UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934; For the quarterly period ended February 28, 2005 or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934; For the transition period from _____to ______
Commission File Number: 000-21788
Exact name of registrant as specified in its charter:
DELTA AND PINE LAND COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification Number: 62-1040440
Address of Principal Executive Offices (including zip code):
One Cotton Row, Scott, Mississippi 38772
Registrant's telephone number, including area code:
(662) 742-4000
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES (x) NO ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES (x) NO ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.10 Par Value, 38,452,574 shares outstanding as of March 31,
2005.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - February 28, 2005,
August 31, 2004, and February 29, 2004 3
Consolidated Statements of Operations - Three Months
Ended February 28, 2005 and February 29, 2004 4
Consolidated Statements of Operations - Six Months
Ended February 28, 2005 and February 29, 2004 5
Consolidated Statements of Cash Flows - Six Months
Ended February 28, 2005 and February 29, 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 32
Signatures 33
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
February 28, August 31, February 29,
2005 2004 2004
------------------ ----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 110,632 $ 149,587 $ 91,617
Receivables, net 139,330 184,759 99,773
Inventories 56,861 30,151 58,081
Prepaid expenses 2,038 1,923 1,687
Deferred income taxes 6,725 9,055 8,230
------------------ ----------------- -----------------
Total current assets 315,586 375,475 259,388
PROPERTY, PLANT AND EQUIPMENT, NET 62,005 61,988 62,914
EXCESS OF COST OVER NET ASSETS OF
BUSINESSES ACQUIRED 4,183 4,183 4,183
INTANGIBLES, NET 5,757 5,471 5,382
OTHER ASSETS 1,545 1,594 1,735
DEFERRED INCOME TAXES 9,685 8,312 -
------------------ ----------------- -----------------
TOTAL ASSETS $ 398,761 $ 457,023 $ 333,602
================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Notes payable $ 11,405 $ 5,639 $ 248
Accounts payable 19,466 23,784 12,878
Accrued expenses 108,508 187,890 90,674
Income taxes payable 10,712 8,912 6,078
------------------ ----------------- -----------------
Total current liabilities 150,091 226,225 109,878
------------------ ----------------- -----------------
LONG-TERM DEBT 11,109 16,486 1,581
------------------ ----------------- -----------------
DEFERRED INCOME TAXES - - 4,304
------------------ ----------------- -----------------
MINORITY INTEREST IN SUBSIDIARIES 6,572 4,586 5,600
------------------ ----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.10 per share; 2,000,000 shares authorized;
Series A Junior Participating Preferred, par value $0.10 per share;
456,989 shares authorized; no shares issued or outstanding; - - -
Series M Convertible Non-Voting Preferred, par value $0.l0 per share;
1,066,667 shares authorized, issued and outstanding 107 107 107
Common stock, par value $0.10 per share; 100,000,000 shares authorized;
40,788,040, 40,162,820 and 39,811,148 shares issued;
39,120,574, 38,495,354 and 38,250,882 shares outstanding 4,079 4,016 3,982
Capital in excess of par value 78,340 64,250 59,114
Retained earnings 182,071 176,808 183,440
Accumulated other comprehensive loss (1,889) (3,736) (4,981)
Treasury stock, at cost; 1,667,466, 1,667,466 and 1,560,266 shares (31,719) (31,719) (29,423)
------------------ ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 230,989 209,726 212,239
------------------ ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 398,761 $ 457,023 $ 333,602
================== ================= =================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
February 28, February 29,
2005 2004
----------------- ------------------
NET SALES AND LICENSING FEES $ 119,859 $ 89,172
COST OF SALES 75,175 57,008
----------------- ------------------
GROSS PROFIT 44,684 32,164
----------------- ------------------
OPERATING EXPENSES:
Research and development 5,646 4,997
Selling 3,486 3,209
General and administrative 4,905 4,533
----------------- ------------------
Total operating expenses 14,037 12,739
----------------- ------------------
OPERATING INCOME 30,647 19,425
INTEREST INCOME, NET 641 326
OTHER EXPENSE, NET (973) (3,511)
EQUITY IN NET LOSS OF AFFILIATE (648) (1,319)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (9) (416)
----------------- ------------------
INCOME BEFORE INCOME TAXES 29,658 14,505
INCOME TAX EXPENSE 10,498 5,062
----------------- ------------------
NET INCOME 19,160 9,443
DIVIDENDS ON PREFERRED STOCK (128) (128)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 19,032 $ 9,315
================= ==================
BASIC EARNINGS PER SHARE $ 0.49 $ 0.24
================= ==================
NUMBER OF SHARES USED IN BASIC EARNINGS
PER SHARE CALCULATIONS 38,763 38,138
================= ==================
DILUTED EARNINGS PER SHARE $ 0.48 $ 0.24
================= ==================
NUMBER OF SHARES USED IN DILUTED EARNINGS
PER SHARE CALCULATIONS 40,276 39,768
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.12 $ 0.12
================= ==================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
February 28, February 29,
2005 2004
----------------- ------------------
NET SALES AND LICENSING FEES $ 137,313 $ 103,017
COST OF SALES 83,596 65,044
----------------- ------------------
GROSS PROFIT 53,717 37,973
----------------- ------------------
OPERATING EXPENSES:
Research and development 10,076 9,133
Selling 6,552 5,951
General and administrative 9,444 9,274
----------------- ------------------
Total operating expenses 26,072 24,358
----------------- ------------------
OPERATING INCOME 27,645 13,615
INTEREST INCOME, NET 1,099 699
OTHER EXPENSE, NET (2,480) (6,323)
EQUITY IN NET LOSS OF AFFILIATE (1,386) (1,734)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (2,345) (2,405)
----------------- ------------------
INCOME BEFORE INCOME TAXES 22,533 3,852
INCOME TAX EXPENSE 7,690 1,387
----------------- ------------------
NET INCOME 14,843 2,465
DIVIDENDS ON PREFERRED STOCK (256) (235)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 14,587 $ 2,230
================= ==================
BASIC EARNINGS PER SHARE $ 0.38 $ 0.06
================= ==================
NUMBER OF SHARES USED IN BASIC EARNINGS
PER SHARE CALCULATIONS 38,653 38,118
================= ==================
DILUTED EARNINGS PER SHARE $ 0.37 $ 0.06
================= ==================
NUMBER OF SHARES USED IN DILUTED EARNINGS
PER SHARE CALCULATIONS 40,124 39,711
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.24 $ 0.22
================= ==================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
(in thousands)
(Unaudited)
February 28, February 29,
2005 2004
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,843 $ 2,465
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 4,265 4,042
(Gain) loss on sale of assets (323) 49
Equity in net loss of affiliate 1,386 1,734
Foreign exchange gain (219) (131)
Accretion of debt discount 389 -
Minority interest in earnings of subsidiaries 2,345 2,405
Change in deferred taxes 974 1,510
Changes in assets and liabilities:
Receivables 45,851 67,300
Inventories (26,260) (25,971)
Prepaid expenses (118) 417
Intangibles and other assets (370) 120
Accounts payable (4,591) (5,240)
Accrued expenses (79,431) (85,457)
Income taxes 3,987 (2,266)
------------------ -----------------
Net cash used in operating activities (37,272) (39,023)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,561) (2,244)
Sale of investments and property 388 47
Investment in affiliate (1,550) (1,140)
------------------ -----------------
Net cash used in investing activities (4,723) (3,337)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt - (40)
Dividends paid (9,580) (8,635)
Proceeds from short-term debt - 245
Minority interest in dividends paid by subsidiary (359) (424)
Payments to acquire treasury stock - (3,452)
Proceeds from exercise of stock options 11,855 2,670
------------------ -----------------
Net cash provided by (used in) financing activities 1,916 (9,636)
------------------ -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES 1,124 328
NET DECREASE IN CASH AND CASH EQUIVALENTS (38,955) (51,668)
CASH AND CASH EQUIVALENTS, August 31 149,587 143,285
------------------ -----------------
CASH AND CASH EQUIVALENTS, February 28 and February 29 $ 110,632 $ 91,617
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the six months for:
Interest $ - $ 10
Income taxes paid $ 1,645 $ 1,810
Noncash financing activities:
Tax benefit of stock option exercises $ 2,298 $ 1,623
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
the fair presentation of the consolidated financial statements have been
included. The business of Delta and Pine Land Company and its subsidiaries
("D&PL") is seasonal in nature; thus, the results of operations for the three
and six month periods ended February 28, 2005 and February 29, 2004, or for any
quarterly period, are not necessarily indicative of the results to be expected
for the full year. D&PL's investment in 50%-owned affiliate DeltaMax Cotton, LLC
("DeltaMax") is accounted for using the equity method. For further information,
reference should be made to the consolidated financial statements and footnotes
thereto included in D&PL's Annual Report to Stockholders on Form 10-K for the
fiscal year ended August 31, 2004.
