establishment of their annual or long term compensation level and benefits and basis for awards (other than agreements in effect on the Effective Date); provided, however, that Monsanto shall have the right to select the Chief Technical Officer of the Corporation and a controller reporting to the Chief Financial Officer of the Corporation; (ix) approval of the annual operating plan (the "Operating Plan") and long-term strategic plan (the "Strategic Plan") of the Corporation and its Affiliates, as well as the annual operating plan and long-term strategic plan for the Gargiulo Business, to be submitted to the Board annually for approval, and any material changes thereto; -15- (x) any transaction between the Corporation (and its Affiliates), on the one hand, and its (their) directors, officers or employees, on the other hand, which is not in the normal course of business; (xi) any modification of the Transaction Agreements; (xii)any amendment of the By-laws or Certificate of Incorporation of the Corporation, Calgene or Tomato Associates by the respective boards of directors thereof; (xiii) the issuance of any warrants for the purchase of Equity Securities or the issuance of additional Equity Securities (other than warrants for the purchase of Equity Securities) in excess of four million (4,000,000) shares of Common Stock in any two (2) year period to a third party, other than pursuant to plans referred to in subsection (vii) above; (xiv)the sale or licensing by the Corporation or any of its Affiliates of (A) any intangible property set forth in Exhibit B attached to the Monsanto Disclosure Letter or (B) any other intangible property for consideration (other than royalties contingent on future sales) exceeding Five Million Dollars ($5,000,000) in the aggregate (determined on a consolidated basis) per transaction or per series of related transactions; (xv) new fixed capital investments, capital leases or noncancellable operating leases by the Corporation and its Affiliates having annual payments in the aggregate (determined on a consolidated basis) exceeding the aggregate amount set forth in the Operating Plan; (xvi)matters covered in Article 5 of the Governance Agreement, including, without limitation, any changes in the composition of the Tomato Associates' Board of Directors other than with respect to Messrs. Salquist and Stacey; -16- (xvii) any press release which mentions or directly or indirectly refers to Monsanto, except as required by law and where approval of the Board of Directors cannot be obtained in a timely manner; (xviii) the initiation, settlement or termination of any suit or proceeding concerning intellectual property, any other matter which could have an adverse public affairs effect upon Monsanto or the filing of any insolvency or bankruptcy proceeding by or on behalf of the Corporation or any of its Affiliates; or (xix)the removal or election of the directors, subject to Section 5.1 of the Governance Agreement, of Tomato Associates. (b) After a Trigger Event and until the earlier of (i) the third anniversary of the Effective Date or (ii) Monsanto's Percentage Interest is at least seventy percent (70%), a majority of the Board, including at least two (2) Corporation Directors, shall be required to approve any of the following: (i) except as provided in Section D(1)(a)(xvi), above, the matters set forth in subsections (i), (ii), (vi), (viii), (ix) and (xi) of paragraph D(1)(a), above; or (ii) any transaction between the Corporation (and its Affiliates) and Monsanto or any Affiliate of Monsanto. (c) From and after the occurrence of both (i) a Trigger Event and (ii) the third anniversary of the Effective Date, and until Monsanto's Percentage Interest is at least ninety-nine percent (99%), neither Monsanto nor any of its Affiliates shall enter into any transaction with the Corporation or any of its Affiliates without the approval of at least two (2) Corporation Directors. SIXTH. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the -17- application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. SEVENTH. A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law as the same exists or may hereafter be amended. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. EIGHTH. 1. Actions, Suits and Proceedings other than by or in the Right of the Corporation. The Corporation shall indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) (all such persons being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of -18- the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Notwithstanding anything to the contrary in this Article, except as set forth in Section 7 below, the Corporation shall not indemnify an Indemnitee seeking indemnification in connection with a proceeding (or part thereof) initiated by the Indemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. Notwithstanding anything to the contrary in this Article, the Corporation shall not indemnify an Indemnitee to the extent such Indemnitee is reimbursed from the proceeds of insurance, and in the event the Corporation makes any indemnification payments to an Indemnitee and such Indemnitee is subsequently reimbursed from the proceeds of insurance, such Indemnitee shall promptly refund such indemnification payments to the Corporation to the extent of such insurance reimbursement. 2. Actions or Suits by or in the Right of the Corporation. The Corporation shall indemnify any Indemnitee who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees) and, to the extent permitted by law, amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, -19- such person is fairly and reasonably entitled to indemnity for such expenses (including attorneys' fees) which the Court of Chancery of Delaware shall deem proper. 3. Indemnification for Expenses of Successful Party. Notwithstanding the other provisions of this Article, to the extent that an Indemnitee has been successful, on the merits or otherwise, in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article, or in defense of any claim, issue or matter therein, or on appeal from any such action, suit or proceeding, he shall be indemnified against all expenses (including attorneys' fees) actually and reasonably incurred by him or on his behalf in connection therewith. Without limiting the foregoing, if any action, suit or proceeding is disposed of, on the merits or otherwise (including a disposition without prejudice) without (i) the disposition being adverse to the Indemnitee, (ii) an adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the Indemnitee did not act in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and (v) with respect to any criminal proceeding, an adjudication that the Indemnitee had reasonable cause to believe his conduct was unlawful, the Indemnitee shall be considered for the purposes hereof to have been wholly successful with respect thereto. 4. Notification and Defense of Claim. As a condition precedent to his right to be indemnified, the Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving him for which indemnity will or could be sought. With respect to any action, suit, proceeding or investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. After notice from the Corporation to the Indemnitee of its election so to assume such defense, the Corporation shall not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with such claim, other than as provided below in this Section 4. The Indemnitee shall have the right to employ his own counsel in connection with such claim, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and the -20- Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel for the Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided by this Article. The Corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any claim brought by or in the right of the Corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. 5. Advancement of Expenses. Subject to the provisions of Section 6 below, in the event that the Corporation does not assume the defense pursuant to Section 4 of this Article of any action, suit, proceeding or investigation of which the Corporation receives notice under this Article, any expenses (including attorneys' fees) incurred by an Indemnitee in defending a civil or criminal action, suit, proceeding or investigation or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter; provided, however, that the payment of such expenses incurred by an Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article. Such undertaking shall be accepted without reference to the financial ability of the Indemnitee to make such repayment. 6. Procedure for Indemnification. In order to obtain indemnification or advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the Indemnitee shall submit to the Corporation a written request, including in such request such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification or advancement of expenses. Any such indemnification or advancement of expenses shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the Corporation determines within such 60-day period that the Indemnitee did not meet the applicable standard of conduct set forth in Section 1 or 2, as the case may be. Such determination shall be made in each instance by (a) a majority vote of the directors of the Corporation who are not at that time parties to the action, suit or proceeding in question ("disinterested directors"), whether or not a quorum, (b) a majority vote of a quorum of the outstanding shares of stock of all classes entitled to vote in an election of directors, voting as a single -21- class, which quorum shall consist of stockholders who are not at that time parties to the action, suit or proceeding in question, (c) independent legal counsel (who may, to the extent permitted by law, be regular legal counsel to the Corporation), or (d) a court of competent jurisdiction. 7. Remedies. The right to indemnification or advancement of expenses as granted by this Article shall be enforceable by the Indemnitee in any court of competent jurisdiction if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within the 60-day period referred to in Section 6 above. Unless otherwise required by law, the burden of proving that the Indemnitee is not entitled to indemnification or advancement of expenses under this Article shall be on the Corporation. Neither the failure of the Corporation to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation pursuant to Section 6 that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's expenses (including attorneys' fees) incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. 8. Subsequent Amendment. No amendment, termination or repeal of this Article or of the relevant provisions of the General Corporation Law or any other applicable laws shall affect or diminish in any way the rights of any Indemnitee to indemnification or advancement of expenses under the provisions hereof with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal. 9. Other Rights. The rights to indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in any other capacity while holding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, -22- executors and administrators of the Indemnitee. Nothing contained in this Article shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with officers and directors providing indemnification rights and procedures different from those set forth in this Article. In addition, the Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article. 10. Partial Indemnification. If an Indemnitee is entitled under any provision of this Article to indemnification by the Corporation for some or a portion of the expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with any action, suit, proceeding or investigation and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion of such expenses (including attorneys' fees), judgments, fines or amounts paid in settlement to which the Indemnitee is entitled. 11. Insurance. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or of another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) against any expense, liability or loss incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law. 12. Merger or Consolidation. If the Corporation is merged into or consolidated with another corporation and the Corporation is not the surviving corporation, the surviving corporation shall assume the obligations of the Corporation under this Article with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the date of such merger or consolidation. 13. Savings Clause. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify and advance expenses to each Indemnitee as to any expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by -23- or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article that shall not have been invalidated and to the fullest extent permitted by applicable law. 14. Definitions. Terms used herein and defined in Section 145(h) and Section 145(i) of the General Corporation Law shall have the respective meanings assigned to such terms in such Section 145(h) and Section 145(i). 15. Subsequent Legislation. If the General Corporation Law is amended after adoption of this Article to expand further the indemnification and advancement of expenses permitted to Indemnitees, then the Corporation shall indemnify and advance expenses to such persons to the fullest extent permitted by the General Corporation Law, as so amended. NINTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Restated Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. - 24- IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which restates, integrates and amends the provisions of the Certificate of Incorporation of the Corporation, and which has been duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware, has been signed by its President this __ day of March, 1996. CALGENE II, INC. By: /s/ Roger H. Salquist President EX-2.2 5 STOCK PURCHASE AGREEMENT Agreement dated as of September 27, 1996 between Monsanto Company, a Delaware corporation ("Monsanto"), and Calgene, Inc., a Delaware corporation ("Calgene"). In consideration of the mutual promises and covenants contained in this Agreement, the parties hereto agree as follows: 1. Sale of Shares. Subject to the terms and conditions of this Agreement, at the Closing (as defined below), Calgene will sell and issue to Monsanto, and Monsanto will purchase, 6,250,000 shares (the "Shares") of Common Stock, $.001 par value per share, of Calgene ("Common Stock") for an aggregate purchase price of $50,000,000. The number of Shares shall be appropriately adjusted for any stock splits, stock dividends or similar events affecting the Common Stock after the date hereof and prior to the Closing. 2. The Closing. (a) The closing ("Closing") of the sale and purchase of the Shares under this Agreement shall take place at the offices of Hale and Dorr, 60 State Street, Boston, Massachusetts at 9:00 a.m. on the first date on which all of the conditions set forth in Sections 6 and 7 have been satisfied or duly waived. At the Closing, Calgene shall deliver to Monsanto a certificate for the Shares, registered in the name of Monsanto, against payment to Calgene of the purchase price therefor, by wire transfer. (b) Either Monsanto or Calgene may terminate this Agreement if the conditions set forth in Sections 6 and 7 have not been satisfied or duly waived prior to January 31, 1997, other than by reason of a breach of this Agreement by the terminating party. 3. Representations of Calgene. Subject to and except as disclosed by Calgene in the disclosure schedule provided by Calgene to Monsanto on the date hereof (the "Disclosure Schedule"), Calgene hereby represents and warrants as follows: 3.1 Organization and Standing. Calgene is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to conduct its business as presently conducted and as proposed to be conducted by it and to enter into and perform this Agreement and to carry out the transactions contemplated by this Agreement. Calgene is duly qualified to do business as a foreign corporation and is in good standing in the State of California and in every other jurisdiction in which the failure to so qualify would have a material adverse effect on the assets, business, results of operations or financial condition of Calgene. Calgene has furnished to Monsanto true and complete copies of its Certificate of Incorporation and By-Laws, each as amended to date and presently in effect. 3.2 Capitalization. The authorized capital stock of Calgene consists of 80,000,000 shares of Common Stock, of which 60,443,115 shares were issued and outstanding as of August 31, 1996, and 10,000,000 shares of Preferred Stock, $.001 par value per share, none of which shares are issued or outstanding. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in Section 3.2 of the Disclosure Schedule hereto or provided in this Agreement, (i) no subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or acquire any shares of capital stock of Calgene is authorized or outstanding, (ii) Calgene has no obligation (contingent or otherwise) to issue any subscription, warrant, option, convertible security or other such right or to issue or distribute to holders of any shares of its capital stock any evidences of indebtedness or assets of Calgene, and (iii) Calgene has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. 3.3 Issuance of Shares. The Shares, when issued, sold and delivered against payment therefor in accordance with the provisions of this Agreement, will be duly and validly issued, fully paid and non-assessable. 3.4 Authority for Agreement. The execution, delivery and performance by Calgene of this Agreement and the Amended and Restated Stockholders Agreement attached hereto as Exhibit A (the "Amendment"), and the consummation by Calgene of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action, subject to (i) approval of the Certificate of Amendment attached hereto as Exhibit B (the "Certificate of Amendment") by the stockholders of Calgene holding a majority of the shares of Common Stock outstanding, and (ii) approval of the issuance of the Shares to Monsanto, the Amendment and this Agreement by the holders of a majority of the outstanding shares of Common Stock present or represented at the meeting of stockholders to be held for such purpose (the "Stockholders Meeting"), excluding broker non-votes and shares held by Monsanto; (such approvals being referred to collectively as the "Requisite Stockholder Approval"). This Agreement has been, and the Amendment as of the Closing will be, duly executed and delivered by Calgene. This Agreement constitutes, and the Amendment will constitute as of the Closing, valid and binding obligations of Calgene, enforceable in accordance with their respective terms. The execution of and performance of the transactions contemplated by this Agreement and the Amendment and compliance with their provisions by Calgene will not violate any provision of law and will not conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under, or require a consent or waiver under, its Certificate of Incorporation or ByLaws (each as amended to date) or any indenture, lease, agreement or other instrument to which Calgene is a party or by which it or any of its properties is bound, or any decree, judgment, order, statute, rule or regulation applicable to Calgene. 3.5 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority is required on the part of Calgene in connection with the execution and delivery of this Agreement, the issuance, sale and delivery of the Shares, or the other transactions to be consummated at the Closing, as contemplated by this Agreement, except (i) the filing with the Secretary of State of Delaware of the Certificate of Amendment and (ii) compliance with Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and (iii) compliance with the applicable requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). 3.6 Reports and Financial Statements. Calgene has previously furnished to Monsanto complete and accurate copies, as amended or supplemented, of its (a) Annual Report on Form 10-K for the fiscal year ended June 30, 1995, as filed with the Securities and Exchange Commission (the "SEC"), (b) proxy statements relating to all meetings of its stockholders (whether annual or special) since June 30, 1995 and (c) all other reports or registration statements, other than Registration Statements on Form S-8, filed by Calgene with the SEC since June 30, 1995 (such annual reports, proxy statements, registration statements and other filings, together with any amendments or supplements thereto, are collectively referred to herein as the "Calgene Reports"). The Calgene Reports constitute all of the documents filed or required to be filed by Calgene with the SEC since June 30, 1995, other than any Registration Statement on Form S-8. As of their respective dates, the Calgene Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited financial statements and unaudited interim financial statements of Calgene included in the Calgene Reports (together, the "Financial Statements") (i) comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, (ii) have been prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods covered thereby (except as may be indicated therein or in the notes thereto, and in the case of quarterly financial statements, as permitted by Form 10-Q under the Exchange Act), and (iii) fairly present in all material respects the consolidated financial condition, results of operations and cash flows of Calgene as of the respective dates thereof and for the periods referred to therein. 3.7 Litigation. Section 3.7 of the Disclosure Schedule identifies, and contains a brief description of, (a) any unsatisfied judgment, order, decree, stipulation or injunction and (b) any claim, complaint, action, suit, proceeding, hearing or investigation of or in any court or governmental agency or before any arbitrator to which Calgene or any subsidiary is a party or, to the knowledge of Calgene, is threatened to be made a party, in each case which could have a material adverse effect on the assets, business, financial condition or results of operations of Calgene. 4. Representations of Monsanto. Monsanto represents and warrants as follows: 4.1 Investment. Monsanto is acquiring the Shares for its own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same. 4.2 Authority. Monsanto has full power and authority to enter into and to perform this Agreement and the Amendment in accordance with their respective terms. 4.3 Experience. Monsanto has sufficient knowledge and experience in investing in companies similar to Calgene so as to be able to evaluate the risks and merits of its investment in Calgene and is able financially to bear the risks thereof. 5. Covenants. 5.1 Best Efforts. (a) Each of the parties shall use its respective best efforts to take all actions and to do all things necessary, proper or advisable to consummate the transactions contemplated by this Agreement. Without limiting the foregoing, Monsanto shall vote all of its shares of Common Stock in favor of the Certificate of Amendment at the Stockholders Meeting. (b) At the Closing, Monsanto and Calgene shall execute and deliver the Amendment. (c) At the Closing, Monsanto and Calgene shall execute a certificate setting forth the "Effective Date Percentage" as defined in the Amendment. 5.2 Stockholders Meeting, Proxy Statement. (a) As soon as practicable, Calgene shall prepare and file with the SEC under the Exchange Act preliminary proxy materials (the "Proxy Statement") for the purpose of soliciting proxies from its stockholders to vote in favor of (i) the issuance of the Shares, (ii) the Certificate of Amendment, and (iii) the election of the directors contemplated by the Amendment (the "Proposals") at the Stockholders Meeting. Calgene shall promptly respond to any SEC comments on the Proxy Statement and shall otherwise use its best efforts to resolve as promptly as practicable all SEC comments to the satisfaction of the SEC. Calgene shall furnish to Monsanto and its counsel copies of the preliminary Proxy Statement prior to filing it with the SEC and copies of the final Proxy Statement prior to mailing it to stockholders. (b) Promptly following the resolution to the satisfaction of the SEC of all SEC comments on the Proxy Statement (or the expiration of the ten-day period under Rule 14a-6(a) under the Exchange Act, if no SEC comments are received by such date), Calgene shall distribute the Proxy Statement to its stockholders and solicit proxies from its stockholders to vote in favor of the Proposals. (c) Calgene shall comply with all applicable provisions of and rules under the Exchange Act and all applicable provisions of the Delaware General Corporation Law in the preparation, filing and distribution of the Proxy Statement, the solicitation of proxies thereunder, and the calling and holding of the Stockholders Meeting. Without limiting the foregoing, Calgene shall ensure that the Proxy Statement does not, as of the date on which it is distributed to its stockholders, and as of the date of the Stockholders Meeting, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading (provided that Calgene shall not be responsible for the accuracy or completeness of any information furnished by Monsanto in writing for inclusion in the Proxy Statement). 5.3 HSR Act. Each of the parties shall promptly file any Notification and Report Forms and related material that it may be required to file with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice under the HSR Act, shall use its best efforts to obtain an early termination of the applicable waiting period, and shall make any further filings or information submissions pursuant thereto that may be necessary, proper or advisable. 5.4 Pending Closing. Pending Closing Calgene shall carry on the business of Calgene and its subsidiaries in the ordinary and regular course of business. 6. Conditions to the Obligations of Monsanto. The obligation of Monsanto to purchase Shares at the Closing is subject to the fulfillment, or the waiver by Monsanto, of each of the following conditions on or before the Closing: 6.1 Accuracy of Representations and Warranties. Each representation and warranty contained in Section 3 shall be true and correct in all material respects on and as of the Closing Date with the same effect as though such representation and warranty had been made on and as of that date (except for representations and warranties made as of a specific date, which shall be true and correct as of such date). 6.2 Performance. Calgene shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by Calgene prior to or at the Closing. 6.3 Stockholder Agreement. The Amendment shall have been executed and delivered by Calgene. 6.4 Certificate of Amendment. The Certificate of Amendment shall have been filed with the Secretary of State of Delaware. 6.5 HSR Act. All applicable waiting periods (and any extensions thereof) under the HSR Act shall have expired or otherwise been terminated. 6.6 No Injunctions or Other Proceedings. No temporary restraining order, preliminary or permanent injunction or other order issued by any court or other legal or regulatory restraint or prohibition preventing the consummation of the transactions contemplated hereby shall have been issued and remain outstanding. No investigation, action, suit or proceeding by any governmental or regulatory commission, agency, body or authority, and no action, suit or proceeding by any other person or entity shall be pending on the Closing Date which challenges, or might result in a challenge to, this Agreement or any transactions contemplated hereby, or which claims, or might give rise to a claim for, damages in a material amount as a result of the consummation of this Agreement. 6.7 NASDAQ. The Shares shall have been authorized for listing on the Nasdaq National Market, subject to official notice of issuance. 6.8 Opinion of Counsel. Monsanto shall have received an opinion from Hale and Dorr, counsel for Calgene, dated the Closing Date, substantially in the form attached hereto as Exhibit C. 6.9 Stockholder Approval. The issuance of the Shares and the Certificate of Amendment shall have received the Requisite Stockholder Approval and the directors contemplated by the Amendment shall have been elected. 6.10 Material Adverse Change. Between the date of this Agreement and the Closing Date there shall have been no materially adverse change in the position, financial or otherwise, or the operations, assets, liabilities or results of operations of Calgene or its subsidiaries, provided that such a material adverse change shall not be deemed to have occurred as a result of any change in the customers, pricing or sales volume of Calgene or any outcome of the litigation between Calgene and Enzo Biochem, Inc. 6.11 No Change in Capitalization. Prior to Closing Calgene shall not have issued, agreed to issue or approve the issuance of any shares of its capital stock or any options, warrants or other rights entitling the holder thereof to convert into or receive shares of Calgene capital stock, except for the grant of options for Calgene Common stock to employees and consultants in the ordinary course of business and the issuance of shares of Calgene Common Stock pursuant to the exercise of outstanding options or warrants, unless approved by Calgene directors designated by Monsanto in writing. 7. Conditions to the Obligations of Calgene. The obligations of Calgene under this Agreement are subject to fulfillment, or the waiver by Calgene, of the following conditions on or before the Closing: 7.1 Accuracy of Representations and Warranties. The representations and warranties of Monsanto contained in Section 4 shall be true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of that date. 7.2 Performance. Monsanto shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by Monsanto prior to or at the Closing. 7.3 Stockholder Agreement. The Amendment shall have been executed and delivered by Monsanto. 7.4 HSR Act. All applicable waiting periods (and any extensions thereof) under the HSR Act shall have expired or otherwise been terminated. 7.5 No Injunction or Other Proceedings. No temporary restraining order, preliminary or permanent injunction or other order issued by any court or other legal or regulatory restraint or prohibition preventing the consummation of the transaction contemplated hereby shall have been issued and remain outstanding. No investigation, action, suit or proceeding by any governmental or regulatory commission, agency, body or authority, and no action, suit or proceeding by any other person or entity shall be pending on the Closing Date which challenges, or might result in a challenge to, this Agreement or any transactions contemplated hereby, or which claims, or might give rise to a claim for, damages in a material amount as a result of the consummation of this Agreement. 7.6 Stockholder Approval. The issuance of the Shares and the Certificate of Amendment shall have received the Requisite Stockholder Approval. 8. Miscellaneous. 8.1 Press Releases and Announcements. No party shall issue any press release or public disclosure relating to the subject matter of this Agreement without the prior written approval of the other party; provided, however, that any party may make any public disclosure it believes in good faith is required by law or regulation (in which case the disclosing party shall advise the other party and provide it with a copy of the proposed disclosure prior to making the disclosure). 8.2 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the parties. 8.3 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the parties and supersedes any prior understandings, agreements, or representations by or among the parties, written or oral, with respect to the subject matter hereof. 8.4 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other party. 8.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8.6 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 8.7 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the law of conflicts) of the State of Delaware. 8.8 Amendments and Waivers. The parties may mutually amend any provision of this Agreement at any time prior to the Closing Date, provided, however, that any amendment effected subsequent to the Requisite Stockholder Approval shall be subject to the restrictions contained in the Delaware General Corporation Law. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 8.9 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 8.10 Specific Performance. Each of the parties acknowledges and agrees that the other party would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties agrees that the other party shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the parties and the matter, in addition to any other remedy to which it may be entitled, at law or in equity. 8.11 Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. CALGENE, INC. By:/s/ Lloyd M. Kunimoto Title: President MONSANTO COMPANY By:/s/ Hendrik A. Verfaillie Title: Executive Vice President EX-10.57 6 BUSINESS LOAN AGREEMENT This Agreement dated as of February 28, 1997, is between BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and CALGENE, INC. (the "Borrower"). 1. DEFINITIONS In addition to the terms which are defined elsewhere in this Agreement, the following terms have the meanings indicated for the purposes of this Agreement: 1.1 "Acceptable Inventory" means inventory which satisfies the following requirements: (a) The inventory is owned by the Pledgor free of any title defects or any liens or interests of others except the security interest in favor of the Bank; and the Pledgor is the Borrower; Stoneville Pedigreed Seed Company; Delinting and Seed Treating Co.; Gargiulo, Inc.; or Calgene Chemical, Inc. This does not prohibit any statutory liens which may exist in favor of the growers of agricultural products which are purchased by the Pledgor. Goods sold by the Borrower as a broker for other parties ("Brokered Goods") will not be considered owned by the Borrower for these purposes. (b) The inventory is located at locations which the Pledgor has disclosed to the Bank and which are acceptable to the Bank. If the inventory is covered by a negotiable document of title (such as a warehouse receipt) that document must be delivered to the Bank. Inventory which is in transit is not acceptable. (c) The inventory is held for sale or use in the ordinary course of the Pledgor's business and is of good and merchantable quality. Display items, work-in-process and packing and shipping materials are not acceptable. Inventory which is obsolete, unsalable, damaged, defective, discontinued or slow-moving, or which has been returned by the buyer and is not otherwise saleable, is not acceptable. Inventory will be considered slow-moving if it is aged more than 18 months from its production date. In addition, carryover cotton seed inventory exceeding 30% of the projected sales for the year will not be acceptable. "Carryover" cotton seed inventory means cotton seed inventory produced in the prior calendar year. (d) The inventory has not been manufactured to the specifications of a particular account debtor. (e) The inventory is not subject to any licensing agreements which would prohibit or restrict in any way the ability of the Bank to sell the inventory to third parties. (f) The inventory is not placed on consignment. (g) The inventory is otherwise acceptable to the Bank. 1.2 "Acceptable Receivable" means an account receivable which satisfies the following requirements: (a) The account has resulted from the sale of goods or the performance of services by the Pledgor in the ordinary course of the Pledgor's business; and the Pledgor is the Borrower; Stoneville Pedigreed Seed Company; Delinting and Seed Treating Co.; Gargiulo, Inc.; or Calgene Chemical, Inc. (b) There are no conditions which must be satisfied before the Pledgor is entitled to receive payment of the account. Accounts arising from COD sales, consignments or guaranteed sales are not acceptable. (c) The debtor upon the account does not claim any defense to payment of the account, whether well founded or otherwise. (d) The account balance does not include the amount of any counterclaims or offsets which have been or may be asserted against the Pledgor by the account debtor (including offsets for any "contra accounts" owed by the Pledgor to the account debtor for goods purchased by the Pledgor or for services performed for the Pledgor). To the extent any counterclaims, offsets, or contra accounts exist in favor of the debtor, such amounts shall be deducted from the account balance. (e) The account represents a genuine obligation of the debtor for goods sold and accepted by the debtor, or for services performed for and accepted by the debtor. To the extent any credit balances exist in favor of the debtor, such credit balances shall be deducted from the account balance. (f) The Pledgor has sent an invoice to the debtor in the amount of the account. (g) The Pledgor is not prohibited by the laws of the state where the account debtor is located from bringing an action in the courts of that state to enforce the debtor's obligation to pay the account. The Pledgor has taken all reasonable actions to ensure access to the courts of the state where the account debtor is located, including, where necessary, the filing of a Notice of Business Activities Report or other similar filing with the applicable state agency or the qualification by the Pledgor as a foreign corporation authorized to transact business in such state. (h) The account is owned by the Pledgor free of any title defects or any liens or interests of others except the security interest in favor of the Bank. Accounts arising from the sale of Brokered Goods will not be considered to be owned by the Borrower for these purposes. (i) The debtor upon the account is not any of the following: (i) an employee, affiliate, parent or subsidiary of the Pledgor, or an entity which has common officers or directors with the Pledgor. (ii) the U.S. government or any agency or department of the U.S. government unless the Bank agrees in writing to accept the obligation, the Pledgor complies with the procedures in the Federal Assignment of Claims Act of 1940 (41 U.S.C. section 15) with respect to the obligation, and the underlying contract expressly provides that neither the U.S. government nor any agency or department thereof shall have the right of set-off against the Pledgor. (iii) any state, county, city, town or municipality. (iv) any person or entity located in a country or area other than the United States unless either (A) the account is supported by an irrevocable letter of credit issued by a bank acceptable to the Bank, or (B) the account debtor carries an investment grade rating from Dun & Bradstreet of BBB or higher. (j) The account is not in default. An account will be considered in default if any of the following occur: (i) The account is not paid within 60 days from its due date; (ii) The debtor obligated upon the account suspends business, makes a general assignment for the benefit of creditors, or fails to pay its debts generally as they come due; or (iii) Any petition is filed by or against the debtor obligated upon the account under any bankruptcy law or any other law or laws for the relief of debtors; (k) The account does not arise from the sale of goods which remain in the Pledgor's possession or under the Pledgor's control. (l) The account is not evidenced by a promissory note or chattel paper, nor is the account debtor obligated to the Pledgor under any other obligation which is evidenced by a promissory note. (m) The account is otherwise acceptable to the Bank. In addition to the foregoing limitations, the dollar amount of accounts included as Acceptable Receivables which are the obligations of a single debtor shall not exceed the concentration limit established for that debtor. To the extent the total of such accounts exceeds a debtor's concentration limit, the amount of any such excess shall be excluded. The concentration limit for each debtor shall be equal to 20% of the total amount of the aggregate of all Pledgors' accounts at that time. It is provided, however, if the debtor obligated upon an account is Terra Industries, Inc., the concentration limit applicable to such debtor will be the amount of $7,500,000. 1.3 "Borrowing Base" means the sum of: (a) 80% of the balance due on Acceptable Receivables; and (b) 60% of the value of Acceptable Inventory consisting of finished goods comprised of cotton seed (including bulk cotton seed) and plant oil and plant oil-based products (including, but not limited to, canola, palm, and soybean oils). In determining the value of Acceptable Inventory to be included in the Borrowing Base, the Bank will use the lowest of (i) the Pledgor's cost, (ii) the Pledgor's estimated market value, or (iii) the Bank's independent determination of the resale value of such inventory in such quantities and on such terms as the Bank deems appropriate. Prior to multiplying the value of Acceptable Inventory by the percentage rate specified above, the Bank will deduct any amounts the Pledgor owes to growers of agricultural products which the Pledgor has purchased for processing or for use in producing the inventory. In addition, prior to multiplying the value of Acceptable Receivables by the percentage rate specified above, the Bank will deduct any amounts the Pledgor owes to growers of perishable agricultural products (to the extent that such grower payables have not already been subtracted from Acceptable Inventory under the preceding sentence) if such growers would, by timely filing of notice, be entitled to the benefits of the federal Perishable Agricultural Commodities Act of 1930 (7 USC section 499a et seq.) Amounts owed to the growers of Brokered Goods need not be deducted under this paragraph. 1.4 "Credit Limit" means the amount indicated for each period set forth below: Period Amount From the date of this Agreement until 12/31/97 $20,000,000 From 1/1/98 until 12/31/98 $30,000,000 From 1/1/99 until the Expiration Date (as defined below) $40,000,000 1.5 "Guarantors" means the following subsidiaries of the Borrower, together with any future subsidiary of the Borrower unless the Bank, in its discretion, waives the requirement of a guaranty from such subsidiary: Stoneville Pedigreed Seed Company; Delinting and Seed Treating Co.; Gargiulo, Inc.; or Calgene Chemical, Inc. 1.6 "Monsanto Sub Debt" means Subordinated Debt owed by the Borrower to Monsanto Company, including the Monsanto Line of Credit. 1.7 "Monsanto Line of Credit" means the existing line of credit from Monsanto Company to the Borrower, with terms and conditions as previously disclosed to the Bank. 1.8 "Pledgor" means, with respect to collateral pledged under this Agreement, the Borrower or Guarantor which owns the collateral. 1.9 "Subordinated Debt" means indebtedness subordinated, in a manner acceptable to the Bank, to all of the Borrower's obligations to the Bank pursuant to this Agreement. 2. LINE OF CREDIT AMOUNT AND TERMS 2.1 Line of Credit Amount. (a) During the availability period described below, the Bank will provide a line of credit to the Borrower. The amount of the line of credit (the "Commitment") is equal to the lesser of (i) the Credit Limit or (ii) the Borrowing Base. (b) This is a revolving line of credit providing for cash advances and financing overdrafts. During the availability period, the Borrower may repay principal amounts and reborrow them. (c) The Borrower agrees not to permit the outstanding principal balance of advances under the line of credit plus the amount of the Overdraft Limit (as defined below), to exceed the Commitment. If the Borrower exceeds this limit, the Borrower will immediately pay the excess to the Bank upon the Bank's demand. The Bank may apply payments received from the Borrower under this Paragraph to the obligations of the Borrower to the Bank in the order and the manner as the Bank, in its discretion, may determine. 2.2 Availability Period. The line of credit is available between the date of this Agreement and December 1, 1999 (the "Expiration Date") unless the Borrower is in default. 2.3 Interest Rate (a) Unless the Borrower elects an optional interest rate as described below, the interest rate is the Bank's Reference Rate minus one-quarter (0.25) of one percentage point. (b) The Reference Rate is the rate of interest publicly announced from time to time by the Bank in San Francisco, California, as its Reference Rate. The Reference Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate shall take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Reference Rate. 2.4 Repayment Terms (a) The Borrower will pay interest on the first day of each month until payment in full of any principal outstanding under this line of credit. (b) The Borrower will repay in full all principal and any unpaid interest or other charges outstanding under this line of credit no later than the Expiration Date. 2.5 Optional Interest Rates. Instead of the interest rate based on the Bank's Reference Rate, the Borrower may elect the optional interest rates listed below during interest periods agreed to by the Bank and the Borrower. The optional interest rates shall be subject to the terms and conditions described later in this Agreement. Any principal amount bearing interest at an optional rate under this Agreement is referred to as a "Portion." The following optional interest rates are available, as described in Article 3: (a) Fixed Rates. (b) the LIBOR Rate plus one and one-half (1.5) percentage points. 