Reclassifications
In the consolidated statements of operations for the three and six months ended
February 28, 2005 and February 29, 2004, certain shipping expenses historically
classified as a reduction to Net Sales and Licensing Fees have been reclassified
as Cost of Sales. These expenses relate primarily to costs incurred to ship
finished goods to customers. The amount of expenses reclassified for the three
and six months ended February 28, 2005 and February 29, 2004 was $919,000 and
$896,000, respectively.
In addition, certain other prior year amounts have been reclassified to conform
with the current year presentation.
2. COMPREHENSIVE INCOME
Total comprehensive income for the three and six months ended February 28, 2005
and February 29, 2004, was (in thousands):
Three Months Ended Six Months Ended
------------------------------------- --------------------------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
----------------- ------------------ ----------------- -------------------
Net income $ 19,160 $ 9,443 $ 14,843 $ 2,465
Other comprehensive income (loss):
Foreign currency translation gains 312 190 1,857 819
Net realized and unrealized gains
(losses) on hedging instruments 105 (606) (10) (358)
----------------- ------------------ ----------------- -------------------
Other comprehensive income (loss) 417 (416) 1,847 461
----------------- ------------------ ----------------- -------------------
Total comprehensive income $ 19,577 $ 9,027 $ 16,690 $ 2,926
================= ================== ================= ===================
3. SEGMENT DISCLOSURES
D&PL is in a single line of business and operates in two business segments,
domestic and international. D&PL's reportable segments offer similar products;
however, the business units are managed separately due to the geographic
dispersion of their operations. D&PL breeds, produces, conditions and markets
proprietary varieties of cotton and soybean planting seed in the United States.
The international segment offers cottonseed in several foreign countries through
both export sales and in-country operations. D&PL develops its proprietary seed
products through research and development efforts in the United States and
certain foreign countries.
D&PL's chief operating decision maker utilizes revenue information in assessing
performance and making overall operating decisions and resource allocations.
Profit and loss information is reported by segment to the chief operating
decision maker and D&PL's Board of Directors. The accounting policies of the
segments are substantially the same as those described in the summary of
significant accounting policies in D&PL's Form 10-K filed for the year ended
August 31, 2004.
Information about D&PL's segments for the three and six month periods ended
February 28, 2005 and February 29, 2004, is as follows (in thousands):
Three Months Ended Six Months Ended
------------------------------------ ---------------- -----------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
----------------- ----------------- ---------------- -----------------
Net sales and licensing fees (by segment)
Domestic $ 108,108 $ 77,778 $ 108,660 $ 78,618
International 11,751 11,394 28,653 24,399
----------------- ----------------- ---------------- -----------------
$ 119,859 $ 89,172 $ 137,313 $ 103,017
================= ================= ================ =================
Net sales and licensing fees
Cottonseed $ 114,457 $ 78,448 $ 131,107 $ 91,381
Soybean seed 4,813 9,475 4,826 9,479
Other 589 1,249 1,380 2,157
----------------- ----------------- ---------------- -----------------
$ 119,859 $ 89,172 $ 137,313 $ 103,017
================= ================= ================ =================
Operating income
Domestic $ 28,530 $ 17,536 $ 19,455 $ 8,478
International 2,117 1,889 8,190 5,137
----------------- ----------------- ---------------- -----------------
$ 30,647 $ 19,425 $ 27,645 $ 13,615
================= ================= ================ =================
4. SIGNIFICANT CHANGES IN ASSETS AND LIABILITIES FROM AUGUST 31, 2004
Accounts receivable decreased approximately $45,429,000 to $139,330,000 at
February 28, 2005 from $184,759,000 at August 31, 2004. This decrease is
primarily related to the collection of the 2004 technology sublicense fees in
September 2004. The corresponding decrease in accrued expenses is primarily
related to the royalty payments made by the Company in September 2004 for the
Bollgard(R) and Roundup Ready(R) licensing fees on fiscal year 2004 sales.
Inventories increased approximately $26,710,000 to $56,861,000 at February 28,
2005 from $30,151,000 at August 31, 2004. This increase reflects the seasonal
nature of the Company's domestic production cycle. The Company's domestic
segment purchases bulk seed in its first and second fiscal quarters and begins
processing for the current year's selling season. The increase in inventories at
February 28, 2005 from August 31, 2004 is primarily related to those events and
is consistent with the Company's historical experience.
5. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions" (SFAS 153). This statement's amendments are based on
the principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. Further, SFAS 153 eliminates the narrow
exception for nonmonetary exchanges of similar productive assets and replaces it
with a broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Provisions of this statement are effective for fiscal
periods beginning after June 15, 2005. The Company does not expect the adoption
of this statement to have a material impact on D&PL's financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," which clarifies the types of costs that should be
expensed rather than capitalized as inventory. This statement also clarifies the
circumstances under which fixed overhead costs associated with operating
facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June
15, 2005, and may impact certain inventory costs D&PL incurs after September 1,
2005. The Company has not determined the impact, if any, that this statement
will have on D&PL's consolidated financial position or results of operations.
SFAS No. 123 (Revised 2004), "Share-Based Payment," issued in December 2004, is
a revision of FASB Statement 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
its related implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123 (Revised 2004) requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award. This
statement is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. This statement will apply to
all awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. SFAS No. 123(R) will be effective for
D&PL in the first quarter of 2006. The Company has not yet made any decisions
about how D&PL will adopt FAS 123(R). However, the pro forma net income effect
of using the fair value method for the three and six months ended February 28,
2005 and February 29, 2004, is presented in Note 6 below. The pro forma
compensation costs presented in Note 6 below and in our prior filings have been
calculated using a Black-Scholes option pricing model and may not be indicative
of amounts that should be expected in future years. We have not made any
decisions about which option-pricing model is most appropriate for us for future
awards. The Company has not determined the impact, if any, that this statement
will have on D&PL's consolidated financial position or results of operations.
6. STOCK-BASED COMPENSATION PLANS
As permitted by both SFAS No. 123, "Accounting for Stock-Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure -- an Amendment of FASB Statement No. 123," D&PL applies Accounting
Principles Board Opinion 25 in accounting for its employee stock option plans.
Therefore, no compensation expense for stock options is deducted in determining
net income, as all options granted had an exercise price equal to the fair
market value of the underlying common stock on the grant date. For further
information about D&PL's employee stock option plans, reference should be made
to the consolidated financial statements and footnotes thereto included in
D&PL's Annual Report to Stockholders on Form 10-K for the fiscal year ended
August 31, 2004.
The following table illustrates the effect on net income and net income per
share if D&PL had recorded compensation expense in accordance with the fair
value provisions of SFAS No. 123.