2.6 Overdraft Financing Facility (a) This line of credit may be used to pay overdrafts in the Borrower's checking accounts. The total amount of all unreimbursed overdrafts outstanding at any one time may not exceed One Million Dollars ($1,000,000) (the "Overdraft Limit"). This portion of the line of credit may only be accessed through this overdraft facility. The total amount of all other credit outstanding at any time may not exceed the Commitment, minus the Overdraft Limit. (b) The checking accounts which the Borrower may overdraw are listed below, together with the allocated Overdraft Limit for each account: Account Number Overdraft Limit 14899-02502 $1,000,000 (c) As part of the monthly calculation of service charges to be assessed against the Borrower's account, the Bank will include an interest charge calculated on the daily amount of unreimbursed overdrafts outstanding in the account. The interest rate will be an annual rate of the Bank's Reference Rate minus one-quarter (0.25) of one percentage point. (d) If items are presented against an account covered by this overdraft facility which, if paid, would exceed the allocated Overdraft Limit for that account, the Bank will have no obligation to pay those items, but may at its discretion pay any or all of the items. The excess amount of unreimbursed overdrafts outstanding which exceeds the applicable limits will incur interest at the greater of (i) the rate specified for overdrafts above or (ii) 120% of the Bank's Reference Rate. (e) The Bank or the Borrower may, at its discretion, at any time upon 10 days written notice to the other party, terminate this overdraft facility and require repayment of all outstanding overdrafts. The Borrower will in any event repay all outstanding overdrafts no later than the Expiration Date. (f) For the purposes of this Agreement, the amount of unreimbursed overdrafts outstanding on any day will equal the daily net collected balance of the account on any day when such balance is negative. In calculating the amount of interest accruing under this facility, the daily net collected balance will not include provisional credits for items in the process of collection ("Uncollected Items") as determined under the Bank's normal practices for the Borrower's account. However, in determining whether the Borrower has exceeded the Overdraft Limit, the Commitment, or any other dollar limits on borrowing established in this Agreement, the Borrower shall be given credit for such Uncollected Items. The negative daily net collected balance may include fees and charges which have been posted to the Borrower's account, including overdraft interest charges. This may result in compounding of interest. (g) The Borrower agrees that overdraft interest charges and other fees and charges relating to its accounts may be directly debited from its accounts. (h) The Bank may terminate this overdraft facility if a levy is imposed on any account covered by this facility. 3. OPTIONAL INTEREST RATES 3.1 Optional Rates. Each optional interest rate is a rate per year. Interest will be paid on the last day of each interest period, and, if the interest period is longer than one month, then on the first day of each month during the interest period. At the end of any interest period, the interest rate will revert to the rate based on the Reference Rate, unless the Borrower has designated another optional interest rate for the Portion. No Portion will be converted to a different interest rate during the applicable interest period. Upon the occurrence of an event of default under this Agreement and so long as such default has not been cured, the Bank may terminate the availability of optional interest rates for interest periods commencing after the default occurs. 3.2 Fixed Rate. The election of Fixed Rates shall be subject to the following terms and requirements: (a) The "Fixed Rate" means the fixed interest rate the Bank and the Borrower agree will apply during the applicable interest period. (b) The interest period during which the Fixed Rate will be in effect will be one year or less. (c) Each Fixed Rate Portion will be for an amount not less than the following: (i) for interest periods of 14 days or longer, Five Hundred Thousand Dollars ($500,000). (ii) for interest periods of between 1 and 13 days, an amount which, when multiplied by the number of days in the applicable interest period, is not less than fifteen million (15,000,000) dollar-days. (d) Each prepayment of a Fixed Rate Portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid, and a prepayment fee as described below. A "prepayment" is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which: (i) the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by the Bank for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such Portion (or the scheduled payment date for the amount prepaid, if earlier). 3.3 LIBOR Rate. The election of the LIBOR Rate shall be subject to the following terms and requirements: (a) The interest period during which the LIBOR Rate will be in effect will be one, two, three, four, five, six, seven, eight, nine, ten, eleven, or twelve months. The first day of the interest period must be a day other than a Saturday or a Sunday on which the Bank is open for business in California, New York and London and dealing in offshore dollars (a "LIBOR Banking Day"). The last day of the interest period and the actual number of days during the interest period will be determined by the Bank using the practices of the London inter-bank market. (b) Each LIBOR Rate Portion will be for an amount not less than Five Hundred Thousand Dollars ($500,000). (c) The "LIBOR Rate" means the average per annum interest rate, rounded upward to the nearest 1/100 of one percent, of rates at which U.S. dollar deposits would be offered for the applicable interest period by major banks in the London inter-bank market, as shown on the Telerate Page 3750 (or such other page as may replace it) at approximately 11:00 a.m. London time two (2) London Banking Days before the commencement of the interest period. If such rate does not appear on the Telerate Page 3750 (or such other page that may replace it), the rate for that interest period will be determined by such alternate method as reasonably selected by Bank. A "London Banking Day" is a day on which the Bank's London Branch is open for business and dealing in offshore dollars. All amounts in the calculation will be determined by the Bank as of the first day of the interest period. (d) The Borrower shall irrevocably request a LIBOR Rate Portion no later than 12:00 noon San Francisco time on the LIBOR Banking Day preceding the day on which the London Inter-Bank Offered Rate will be set, as specified above. (e) Any Portion of the principal balance already bearing interest at the LIBOR Rate will not be converted to a different rate during its interest period. (f) Each prepayment of a LIBOR Rate Portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid and a prepayment fee as described below. A "prepayment" is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which: (i) the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by the Bank, for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such Portion (or the scheduled payment date for the amount prepaid, if earlier). (g) The Bank will have no obligation to accept an election for a LIBOR Rate Portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the interest period, of a LIBOR Rate Portion are not available in the London inter-bank market; or (ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate Portion. 4. FEES, AND EXPENSES 4.1 Unused Commitment Fee. The Borrower agrees to pay a fee on any difference between the Credit Limit and the amount of credit it actually uses, determined by the weighted average credit outstanding during the specified period. The fee will be calculated at 0.20% per year. This fee is due on the first day of each month until the Expiration Date. 4.2 Expenses. The Borrower agrees to immediately repay the Bank for reasonable expenses that include, but are not limited to, filing, recording and search fees, and title report fees. 4.3 Reimbursement Costs. (a) The Borrower agrees to reimburse the Bank for any reasonable expenses it incurs in the preparation of this Agreement and any agreement or instrument required by this Agreement. Expenses include, but are not limited to, reasonable attorneys' fees, including any allocated costs of the Bank's in-house counsel. (b) The Borrower agrees to reimburse the Bank for the reasonable cost of periodic audits of the collateral securing this Agreement, at such intervals as the Bank may reasonably require; provided, however, that the Borrower shall not be required to reimburse the Bank for more than 2 such audits (in addition to the pre-closing audit) unless there has been an event of default under this Agreement, with each such audit costing no more than $10,000. 5. COLLATERAL The Borrower's and the Guarantors' obligations to the Bank under this Agreement will be secured by personal property the Borrower and Guarantors now own or will own in the future as listed below. The collateral is further defined in security agreement(s) executed by the Borrower and Guarantors. In addition, all personal property collateral securing this Agreement shall also secure all other present and future obligations of the Borrower to the Bank. All personal property collateral securing any other present or future obligations of the Borrower to the Bank shall also secure this Agreement. (a) A blanket lien on machinery and equipment. (b) Inventory. (c) Receivables. 6. DISBURSEMENTS, PAYMENTS AND COSTS 6.1 Requests for Credit. Each request for an extension of credit will be made in writing in a manner acceptable to the Bank, or by another means acceptable to the Bank. 6.2 Disbursements and Payments. Each disbursement by the Bank and each payment by the Borrower will be: (a) made at the Bank's branch (or other location) selected by the Bank from time to time; (b) made for the account of the Bank's branch selected by the Bank from time to time; (c) made in immediately available funds, or such other type of funds selected by the Bank; (d) evidenced by records kept by the Bank. In addition, the Bank may, at its discretion, require the Borrower to sign one or more promissory notes. 6.3 Telephone and Telefax Authorization. (a) The Bank may honor telephone or telefax instructions for advances or repayments or for the designation of optional interest rates given by any one of the individuals authorized to sign loan agreements on behalf of the Borrower, or any other individual designated by any one of such authorized signers. (b) Advances will be deposited in and repayments will be withdrawn from the Borrower's account number 14899-02502, or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower. (c) The Borrower indemnifies and excuses the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any act resulting from telephone or telefax instructions it reasonably believes are made by any individual authorized by the Borrower to give such instructions; except to the extent that such liability, loss or costs arises from the Bank's gross negligence or willful misconduct. This indemnity and excuse will survive this Agreement's termination. 6.4 Direct Debit (Pre-Billing) (a) The Borrower agrees that the Bank will debit the Borrower's account number 14899-02502, or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower (the "Designated Account") on the date each payment of interest and any fees from the Borrower becomes due (the "Due Date"). If the Due Date is not a banking day, the Designated Account will be debited on the next banking day. (b) Approximately 10 days prior to each Due Date, the Bank will mail to the Borrower a statement of the amounts that will be due on that Due Date (the "Billed Amount"). The calculation will be made on the assumption that no new extensions of credit or payments will be made between the date of the billing statement and the Due Date, and that there will be no changes in the applicable interest rate. (c) The Bank will debit the Designated Account for the Billed Amount, regardless of the actual amount due on that date (the "Accrued Amount"). If the Billed Amount debited to the Designated Account differs from the Accrued Amount, the discrepancy will be treated as follows: (i) If the Billed Amount is less than the Accrued Amount, the Billed Amount for the following Due Date will be increased by the amount of the discrepancy. The Borrower will not be in default by reason of any such discrepancy. (ii) If the Billed Amount is more than the Accrued Amount, the Billed Amount for the following Due Date will be decreased by the amount of the discrepancy. Regardless of any such discrepancy, interest will continue to accrue based on the actual amount of principal outstanding without compounding. The Bank will not pay the Borrower interest on any overpayment. (d) The Borrower will maintain sufficient funds in the Designated Account to cover each debit. If there are insufficient funds in the Designated Account on the date the Bank enters any debit authorized by this Agreement, the debit will be reversed. 6.5 Banking Days. Unless otherwise provided in this Agreement, a banking day is a day other than a Saturday or a Sunday on which the Bank is open for business in California. All payments and disbursements which would be due on a day which is not a banking day will be due on the next banking day. All payments received on a day which is not a banking day will be applied to the credit on the next banking day. 6.6 Taxes. (a) If any payments to the Bank under this Agreement are made from outside the United States, the Borrower will not deduct any foreign taxes from any payments it makes to the Bank. If any such taxes are imposed on any payments made by the Borrower (including payments under this paragraph), the Borrower will pay the taxes and will also pay to the Bank, at the time interest is paid, any additional amount which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed. The Borrower will confirm that it has paid the taxes by giving the Bank official tax receipts (or notarized copies) within 30 days after the due date. (b) Payments made by the Borrower to the Bank will be made without deduction of United States withholding or similar taxes. If the Borrower is required to pay U.S. withholding taxes, the Borrower will pay such taxes in addition to the amounts due to the Bank under this Agreement. If the Borrower fails to make such tax payments when due, the Borrower indemnifies the Bank against any liability for such taxes, as well as for any related interest, expenses, additions to tax, or penalties asserted against or suffered by the Bank with respect to such taxes. 6.7 Interest Calculation. Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 360-day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365-day year is used. 6.8 Default Rate. Upon the occurrence and during the continuation of any default under this Agreement, principal amounts outstanding under this Agreement will at the option of the Bank bear interest at a rate which is one (1.0) percentage point higher than the rate of interest otherwise provided under this Agreement. This will not constitute a waiver of any default. Installments of principal which are not paid when due under this Agreement shall continue to bear interest until paid. Any interest, fees or costs which are not paid when due shall bear interest at the Bank's Reference Rate plus three-quarters of one (0.75) percentage point. This may result in compounding of interest. 6.9 Payments in Kind. If the Bank requires delivery in kind of the proceeds of collection of the Borrower's accounts receivable, such proceeds shall be credited to interest, principal, and other sums owed to the Bank under this Agreement in the order and proportion determined by the Bank in its sole discretion. All such credits will be conditioned upon collection and any returned items may, at the Bank's option, be charged to the Borrower. 7. CONDITIONS The Bank must receive the following items, in form and content acceptable to the Bank, before it is required to extend any credit to the Borrower under this Agreement: 7.1 Authorizations. Evidence that the execution, delivery and performance by the Borrower (and each Guarantor) of this Agreement and any instrument or agreement required under this Agreement have been duly authorized. 7.2 Governing Documents. A copy of the Borrower's and each Guarantor's articles of incorporation. 7.3 Security Agreements. Signed original security agreements, assignments, and financing statements (together with collateral in which the Bank requires a possessory security interest), which the Bank requires. 7.4 Evidence of Priority. Evidence that security interests and liens in favor of the Bank are valid, enforceable, and prior to all others' rights and interests, except those the Bank consents to in writing. 7.5 Consent to Removal. For any personal property collateral located on real property which is subject to a mortgage or deed of trust or which is not owned by the grantor of the security interest, if the Bank so requires in its discretion, a Consent to Removal from the owner of the real property and the holder of any mortgage or deed of trust. 7.6 Insurance. Evidence of insurance coverage, as required in the "Covenants" section of this Agreement. 7.7 Guaranties. Guaranties signed by each Guarantor, covering the entire amount of the Borrower's obligations to the Bank. 7.8 Subordination Agreement. A subordination agreement in favor of the Bank signed by Monsanto Company, covering the Monsanto Line of Credit and other obligations of the Borrower to Monsanto Company, together with evidence that the outstanding principal amount of the Monsanto Sub Debt is not less than Twenty Four Million Seven Hundred Sixty Thousand Dollars ($24,760,000). 7.9 Payment of Fees. Payment of all accrued and unpaid expenses incurred by the Bank as required by the paragraph entitled "Reimbursement Costs." 7.10 Equity Contribution. Evidence that Monsanto Company has contributed an additional Fifty Million Dollars ($50,000,000) of cash equity to the Borrower, as approved by the shareholders in November, 1996. 7.11 Other Items. Any other items that the Bank reasonably requires. 8. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement, and until the Bank is repaid in full, the Borrower makes the following representations and warranties. Each request for an extension of credit constitutes a renewed representation: 8.1 Organization of Borrower. The Borrower is a corporation duly formed and existing under the laws of the state where organized. 8.2 Authorization. This Agreement, and any instrument or agreement required hereunder, are within the Borrower's powers, have been duly authorized, and do not conflict with any of its organizational papers. 8.3 Enforceable Agreement. This Agreement is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable. 8.4 Good Standing. In each state in which the Borrower does business, it is properly licensed, in good standing, and, where required, in compliance with fictitious name statutes. 8.5 No Conflicts. This Agreement does not conflict with any law, agreement, or obligation by which the Borrower is bound. 8.6 Financial Information. All financial and other information that has been or will be supplied to the Bank, including the Borrower's consolidated financial statement dated as of December 31, 1996, is: (a) sufficiently complete to give the Bank accurate knowledge of the Borrower's and Guarantors' financial condition. (b) in compliance with all government regulations that apply. Since the date of the financial statement specified above, there has been no material adverse change in the business condition (financial or otherwise), operations, properties or prospects of the Borrower or any Guarantor. 8.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or threatened against the Borrower which, if lost, would impair the Borrower's financial condition or ability to repay the loan, except as have been disclosed in writing to the Bank. 8.8 Collateral. All collateral required in this Agreement is owned by the grantor of the security interest free of any title defects and, with respect to accounts receivable and inventory, free of any liens or interests of others. 8.9 Permits, Franchises. The Borrower possesses all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade name rights, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged. 8.10 Other Obligations. The Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation, except as have been disclosed in writing to the Bank. 8.11 Income Tax Matters. The Borrower has no knowledge of any pending assessments or adjustments of its income tax for any year, except as have been disclosed in writing to the Bank. 8.12 No Tax Avoidance Plan. The Borrower's obtaining of credit from the Bank under this Agreement does not have as a principal purpose the avoidance of U.S. withholding taxes. 8.13 No Event of Default. There is no event which is, or with notice or lapse of time or both would be, a default under this Agreement. 8.14 Merchantable Inventory. All inventory which is included in the Borrowing Base is of good and merchantable quality and free from defects. 8.15 ERISA Plans. (a) Each Plan (other than a multiemployer plan) is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan has received a favorable determination letter from the IRS and to the best knowledge of the Borrower, nothing has occurred which would cause the loss of such qualification. The Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan, and has not incurred any liability with respect to any Plan under Title IV of ERISA. (b) There are no claims, lawsuits or actions (including by any governmental authority), and there has been no prohibited transaction or violation of the fiduciary responsibility rules, with respect to any Plan which has resulted or could reasonably be expected to result in a material adverse effect. (c) With respect to any Plan subject to Title IV of ERISA: (i) No reportable event has occurred under Section 4043(c) of ERISA for which the PBGC requires 30 day notice. (ii) No action by the Borrower or any ERISA Affiliate to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA. (iii) No termination proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. (d) The following terms have the meanings indicated for purposes of this Agreement: (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (ii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. (iii) "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Code. (iv) "PBGC" means the Pension Benefit Guaranty Corporation. (v) "Plan" means a pension, profit-sharing, or stock bonus plan intended to qualify under Section 401(a) of the Code, maintained or contributed to by the Borrower or any ERISA Affiliate, including any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA. 8.16 Location of Borrower. The Borrower's place of business (or, if the Borrower has more than one place of business, its chief executive office) is located at the address listed under the Borrower's signature on this Agreement. 8.17 Environmental Matters. Except as has been disclosed to the Bank in writing, the Borrower (a) is not in violation of any health, safety, or environmental law or regulation regarding hazardous substances and (b) is not the subject of any claim, proceeding, notice, or other communication regarding hazardous substances. "Hazardous substances" means any substance, material or waste that is or becomes designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant" or a similar designation or regulation under any federal, state or local law (whether under common law, statute, regulation or otherwise) or judicial or administrative interpretation of such, including without limitation petroleum or natural gas. 9. COVENANTS The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full: 9.1 Use of Proceeds. To use the proceeds of the credit only for general working capital purposes. 9.2 Financial Information. To provide the following financial information and statements in form and content acceptable to the Bank, and such additional information as reasonably requested by the Bank from time to time: (a) Copies of the Borrower's Form 10-K Annual Report within 90 days after the date of filing with the Securities and Exchange Commission. (b) Copies of the Borrower's Form 10-Q Quarterly Report and Form 8-K Current Report within 45 days after the date of filing with the Securities and Exchange Commission. (c) Within 45 days of the period's end, the Borrower's quarterly financial statements. These financial statements may be Borrower prepared. The statements shall be prepared on a consolidated and consolidating basis. (d) Within 30 days of each month end, a borrowing certificate setting forth the amount of Acceptable Receivables and Acceptable Inventory as of the last day of such month. (e) Within 30 days of each month end, a compliance certificate of the Borrower signed by an authorized financial officer of the Borrower setting forth (i) the information and computations (in sufficient detail) to establish that the Borrower is in compliance with all financial covenants at the end of the period covered by the financial statements then being furnished and (ii) whether there existed as of the date of such financial statements and whether there exists as of the date of the certificate, any default under this Agreement and, if any such default exists, specifying the nature thereof and the action the Borrower is taking and proposes to take with respect thereto. (f) By December 31 of each year, projected income statements, balance sheets and cash flow statements for (i) the Borrower on a consolidated basis; (ii) Gargiulo, Inc.; and (iii) all subsidiaries other than Gargiulo, Inc. The projections shall include an annual projection by month covering the subsequent year, as well as a five year projection. (g) promptly upon receipt, copies of all notices, orders, or other communications regarding (i) any material enforcement action by any governmental authority relating to health, safety, the environment, or any hazardous substances with regard to the Borrower's property, activities, or operations, or (ii) any material claim against the Borrower regarding hazardous substances. (h) Statements showing an aging of the Borrower's receivables within thirty (30) days after the end of each month. (i) A statement showing an aging of accounts payable within thirty (30) days after the end of each month. (j) If the Borrower purchases agricultural products from growers for use in the Borrower's business, a listing of accounts payable to growers within 30 days after the end of each month. (k) An inventory listing, covering cotton seed (including bulk seed) and plant oil and plant oil-based products (including, but not limited to, canola, palm, and soybean oils) within thirty (30) days after the end of each month; the listing must include a description of the inventory, its location and cost, and such other information as the Bank may require. (l) Promptly upon the Bank's reasonable request, such other statements, lists of property and accounts, budgets, forecasts or reports as to the Borrower and as to each Guarantor of the Borrower's obligations to the Bank as the Bank may request. 9.3 Limitation on Losses. Not to incur on a consolidated basis a net loss after taxes and extraordinary items in excess of the following: (a) In any one fiscal year, the sum of: (i) Ten Million Dollars ($10,000,000); plus (ii) the increase, since the beginning of the fiscal year, in the principal amount outstanding under the Monsanto Sub Debt; plus (iii) cash received during the fiscal year from the sale of the Borrower's stock; plus (iv) the increase, since the beginning of the fiscal year, in the amount of accrued but unpaid interest on the Subordinated Debt. (b) From the date of this Agreement through any calculation date up to and including December 1, 1999, the sum of: (i) Fifteen Million Dollars ($15,000,000); plus (ii) the increase, since December 31, 1996, in the principal amount outstanding under the Monsanto Sub Debt; plus (iii) cash received, since December 31, 1996, from the sale of the Borrower's stock; plus (iv) the increase, since December 31, 1996, in the amount of accrued but unpaid interest on Subordinated Debt. 9.4 Adjusted Tangible Net Worth. To maintain on a consolidated basis Adjusted Tangible Net Worth equal to at least Fifty Million Dollars ($50,000,000). "Adjusted Tangible Net Worth" means Tangible Net Worth, plus Subordinated Debt, plus Monsanto R&D Advances. "Monsanto R&D Advances" means the amount of cash research and development advances made by Monsanto Company to the Borrower and accounted for as deferred revenue. "Tangible Net Worth" means the gross book value of the Borrower's assets (excluding goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and expense, capitalized or deferred research and development costs, deferred marketing expenses, deferred receivables, and other like intangibles, and monies due from affiliates, officers, directors, employees, or shareholders of the Borrower) plus Subordinated Debt, less total liabilities, including but not limited to accrued and deferred income taxes, and any reserves against assets. 9.5 Leverage. To maintain on a consolidated basis a ratio of (a) Total Liabilities, minus Subordinated Debt, minus Monsanto R&D Advances, to (b) Adjusted Tangible Net Worth, not exceeding 1.50:1.0. "Total liabilities" means the sum of current liabilities plus long term liabilities. 9.6 Adjusted Cash Flow. To maintain on a consolidated basis for each fiscal year Adjusted Cash Flow not less than negative Three Million Dollars ($-3,000,000). "Adjusted Cash Flow" means the sum of net income from operations and investments, after taxes, plus the increase in the principal amount outstanding under the Monsanto Sub Debt, plus depreciation, depletion, amortization and other non-cash charges, plus accrued but unpaid interest on Subordinated Debt, minus Unfinanced Acquisitions of Fixed or Capital Assets. "Unfinanced Acquisitions of Fixed or Capital Assets" means acquisitions of fixed or capital assets with cash or with the proceeds of revolving lines of credit. 9.7 Other Debts. Not to have outstanding or incur (or permit any Guarantor to have outstanding or incur) any direct or contingent liabilities or lease obligations (other than those to the Bank), or become liable for the liabilities of others without the Bank's written consent. This does not prohibit: (a) Acquiring goods, supplies, or merchandise on normal trade credit. (b) Endorsing negotiable instruments received in the usual course of business. (c) Obtaining surety bonds in the usual course of business. (d) Liabilities and lines of credit and leases in existence on the date of this Agreement disclosed in writing to the Bank in the Borrower's financial statement dated December 31, 1996. (e) Additional debts and lease obligations for the acquisition of fixed or capital assets (to the extent permitted in paragraph 9.9 below) in an amount not exceeding Six Million Dollars ($6,000,000) outstanding at any one time. (f) Subordinated Debt acceptable to the Bank in its sole discretion. (g) Debts and lease obligations, acceptable to the Bank in its sole discretion, which are assumed by the Borrower or Guarantor in an acquisition permitted under paragraph 9.21(d) below. (h) Operating leases. 9.8 Other Liens. Not to create, assume, or allow any security interest or lien (including judicial liens) on property the Borrower or any Guarantor now or later owns, except: (a) Deeds of trust and security agreements in favor of the Bank. (b) Liens for taxes not yet due. (c) Liens outstanding on the date of this Agreement. (d) Additional purchase money security interests in fixed assets or equipment acquired after the date of this Agreement, if the total principal amount of debts secured by such liens does not exceed Six Million Dollars ($6,000,000) at any one time. (e) Additional liens on fixed assets or equipment with a net book value of no more than Six Million Dollars ($6,000,000) to secure purchase money financing permitted by the foregoing paragraphs. (f) Liens arising by operation of law and in the ordinary course of the Borrower's or Guarantor's business securing amounts the Borrower or Guarantor owes to growers of agricultural products purchased by the Borrower or Guarantor for resale, processing, or use in producing the Borrower's or Guarantor's inventory, provided such obligations are not past due. 9.9 Monsanto Line of Credit. To continue to maintain the Monsanto Line of Credit in an amount not less than Fifteen Million Dollars ($15,000,000), with terms and conditions substantially identical to those in the existing credit agreement dated March 31, 1996. 9.10 Dividends. Not to declare or pay any dividends on any of its shares except dividends payable in capital stock of the Borrower, and not to purchase, redeem or otherwise acquire for value any of its shares, or create any sinking fund in relation thereto. 9.11 Notices to Bank. To promptly notify the Bank in writing of: (a) any lawsuit claiming damages of over Two Hundred Fifty Thousand Dollars ($250,000) against the Borrower or any Guarantor. (b) any substantial dispute between the Borrower (or any Guarantor) and any government authority. (c) any failure to comply with this Agreement. (d) any material adverse change in the Borrower's (or any Guarantor's) business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. (e) any change in the Borrower's or any Guarantor's name, legal structure, or chief executive office. (f) the receipt of any notice or communication regarding (i) any threatened or pending investigation or enforcement action by any governmental authority or any other claim relating to health, safety, the environment, or any hazardous substances with regard to the Borrower's or any Guarantor's property, activities, or operations or (ii) any knowledge on the part of the Borrower that hazardous substances exist on or under the Borrower's or any Guarantor's real property. 9.12 Books and Records. To maintain, and cause each Guarantor to maintain, adequate books and records. 9.13 Audits. (a) To allow the Bank and its agents, upon ten days' notice, to inspect the Borrower's and each Guarantor's properties (including taking and removing samples related to any investigation regarding hazardous substances) and examine, audit and make copies of books and records at any reasonable time. If any of the Borrower's or Guarantor's properties, books or records are in the possession of a third party, the Borrower authorizes that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books and records. (b) The Bank has no duty to inspect the Borrower's or Guarantor's properties or to examine, audit or copy books and records and the Bank shall not incur any obligation or liability by reason of not making any such inspection or inquiry. In the event that the Bank inspects the Borrower's or Guarantor's properties or examines, audits or copies books and records, the Bank will be acting solely for the purposes of protecting the Bank's security and preserving the Bank's rights under this Agreement. Neither the Borrower nor any other party is entitled to rely on any inspection or other inquiry by the Bank. The Bank owes no duty of care to protect the Borrower, the Guarantor or any other party against, or to inform the Borrower, the Guarantor or any other party of, any adverse condition that may be observed as affecting the Borrower's or Guarantor's properties or premises, or the Borrower's or Guarantor's business. (c) The Bank shall hold all nonpublic information concerning the Borrower obtained from the Borrower through such audits and inspections, including information obtained through the Bank's agents, confidential pursuant to the Bank's normal practices and procedures for handling confidential information of such nature, provided that the Bank shall not be precluded from making disclosure regarding such information: (i) to counsel of the Bank, accountants and other professional advisors of the Bank; (ii) in response to a subpoena or order of a court or governmental agency; (iii) at the request of any bank regulatory authority or in connection with an examination of the Bank by such authority; (iv) as required by law or applicable regulation; or (v) to the extent required in connection with the exercise of any remedy hereunder. Notwithstanding the foregoing, the Bank may in its discretion disclose to the Borrower, the Guarantor or any other party any findings relating to hazardous substances (as defined in paragraph 10 below) made as a result of, or in connection with, any inspection of the Borrower's or Guarantor's properties. 9.14 Compliance with Laws. To comply (and cause each Guarantor to comply) with the laws (including any fictitious name statute), regulations, and orders of any government body with authority over the Borrower's or the Guarantor's business. 9.15 Preservation of Rights. To maintain and preserve all rights, privileges, and franchises the Borrower and each Guarantor now has. 9.16 Maintenance of Properties. To make any repairs, renewals, or replacements to keep the Borrower's and each Guarantor's properties in good working condition. 9.17 Perfection of Liens. To help the Bank perfect and protect its security interests and liens, and reimburse it for related reasonable costs it incurs to protect its security interests and liens. 9.18 Cooperation. To take any action reasonably requested by the Bank to carry out the intent of this Agreement. 9.19 Insurance. (a) Insurance Covering Collateral. To maintain all risk property damage insurance policies covering the tangible property comprising the collateral. Each insurance policy must be for the full replacement cost of the collateral and include a replacement cost endorsement, and may have a deductible of up to $25,000. The insurance must be issued by an insurance company acceptable to the Bank and must include a lender's loss payable endorsement in favor of the Bank in a form acceptable to the Bank. (b) General Business Insurance. To maintain insurance satisfactory to the Bank as to amount, nature and carrier covering property damage (including loss of use and occupancy) to any of the Borrower's or Guarantor's properties, public liability insurance including coverage for contractual liability, product liability and workers' compensation, and any other insurance which is usual for the Borrower's or Guarantor's business. (c) Evidence of Insurance. Upon the request of the Bank, to deliver to the Bank a copy of each insurance policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force. 9.20 Additional Negative Covenants. Not to, without the Bank's written consent (and not permit any Guarantor to): (a) engage in any business activities substantially different from the Borrower's or Guarantor's present business. (b) liquidate or dissolve the Borrower's or Guarantor's business. (c) enter into any consolidation, merger, or other combination. (d) sell, assign, lease, transfer or otherwise dispose of all or a substantial part of the Borrower's or Guarantor's business or the Borrower's or Guarantor's assets. (e) sell, assign, lease, transfer or otherwise dispose of any material assets, or enter into any agreement to do so, except as follows: (i) with respect to accounts receivable, for a consideration at least equal to the balance outstanding thereunder; (ii) with respect to inventory, for a consideration at least equal to the Borrower's or Guarantor's cost thereof; (iii) with respect to fixed assets or equipment, sales or dispositions in the ordinary course of business, including dispositions of used, worn-out or surplus equipment; and (iv) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment. (f) enter into any sale and leaseback agreement covering any of its fixed or capital assets, except to the extent permitted by paragraphs 9.7 and 9.8 above. (g) voluntarily suspend its business for more than one day (except for weekends and state or federal holidays). 9.21 ERISA Plans. With respect to a Plan subject to Title IV of ERISA, to give prompt written notice to the Bank of: (a) The occurrence of any reportable event under Section 4043(c) of ERISA for which the PBGC requires 30 day notice. (b) Any action by the Borrower or any ERISA Affiliate to terminate or withdraw from a Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA. (c) The commencement of any proceeding with respect to a Plan under Section 4042 of ERISA. 9.22 Compliance with Environmental Requirements. With regard to the Borrower's and each Guarantor's property, activities, or operations, to comply with the recommendations of any qualified environmental engineer or orders or directions issued by any governmental authority relating to health, safety, the environment, or any hazardous substances including those orders or directives requiring the investigation, clean-up, or removal of hazardous substances. 9.23 Loans and Investments. Not to (and not permit any Guarantor to) make any loans or other extensions of credit to, or make any investments in, or make any capital contributions or other transfers of assets to, any individual or entity, or acquire or purchase a business or its assets, or become a partner in any partnership or member of any joint venture (collectively, "Investments"), except for: (a) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business. (b) investments in any of the following: (i) certificates of deposit; (ii) U.S. treasury bills and other obligations of the federal government; (iii) other investments in accordance with the Borrower's investment policy previously provided to the Bank; (c) intercompany loans among the Borrower and the Guarantors; (d) Investments not covered by (a) through (c) above, for an aggregate consideration (including assumption of liabilities) not exceeding the following: (i) Five Million Dollars ($5,000,000) in 1997; and (ii) Ten Million Dollars ($10,000,000) from the date of this Agreement through December 1, 1999. 10. HAZARDOUS WASTE INDEMNIFICATION The Borrower will indemnify and hold harmless the Bank from any loss or liability directly or indirectly arising out of the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of a hazardous substance. This indemnity will apply whether the hazardous substance is on, under or about the Borrower's property or operations or property leased to the Borrower. The indemnity includes but is not limited to reasonable attorneys' fees (including the reasonable estimate of the allocated cost of in-house counsel and staff). The indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys and assigns. "Hazardous substances" means any substance, material or waste that is or becomes designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant" or a similar designation or regulation under any federal, state or local law (whether under common law, statute, regulation or otherwise) or judicial or administrative interpretation of such, including without limitation petroleum or natural gas. This indemnity will survive repayment of the Borrower's obligations to the Bank. 11. DEFAULT If any of the following events occurs, the Bank may do one or more of the following: declare the Borrower in default, stop making any additional credit available to the Borrower, and require the Borrower to repay its entire debt immediately and without prior notice. If an event of default occurs under the paragraph entitled "Bankruptcy," below, with respect to the Borrower, then, the entire debt outstanding under this Agreement will automatically be due immediately. 11.1 Failure to Pay. The Borrower fails to make a payment under this Agreement within 5 days after the date when due. 11.2 Lien Priority. The Bank fails to have an enforceable first lien (except for liens on equipment and except for any prior liens to which the Bank has consented in writing) on or security interest in any property given as security for this loan. If, in the Bank's reasonable opinion, the breach is capable of being remedied, the breach will not be considered an event of default under this Agreement for a period of five (5) days after the date on which the Bank gives written notice of the breach to the Borrower; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during that period. 11.3 False Information. The Borrower (or any Guarantor) has given the Bank materially false or misleading information or representations. 11.4 Bankruptcy. The Borrower (or any Guarantor) files a bankruptcy petition, a bankruptcy petition is filed against the Borrower (or any Guarantor) or the Borrower (or any Guarantor) makes a general assignment for the benefit of creditors. 11.5 Receivers. A receiver or similar official is appointed for the Borrower's (or any Guarantor's) business, or the business is terminated. 11.6 Lawsuits. Any lawsuit or lawsuits are filed on behalf of one or more trade creditors against the Borrower in an aggregate amount of Four Million Dollars ($4,000,000) or more in excess of any insurance coverage, and the lawsuit(s) are not dismissed within thirty (30) days of the date of filing. 11.7 Judgments. Any judgments or arbitration awards are entered against the Borrower (or any Guarantor), or the Borrower (or any Guarantor) enters into any settlement agreements with respect to any litigation or arbitration, in an aggregate amount of Four Million Dollars ($4,000,000) or more in excess of any insurance coverage. 11.8 Government Action. Any government authority takes action that the Bank believes materially adversely affects the Borrower's (or any Guarantor's) financial condition or ability to repay. 11.9 Material Adverse Change. A material adverse change occurs in the Borrower's (or any Guarantor's) business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. 11.10 Cross-default. Any default occurs under any agreement in connection with any credit the Borrower, any Guarantor, or any of the Borrower's related entities or affiliates (except Monsanto Company) has obtained from anyone else or which the Borrower, any Guarantor, or any of the Borrower's related entities or affiliates has guaranteed in the amount of Two Hundred Fifty Thousand Dollars ($250,000) or more in the aggregate, if (a) any applicable cure period in the relevant credit agreement has expired, and (b) the default either consists of failing to make a payment when due or gives the other lender the right to accelerate the obligation. 11.11 Default under Related Documents. Any guaranty, subordination agreement, security agreement, or other document in favor of the Bank required by this Agreement is defaulted or no longer in effect. If, in the Bank's reasonable opinion, the breach is capable of being remedied, the breach will not be considered an event of default under this Agreement for a period of thirty (30) days after the date on which the Bank gives written notice of the breach to the Borrower; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during that period. 