Three Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
------------------ ------------------ ------------------ ------------------
Net income:
As reported $ 19,160 $ 9,443 $ 14,843 $ 2,465
Less: Total stock-based compensation expense
determined under the fair value based
method for all awards, net of related tax
effects (700) (788) (1,431) (1,600)
------------------ ------------------ ------------------ ------------------
Pro forma $ 18,460 $ 8,655 $ 13,412 $ 865
================== ================== ================== ==================
Basic earnings per share:
As reported $ 0.49 $ 0.24 $ 0.38 $ 0.06
================== ================== ================== ==================
Pro forma $ 0.47 $ 0.22 $ 0.34 $ 0.02
================== ================== ================== ==================
Diluted earnings per share:
As reported $ 0.48 $ 0.24 $ 0.37 $ 0.06
================== ================== ================== ==================
Pro forma $ 0.46 $ 0.22 $ 0.33 $ 0.02
================== ================== ================== ==================
7. INVENTORIES
Inventories consisted of the following as of (in thousands):
February 28, August 31, February 29,
2005 2004 2004
------------------ ----------------- -----------------
Finished goods $ 36,626 $ 24,867 $ 35,785
Raw materials 25,084 14,333 29,093
Growing crops 169 1,432 187
Supplies 1,461 1,040 1,076
------------------ ----------------- -----------------
63,340 41,672 66,141
Less reserves (6,479) (11,521) (8,060)
------------------ ----------------- -----------------
$ 56,861 $ 30,151 $ 58,081
================== ================= =================
Finished goods and raw material inventory is valued at the lower of average cost
or market. Growing crops are recorded at cost. Elements of cost in inventories
include raw materials, direct production costs, manufacturing overhead and
immaterial general and administrative expenses. Inventory reserves relate to
estimated excess and obsolete inventory. The provision recorded for excess and
obsolete inventory for the quarters ended February 28, 2005 and February 29,
2004 were approximately $3,766,000 and $2,616,000, respectively. The provision
recorded for excess and obsolete inventory for the six-month periods ended
February 28, 2005 and February 29, 2004 were approximately $3,923,000 and
$2,988,000, respectively. See Note 11 for a description of hedging activities.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of (in thousands):
February 28, August 31, February 29,
2005 2004 2004
------------------ ----------------- -----------------
Land and improvements $ 6,235 $ 5,981 $ 5,197
Buildings and improvements 43,667 42,228 42,343
Machinery and equipment 62,766 59,125 60,234
Germplasm 7,500 7,500 7,500
Breeder and foundation seed 2,000 2,000 2,000
Construction in progress 1,635 2,538 3,143
------------------ ----------------- -----------------
123,803 119,372 120,417
Less accumulated depreciation (61,798) (57,384) (57,503)
------------------ ----------------- -----------------
$ 62,005 $ 61,988 $ 62,914
================== ================= =================
Depreciation expense during the quarters ended February 28, 2005 and February
29, 2004 was approximately $1,959,000 and $1,924,000, respectively. Depreciation
expense during the six-month periods ended February 28, 2005 and February 29,
2004 was approximately $4,065,000 and $3,862,000, respectively.
9. INTANGIBLES AND EXCESS OF COST OVER NET ASSETS OF BUSINESS ACQUIRED
The components of identifiable intangible assets are as follows as of (in
thousands):
February 28, 2005 August 31, 2004 February 29, 2004
------------------------------- ----------------------------------- ---------------------------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
----------- --------------- -------------- --------------- -------------- ----------------
Trademarks $ 3,182 $ (918) $ 3,182 $ (879) $ 3,182 $ (839)
Commercialization
agreements 400 (107) 400 (93) 400 (79)
Licenses 1,350 (138) 1,100 (83) 1,100 (28)
Patents 991 (105) 772 (97) 502 (90)
Other 2,046 (944) 1,986 (817) 1,973 (739)
----------- --------------- -------------- ---------------- -------------- ----------------
$ 7,969 $ (2,212) $ 7,440 $ (1,969) $ 7,157 $ (1,775)
=========== =============== ============== ================ ============== ================
Amortization expense for identifiable intangible assets during the quarters
ended February 28, 2005 and February 29, 2004 was approximately $80,000 and
$100,000, respectively. Amortization expense for identifiable intangible assets
during the six-month periods ended February 28, 2005 and February 29, 2004 was
approximately $200,000 and $180,000, respectively. Identifiable intangible asset
amortization expense is estimated to be $220,000 for the remainder of 2005 and
$400,000 in each of the fiscal years from 2006 through 2009 and $300,000 in
2010.
During the fourth quarter of fiscal 2004, "EXCESS OF COST OVER NET ASSETS OF
BUSINESS ACQUIRED" ("goodwill") attributable to the domestic segment was tested
for impairment by comparing its implied fair value to its carrying value. Based
on management's impairment test, management determined that none of the goodwill
recorded was impaired.
10. INVESTMENT IN AFFILIATE
D&PL owns a 50% interest in DeltaMax, a limited liability company jointly owned
with Verdia, Inc. Verdia was acquired by DuPont on July 2, 2004. Established in
May 2002, the DeltaMax joint venture was formed to create, develop and
commercialize herbicide tolerant and insect resistant traits for the cottonseed
market. D&PL has licensed from DeltaMax the developed traits for
commercialization in both the U.S. and other cotton-producing countries in the
world. For the quarters ended February 28, 2005 and February 29, 2004, D&PL's
equity in the net loss of DeltaMax was approximately $648,000 and $1,319,000,
respectively. For the six-month periods ended February 28, 2005 and February 29,
2004, D&PL's equity in the net loss of DeltaMax was approximately $1,386,000 and
$1,734,000, respectively.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Accumulated other comprehensive loss includes the following related to the
Company's soybean hedging program for the six-month periods ended February 28,
2005 and February 29, 2004 (in thousands):
2005 2004
------------------- -------------------
Deferred net (loss) gain, as of August 31 $ (134) $ 262
Net losses on hedging instruments arising during the six months (60) (208)
Reclassification adjustment of losses (gains) on hedging
instruments to earnings 50 (150)
------------------- -------------------
Net change in accumulated other comprehensive loss (10) (358)
------------------- -------------------
Deferred net loss on derivative instruments included in accumulated
other comprehensive loss at February 28 and February 29 $ (144) $ (96)
=================== ===================
The net loss of $144,000 included in accumulated other comprehensive loss at
February 28, 2005 consists of net unrealized gains of $46,000 and net realized
losses of $190,000. The net unrealized gains of $46,000 will be recognized in
earnings within the next twelve to eighteen months; however, the actual amount
that will be charged to earnings may vary as a result of changes in market
conditions. The net realized losses of $190,000 will be reclassified into
earnings in the period in which the forecasted transaction affects earnings,
which is expected to occur during D&PL's third quarter.
For the six-month periods ended February 28, 2005 and February 29, 2004, D&PL
recorded no gains or losses in earnings as a result of hedge ineffectiveness or
discontinuance of cash flow hedges related to soybeans.
12. CONTINGENCIES
Product Claims
D&PL is named as a defendant in various lawsuits that allege, among other
1
things, that certain of D&PL's products (including those containing Monsanto's
technology) did not perform as the farmer had anticipated or expected. In some
of these cases, Monsanto and/or the dealer or distributor who sold the seed are
also named as defendants. In all cases where the seed sold contained either or
both of Monsanto's Bollgard and/or Roundup Ready gene technologies, and where
the farmer alleged a failure of one or more of those technologies, D&PL has
tendered the defense of the case to Monsanto and requested indemnity. Pursuant
to the terms of the February 2, 1996 Bollgard Gene License and Seed Services
Agreement (the "Bollgard Agreement") and the February 2, 1996 Roundup Ready Gene
License and Seed Services Agreement (the "Roundup Ready Agreement") (both as
amended December 1999, January 2000 and March 2003 and the Roundup Ready
Agreement as additionally amended July 1996), D&PL has a right to be
contractually indemnified by Monsanto against all claims arising out of the
failure of Monsanto's gene technology. Pharmacia remains liable for Monsanto's
performance under these indemnity agreements. Some of the product liability
lawsuits contain varietal claims which are aimed solely at D&PL. D&PL does not
have a right to indemnification from Monsanto for any claims involving varietal
characteristics separate from or in addition to the failure of the Monsanto
technology. D&PL believes that the resolution of these matters will not have a
material impact on the consolidated financial statements. D&PL intends to
vigorously defend itself in these matters.
--------
1. On March 31, 2000, Monsanto Company consummated a merger with Pharmacia &
Upjohn Inc. and changed its name to Pharmacia Corporation. On February 9, 2000,
Monsanto Company formed a new subsidiary corporation, Monsanto Ag Company,
which, on March 31, 2000, changed its name to Monsanto Company. On August 31,
2002, Pharmacia distributed to its shareholders its remaining interest in the
new Monsanto Company. Pursuant to the closing of a merger on April 16, 2003,
Pharmacia Corporation merged with and into a wholly-owned subsidiary of Pfizer
Inc. Pharmacia survived the merger as a wholly-owned subsidiary of Pfizer Inc.