11.12 Other Bank Agreements. The Borrower, any Guarantor, or any of the Borrower's related entities or affiliates (except Monsanto Company) materially fails to meet the conditions of, or fails to perform any material obligation under any other agreement such company has with the Bank or any affiliate of the Bank. If, in the Bank's reasonable opinion, the breach is capable of being remedied, the breach will not be considered an event of default under this Agreement for a period of thirty (30) days after the date on which the Bank gives written notice of the breach to the Borrower; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during that period. 11.13 ERISA Plans. The occurrence of any one or more of the following events with respect to a Plan subject to Title IV of ERISA, provided such event or events could reasonably be expected, in the judgment of the Bank, to subject the Borrower to any tax, penalty or liability (or any combination of the foregoing) which, in the aggregate, could have a material adverse effect on the financial condition of the Borrower: (a) A reportable event shall occur under Section 4043(c) of ERISA with respect to a Plan. (b) Any Plan termination (or commencement of proceedings to terminate a Plan) or the full or partial withdrawal from a Plan by the Borrower or any ERISA Affiliate. 11.14 Change of Ownership. Monsanto Company ceases to own a majority of the capital stock of the Borrower. 11.15 Monsanto Agreements. Any term or condition of the Monsanto Sub Debt or any credit agreement or technology licensing agreement between the Borrower and Monsanto Company is modified, amended or waived, or any such agreement is terminated, if such action would have a material adverse effect on the financial condition or prospects of the Borrower or the Borrower's ability to repay the credit. 11.16 Financial Covenants. The Borrower breaches the terms of paragraph 9.3, 9.4, 9.5 or 9.6; whether such failure is evidenced by financial statements delivered to the Bank or is otherwise known to the Borrower or the Bank. If there is credit available to the Borrower under the Monsanto Sub Debt line of credit in an amount sufficient to cure such breach, there shall be no event of default if the Borrower cures the breach by obtaining an advance under such line of credit within five (5) business days after the date on which the breach of the covenant is first known; provided, however, that such advance must be used by the Borrower to reduce any amounts outstanding under this Agreement. 11.17 Other Breach Under Agreement. The Borrower materially fails to meet the conditions of, or fails to perform any material obligation under, any term of this Agreement not specifically referred to in this Article. If, in the Bank's reasonable opinion, the breach is capable of being remedied, the breach will not be considered an event of default under this Agreement for a period of thirty (30) days after the date on which the Bank gives written notice of the breach to the Borrower; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during that period. 12. ENFORCING THIS AGREEMENT; MISCELLANEOUS 12.1 GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank and all financial covenants will be made under generally accepted accounting principles, consistently applied. 12.2 California Law. This Agreement is governed by California law. 12.3 Successors and Assigns. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement without the Bank's prior consent. The Bank may sell participations in or assign this loan, and may exchange financial information about the Borrower with actual or potential participants or assignees. If a participation is sold or the loan is assigned, the purchaser will have the right of set-off against the Borrower. 12.4 Arbitration. (a) This paragraph concerns the resolution of any controversies or claims between the Borrower and the Bank, including but not limited to those that arise from: (i) This Agreement (including any renewals, extensions or modifications of this Agreement); (ii) Any document, agreement or procedure related to or delivered in connection with this Agreement; (iii) Any violation of this Agreement; or (iv) Any claims for damages resulting from any business conducted between the Borrower and the Bank, including claims for injury to persons, property or business interests (torts). (b) At the request of the Borrower or the Bank, any such controversies or claims will be settled by arbitration in accordance with the United States Arbitration Act. The United States Arbitration Act will apply even though this Agreement provides that it is governed by California law. (c) Arbitration proceedings will be administered by the American Arbitration Association and will be subject to its commercial rules of arbitration. (d) For purposes of the application of the statute of limitations, the filing of an arbitration pursuant to this paragraph is the equivalent of the filing of a lawsuit, and any claim or controversy which may be arbitrated under this paragraph is subject to any applicable statute of limitations. The arbitrators will have the authority to decide whether any such claim or controversy is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. (e) If there is a dispute as to whether an issue is arbitrable, the arbitrators will have the authority to resolve any such dispute. (f) The decision that results from an arbitration proceeding may be submitted to any authorized court of law to be confirmed and enforced. (g) The procedure described above will not apply if the controversy or claim, at the time of the proposed submission to arbitration, arises from or relates to an obligation to the Bank secured by real property located in California. In this case, both the Borrower and the Bank must consent to submission of the claim or controversy to arbitration. If both parties do not consent to arbitration, the controversy or claim will be settled as follows: (i) The Borrower and the Bank will designate a referee (or a panel of referees) selected under the auspices of the American Arbitration Association in the same manner as arbitrators are selected in Association-sponsored proceedings; (ii) The designated referee (or the panel of referees) will be appointed by a court as provided in California Code of Civil Procedure Section 638 and the following related sections; (iii) The referee (or the presiding referee of the panel) will be an active attorney or a retired judge; and (iv) The award that results from the decision of the referee (or the panel) will be entered as a judgment in the court that appointed the referee, in accordance with the provisions of California Code of Civil Procedure Sections 644 and 645. (h) This provision does not limit the right of the Borrower or the Bank to: (i) exercise self-help remedies such as setoff; (ii) foreclose against or sell any real or personal property collateral; or (iii) act in a court of law, before, during or after the arbitration proceeding to obtain: (A) an interim remedy; and/or (B) additional or supplementary remedies. (i) The pursuit of or a successful action for interim, additional or supplementary remedies, or the filing of a court action, does not constitute a waiver of the right of the Borrower or the Bank, including the suing party, to submit the controversy or claim to arbitration if the other party contests the lawsuit. However, if the controversy or claim arises from or relates to an obligation to the Bank which is secured by real property located in California at the time of the proposed submission to arbitration, this right is limited according to the provision above requiring the consent of both the Borrower and the Bank to seek resolution through arbitration. (j) If the Bank forecloses against any real property securing this Agreement, the Bank has the option to exercise the power of sale under the deed of trust or mortgage, or to proceed by judicial foreclosure. 12.5 Severability; Waivers. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing. 12.6 Administration Costs. The Borrower shall pay the Bank for all reasonable costs incurred by the Bank in connection with administering this Agreement. 12.7 Attorneys' Fees. The Borrower shall reimburse the Bank for any reasonable costs and attorneys' fees incurred by the Bank in connection with the enforcement or preservation of any rights or remedies under this Agreement and any other documents executed in connection with this Agreement, and including any amendment, waiver, "workout" or restructuring under this Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable attorneys' fees incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. In the event that any case is commenced by or against the Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute, the Bank is entitled to recover costs and reasonable attorneys' fees incurred by the Bank related to the preservation, protection, or enforcement of any rights of the Bank in such a case. As used in this paragraph, "attorneys' fees" includes the allocated costs of the Bank's in-house counsel. 12.8 One Agreement. This Agreement and any related security or other agreements required by this Agreement, collectively: (a) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit; (b) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and (c) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. 12.9 Disposition of Schedules, Reports, Etc. Delivered by Borrower. The Bank will not be obligated to return any schedules, invoices, statements, budgets, forecasts, reports or other papers delivered by the Borrower. The Bank will destroy or otherwise dispose of such materials at such time as the Bank, in its discretion, deems appropriate. 12.10 Returned Merchandise. Until the Bank exercises its rights to collect the accounts receivable as provided under any security agreement required under this Agreement, the Borrower may continue its present policies for returned merchandise and adjustments. Credit adjustments with respect to returned merchandise shall be made immediately upon receipt of the merchandise by the Borrower or upon such other disposition of the merchandise by the debtor in accordance with the Borrower's instructions. If a credit adjustment is made with respect to any Acceptable Receivable, the amount of such adjustment shall no longer be included in the amount of such Acceptable Receivable in computing the Borrowing Base. 12.11 Verification of Receivables. The Bank may at any time, either orally or in writing, request confirmation from any debtor of the current amount and status of the accounts receivable upon which such debtor is obligated. 12.12 Waiver of Confidentiality. The Borrower authorizes the Bank to discuss the Borrower's financial affairs and business operations with any accountants, auditors, business consultants, or other professional advisors employed by the Borrower, and to request from such parties such financial and business information or reports (including management letters) concerning the Borrower as the Bank deems appropriate. 12.13 Indemnification. The Borrower will indemnify and hold the Bank harmless from any loss, liability, damages, judgments, and costs of any kind relating to or arising directly or indirectly out of (a) this Agreement or any document required hereunder, (b) any credit extended or committed by the Bank to the Borrower hereunder, (c) any claim, whether well-founded or otherwise, that there has been a failure to comply with any law regulating the Borrower's sales or leases to or performance of services for debtors obligated upon the Borrower's accounts receivable and disclosures in connection therewith, and (d) any litigation or proceeding related to or arising out of this Agreement, any such document, any such credit, or any such claim. This indemnity includes but is not limited to attorneys' fees (including the allocated cost of in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys, and assigns. This indemnity will survive repayment of the Borrower's obligations to the Bank. All sums due to the Bank hereunder shall be obligations of the Borrower, due and payable immediately without demand. This indemnity shall not apply to any liability, loss or costs which arise from the Bank's gross negligence or willful misconduct. 12.14 Notices. All notices required under this Agreement shall be personally delivered or sent by first class mail, postage prepaid, to the addresses on the signature page of this Agreement, or to such other addresses as the Bank and the Borrower may specify from time to time in writing. 12.15 Headings. Article and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. 12.16 Counterparts. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. This Agreement is executed as of the date stated at the top of the first page. BANK OF AMERICA NATIONAL CALGENE, INC. TRUST AND SAVINGS ASSOCIATION By /s/ Robert L. Munn, Jr. By /s/ Christian Leleu Typed Name Robert L. Munn, Jr. Typed Name Christian Leleu Title V.P. Title Chief Financial Officer By By /s/ Lloyd M. Kunimoto Typed Name Typed Name Lloyd M. Kunimoto Title Title President Address where notices to Address where notices to the Bank are to be sent: the Borrower are to be sent: 555 Capital Mall, Suite 150 1920 Fifth Street Sacramento, CA 95814 Davis, CA 95616 EX-10.0 7 CALGENE, INC. (formerly Calgene II, Inc.) AND MONSANTO COMPANY AMENDED AND RESTATED STOCKHOLDERS AGREEMENT TABLE OF CONTENTS ARTICLE 1 Effect of this Agreement .............................. 2 1.1 Effect of this Agreement ........................................ 2 ARTICLE 2 Compliance with Securities Act ........................ 2 2.1 Certain Definitions ............................................. 2 2.2 Requested Registration .......................................... 8 2.3 Company Registration ............................................ 11 2.4 Expenses of Registration ........................................ 12 2.5 Registration Procedures ......................................... 13 2.6 Indemnification ................................................. 14 2.7 Information by Holder ........................................... 16 2.8 Rule 144 Reporting .............................................. 17 2.9 Transfer of Registration Rights ................................. 17 2.10 Limitations on Subsequent Registration Rights .............. 18 2.11 Termination of Registration Rights ......................... 18 2.12 "Market Stand-off" Agreement ............................... 18 ARTICLE 3 Anti-Dilution Rights and Limitations on Owner ......... 18 3.1 Anti-Dilution Rights ............................................ 18 3.2 Private Offering ................................................ 19 3.3 Public Offering ................................................. 19 3.4 Limitations ..................................................... 20 3.5 Open Market Purchases to Maintain Ownership Percentage .......... 20 3.6 Limitations on Holder's Ownership ............................... 20 3.7 Limitations on Holder's Resale of Company Securities ............ 21 ARTICLE 4 Company and Calgene Corporate Governance .............. 22 4.1 Composition of the Board of Directors and Calgene Board ......... 22 4.2 Solicitation and Voting of Shares ............................... 25 4.3 Committees ...................................................... 26 4.4 Approval Required for Certain Actions ........................... 28 4.5 Enforcement of this Agreement ................................... 31 4.6 Certificate of Incorporation and By-laws ........................ 31 4.7 Advisors ........................................................ 31 4.8 Injunctive Relief ............................................... 31 ARTICLE 5 Governance of Gargiulo ................................ 32 ARTICLE 6 Miscellaneous ......................................... 32 6.1 Governing Law ................................................... 32 6.2 Successors and Assigns .......................................... 32 6.3 Entire Agreement; Amendment ..................................... 32 6.4 Notices ......................................................... 32 6.5 Delays or Omissions ............................................. 33 6.6 Counterparts .................................................... 33 6.7 Severability .................................................... 33 6.8 Stock Legends ................................................... 34 6.9 [This section intentionally left blank.] ........................ 34 6.10 Audits, Consultants and Inspections ........................ 34 6.11 No Third Party Beneficiaries ............................... 35 6.12 Sections and Articles ...................................... 35 6.13 Headings ................................................... 35 AMENDED AND RESTATED STOCKHOLDERS AGREEMENT AGREEMENT made as of the 12th day of November, 1996, by and between Calgene, Inc., a Delaware corporation, (formerly known as Calgene II, Inc.) having its principal place of business at 1920 Fifth Street, Davis, California 95616 (the "Company"), and Monsanto Company, a Delaware corporation, having its principal place of business at 800 North Lindbergh Boulevard, St. Louis, Missouri 63167 ("Monsanto"). WHEREAS, Calgene Technology Corporation, a Delaware corporation and a wholly- owned subsidiary of the Company (formerly known as Calgene, Inc.) ("Calgene"), and Monsanto entered into an Agreement and Plan of Reorganization, dated as of October 13, 1995 (the "Reorganization Agreement"), and certain other Transaction Agreements (as defined in the Reorganization Agreement) whereby Monsanto acquired shares of the Company's common stock, par value $.001 per share ("Common Stock") and may acquire additional shares of Common Stock; WHEREAS, the Company and Monsanto agreed that the Company shall, at the request of a Holder (as hereafter defined), register under the Securities Act of 1933, as amended (the "Securities Act"), and register or qualify under any applicable state securities or blue sky laws the Common Stock of the Company acquired or to be acquired by Holder so as to permit a Holder to sell such Common Stock in the public markets; WHEREAS, the Company and Monsanto agreed on certain restrictions and obligations with respect to the management and operation of the Company, Calgene and Tomato Investment Associates, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company ("Tomato Associates"); WHEREAS, the Company and Monsanto have entered into a Stock Purchase Agreement dated as of September 27, 1996 (the "Stock Purchase Agreement") pursuant to which Monsanto has agreed to purchase additional shares of Common Stock of the Company; and WHEREAS, in connection with the consummation of the transaction contemplated by the Stock Purchase Agreement, the Company and Monsanto desire to amend the Stockholders Agreement dated March 31, 1996 by and between the Company and Monsanto (the "Prior Stockholders Agreement") in its entirety and to become bound by the terms of this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions herein contained, the Company and Monsanto hereby agree as follows: ARTICLE 1 Effect of this Agreement 1.1 Effect of this Agreement. Effective upon the date hereof, and subject only to the conditions set forth herein, all provisions relating to the granting of registration rights and covenants related thereto made by the Company and Monsanto shall be contained in this Agreement. The registration rights and covenants provided herein set forth the sole and entire agreement between the Company and Monsanto on the subject matter of registration rights. ARTICLE 2 Compliance with Securities Act 2.1 Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings (all terms defined in this Article 2 or in other provisions of this Agreement in the singular shall have the same meaning when used in the plural and vice versa): "Affiliate" has the same meaning as in Rule 12b-2 promulgated under the Exchange Act. "Associate" has the same meaning as in Rule 12b-2 promulgated under the Exchange Act. "Board" or "Board of Directors" means the Board of Directors of the Company except where the context otherwise requires. "Calgene" has the meaning set forth in the recitals herein. "Calgene Board" means the Board of Directors of Calgene. "Calgene Director" means a member of the Calgene Board. "Commission" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Common Stock" means the Common Stock, $.001 par value, of the Company. "Company" has the meaning set forth in the first paragraph hereof. "Company Credit Facility" means the Holding Company Credit Facility Agreement dated March 31, 1996 between the Company and Monsanto. "Company Director" means an Independent Director who is designated for such position by the Company in accordance with Section 4.1 hereof. "Company Management Director" means the Chief Executive Officer (or, if there is none at any time, a Director nominated by a majority of the Company Directors) and a second Director who shall be nominated by a majority of the Company Directors. "Company Securities" has the meaning set forth in Section 3.1 hereof. "Control Securities" means securities of the Company, other than Restricted Securities, owned by a Holder at the time such Holder would be deemed to be an Affiliate of the Company. "Credit Facilities" means the Company Credit Facility and the Gargiulo Credit Facility. "Director" means a member of the Board of Directors of the Company. "Effective Date" means November 12, 1996. "Effective Date Percentage" means the greater of 53% or the percentage of outstanding shares of Common Stock of the Company held by Monsanto immediately after the consummation of the transactions contemplated by the Stock Purchase Agreement. "Equity Security" means (i) any Common Stock or other Voting Stock, (ii) any securities of the Company convertible into or exchangeable for Common Stock or other Voting Stock or (iii) any options, rights or warrants (or any similar securities) issued by the Company to acquire Common Stock or other Voting Stock. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Financial Purchaser" means a Person (i) purchasing Company Securities from Monsanto for investment purposes or otherwise in the ordinary course of business and not for the purpose nor with the effect of changing or influencing the control of the Company and (ii) which Person is not already primarily in the same lines of business as the Company. "Gargiulo" means Gargiulo, Inc. formerly known as Tomato Investment Associates, Inc. "Gargiulo Business" means the business transacted by Tomato Associates after March 31, 1996, which business was transacted by Gargiulo prior to March 31, 1996. "Gargiulo Credit Facility" means the Gargiulo Credit Facility Agreement dated March 31, 1996 between the Company and Monsanto. "hereto", "hereunder", "herein", "hereof" and the like mean and refer to this Agreement as a whole and not merely to the specific article, section, paragraph or clause in which the respective word appears. "Holder" means Monsanto and, subject to Section 2.9 hereof and except for purposes of Article 3 hereof, any subsequent holder of outstanding Registrable Securities. "Indemnified Party" has the meaning set forth in Section 2.6(c) hereof. "Indemnifying Party" has the meaning set forth in Section 2.6(c) hereof. "Independent Director" means a Director or Calgene Director (i) who is not and has never been an officer or employee of Calgene, the Company, any Affiliate or Associate of Calgene or the Company or of a Person that derived five percent (5%) or more of its revenues or earnings in its most recent fiscal year from transactions involving Calgene, the Company or any Affiliate or Associate of Calgene or the Company, (ii) who is not and has never been an officer or employee of Monsanto, any Affiliate or Associate of Monsanto or of a Person that derived more than five percent (5%) of its revenues or earnings in its most recent fiscal year from transactions involving Monsanto or any Affiliate or Associate of Monsanto, (iii) who is not and never has been an officer or employee of Gargiulo, any Affiliate or Associate of Gargiulo or of a Person that derived more than five percent (5%) of its revenues or earnings in its most recent fiscal year from transactions involving Gargiulo or any Affiliate or Associate of Gargiulo, (iv) who has no affiliation, compensation, consulting or contracting arrangement with Calgene, the Company, Monsanto, Gargiulo or their respective Affiliates or Associates or any other Person such that a reasonable person would regard such Director as likely to be unduly influenced by management of Calgene, the Company or Monsanto, respectively (provided, however, that no Person shall be regarded as being unduly influenced by the management of Monsanto merely because such Person serves or previously served as a director of Monsanto or any Affiliate or Associate of Monsanto), and (v) who has an outstanding reputation for personal integrity and distinguished achievement in areas relevant to the Company. Notwithstanding the foregoing, no member of the immediate family of any Person who does not qualify to be an Independent Director by reason of clause (i), (ii), (iii) or (iv) above shall be considered an Independent Director. For purposes of the preceding sentence, the term "immediate family" shall have the same meaning as set forth in Item 404(a) of Regulation S-K. Without limiting the foregoing, Roger H. Salquist shall qualify as an Independent Director so long as he continues to qualify under clauses (iv) and (v) of such definition. Roger H. Salquist shall not fail to qualify under clause (iv) above as a result of his Change in Control Employment Agreement dated July 19, 1995, as modified, or Consulting Agreement dated September 16, 1996 with the Company. Any of the above restrictions may be waived by unanimous action of the Board of Directors. "Monsanto" has the meaning set forth in the first paragraph hereof. "Monsanto Director" means a Director or Calgene Director, including any Monsanto Management Director, who is designated for such position by Monsanto in accordance with Section 4.1 hereof. "Monsanto Management Director" means a Director or Calgene Director who is designated for such position by Monsanto in accordance with Section 4.1 hereof and who is or was an employee of Monsanto. "New Percentage Ownership" has the meaning set forth in Section 3.6(c) hereof. "Non-Financial Purchaser" means a Person, other than a Financial Purchaser, purchasing Company Securities from Monsanto. "Operating Plan" has the meaning set forth in Section 4.4(a)(ix) hereof. "Other Selling Stockholders" has the meaning set forth in Section 2.2(c) hereof. "Percentage Interest" means the percentage of outstanding Voting Stock that is controlled directly or directly by Monsanto and its Affiliates. "Person" means a corporation, association, partnership, joint venture, limited liability company, individual, trust, unincorporated organization, a government agency or political subdivision thereof and any other entity. "Preliminary Prospectus" means a preliminary prospectus as contemplated by Rule 430 or 430A under the Securities Act included at any time in the Registration Statement. "Pre-Offering Percentage" has the meaning set forth in Section 3.1 hereof. "Prospectus" means (i) the prospectus as first filed with the Commission pursuant to Rule 424(b) under the Securities Act or, (ii) if no such filing is required, the form of final prospectus included in the Registration Statement at the effective date thereof or (iii) if a Term Sheet or Abbreviated Term Sheet (as such terms are defined in Rule 434(b) and 434(c), respectively, under the Securities Act) is filed with the Commission pursuant to Rule 424(b) (7) under the Securities Act, the Term Sheet or Abbreviated Term Sheet and the last Preliminary Prospectus filed with the Commission prior to the time the Registration Statement became effective, taken together (including, in each case, the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Securities Act), together with any supplement to any of the foregoing. "Registration Statement" means any registration statement of the Company filed under the Securities Act which covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus relating thereto and all amendments and supplements to such registration statement, including post-effective amendments, all exhibits and all material incorporated or deemed to be incorporated by reference in such registration statement. "Registrable Securities" means shares of Common Stock issued or issuable to Monsanto pursuant to the Transaction Agreements and the Prior Stockholders Agreement and the Stock Purchase Agreement whether owned by Monsanto or a permitted transferee of Monsanto and all such other securities of the Company acquired by Monsanto or any Affiliate of Monsanto in accordance herewith. "Register", "Registered" and "Registration", whether or not capitalized, mean and refer to a registration effected by preparing and filing a Registration Statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such Registration Statement. "Registration Expenses" means all expenses incurred by the Company in compliance with this Article 2, including, without limitation, all registration fees, qualification fees, filing fees, advertising and road show expenses (excluding advertising and road show expenses incurred by a Holder), printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). "Reorganization Agreement" has the meaning set forth in the recitals herein. "Requesting Holder" means a Holder requesting any registration pursuant to Section 2.2 hereof. "Restricted Securities" means the securities of the Company acquired by a Holder from the Company or an Affiliate of the Company otherwise than pursuant to a public offering. "Section 16 Officers" has the meaning set forth in Section 4.3(b)(iii) hereof. "Securities Act" means the Securities Act of 1933, as amended. "Selling Expenses" means all underwriting discounts and selling commissions applicable to the sale of Registrable Securities. "Strategic Plan" has the meaning set forth in Section 4.4(a)(ix) hereof. "Subsidiary" has the same meaning as in Rule l2b-2 promulgated under the Exchange Act. "Substantial Part" means more than ten percent (10%) of the total consolidated assets of the Company as shown on the Company's consolidated balance sheet as of the end of the most recent fiscal quarter ending prior to the time the determination is made. "Tomato Associates" has the meaning set forth in the recitals herein. "Transaction Agreements" has the meaning set forth in the Reorganization Agreement. "Trigger Event" means the earliest of (i) any time that Monsanto's Percentage Interest is at least fifty-five percent (55%), (ii) the Company elects to convert borrowings made from Monsanto into Equity Securities and Monsanto's Percentage Interest is at least fifty percent (50%) after such conversion, or (iii) the closing of Monsanto's purchase of additional shares of Common Stock pursuant to the Stock Purchase Agreement. "Unaffiliated Equity Holders" means holders of Equity Securities other than Monsanto or any of its Affiliates. "Voting Stock" means securities having the right to vote generally in any election of Directors of the Company (other than solely by reason of the occurrence of an event). 2.2 Requested Registration. (a) Request for Registration. Holders of Registrable Securities shall have the right to request (with such requests in writing and stating the number of shares of Registrable Securities to be disposed of and the intended method of disposition of shares by such Holders) up to two (2) registrations on Form S-3 (and up to two (2) additional registrations on Form S-3 for each conversion of outstanding principal or interest into shares of Common Stock upon the occurrence of an "Event of Default" under the Company Credit Facility or the Gargiulo Credit Facility (as defined in each such Credit Facility, respectively)) at the Company's expense and an unlimited number of additional registrations on Form S-3 at the selling Holder's expense, provided that the requests for additional registrations are made by Holders of at least ten percent (10%) of the Registrable Securities, subject only to the following: (i) The Company shall not be required to effect a registration pursuant to this Section 2.2 prior to September 30, 1998, unless an Event of Default has occurred and is continuing under the Company Credit Facility or under the Gargiulo Credit Facility, in which event the Company shall be required to effect a registration pursuant to this Section 2.2 at any time upon the request of a Holder with respect to any shares of Common Stock issued to a Holder upon conversion of outstanding principal or accrued interest under either the Company Credit Facility or the Gargiulo Credit Facility after the occurrence of an Event of Default under either of such agreements. (ii) The Company shall not be required to effect a registration pursuant to this Section 2.2 within one hundred eighty (180) days after the effective date of the last such registration pursuant to this Section 2.2. (iii)The Company shall not be required to effect a Registration Statement in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder. (iv) The Company shall not be required to effect a Registration Statement for a period of not more than ninety (90) days immediately following the delivery of a certificate signed by the President of the Company to the Requesting Holders stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Registration Statement to be filed on or before the date filing would otherwise be required hereunder; provided, however, that the Company may not utilize this right more than once in any twelve (12) month period and the Company may not exercise this right based on the fact that the Company has recently registered any of its securities for the account of a security holder or holders exercising their respective demand registration rights. If the Company cannot qualify for registration on Form S-3, then the Company shall effect any registration required or requested by the Holder on Form S-1, or such other appropriate form, in which event this Section 2.2 shall apply in all respects as if the words "Form S-3" were replaced by the words "Form S-1" or the appropriate designation for such other form. (b) Notice of Inclusion. The Company shall give written notice to all Holders of Registrable Securities of the receipt of a request for registration pursuant to this Section 2.2 and shall provide a reasonable opportunity for other Holders to participate in the registration; provided, however, that, if the registration is for an underwritten offering, then the terms of Section 2.2(c) hereof shall apply to all participants in such offering. Subject to the foregoing, the Company shall use its best efforts to effect promptly the registration of all shares of Registrable Securities on Form S-3 to the extent requested by the Holder or Holders thereof for purposes of disposition. (c) Underwriting. If the Requesting Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, then they shall so advise the Company as a part of their request made pursuant to this Section 2.2, and the Company shall include such information in the written notice referred to in Section 2.2(b) hereof. The right of any Holder to registration pursuant to this Section 2.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested and to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters of recognized national standing, selected for such underwriting by a majority in interest of the Requesting Holders and reasonably acceptable to the Company. Notwithstanding any other provision of this Section 2.2, if the representative advises the Requesting Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Requesting Holders shall so advise all Holders, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated first among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the Registration Statement. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder of Registrable Securities disapproves of the terms of the underwriting, then such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Requesting Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration; provided, however, that, if, by the withdrawal of such Registrable Securities, a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used to determine the underwriter limitation in this Section 2.2(c). If the underwriter has not limited the number of Registrable Securities to be underwritten, then the Company and its executive officers, and such other Persons as are determined by the Board of Directors, their successors, and their assigns ("Other Selling Stockholders"), may include securities for their own account in such registration if the underwriter so agrees and if the number of Registrable Securities held by the Holders that would otherwise have been included in such registration and underwriting will not thereby be limited for any reason, including but not limited to the price for which the Registrable Securities will be sold. To the extent that the underwriter wishes to limit the number of shares to be included in the registration on behalf of the Company and the Other Selling Stockholders, the shares of Common Stock to be registered held by the Other Selling Stockholders shall be excluded from such offering prior to excluding any shares held by the Company and those held by the Company shall be excluded prior to excluding any Registrable Securities held by the Holders. 2.3 Company Registration. (a) Notice and Inclusion. If, at any time after September 30, 1998, the Company shall determine to register any of its securities for its own account, other than a registration relating solely to employee benefit plans, or a registration relating solely to a Commission Rule 145 transaction, the Company shall: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all Registrable Securities specified in a written request or requests, within twenty (20) days after receipt of the written notice from the Company, by any Holder or Holders. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering by the Company of its securities through an underwriting, then the Company shall so advise the Holders as a part of the written notice given pursuant to Section 2.3(a)(i) hereof. In such event, the right of any Holder to registration pursuant to this Section 2.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company, and all the Other Selling Stockholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for underwriting by the Company. Notwithstanding any other provision of this Section 2.3, if the underwriter determines that marketing factors require a limitation on the number of shares to be underwritten, then the underwriter may exclude from such registration and underwriting some or all of the Registrable Securities held by the Holders or the stock held by Other Selling Stockholders in accordance with this Section 2.3(b). The Company shall so advise all Holders and all Other Selling Stockholders distributing their securities through such underwriting, and (i) as to the first registration in which Holders are entitled to participate pursuant to this Section 2.3, the number of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among all Holders thereof on the basis that shares held by all the Other Selling Stockholders who are not Holders shall first be excluded to the extent required and, if further exclusion is necessary, shares held by the selling Holders shall then be excluded; provided, however, that, as among the respective Other Selling Stockholders as a group on the one hand and the Holders as a group on the other hand suffering such exclusion, the exclusion shall be in proportion, as nearly as practicable, to the amount of securities entitled to inclusion in such registration held by each of the Other Selling Stockholders as a group and each of the Holders at the time of filing the Registration Statement; and (ii) as to all subsequent registrations, the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among all Other Selling Stockholders and the Holders in proportion, as nearly as practicable, to the respective amounts of securities entitled to inclusion in such registration held by all such Other Selling Stockholders and Holders at the time of filing the Registration Statement. For purposes of the apportionment provisions in clause (i) above, for any selling Holder that is a partnership or corporation, the partners, retired partners, and shareholders of such Holder, the estate and family members of such partners and retired partners, and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling Holder," and any pro rata reduction with respect to such selling Holder shall be based upon the aggregate number of shares carrying registration rights owned by all entities and individuals included in such "selling Holder," as defined in this sentence. If any Other Selling Stockholder or Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 2.4 Expenses of Registration. All Registration Expenses incurred in connection with any registration qualification or compliance pursuant to this Article 2 shall be borne by the Company; provided, however, that the Registration Expenses for the fifth and all subsequent registrations under Section 2.2(a) hereof requested by the Holders shall be borne by the requesting Holders pro rata on the basis of the number of their shares so registered. All Selling Expenses relating to the securities registered by Holders and, if applicable, Other Selling Stockholders, and fees and disbursements of counsel, shall be borne by the Holders or the Other Selling Stockholders, as the case may be, of such securities pro rata on the basis of the number of their shares so registered. 2.5 Registration Procedures. (a) Company shall use its best efforts to register or qualify the Registrable Securities covered by such Registration Statement under such other securities or blue sky laws of such United States jurisdictions as Holder shall reasonably request and do any and all acts and things which may be necessary or desirable to enable Holder to consummate the public sale or other disposition in such jurisdictions; provided, however, that Company shall not be required in connection therewith or as a condition thereto to qualify to do business or file a general consent to service of process in any such jurisdictions. (b) The Company represents and warrants that, on the date of its effectiveness, the Registration Statement will comply in all material respects with the applicable requirements of the Securities Act and the rules thereunder, including without limitation Rule 415; on the date of its effectiveness, the Registration Statement will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein not misleading; provided, however, that no representation is made by Company with respect to information relative to any Holder; and the Prospectus will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that no representation is made by Company with respect to information relative to any Holder. (c) If, at any time or times while the Registration Statement is effective, Company notifies Holder that a development has occurred or is pending which, based upon consultation with Company's legal counsel, Company reasonably believes may cause the then current Prospectus not to be in compliance with applicable securities laws, then Holder shall refrain from delivering the Prospectus and from making any offers or sales of Registrable Securities requiring the delivery of the Prospectus until such time as Company either notifies Holder that the Prospectus complies with such laws or delivers an amended Prospectus in replacement of the deficient Prospectus. Company shall use its reasonable best efforts to minimize the time during which Holder must so refrain, and no more than one (1) such period of refrain shall be imposed during any period of one hundred eighty (180) days. (d) At least two (2) business days prior to the initial filing of the Registration Statement or Prospectus and no fewer than two (2) business days prior to the filing of any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), Company shall furnish Holder, its legal counsel and the managing underwriter, if any, copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) shall be subject to review of Holder, its legal counsel and such underwriters, if any, and Company shall cause its officers and directors and the independent certified public accountants to Company to respond to such inquiries as shall be necessary, in the opinion of respective counsel to Company and any such underwriters, to conduct a reasonable investigation within the meaning of the Securities Act. Company shall not file any such Registration Statement or Prospectus or any amendments or supplements thereto to which Holder, its legal counsel, or the managing underwriters, if any, shall reasonably object on a timely basis (i.e., within two (2) business days of receipt thereof). (e) Company shall promptly notify Holder when the Registration Statement is declared effective; notify Holder of any stop-order or similar proceeding by the Commission or any state securities authority; and furnish such number of Prospectuses, Prospectus supplements and other documents incident thereto as Holder from time to time may reasonably request. (f) In the event of any breach by Company of the provisions of Section 2.2, 2.3, 2.4 or 2.5, the parties agree that Holder will suffer irreparable harm. Accordingly, the parties agree that the provisions of Sections 2.2, 2.3, 2.4 and 2.5 are specifically enforceable by Holder and that Holder shall be entitled to temporary and permanent injunctive relief against Company and the other rights and remedies to which Holder may be entitled to at law, in equity or under this Agreement for any such breach. 