In this document, with respect to events occurring on or before March 31, 2000,
the term "Monsanto" refers to the entity then designated Monsanto Company and
renamed Pharmacia Corporation on that date. With respect to events occurring
between March 31, 2000 and April 16, 2003, this entity is referred to as
"Pharmacia". With respect to events occurring after April 16, 2003, the entity
referred to as "Pharmacia" is that entity which on that date became a
wholly-owned subsidiary of Pfizer Inc. With respect to events occurring after
March 31, 2000, the entity formed as Monsanto Ag Company and renamed Monsanto
Company (NYSE: MON) on March 31, 2000, is referred to as "Monsanto".
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II(R) cottonseed infringes Bayer's Australian patent
that claims an alleged invention entitled "Prevention of Bt Resistance
Development." The suit seeks an injunction, damages and other relief against
Deltapine Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings. Due to the status of this
matter, management is unable to determine the impact of this matter on the
consolidated financial statements.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners, a partnership of D&PL (90%) and Monsanto
(10%), pertaining to matters under the Bollgard and Roundup Ready Licenses for
the United States and matters under license agreements for Argentina and the
Republic of South Africa. In August 2003, D&PL and D&M Partners responded to
Monsanto's positions on each issue and notified Monsanto of additional disputes,
each concerning Monsanto's compliance with its obligations under the Bollgard
and Roundup Ready Licenses for the United States. In accordance with the dispute
resolution provisions of the subject agreements, the issues raised in Monsanto,
D&PL and D&M Partners' notices were submitted to a panel of senior executives
(the "Executive Panel"). Monsanto subsequently withdrew from the Executive Panel
the issue involving the license agreements for the Republic of South Africa and
submitted to the Executive Panel one additional issue of interpretation of the
Bollgard and Roundup Ready Licenses for the United States. Issues arising from
operations in Argentina and issues involving technology fees and interest have
been settled and are no longer in dispute. On May 20, 2004, Monsanto submitted
to arbitration before the American Arbitration Association two unresolved
issues: whether D&M Partners has paid Monsanto all royalties due and whether
D&PL has made unauthorized transfers of materials containing Monsanto
technology. In this arbitration proceeding, Monsanto seeks an adjudication of
its alleged right to terminate the Bollgard and Roundup Ready Licenses, to
dissolve D&M Partners, to obtain an accounting and to receive monetary damages
and a return or destruction of materials containing Monsanto technologies. D&PL
denies the claims asserted by Monsanto in the arbitration filing and has filed
appropriate responses and counterclaims to Monsanto's claims based on the issues
submitted by D&PL to the Executive Panel. On November 8, 2004, Monsanto
submitted one new claim allegedly involving a dispute under the license
agreements to the Executive Panel and the Executive Panel has that claim under
consideration. D&PL is committed to participating in good faith resolution of
the issues in dispute through arbitration, or through the Executive Panel, as
applicable. Due to the status of this matter, management is unable to determine
the impact of this matter on the consolidated financial statements.
In December 1999, Mycogen Plant Science, Inc. ("Mycogen") filed a suit in the
Federal Court of Australia alleging that Monsanto Australia Ltd., Monsanto's
wholly-owned Australian subsidiary, and Deltapine Australia have been infringing
two of Mycogen's Australian patents by making, selling, and licensing cotton
planting seed expressing insect resistance. The suit seeks injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. Trial of this matter commenced on March 7, 2005,
and concluded on April 6, 2005. The Court will render a decision later.
Consistent with its commitments, Monsanto has agreed to defend D&PL in this suit
and to indemnify D&PL against damages, if any are awarded. Monsanto is providing
separate defense counsel for D&PL. D&PL is assisting Monsanto to the extent
reasonably necessary. Due to the status of this matter, management is unable to
determine the impact of this matter on the consolidated financial statements.
A corporation owned by the son of D&PL's former Guatemalan distributor sued D&PL
in 1989 asserting that D&PL violated an agreement with it by granting to another
entity an exclusive license in certain areas of Central America and southern
Mexico. The suit seeks damages of 5,292,459 Guatemalan quetzales (approximately
$700,000 at March 31, 2005 exchange rates) and an injunction preventing D&PL
from distributing seed through any other licensee in that region. The Guatemalan
court, where this action is proceeding, has twice declined to approve the
injunction sought. D&PL continues to make available seed for sale in Central
America and Mexico. D&PL believes that the resolution of the matter will not
have a material impact on the consolidated financial statements.
D&PL vs. Monsanto Company and Pharmacia Corp.
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
effectively terminating Monsanto's efforts to gain government approval of the
merger of Monsanto with D&PL under the May 8, 1998, Merger Agreement. On
December 30, 1999, D&PL filed suit in the First Judicial District of Bolivar
County, Mississippi, seeking, among other things, the payment of the $81 million
termination fee due pursuant to the merger agreement, compensatory damages and
punitive damages. On January 2, 2000, D&PL and Monsanto reached an agreement
whereby D&PL would withdraw the suit, without prejudice, for the purpose of
negotiating a settlement of D&PL's claims, and Monsanto would immediately pay
the $81 million. On January 3, 2000, Monsanto paid to D&PL the termination fee
of $81 million as required by the merger agreement. On January 18, 2000, after
unsuccessful negotiations, D&PL re-filed its suit. D&PL seeks in excess of $1
billion in compensatory and $1 billion in punitive damages for breach of the
merger agreement between the parties.
On September 12, 2003, Monsanto amended its answer to include four counterclaims
against D&PL. Monsanto is seeking unspecified damages for its counterclaims,
including the $81 million paid by Monsanto to D&PL as a termination fee and
related expenses. D&PL answered the counterclaims, denying all liability, and
D&PL intends to vigorously defend against these counterclaims. On December 21,
2004, Monsanto filed a motion to amend its answer to withdraw two of its four
counter claims. Due to the status of this matter, management is unable to
determine the impact of this matter on the consolidated financial statements.
13. EARNINGS PER SHARE
Dilutive common share equivalents consist of both D&PL's Series M Convertible
Non-Voting Preferred shares and the outstanding options to purchase D&PL's
common stock that have been issued under the 1993 Stock Option Plan and the 1995
Long-Term Incentive Plan. Approximately 119,000 and 489,000 outstanding stock
options were not included in the computation of diluted earnings per share for
the three months ended February 28, 2005 and February 29, 2004, respectively,
and approximately 192,000 and 551,000 outstanding stock options were not
included in the computation of diluted earnings per share for the six months
ended February 28, 2005 and February 29, 2004, respectively, because the
exercise price exceeded the average market price of D&PL's common stock for each
respective reporting date. These excluded options expire at various dates from
2007 to 2015.
The table below reconciles the basic and diluted per share computations:
For the Three Months Ended For the Six Months Ended
------------------------------- ---------------------------------
(in thousands, except per share amounts) February 28, February 29, February 28, February 29,
2005 2004 2005 2004
-------------- ------------- --------------- --------------
Income:
Net income $ 19,160 $ 9,443 $ 14,843 $ 2,465
Less: Preferred stock dividends (128) (128) (256) (235)
-------------- ------------- --------------- --------------
Net income for basic EPS 19,032 9,315 14,587 2,230
Effect of Dilutive Securities:
Convertible Preferred Stock Dividends 128 128 256 235
-------------- ------------- --------------- --------------
Net income available to common
stockholders plus assumed conversions - for
diluted EPS $ 19,160 $ 9,443 $ 14,843 $ 2,465
============== ============= =============== ==============
Shares:
Basic EPS Shares 38,763 38,138 38,653 38,118
Effect of Dilutive Securities:
Options to purchase stock 446 563 404 526
Convertible preferred stock 1,067 1,067 1,067 1,067
-------------- ------------- --------------- --------------
Diluted EPS Shares 40,276 39,768 40,124 39,711
============== ============= =============== ==============
Per Share Amounts:
Basic $ 0.49 $ 0.24 $ 0.38 $ 0.06
============== ============= =============== ==============
Diluted $ 0.48 $ 0.24 $ 0.37 $ 0.06
============== ============= =============== ==============
14. EMPLOYEE BENEFIT PLANS
Substantially all full-time employees are covered by a noncontributory defined
benefit plan (the "Plan"). Benefits are paid to employees, or their
beneficiaries, upon retirement, death or disability based on their final average
compensation over the highest consecutive five years. D&PL's funding policy is
to make contributions to the Plan that are at least equal to the minimum amounts
required to be funded in accordance with the provisions of ERISA. Effective
January 1992, D&PL adopted a Supplemental Executive Retirement Plan (the
"SERP"), which will pay supplemental pension benefits to certain employees whose
benefits from the Plan were decreased as a result of certain changes made to the
Plan. The benefits from the SERP will be paid in addition to any benefits the
participants may receive under the Plan and will be paid from Company assets,
not Plan assets. For further information about D&PL's employee benefit plans,
reference should be made to Note 10 to the consolidated financial statements
contained in D&PL's Annual Report on Form 10-K for the year ended August 31,
2004.
The components of net periodic pension cost for D&PL's Plan and SERP follow as
of:
Pension SERP
------- ----
Three Months Ended Three Months Ended
--------------------------------------- ------------------------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
------------------ ------------------ ------------------ -----------------
Service cost $ 213,000 $ 208,000 $ - $ 3,000
Interest cost 274,000 248,000 9,000 9,000
Expected return on assets (272,000) (231,000) (7,000) (7,000)
Amortization of prior service cost 1,000 1,000 - -
Recognized net actuarial loss (gain) 101,000 118,000 (1,000) 13,000
------------------ ------------------ ------------------ ---------------
Net periodic pension cost $ 317,000 $ 344,000 $ 1,000 $ 18,000
================== ================== ================== ===============
Pension SERP
------- ----
Six Months Ended Six Months Ended
--------------------------------------- ------------------------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
------------------ ------------------ ------------------ -----------------
Service cost $ 426,000 $ 416,000 $ - $ 5,000
Interest cost 548,000 495,000 18,000 18,000
Expected return on assets (544,000) (461,000) (14,000) (14,000)
Amortization of prior service cost 2,000 2,000 - -
Recognized net actuarial loss (gain) 202,000 236,000 (2,000) 25,000
------------------ ------------------ ------------------- ----------------
Net periodic pension cost $ 634,000 $ 688,000 $ 2,000 $ 34,000
================== ================== =================== ================
As of February 28, 2005, D&PL had not made any contributions to the Pension
Plan. D&PL anticipates making a $1 million contribution to the Pension Plan in
fiscal 2005.
As of February 28, 2005, no contributions have been made to the SERP. D&PL
presently does not anticipate contributing any amounts to the SERP in fiscal
2005.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW/OUTLOOK
We are currently processing and shipping our seed products to customers in the
U.S. market. Cotton plantings have recently commenced in the major U.S. cotton
growing states and is likely to continue until late June. As our second quarter
results reflect, we believe there was a shift of product shipments into our
second quarter from the third quarter this year due to our distributors
requesting products earlier than last year. Strong early season shipments in the
U.S. coupled with higher selling prices for seed and traits resulted in an
increase in our second quarter revenues and operating results. On March 31,
2005, the USDA issued its "Prospective Plantings" report for this crop season,
which estimated U.S. cotton plantings of 13.8 million acres. This is only
slightly above 2004 cotton plantings of 13.7 million acres. Our 2005 earnings
guidance was based on 2005 U.S. cotton acreage being unchanged from 2004
plantings of 13.7 million acres. Due to both the difficulty in accurately
forecasting cotton plantings at present and because the recent USDA report
reflects only a 1% increase in acreage over 2004, we do not believe it is
necessary to update our previously issued earnings guidance. We will continue to
monitor U.S. cotton plantings, and as more information becomes available,
consider the need to update our earnings guidance. As we have previously stated,
our earnings are affected by U.S. cotton plantings, the types of products we
sell (product mix), market share and several other factors.
Our International business continues to reflect an increase in both revenues and
profitability. We believe sales in most of our international markets will
increase this year over 2004 levels. We are currently shipping products to our
international markets in the Northern hemisphere and cotton plantings in many of
these markets have not yet begun. We have experienced an increase in our sales
in Mexico (due to an increase in cotton acres) as well as Greece and Spain (due
to lower inventory levels at our distributors). However, sales at our Chinese
joint ventures are expected to decline this year due to increased competition
from varieties developed locally by our Chinese competitors. In Brazil, our
joint venture, MDM Sementes De Algodao Ltda., has increased its sales over 2004
levels due to higher selling prices and an increase in market share. We are
optimistic about the Brazilian market due to recent favorable legislation being
enacted which will regulate the sale of transgenic crops, including cotton. On
March 17, 2005, Brazil's National Technical Commission For Biosafety approved
the Bollgard(R) gene for sale in cotton. Shortly thereafter, the Brazilian
President signed a law governing biosafety products in Brazil. We expect final
regulations will be issued shortly which will determine how varieties are
registered. Sales of transgenic varieties can commence once our varieties are
registered. Based on current requirements, we believe our transgenic varieties
may be available for sale in 2007.
Other Matters
1
We are continuing to rapidly develop new product offerings containing Monsanto's
second generation traits, Bollgard II(R) and Roundup Ready Flex(R). On March 15,
2005, Monsanto announced it had obtained U.S. regulatory clearance for Roundup
Ready Flex cotton. We expect to commercialize limited quantities of our
varieties containing this technology in 2006. In addition, we are continuing to
develop products containing Syngenta's VipCot technology and expect to have
expanded field testing of VipCot products this year. Syngenta is responsible for
obtaining U.S. regulatory approval for VipCot and we could have seed production
in the U.S. as early as 2006 with commercial launch to occur in 2007 or 2008,
depending on when full regulatory approval is obtained. In addition, our joint
venture with Verdia, Inc. (a subsidiary of DuPont), DeltaMax Cotton LLC,
continues development of novel cotton traits in the areas of glyphosate
tolerance and insect resistance.
We continue to seek opportunities to expand our International business into new
markets, including India and parts of Africa. Our subsidiary, D&PL India Seed
Private Ltd., will expand research and testing of our hybrid products throughout
India this year. Results of our testing programs from 2004 have shown many of
our products are competitive in India in terms of both yield and fiber quality.
--------
1. On March 31, 2000, Monsanto Company consummated a merger with Pharmacia &
Upjohn Inc. and changed its name to Pharmacia Corporation. On February 9, 2000,
Monsanto Company formed a new subsidiary corporation, Monsanto Ag Company,
which, on March 31, 2000, changed its name to Monsanto Company. On August 31,
2002, Pharmacia distributed to its shareholders its remaining interest in the
new Monsanto Company. Pursuant to the closing of a merger on April 16, 2003,
Pharmacia Corporation merged with and into a wholly-owned subsidiary of Pfizer
Inc. Pharmacia survived the merger as a wholly-owned subsidiary of Pfizer Inc.
In this document, with respect to events occurring on or before March 31, 2000,
the term "Monsanto" refers to the entity then designated Monsanto Company and
renamed Pharmacia Corporation on that date. With respect to events occurring
between March 31, 2000 and April 16, 2003, this entity is referred to as
"Pharmacia". With respect to events occurring after April 16, 2003, the entity
referred to as "Pharmacia" is that entity which on that date became a
wholly-owned subsidiary of Pfizer Inc. With respect to events occurring after
March 31, 2000, the entity formed as Monsanto Ag Company and renamed Monsanto
Company (NYSE: MON) on March 31, 2000, is referred to as "Monsanto".
We are continuing to pursue our litigation against Monsanto Company and
Pharmacia. On February 22, 2005, we announced that the Mississippi Supreme Court
(the "Court") had granted our petitions to appeal two rulings from the trial
court. One petition related to our claim for expectation or "benefit of the
bargain" damages. The second petition related the production of documents that
Monsanto had claimed to be immune from disclosure under the attorney-client
privilege and work product doctrine. As a result of these rulings, the Court
will hear our appeals related to these matters immediately rather than after the
trial occurs. The Court also issued a temporary stay of the trial while these
appeals are being resolved. In addition, we filed a motion with the trial court
to amend our complaint to add a claim against Monsanto and Pharmacia for
fraudulently inducing us to extend the deadline for completing the merger in
1999. At this point, we do not expect the trial to occur in 2005. See Part II,
Item 1 for further discussion.