2.6 Indemnification. (a) Indemnification by the Company. The Company shall indemnify each Holder with respect to which registration, qualification or compliance has been effected pursuant to this Article 2, each of its officers, directors, employees, agents and partners, each Person controlling such Holder within the meaning of Section 15 of the Securities Act, each underwriter, if any, and each Person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any Prospectus, offering circular or other document (including any related Registration Statement, notification or the like) incident to any such registration qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance. The Company shall reimburse each such Holder, each of its officers, directors, employees, agents and partners, and each Person controlling such Holder, each such underwriter and each Person who controls any such underwriter for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such expense, claim, loss, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such claim, loss, damage, liability, action or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder or underwriter and stated to be specifically for use therein. (b) Indemnification by the Holders. To the extent set forth in the second sentence of this Section 2.6(b), each Holder shall, if Registrable Securities or other securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors, officers, employees and agents, each underwriter, if any, of the Company's securities covered by such a Registration Statement, each Person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, each other such Holder, each of such other Holder's officers, directors, employees, agents and partners, and each Person controlling such Holder within the meaning of Section 15 of the Securities Act against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact made by the Holder and contained in any such Registration Statement, Prospectus, offering circular or other document, or any amendment or supplement thereto or incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be made by the Holder and stated therein or necessary to make the statements therein not misleading or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company in connection with such registration, qualification or compliance as a result of any statement (or based on any omission to state or alleged omission) required to be made by such Holder. Each such Holder shall reimburse the Company, such other Holders, directors, officers, employees, agents, partners, Persons, underwriters and control persons for any legal or any other expenses reasonably incurred in connection with investigating, preparing or defending any such expense, claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such Registration Statement, Prospectus, offering circular or other document or any amendment or supplement thereto in reliance upon and in conformity with written information furnished by the Holder to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the obligations of such Holders hereunder shall be limited to an amount equal to the proceeds to each such Holder of Registrable Securities sold as contemplated herein in connection with the particular registration qualification or compliance involved. (c) Notice. Each party entitled to indemnification under this Section 2.6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided, however, that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and that the Indemnified Party may participate in such defense at its own expense; and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 2.6 unless such failure resulted in detriment to the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 2.7 Information by Holder. Each Holder or Holders of Registrable Securities in any registration shall furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may reasonably request in writing but only to the extent as shall be required in connection with any registration, qualification or compliance referred to in this Article 2. 2.8 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may permit the sale of the Restricted Securities or Control Securities to the public without registration, the Company agrees to: (a) Use its best efforts to make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); (c) For so long as a Holder owns any Restricted Securities or Control Securities, furnish to the Holder forthwith upon request (i) a written statement by the Company as to its compliance with the reporting requirements of Rule 144 and of the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company, and (iii) such other reports and documents so filed as such Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration; and (d) When any Holder qualifies under Rule 144 for the unrestricted right of sale under Rule 144, the Company shall, upon written request of such Holder (such request to include sufficient detail as to establish how the Holder so qualifies under Rule 144), promptly remove any restrictive legend that may have been placed on any Restricted or Control Securities and issue Common Stock of the Company free of such restrictive or other legends. 2.9 Transfer of Registration Rights. The rights to cause the Company to register the Registrable Securities granted to each Holder by the Company under Sections 2.2 and 2.3 hereof may be transferred or assigned to a transferee or assignee in connection with the transfer or assignment of not less than one million (1,000,000) shares of the Registrable Securities; provided, however, that the Company shall be entitled to notice of any such transfer of registration rights within thirty (30) days of the date such transfer is effected. 2.10 Limitations on Subsequent Registration Rights. No owner or prospective owner of securities of the Company shall have any registration rights other than as set forth in this Agreement. The Company shall not, without the prior written consent of the Holders (which consent shall not be unreasonably withheld) of not less than sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities then held by Holders, enter into any agreement with any owner or prospective owner of any securities of the Company that would allow such owner or prospective owner to include such securities in any registration filed under this Article 2 if such inclusion would adversely affect the rights of any Holder. 2.11 Termination of Registration Rights. The registration rights granted pursuant to this Article 2 shall terminate as to each Holder at such time as (a) all Registrable Securities can be sold within a given three (3) month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144 supported by a written opinion of legal counsel for the Company, which opinion shall be reasonably satisfactory in form and substance to legal counsel for such Holders, and (b) all accrued interest and principal under the Company Credit Facility and the Gargiulo Credit Facility has been repaid in full or converted into Common Stock of the Company (and such Common Stock can be sold as provided in (a) above). 2.12 "Market Stand-off" Agreement. Each Holder hereby agrees that, to the extent requested by the Company and an underwriter of a sale of Common Stock (or other securities) of the Company for the account of the Company and not for the account of a security holder or holders exercising their respective demand registration rights, it shall not sell or otherwise transfer or dispose of (other than to transferees who agree to be similarly bound) any Registrable Securities during the ninety (90) day period following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that all officers and directors of the Company, all Other Selling Stockholders and all other Persons with registration rights (whether or not pursuant to this Agreement) shall enter into similar agreements. To enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other Person subject to the foregoing restriction) until the end of such ninety (90) day period. ARTICLE 3 Anti-Dilution Rights and Limitations on Owner 3.1 Anti-Dilution Rights. If, at any time after the Effective Date, Company agrees to sell shares of its Common Stock or other Voting Stock ("Company Securities") in a private or public offering (other than Company Securities issued pursuant to the Company's stock option plans), Holder shall have the right, but not the obligation, to acquire all or any portion of the Company Securities sufficient for Holder to maintain, after the offering, the same percentage of ownership of issued and outstanding Company Securities that Holder possessed immediately prior to the offering (the "Pre-Offering Percentage"). With respect to the issuance of Company Securities pursuant to the Company's stock option plans, Holder shall have a right to maintain its percentage ownership of issued and outstanding Company Securities by making open market purchases as provided in Section 3.5 hereof. 3.2 Private Offering. With respect to a private offering, other than pursuant to a Company stock option plan, Company shall, within five (5) business days after the execution of any agreement entered into in connection with such private offering, notify Holder in writing of the proposed offering and provide Holder with copies of all related documentation, including, for example, any letter of intent and the final contract. Holder shall have twenty (20) business days from the date of receipt of Company's notice in which to advise Company whether Holder elects to exercise its rights under Section 3.1 hereof. If Holder does not respond, or if Holder indicates that it will not exercise its rights, Holder shall be considered irrevocably to have waived its rights under Section 3.1 hereof with respect to such specific private offering. If Holder timely advises Company that Holder will exercise its rights under Section 3.1 hereof, Holder shall have the right to acquire all or any portion of the necessary amount of the Company Securities to maintain Holder's Pre-Offering Percentage at the price or value of the consideration specified in the private offering agreement entered into between Company and the purchaser. Closing shall be in accordance with the terms of the private offering agreement, and Holder shall make such investment representations to Company and shall provide Company with such other documentation at closing as is reasonably required by Company to comply with applicable securities laws. 3.3 Public Offering. With respect to a public offering, Company shall notify Holder no later than five (5) business days after Company has entered into a letter of intent with its underwriters, and shall provide Holder with a copy of the letter of intent. Holder shall have twenty (20) business days from the date of receipt of Company's notice in which to advise Company whether Holder elects to exercise its rights under Section 3.1 hereof. If Holder does not respond or if Holder indicates that it will not exercise its rights, Holder shall be considered irrevocably to have waived its rights under Section 3.1 hereof with respect to the public offering. If Holder timely advises Company that Holder desires to retain its rights under Section 3.1 hereof, then, when Company files a Registration Statement containing a Preliminary Prospectus with the Commission, Company shall provide Holder with copies of the Preliminary Prospectus and all subsequent amendments. Holder shall have twenty (20) business days from its receipt of the Preliminary Prospectus in which to exercise its rights under Section 3.1 hereof by making an offer to acquire all or any portion of the necessary amount of Company Securities to maintain Holder's Pre-Offering Percentage based on the price, less all Selling Expenses, and the other terms contained in the final Prospectus. No such offer to buy shall be accepted prior to the time that the Registration Statement becomes effective. The Registration Statement shall indicate that Holder has anti-dilution rights to purchase Company Securities on the terms offered to the public. 3.4 Limitations. Notwithstanding the preceding provisions of this Article 3, Company shall not be required to issue any fractional shares as a result of Holder's exercise of its rights under Section 3.1 hereof. Company shall not be required to transfer any Company Securities to Holder under this Article 3 if to do so would result in the violation of any applicable law, rule or regulation. 3.5 Open Market Purchases to Maintain Ownership Percentage. Notwithstanding any other provision hereof, at any time after the Effective Date, Holder may make such open market purchases of Company Securities as are necessary to maintain Holder's percentage of ownership of issued and outstanding Company Securities at the Effective Date Percentage or to increase its percentage of ownership of issued and outstanding Company Securities to the Effective Date Percentage. With respect to the issuance of Company Securities pursuant to a Company stock option plan or any warrant, conversion right or other option, Company shall notify Holder no later than ten (10) calendar days after the end of each calendar quarter and within ten (10) calendar days of the record date for a shareholder meeting and for dividend payments for Company Securities of the number of shares and issuance price of Company Securities issued pursuant to Company's stock option plans or any warrant, conversion right or other option subsequent to the last notice given pursuant to this Section 3.5 so as to enable Holder to make open market purchases of Company Securities as permitted under this Section 3.5. 3.6 Limitations on Holder's Ownership. Except for purchases of Company Securities made in accordance with this Article 3 or the Stock Purchase Agreement, during the term of this Agreement, Holder shall not directly or indirectly acquire any Company Securities except as follows: (a) On and after March 31, 1996 until September 30, 1998, Holder shall not increase or further increase its ownership of issued and outstanding Company Securities above the Effective Date Percentage, except through one (1) or more of the following: (i) Conversion of principal and/or interest under the Company Credit Facility or the Gargiulo Credit Facility into shares of Common Stock; (ii) Issuance of Company Securities in an asset sale by Holder Company; and (iii)A tender offer by Holder to increase its ownership to seventy percent (70%) or more of the issued and outstanding Company Securities at a price approved by the disinterested Directors of Company and based upon a fairness opinion delivered to the Board of Directors of the Company by an investment banking firm; provided, however, that, if Holder makes a tender offer to increase its ownership to more than eighty percent (80%) of the issued and outstanding Company Securities, such tender offer must be for one hundred percent (100%) of the publicly traded Company Securities. (b) After September 30, 1998, Holder may increase its ownership of Company Securities through open market purchases or otherwise. (c) If, at any time after the Effective Date, Holder shall elect to increase its percentage of ownership of issued and outstanding Company Securities above the Effective Date Percentage as permitted by paragraph (a) above (such increased percentage hereafter being the "New Percentage Ownership"), then thereafter Holder may make such open market purchases of Company Securities as are necessary to maintain such New Percentage Ownership or to increase its percentage of ownership of issued and outstanding Company Securities to such New Percentage Ownership. (d) Holder shall not be required to dispose of any Company Securities if Holder's percentage ownership of Company Securities is increased as a result of any recapitalization by Company or any other action taken by Company. 3.7 Limitations on Holder's Resale of Company Securities. Holder shall not directly or indirectly sell any Company Securities (other than to an Affiliate of Holder) except as follows: (a) On and after March 31, 1997 until September 30, 1998, Holder may sell Company Securities (i) as part of a joint venture, merger or sale of all or substantially all of its current Crop Protection business unit, as such business may be subsequently renamed or reorganized, or (ii) pursuant to a tender offer by a third party to the shareholders of Company. (b) After September 30, 1998, in addition to the rights to sell Company Securities set forth in paragraph (a) above, Holder may sell Company Securities (i) in a registered public offering pursuant to the registration rights granted to Holder under this Agreement, (ii) through sales pursuant to Rule 144 under the Securities Act, (iii) through sales of not more than ten percent (10%) of the total issued and outstanding Company Securities to a Non-Financial Purchaser, or (iv) through sales to a Financial Purchaser. (c) After September 30, 1999, in addition to the rights to sell Company Securities as set forth in paragraphs (a) and (b) above, Holder may sell Company Securities through a private sale of thirty-five percent (35%) or more of the total issued and outstanding Company Securities to a Non-Financial Purchaser under circumstances where such third party assumes the applicable and proportionate rights and obligations of Holder under this Agreement and the other Transaction Agreements. (d) Notwithstanding the foregoing, at any time after the Effective Date, Holder may sell Company Securities issued to Holder upon conversion by Holder of principal or accrued interest under either of the Credit Facilities after the occurrence of an Event of Default under either of such Credit Facilities. ARTICLE 4 Company and Calgene Corporate Governance 4.1 Composition of the Board of Directors and Calgene Board. The number of Directors comprising both the Board of Directors and the Calgene Board and the manner of nominating the members thereof shall be as follows: (a) The number of Directors comprising the Board of Directors shall initially be fixed at nine (9) Directors. The parties agree that the manner of nominating, and the governance provisions relating to, the Board of Directors and the Calgene Board shall be identical, and that the provisions of this Section 4.1 set forth below and of Sections 4.3(c) and 4.3(d) hereof shall be deemed to apply equally to the Calgene Board and Calgene Directors. Accordingly, when applied to the Calgene Board, the term "Director" shall be deemed to mean "Calgene Director", the term "Company", whether used alone or as a modifier, shall be deemed to mean "Calgene", and the term "Board of Directors" shall be deemed to mean "Calgene Board". (b) Until changed in accordance with this Agreement, the Board of Directors shall be comprised of nine (9) Directors, and the Company shall nominate for election as Directors: (i) one (1) Company Management Director, (ii) three (3) Company Directors, and (iii) five (5) Directors designated by Monsanto, at least one (1) of which shall be an Independent Director. (c) [This section intentionally left blank] (d) At any time that Monsanto's Percentage Interest is at least seventy percent (70%), (i) the Company shall nominate: (i) six (6) Directors designated by Monsanto, which shall consist of the one (1) Company Management Director and five (5) other Monsanto Directors (including at least one (1) Independent Director) and (ii) three (3) Independent Directors. At such time as Monsanto's Percentage Interest is at least ninety-nine percent (99%), the Company shall nominate nine (9) Directors designated by Monsanto. (e) Notwithstanding anything in the foregoing paragraphs (b) and (d) to the contrary, (i) at any time Monsanto's Percentage Interest is less than forty percent (40%) but at least twenty percent (20%), the Company shall nominate three (3) Directors designated by Monsanto, (ii) at any time Monsanto's Percentage Interest is less than twenty percent (20%) but at least ten percent (10%), the Company shall nominate two (2) Directors designated by Monsanto and (iii) at any time Monsanto's Percentage Interest is less than ten percent (10%) but at least five percent (5%), the Company shall nominate one (1) Director designated by Monsanto. If, at any time, Monsanto's Percentage Interest is less than five percent (5%), the Company shall not be obligated to nominate any Director designated by Monsanto. At any such time, all other Directors, other than the Company Management Directors, shall be nominated by the Company. (f) The Independent Directors to be nominated by the Company from time to time shall be nominated by action of a majority of Company Directors then in office. The Company Directors shall consult with the other Independent Directors as to the nomination of any Company Director, and in the event a majority of the Company Directors are unable to agree upon any Company Director nominee, then the majority of all the Independent Directors shall nominate such nominee. In the event that no Company Directors are in office at the time of any nomination of a Company Director, such Company Directors shall be nominated by a majority of the Independent Directors then in office; provided, however, that the holders of a majority of the outstanding Voting Stock held by Unaffiliated Equity Holders shall be entitled to nominate and elect Company Directors in lieu of any individuals so nominated to be such Company Directors by a majority of the Independent Directors. (g) The Company and Monsanto, respectively, shall have the right to nominate any replacement for a Director nominated in accordance with this Section 4.1 by the Company or Monsanto, respectively, upon the death, resignation, retirement, disqualification or removal from office for cause of such Director. Such replacement for any Independent Director shall also be an Independent Director unless, in the case of a replacement of a Monsanto Director, the Monsanto Directors include more than the required number of Independent Directors. The Board of Directors shall elect each person so nominated by Monsanto or the Company pursuant to this paragraph (g). In addition, the Board of Directors shall nominate the Company's Chief Executive Officer to replace such officer's predecessor in office as a Company Management Director. (h) In the event that the number of Monsanto Directors on the Board of Directors differs from the number that Monsanto has the right (and wishes) to designate for nomination pursuant to this Section 4.1, (i) if the number of Monsanto Directors exceeds such number, Monsanto shall promptly take all appropriate action to cause to resign that number of Monsanto Directors as is required to make the remaining number of such Monsanto Directors conform to this Section 4.1 or (ii) if the number of Monsanto Directors otherwise is less than such number, the Company shall promptly take all necessary action to create sufficient vacancies on the Board of Directors to permit Monsanto to designate the full number of Monsanto Directors which it is entitled (and wishes) to nominate pursuant to this Section 4.1 (such action to include seeking the resignation or removal of Directors or, at the request of Monsanto, calling a special meeting of the stockholders of the Company for the purpose of removing Directors to create such vacancies to the extent permitted by applicable law). Upon the creation of any vacancy pursuant to the preceding sentence, Monsanto shall nominate the person to fill such vacancy in accordance with this Section 4.1 and the Board of Directors shall elect each person so nominated. Notwithstanding the foregoing, at each annual meeting of the stockholders of the Company, the Company shall nominate such number of Directors as Monsanto is otherwise entitled to designate under this Section 4.1. (i) Notwithstanding anything herein to the contrary, no individual who is an officer, director, employee, agent, partner or principal stockholder of any competitor of the Company or any of its Affiliates (other than Monsanto and its Affiliates) or any competitor of Monsanto or any of its Affiliates (other than the Company) shall serve as a Director without the unanimous consent of the Board of Directors. (j) In the event that Monsanto desires to remove any Monsanto Director with or without cause and Monsanto is unable to procure the resignation of such Monsanto Director, then, upon the request of Monsanto, the Board of Directors shall promptly call a special meeting of stockholders of the Corporation for purposes of removing such Monsanto Director. In the event that the Company desires to remove any Company Director with or without cause and the Company is unable to procure the resignation of such Company Director, then, upon the request of a majority of all of the Independent Directors then in office, the Board of Directors shall promptly call a special meeting of stockholders of the Company for purposes of removing such Company Director. In the event that the Chief Executive Officer's employment with the Company is terminated for any reason, then upon the request of either Monsanto or a majority of all of the Independent Directors then in office, the Board of Directors shall promptly call a special meeting of stockholders of the Corporation for the purpose of removing such person as a Company Management Director. (k) Notwithstanding anything to the contrary herein, the Board of Directors, by unanimous action of all members of the Board of Directors, may increase the number of directors comprising the Board of Directors and may elect, or nominate for election, the director(s) to fill the vacancy or vacancies created by such increase. 