On May 20, 2004, Monsanto submitted to arbitration before the American
Arbitration Association two matters which had been in a formal dispute
resolution process before a panel of senior executives since July, 2003. In the
arbitration filing, Monsanto is seeking an adjudication of its alleged right to
terminate the Bollgard and Roundup Ready(R) Licenses between our companies,
monetary damages, as well as other items. We have responded to this arbitration
filing and denied Monsanto's claims. In addition, we have asserted counterclaims
based on issues that we had submitted to the panel of senior executives.
Arbitrators have been selected and the first hearing has been held. See Part II,
Item 1 for more information.
Results of Operations
Due to the seasonal nature of our business, we typically incur losses in our
first and fourth fiscal quarters because the majority of our domestic sales are
made in our second and third quarters. Sales in the first and fourth quarters
are generally limited to those made to export markets and those made by our
non-U.S. joint ventures and subsidiaries located primarily in the Southern
hemisphere.
The following sets forth selected operating data of D&PL (in thousands):
For the Three Months Ended For the Six Months Ended
-------------------------------------- --------------------------------------
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
------------------ ----------------- ----------------- ------------------
Operating results-
Net sales and licensing fees $ 119,859 $ 89,172 $ 137,313 $ 103,017
Gross profit 44,684 32,164 53,717 37,973
Operating expenses 14,037 12,739 26,072 24,358
Operating income 30,647 19,425 27,645 13,615
Income before income taxes 29,658 14,505 22,533 3,852
Net income applicable to common shares 19,032 9,315 14,587 2,230
The following sets forth selected balance sheet data of D&PL at the following
dates (in thousands):
February 28, August 31, February 29,
2005 2004 2004
------------------ ----------------- -----------------
Balance sheet summary-
Current assets $ 315,586 $ 375,475 $ 259,388
Current liabilities 150,091 226,225 109,878
Working capital 165,495 149,250 149,510
Property, plant and equipment, net 62,005 61,988 62,914
Total assets 398,761 457,023 333,602
Outstanding borrowings 22,514 22,125 1,829
Stockholders' equity 230,989 209,726 212,239
Three months ended February 28, 2005, compared to three months ended February
29, 2004:
For the quarter ended February 28, 2005, we reported net income of $19.2
million, compared to net income of $9.4 million reported in the comparable prior
year quarter. This increase was due primarily to higher sales and profits in our
domestic segment and lower litigation expenses incurred in our lawsuit against
Monsanto/Pharmacia ($1.5 million versus $3.5 million), which are reported in
Other Expense. These items were partially offset by higher operating expenses.
Net sales and licensing fees increased approximately $30.7 million to $119.9
million from $89.2 million in the comparable period in the prior year. Gross
profit increased approximately $12.5 million to $44.7 million from $32.2
million. The increase in net sales and licensing fees is primarily attributable
to the domestic segment, where cottonseed sales increased due to an anticipated
shift in shipments into our second quarter from the third quarter. Price
increases on seed and traits in the domestic segment also contributed to
increased revenue. These increases were slightly offset by lower sales of
soybean planting seed. Higher export sales to Greece and Mexico during the
current-year quarter were offset by lower sales at our joint ventures in China
for the international segment. Sales to Greece were higher due to an anticipated
shift of shipments to that country into the second quarter from the third
quarter. Shipments to Mexico increased due to an overall increase in acreage
planted to cotton there. Gross profit as a percentage of Net Sales and Licensing
Fees increased slightly to 37.3% in the current year quarter from 36.1% in the
same prior year quarter. This increase was primarily due to price increases for
cottonseed in the domestic segment and lower soybean sales, which earn a lower
margin than cottonseed sales.
Operating expenses increased approximately $1.3 million to $14.0 million from
$12.7 million in the second quarter of 2004. This increase is primarily related
to higher research and development and insurance expenses.
We reported net other expense of approximately $1.0 million for the quarter
ended February 28, 2005 compared to net other expense of approximately $3.5
million for the same period in the prior year. The decrease is primarily
attributable to lower legal fees related to the Monsanto/Pharmacia litigation.
In the three months ended February 28, 2005, we incurred $1.5 million, or $0.02
per diluted share, related to the Monsanto/Pharmacia litigation expenses,
compared to $3.5 million, or $0.06 per diluted share, in the three months ended
February 29, 2004.
Six months ended February 28, 2005, compared to six months ended February 29,
2004:
For the six-month period ended February 28, 2005, we reported net income of
$14.8 million, compared to net income of $2.5 million reported in the comparable
prior year period. This increase was due primarily to higher revenues and
profits in both the domestic and international segments and lower litigation
expenses incurred in our lawsuit against Monsanto/Pharmacia ($3.0 million versus
$6.4 million), which are reported in Other Expense. These items were partially
offset by higher operating expenses.
Net sales and licensing fees increased approximately $34.3 million to $137.3
million from $103.0 million in the comparable period in the prior year. Gross
profit increased approximately $15.7 million to $53.7 million from $38.0
million. The increase in net sales and licensing fees is primarily attributable
to increased revenue in the domestic segment due to an anticipated shift in
shipments into our second quarter from the third quarter. Price increases on
seed and traits in the domestic segment also contributed to higher revenue.
International revenues also increased due to higher sales in Australia and
Brazil, and increased export sales to Greece and Mexico. Sales in Australia were
higher due to an increase in cotton acreage and higher market share. Revenues
from Brazil were higher due to higher selling prices and increased market share.
These increases were offset by a reduction in sales at our two joint ventures in
China due to stronger competition from local products. Gross profit as a
percentage of Net Sales and Licensing Fees increased to 39.1% in the current
year six-month period, compared to 36.9% in the same prior year period. This
increase is primarily attributable to higher seed selling prices over 2004, a
shift in sales to our higher priced cottonseed products, and a reduction in
soybean sales which have a lower margin.
Operating expenses increased approximately $1.7 million to $26.1 million from
$24.4 million in the six months ended February 29, 2004. This increase is
primarily related to higher research and development and advertising expenses.
We reported net other expense of approximately $2.5 million for the six-month
period ended February 28, 2005 compared to net other expense of approximately
$6.3 million for the same period in the prior year. The decrease is primarily
attributable to lower legal fees related to the Monsanto/Pharmacia litigation.
In the six months ended February 28, 2005, we incurred $3.0 million, or $0.05
per diluted share, related to the Monsanto/Pharmacia litigation expenses,
compared to $6.4 million, or $0.10 per diluted share, in the six months ended
February 28, 2005.
CONTRACTUAL OBLIGATIONS
As of February 28, 2005, we owed approximately $3.4 million for a portion of our
raw materials that had been received from the 2004 production season. This
amount represents the amount due on seed production delivered that had not yet
been paid. It does not include other amounts that may become due from
contingencies contained in seed production contracts. The amount owed of $3.4
million is included in Current Liabilities in our Consolidated Balance Sheet at
February 28, 2005.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Overview
Management's discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing in Item 8 of our Annual Report on Form
10-K for the fiscal year ended August 31, 2004. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
We have identified below the accounting policies that involve those estimates
and assumptions that we believe are critical to an understanding of our
financial statements. Our management has discussed the development and selection
of each critical accounting estimate with the Audit Committee of our Board of
Directors, and the Audit Committee has reviewed the related disclosures below.
Since application of these accounting policies involves the exercise of judgment
and use of estimates, actual results could differ from those estimates.
Revenue Recognition
Revenues from domestic seed sales are recognized when the seed is shipped.
Revenues from technology licensing fees are recognized when the seed is shipped.
Domestically, the licensing fees charged to farmers for transgenic cottonseed
are based on pre-established planting rates for each of nine geographic regions
and, for years prior to 2004, considered the estimated number of seed contained
in each bag which varied by variety, location grown, and other factors.
Effective in 2004, picker and stripper cottonseed products were sold in bags
containing approximately 250,000 seed or bulk boxes containing approximately
8,000,000 seed. Acala and Pima cottonseed products continue to be sold in
50-pound bags.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. International export sales are not subject to return
except in limited cases in Mexico and Colombia. All other international revenues
from the sale of planting seed, less estimated reserves for returns, are
recognized when the seed is shipped, except in Australia where certain
immaterial revenues are recognized when collected.
All of our domestic seed products (including those containing Bollgard and
Roundup Ready technologies) are subject to return and credit risk, the effects
of which vary from year to year. The annual level of returns and, ultimately,
net sales are influenced by various factors, principally commodity prices and
weather conditions occurring in the spring planting season during our third and
fourth quarters. We provide for estimated returns as sales occur. To the extent
actual returns differ from estimates, adjustments to our operating results are
recorded when such differences become known, typically in our fourth quarter.
All significant returns occur or are accounted for by fiscal year end.
Therefore, the application of this estimate could affect our quarterly
information.
Domestically, we promote our cotton and soybean seed directly to farmers and
sell our seed through distributors and dealers. We also offer various sales
incentive programs for seed and participate in such programs related to the
Bollgard and Roundup Ready technology fees offered by Monsanto. Under these
programs, if a farmer plants his seed and the crop is lost (usually due to
inclement weather) by a certain date, a portion of the price of the seed and
technology fees are forgiven or rebated to the farmer if certain conditions are
met. The amount of the refund and the impact to D&PL depends on a number of
factors including whether the farmer can replant the crop that was destroyed. We
record monthly estimates to account for these programs. The majority of program
rebates occur during the second, third, and fourth quarters. Essentially all
material claims under these programs have occurred or are accounted for by
fiscal year end.
Provision for Damaged, Obsolete and Excess Inventory
Each year, we record a provision to adjust our reserves related to inventory
based on our estimate of seed that will not pass our quality assurance ("QA")
standards at year end, or is deemed excess based on our desired seed stock level
for a particular variety ("dump seed"). Seed can fail QA standards based on
physical defects (i.e., cut seed, moisture content, discoloration, etc.),
germination rates, or transgenic purities. The amount recorded as inventory
provision in a given year is calculated based on the total quantity of inventory
that has not passed QA standards at any fiscal year end, any seed that is
expected to deteriorate before it can be sold and seed deemed to be excess. In
establishing the provision, we consider the scrap value of the seed to be
disposed. An initial estimate of the needed provision is made at the beginning
of each year and recorded over the course of the year. Adjustments for changes
in our estimates are made monthly, if necessary.
See Note 7 of the Notes to Consolidated Financial Statements in Item 1 for
further details about inventory reserves.
Deferred Income Taxes
Deferred income taxes are estimated based upon temporary differences between the
income and losses that we report in our financial statements and our taxable
income and losses as determined under applicable tax laws. We estimate the value
of deferred income taxes based on existing tax rates and laws, and our
expectations of future earnings. For deferred income taxes, we applied a
composite statutory income tax rate of 38%.
We are required to evaluate the likelihood of our ability to generate sufficient
future taxable income that will enable us to realize the value of our deferred
tax assets. If, in our judgment, we determine that we will not realize deferred
tax assets, then valuation allowances are recorded. As of February 28, 2005, we
had recorded net deferred tax assets of approximately $16.4 million primarily
related to capitalizing the licenses from Syngenta for income tax reporting
purposes. We estimate that our deferred tax assets will be realized; therefore,
we have not recorded any valuation allowances as of February 28, 2005.
We use management judgment and estimates when estimating deferred taxes. If our
judgments and estimates prove to be inadequate, or if certain tax rates and laws
should change, our financial results could be materially adversely impacted in
future periods.
Contingent Liabilities
A liability is contingent if the amount is not presently known, but may become
known in the future as a result of the occurrence of some uncertain future
event. D&PL estimates its contingent liabilities based on management's estimates
about the probability of outcomes and its ability to estimate the range of
exposure. Accounting standards require that a liability be recorded if
management determines that it is probable that a loss has occurred and the loss
can be reasonably estimated. In addition, it must be probable that the loss will
be confirmed by some future event. As part of the estimation process, management
is required to make assumptions about matters that are by their nature highly
uncertain. The assessment of contingent liabilities, including legal
contingencies and income tax liabilities, involves the use of critical
estimates, assumptions and judgments. Management's estimates are based on their
belief that future events will validate the current assumptions regarding the
ultimate outcome of these exposures. However, there can be no assurance that
future events, such as court decisions or I.R.S. positions, will not differ from
management's assessments. Whenever practicable, management consults with third
party experts (attorneys, accountants, claims administrators, etc.) to assist
with the gathering and evaluation of information related to contingent
liabilities.
LIQUIDITY AND CAPITAL RESOURCES
In the United States, we purchase seed from contract growers in our first and
second fiscal quarters. Seed conditioning, treating and packaging commence late
in the first fiscal quarter and continue through the third fiscal quarter.
Seasonal cash needs normally begin to increase in the first fiscal quarter and
cash needs peak in the third fiscal quarter. Cash is generated and loan
repayments, if applicable, normally begin in the middle of the third fiscal
quarter and are typically completed by the first fiscal quarter of the following
year. In some cases, we offer customers financial incentives to make early
payments. To the extent we attract early payments from customers, bank
borrowings, if any, are reduced.
In the U.S., we record revenue and accounts receivable for technology licensing
fees on transgenic seed sales upon shipment, usually in our second and third
fiscal quarters. Receivables from seed sales generally become due in May and
June. The licensing fees are due in September, at which time we receive payment.
We then pay Monsanto its royalty for the Bollgard and Roundup Ready licensing
fees, which is recorded as a component of cost of sales. As a result of the
timing of these events, licensing fees receivable and royalties payable peak at
our fiscal year end, August 31.
The seasonal nature of our business significantly impacts cash flow and working
capital requirements. Historically, we have maintained credit facilities, and
used early payments by customers and cash from operations to fund working
capital needs. In the past, we have borrowed on a short-term basis to meet
seasonal working capital needs. However, since 2002, we have used cash generated
from operations and other available cash to meet working capital needs. We
continue to evaluate potential uses of our cash for purposes other than for
working capital needs. Potential uses of our cash may be the acquisition of, or
funding of, alternative technologies (such as, or in addition to, DeltaMax and
Syngenta) that could be used to enhance our product portfolio and ultimately our
long-term earnings potential and/or an investment in new markets outside the
U.S. Another potential use is the repurchase of our shares pursuant to our
previously announced share repurchase program. We are currently considering
other potential uses of the remaining cash, including increasing the dividend
rate or repurchasing shares more aggressively depending on market considerations
and other factors. As a part of this analysis, we are evaluating the Company's
liquidity needs and its capital structure.
In April 1998, we entered into a syndicated credit facility with three lenders,
which provided for aggregate, unsecured borrowings of $110 million. This
agreement expired on April 1, 2001. We have had discussions with several
potential lenders about a replacement facility.
Capital expenditures were $3.6 million and $2.2 million in the six months ended
February 28, 2005 and February 29, 2005, respectively. We anticipate that
capital expenditures will approximate $8.0 to $10.0 million in 2005.
For the six months ended February 28, 2005, aggregate dividends of $9.6 million
have been paid on common and preferred shares. On April 1, 2005, we announced
that our Board of Directors had declared a $0.12 per share dividend for the
third quarter. The third quarter dividend will be paid on June 14, 2005 to
shareholders of record on May 31, 2005. The Board anticipates that quarterly
dividends of $0.12 per share will continue to be paid in the future; however,
the Board of Directors reviews this policy quarterly. Based on a quarterly
dividend of $0.12 per share in 2005, aggregate preferred and common stock
dividends should approximate $19.2 million in 2005.
The Company purchases its common stock in the open market from time to time
depending on market conditions and other factors. The shares repurchased are to
be used to provide for option exercises, conversion of our Series M Convertible
Non-Voting Preferred shares and for other general corporate purposes. From
September 1, 2004 through March 31, 2005, the Company has purchased 672,600
shares of its common stock at an aggregate purchase price of $17.8 million.
Cash provided from operations, cash on hand, early payments from customers and
borrowings under a loan agreement, if necessary, should be sufficient to meet
the Company's 2005 working capital needs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure relative to fluctuations in the price of soybean raw material
inventory, foreign currency fluctuations and interest rate changes. For more
information about market risk and how we manage specific risk exposures, see
Notes 1 and 14 to our consolidated financial statements contained in our Annual
Report on Form 10-K for the year ended August 31, 2004. Also see Note 11 of the
Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on
Form 10-Q for further details about our exposure to market risk.