4.2 Solicitation and Voting of Shares. (a) The Company shall use its best efforts to solicit from the stockholders of the Company eligible to vote for the election of Directors proxies in favor of the Company Management Directors and the nominees designated in accordance with Section 4.1 hereof or the removal of any Director pursuant to Section 4.1(h) or 4.1(j) hereof. (b) In any election of Directors or any meeting of the stockholders of the Company called expressly for the removal of Directors, so long as the Board of Directors includes (and will include after any such removal) the number of Monsanto Directors contemplated by Section 4.1 hereof and so long as such meeting is properly called and Monsanto is properly notified in accordance with the Company's By-laws and Certificate of Incorporation, Monsanto and its Affiliates shall attend such meeting for purposes of establishing a quorum and shall vote all their shares of Voting Stock (i) in favor of any nominee or Director designated in accordance with Section 4.1 hereof, (ii) in favor of removal of any Director as contemplated by Section 4.1(h) or 4.1(j) hereof, and (iii) otherwise against the removal of any Director designated in accordance with Section 4.1 hereof (other than in cases of removal of a Director for cause); provided, however, that, if Monsanto and its Affiliates elect to cumulate their votes in accordance with the Company's By-laws and Certificate of Incorporation, then, in any vote electing Monsanto Directors, Monsanto and its Affiliates may cast all of their votes in favor of one (1) or more of the Monsanto Directors designated by Monsanto and in any vote with respect to the removal of a Monsanto Director, Monsanto and its Affiliates may cast all or any portion of their votes either in favor or against the removal of any Monsanto Director unless a Monsanto Director is otherwise required to be removed in accordance with Section 4.1(h) hereof. In any other matter submitted to a vote of the stockholders of the Company, Monsanto and its Affiliates may vote any or all of their shares in their sole discretion. (c) Monsanto agrees that it will, and will cause any of its Subsidiaries (other than the Company and its Subsidiaries) to, take all action as a stockholder of the Company or as is otherwise reasonably within its control, as necessary to effect the provisions of this Agreement, including, without limitation, voting all shares of Voting Stock in favor of all persons nominated in accordance with Section 4.1 hereof; provided, however, that, if Monsanto cannot so take actions to give effect to all of the provisions of this Agreement, it may first take actions to ensure that it receives all of its benefits hereunder and then, to the extent possible, to give effect to the provisions in favor of the Company. 4.3 Committees. (a) The Board of Directors shall establish, empower and maintain the committees of the Board of Directors contemplated by this Section 4.3. (b) The following committees shall be established, empowered and maintained by the Board of Directors at all times during the term of this Agreement: (i) an Audit Committee, consisting of at least three (3) of the Company's Independent Directors, which committee shall be authorized and empowered to cause an audit to be performed of the Company and each of its Subsidiaries; (ii) [This section intentionally left blank] (iii)a Compensation Committee, responsible, among other things, for recommending to the Board of Directors, for approval by a majority of the Board of Directors, (a) the adoption and amendment of all employee benefit plans and arrangements, (b) the engagement of, terms of any employment agreements and arrangements with, and termination of, all persons designated by the Company as "officers" for purposes of Section 16 of the Exchange Act ("Section 16 Officers") and (c) the policies, limitations and procedures under which the Stock Option Plan Administration Committee shall operate; and (iv) such other committees as the Board of Directors deems necessary or desirable; provided, however, that such committees are established in compliance with Section 4.4(a)(vi) hereof, if applicable. (c) Except as otherwise provided in Section 4.3(b) hereof or as agreed by a majority of the Monsanto Management Directors, the number of Monsanto Directors on each committee of the Board of Directors shall be the same proportion (but not less than one (1)) of the total membership of such committee as the number of Monsanto Directors, as the case may be, is of the entire Board of Directors. Except as otherwise provided in Section 4.3(b) hereof, the Monsanto Directors on each committee of the Board of Directors shall be determined by a majority of the Monsanto Management Directors. (d) No action by any committee of the Board of Directors shall be valid unless taken by unanimous written consent as provided in the Company's by-laws or taken at a meeting for which adequate notice has been duly given or waived by the members of such committee. Such notice shall include a description of the general nature of the business to be transacted at the meeting, and no other business may be transacted at such meeting unless all members of the committee are present and consent to the consideration of such other business. Any committee member unable to participate in person at any meeting shall be given the opportunity to participate by telephone. The Board of Directors or the remaining committee members shall designate an Independent Director or Company Management Director to replace any absent or disqualified Independent Director member or Company Management Director member, respectively, of any committee and a majority of the Monsanto Management Directors shall designate a Monsanto Director to replace any absent or disqualified Monsanto Director member of any committee. Each of the committees established by the Board of Directors pursuant to this Section 4.3 shall establish such other rules and procedures for its operation and governance (consistent with the terms of this Agreement) as it shall see fit and may seek such consultation and advice as to matters within its purview as it shall require. 4.4 Approval Required for Certain Actions. (a) On and after the Effective Date and until the earlier of a Trigger Event or such date on which Monsanto's Percentage Interest is less than twenty-five (25%), a majority of the Board, including at least one (1) Company Director and one (1) Monsanto Management Director, shall be required to approve any of the following: (i) the entry by the Company or any of its Affiliates into any merger or consolidation or the acquisition by the Company or any of its Affiliates of any business or assets that would constitute a Substantial Part of the Company (determined on a consolidated basis) whether such acquisition be by merger or consolidation or the purchase of stock or assets or otherwise; (ii) the sale, pledge, grant of security interest in, transfer, retirement or other disposal of (A) a Substantial Part of the Company (determined on a consolidated basis), except pursuant to a security interest granted in connection with borrowings permitted under subsection (iv) below or (B) the pledge or granting of a security interest in any intangible property set forth in Exhibit B attached to the disclosure letter from Monsanto to Calgene dated June 27, 1995 (the "Monsanto Disclosure Letter"); (iii)any dividend by or return of capital by the Company or Gargiulo (other than such distributions by Gargiulo to the Company as are necessary for the Company to timely perform its obligations under Sections 1.02 and 5.02(c) of the Gargiulo Credit Facility); (iv) any incurrence or assumption, in the aggregate, by the Company, any of its Affiliates or any combination thereof, of any indebtedness for borrowed money at any time outstanding exceeding in the aggregate (determined on a consolidated basis) the greater of (i) fifteen million dollars ($15,000,000), increasing by five million dollars ($5,000,000) on each July 1 commencing July 1, 1996, plus amounts secured by inventory and/or receivables for seasonal working capital lines and indebtedness incurred to acquire property, plant or equipment and secured by the acquired asset, minus amounts outstanding under the Company Credit Facility, or (ii) the amounts set forth in the Company's Operating Plan (hereinafter defined), provided that loans under the Gargiulo Credit Facility shall not be counted in this limitation; (v) the repurchase or redemption of any Equity Securities of the Company, other than from employees upon termination of employment or service; (vi) the establishment of any new committees of the Board (or the Calgene Board) or new or revised delegation(s) of Board (or the Calgene Board) authority to any Board (or Calgene Board) committee or changes or revisions to general delegations of authority to officers or other Persons for categories of expenditures; (vii)the adoption of or amendment to any benefit or incentive plans of the Company or any of its Affiliates which would increase the annual cost thereof by more than fifteen percent (15%) from the prior fiscal year or any adoption of, or amendment to, any stock option plan; (viii)the election, appointment or removal of the Chief Executive Officer, Chief Operating Officer or Chief Financial Officer of the Company and Calgene and their successors and the establishment of their annual or long term compensation level and benefits and basis for awards (other than agreements in effect on the Effective Date); provided, however, that Monsanto shall have the right to select the Chief Technical Officer of the Company and a controller reporting to the Chief Financial Officer of the Company; (ix) approval of the annual operating plan ("Operating Plan") and long-term strategic plan ("Strategic Plan") of the Company and its Affiliates, as well as the annual operating plan and long-term strategic plan for the Gargiulo Business, to be submitted to the Board annually for approval, and any material changes thereto; (x) any transaction between the Company (and its Affiliates), on the one hand, and its (their) directors, officers or employees, on the other hand, which is not in the normal course of business; (xi) any modification of the Transaction Agreements; (xii)any amendment of the By-laws or Certificate of Incorporation of the Company, Calgene or Gargiulo by the respective Boards of Directors thereof; (xiii)the issuance of any warrants for the purchase of Equity Securities or the issuance of additional Equity Securities (other than warrants for the purchase of Equity Securities) in excess of four million (4,000,000) shares of Common Stock in any two (2) year period to a third party, other than pursuant to plans referred to in subsection (vii) above; (xiv)the sale or licensing by the Company or any of its Affiliates of (A) any intangible property set forth in Exhibit B attached to the Monsanto Disclosure Letter or (B) any other intangible property for consideration (other than royalties contingent on future sales) exceeding five million dollars ($5,000,000) in the aggregate (determined on a consolidated basis) per transaction or per series of related transactions; (xv) new fixed capital investments, capital leases or noncancellable operating leases by the Company and its Affiliates having annual payments in the aggregate (determined on a consolidated basis) exceeding the aggregate amount set forth in the Operating Plan; (xvi)[This section intentionally left blank] (xvii)any press release which mentions or directly or indirectly refers to Monsanto, except as required by law and where Board approval cannot be obtained in a timely manner; (xviii)the initiation, settlement or termination of any suit or proceeding concerning intellectual property, any other matter which could have an adverse public affairs effect upon Monsanto or the filing of any insolvency or bankruptcy proceeding by or on behalf of the Company or any of its Affiliates; or (xix)the removal or election of the directors of Gargiulo. (b) After a Trigger Event and until the earlier of (i) March 31, 1999 or (ii) Monsanto's Percentage Interest is at least seventy percent (70%), a majority of the Board, including at least two (2) Company Directors, shall be required to approve any of the following: (i) the matters set forth in subsections (i), (ii), (vi), (viii), (ix) and (xi) of paragraph (a) above; or (ii) any transaction between the Company (and its Affiliates) and Monsanto or any Affiliate of Monsanto. (c) From and after the occurrence of both (i) a Trigger Event and (ii) March 31, 1999, and until Monsanto's Percentage Interest is at least ninety-nine percent (99%), neither Monsanto nor any of its Affiliates shall enter into any transaction with the Company or any of its Affiliates without the approval of at least two (2) Company Directors. 4.5 Enforcement of this Agreement. The Independent Directors, acting by unanimous consent, shall have full and complete authority on behalf of the Company to enforce the terms of this Agreement. 4.6 Certificate of Incorporation and By-laws. The Company and Monsanto shall take or cause to be taken all lawful action necessary to ensure at all times that the Company's and Calgene's Certificate of Incorporation and By-laws are not at any time inconsistent with the provisions of this Agreement. Not later than the Effective Date, the Board of Directors shall amend the Company's By-laws and the Calgene Board shall amend Calgene's By-laws to reflect the provisions of this Agreement. 4.7 Advisors. The Independent Directors shall be entitled to retain, at the cost and expense of the Company, the services of an investment banking firm of national reputation of their choice and one (1) law firm of their choice to advise them in their capacity as Independent Directors with respect to any matter on which the Independent Directors are required or permitted to act hereunder. 4.8 Injunctive Relief. In the event of a breach of the provisions of this Article 4, a party hereto entitled to rights under this Article 4 will suffer irreparable harm and the total amount of monetary damages will be impossible to calculate and will therefore be an inadequate remedy. Accordingly, in such event, such party shall be entitled to temporary and permanent injunctive relief against the Company and any other breaching party and to any other rights and remedies to which such party may be entitled to at law or in equity. ARTICLE 5 Governance of Gargiulo [This Article intentionally left blank.] ARTICLE 6 Miscellaneous 6.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of Delaware (exclusive of such state's choice of laws rules). 6.2 Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 6.3 Entire Agreement; Amendment. The Company and Monsanto hereby agree that, as of the date of this Agreement: (i) the Prior Stockholders Agreement is hereby amended in its entirety by this Agreement, (ii) the provisions of the Prior Stockholders Agreement shall no longer be of any force or effect, (iii) the Company and Monsanto shall be bound by the terms of this Agreement, and (iv) this Agreement and the other documents delivered pursuant hereto constitute the complete, exclusive and final understanding and agreement between the parties with regard to the subjects hereof and thereof. Except as specifically set forth herein, any term of Section 2 or 3 hereof may be waived only with the prior written consent of the Company and the Holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 6.3 shall be binding upon each Holder of the Registrable Securities (including securities into which such Registrable Securities have been converted) outstanding at the time, each future Holder of all such securities, and the Company. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company and Monsanto, or in the case of a waiver, by the party against whom the waiver is to be effective; provided that no such amendment or waiver shall be effective without the approval of all of the Independent Directors. 6.4 Notices. Any notice required or permitted to be given under this Agreement shall be in writing, and shall be deemed sufficiently given when delivered in person or transmitted by telegram or telecopier (confirmed by mail), addressed as follows: If to Monsanto: Monsanto Company 800 North Lindbergh Boulevard St. Louis, Missouri 63167 Attention: Assistant Secretary Telecopy Number: 314-694-2574 If to any other Holder, at such address and telecopy number as such Holder shall have furnished the Company in writing. If to Company: Calgene, Inc. 1920 Fifth Street Davis, California 95616 Attention: Chairman and Chief Executive Officer Telecopy Number: 916-753-1510 or to such other address as may be specified from time to time in a notice given by such party. The parties agree to acknowledge in writing the receipt of any such notice delivered in person. 6.5 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Holder of any Registrable Securities, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party or any waiver on the part of any party of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, at law, in equity or otherwise afforded to any party, shall be cumulative and not alternative. 6.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 6.7 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided, however, that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 6.8 Stock Legends. Subject to Section 2.8(d) hereof, certificates representing Restricted Securities (other than Restricted Securities issued to Monsanto in connection with the conversion of principal and/or accrued interest under the Company Credit Facility or the Gargiulo Credit Facility upon the occurrence of an Event of Default under either such Credit Facility) issued to Monsanto pursuant to the Transaction Agreements and the Stock Purchase Agreement shall bear the following legend: "The securities represented by this certificate are subject to certain resale restrictions and entitled to the benefits set forth in a Stockholders Agreement dated March 31, 1996, as amended and restated on November 12, 1996, between Calgene, Inc., a Delaware corporation (formerly known as Calgene II, Inc.), and Monsanto Company, a Delaware corporation (the "Agreement") . A copy of the Agreement and all amendments thereto are on file in the office of the Secretary of the Company." 6.9 [This section intentionally left blank.] 6.10 Audits, Consultants and Inspections. Monsanto (using Monsanto's internal and/or external auditors or any other Person appointed by Monsanto to whom the Company does not reasonably object) shall have the right (i) to audit the books and records, other financial information and business practices and operations of the Company and its Affiliates, and (ii) to discuss the business practices and operations, affairs, finances and accounts of the Company and its Affiliates with the officers of the Company and its Affiliates and the independent public accountants who review or audit the Company's financial statements, all at such reasonable times and as often as may reasonably be requested. The Company shall also permit inspection of its (and its Affiliates') properties, books and records by Monsanto (using the Persons identified above) during normal business hours or at other reasonable times. The scope of all such audits, discussions and inspections shall be determined by Monsanto in its sole discretion. Any authorized representative of Monsanto who or which is not employed by Monsanto (i) shall be required to execute a confidentiality agreement in a form approved by the Board of Directors (which approval shall not be unreasonably withheld or delayed) and (ii) may not be employed by or affiliated with a competitor of the Company, as reasonably determined by the Board of Directors; provided, however, that an independent certified public accounting firm shall not be deemed to be employed by or affiliated with a competitor of the Company even if such firm provides services to a competitor of the Company. 6.11 No Third Party Beneficiaries. Nothing contained in this Agreement, express or implied, is intended to or shall confer upon anyone other than the parties hereto (and their successors and assigns, including, without limitation, subsequent Holders and purchasers under Section 3.7(c)) any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 6.12 Sections and Articles. All sections and articles referred to herein are sections and articles of this Agreement. 6.13 Headings. Headings as to the contents of particular articles and sections 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 or sections to which they refer. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the day and year first above written. CALGENE, INC. By: /s/ Lloyd M. Kunimoto Lloyd M. Kunimoto President MONSANTO COMPANY By: /s/ Hendrik A. Verfaillie Hendrik A. Verfaillie Executive Vice President dansz/borden/103884.212/amstkag5.wpf -----END PRIVACY-ENHANCED MESSAGE-----