The fair value of derivative commodity instruments outstanding as of February
28, 2005, was $46,000. A 10% adverse change in the underlying commodity prices
upon which these contracts are based would result in a $25,000 loss in future
earnings (not counting the gain on the underlying commodities).
Our earnings are also affected by fluctuations in the value of the U.S. dollar
compared to foreign currencies as a result of transactions in foreign markets.
We conduct non-U.S. operations through subsidiaries and joint ventures in,
primarily, Argentina, Australia, Brazil, China, South Africa and Turkey. At
February 28, 2005, the result of a uniform 10% change in the value of the dollar
relative to the currencies in which our transactions are denominated would not
cause a material impact on earnings.
For the quarter ended February 28, 2005, a 10% adverse change in the interest
rate that we earned on our cash that we invested would not have resulted in a
material change to our net interest income or cash flow.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
D&PL's chief executive officer and chief financial officer have evaluated the
effectiveness of the design and operation of D&PL's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of February 28, 2005.
Based on that evaluation, the chief executive officer and chief financial
officer have concluded that D&PL's disclosure controls and procedures are
effective to ensure that material information relating to D&PL and D&PL's
consolidated subsidiaries is made known to such officers by others within these
entities in order to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
There have not been any changes in D&PL's internal control over financial
reporting or in other factors that have materially affected, or are reasonably
likely to materially affect, D&PL's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following sets forth all known pending litigation in which D&PL is named as
a defendant and a description of other legal matters.
Product Claims
D&PL and Monsanto were named as defendants in a lawsuit filed in the 106th
Judicial District Court of Gaines County, Texas, on April 27, 2000. In this case
the plaintiff alleges, among other things, that certain cottonseed acquired from
D&PL that contained the Roundup Ready gene did not perform as the farmer had
anticipated. D&PL and Monsanto are investigating the claims to determine the
cause or causes of the alleged problem. Pursuant to the terms of the February 2,
1996 Roundup Ready Gene License and Seed Service Agreement (the "Roundup Ready
Agreement"), D&PL has tendered the defense of this claim to Monsanto and
requested indemnity. Pursuant to the Roundup Ready Agreement, Monsanto is
contractually obligated to defend and indemnify D&PL against all claims arising
out of the failure of the Roundup(R) glyphosate tolerance gene and Monsanto has
agreed to do so. D&PL will not have a right of indemnification from Monsanto,
however, for any claim involving defective varietal characteristics separate
from or in addition to the herbicide tolerance gene and such claims are
contained in this litigation.
D&PL was named in two lawsuits filed in the Circuit Court of Holmes County,
Mississippi. One was filed March 14, 2002, and the second was filed on August
19, 2002. Both cases include numerous plaintiffs who allege that certain
cottonseed sold by D&PL was improperly mixed and blended and failed to perform
as advertised. On December 14, 2004, an Order was entered in the March 14, 2002
case severing the individual claims of the 57 original plaintiffs into
fifty-seven separate actions. Fourteen of the fifty-seven cases will remain in
Holmes County, Mississippi. The venue to which the other cases will be
transferred has not yet been determined. On January 24, 2005, the Supreme Court
of the State of Mississippi granted D&PL's interlocutory appeal of the trial
court's denial of D&PL's motion to dismiss the claims of seven plaintiffs for
failure to comply with the Mississippi Seed Arbitration Act. The briefing and
scheduling order has not yet been entered on the consolidated appeals but it is
anticipated that resolution of this matter will take approximately one year. The
interlocutory appeal issue is ultimately dispositive of the claims of forty-six
plaintiffs in the March 14, 2002 suit and of fifteen plaintiffs' claims in the
August 19, 2002 suit. Both cases are in the preliminary discovery stage.
Dispositive motions are pending in the remanded August 19, 2002 case. It is
anticipated the state court will rule on those motions precisely as it ruled on
identical motions in the March 14, 2002 case. Neither of these lawsuits alleges
that the Monsanto gene technology failed, and accordingly, it does not appear
that D&PL has a claim for indemnity or defense under the terms of any of the
gene licenses with Monsanto.
In December 2002, D&PL filed a suit in the Circuit Court of Holmes County,
Mississippi, against Nationwide Agribusiness and other insurance companies
seeking a declaration that the allegations of the Holmes County, Mississippi
lawsuit filed March 14, 2002, are covered by D&PL's comprehensive general
liability and umbrella liability policies. This case was removed by the
defendants to the United States District Court for the Southern District of
Mississippi. In this litigation, D&PL seeks a declaration that its insurers are
responsible for the cost of defending such actions, and full indemnification of
D&PL in the event a judgment is rendered against it based upon the seed mix
claim alleged by plaintiffs. D&PL alleges in this litigation that the
allegations of plaintiffs' complaint are covered by one or more of D&PL's
insurance policies issued by the defendant insurance companies.
In the August 19, 2002 Holmes County lawsuit, D&PL has filed a third party
Complaint and seeks a declaration that its insurers are responsible for the cost
of defending the action and for full indemnification of D&PL in the event a
judgment is entered against it. The third-party defendant removed the case to
the United States District Court for the Southern District of Mississippi,
Jackson Division, where a motion to remand was granted on September 28, 2004.
Accordingly, that case has now been returned to the docket of Holmes County,
Mississippi.
All lawsuits related to product claims seek monetary damages. See Note 12 of the
Notes to Consolidated Financial Statements in Item 1 for further details about
product claims.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II cottonseed infringes Bayer's Australian patent that
claims an alleged invention entitled "Prevention of Bt Resistance Development."
The suit seeks an injunction, damages and other relief against Deltapine
Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners, a partnership of D&PL (90%) and Monsanto
(10%), pertaining to matters under the Bollgard and Roundup Ready Licenses for
the United States and matters under license agreements for Argentina and the
Republic of South Africa. In August 2003, D&PL and D&M Partners responded to
Monsanto's positions on each issue and notified Monsanto of additional disputes,
each concerning Monsanto's compliance with its obligations under the Bollgard
and Roundup Ready Licenses for the United States. In accordance with the dispute
resolution provisions of the subject agreements, the issues raised in Monsanto,
D&PL and D&M Partners' notices were submitted to a panel of senior executives
(the "Executive Panel"). Monsanto subsequently withdrew from the Executive Panel
the issue involving the license agreements for the Republic of South Africa and
submitted to the Executive Panel one additional issue of interpretation of the
Bollgard and Roundup Ready Licenses for the United States. Issues arising from
operations in Argentina and issues involving technology fees and interest have
been settled without material financial impact on the Company and are no longer
in dispute. On May 20, 2004, Monsanto submitted to arbitration before the
American Arbitration Association two unresolved issues: whether D&M Partners has
paid Monsanto all royalties due and whether D&PL has made unauthorized transfers
of materials containing Monsanto technology. In this arbitration proceeding,
Monsanto seeks an adjudication of its alleged right to terminate the Bollgard
and Roundup Ready Licenses, to dissolve D&M Partners, to obtain an accounting
and to receive monetary damages and a return or destruction of materials
containing Monsanto technologies. D&PL denies the claims asserted by Monsanto in
the arbitration filing and has filed appropriate responses and counterclaims to
Monsanto's claims based on the issues submitted by D&PL to the Executive Panel.
On November 8, 2004, Monsanto submitted one new claim allegedly involving a
dispute under the license agreements to the Executive Panel and the Executive
Panel has that claim under consideration. D&PL is committed to participating in
good faith resolution of the issues in dispute through arbitration or through
the Executive Panel, as applicable.
In October 2002, Transportes Darkepe Ltda, a Brazilian trucking company, filed
suit in a local court in the State of Parana, Brazil, against an employee of
D&PL Brasil Ltda. ("D&PL Brasil"), a Brazilian subsidiary of D&PL, and Localiza
Rent a Car ("LRC"), alleging that the employee had caused a motor vehicle
accident resulting in property damage to a truck owned by the plaintiff. In
December 2002, D&PL Brasil was joined as a defendant on the basis that the
rental car driven by the employee had been rented in its name. The case remains
pending in pretrial proceedings. The damages sought, including interest, is
approximately $49,000. The employee and D&PL Brasil are being defended and are
indemnified in this litigation by the respective insurance carriers for LRC and
D&PL.
In January 2001, Sure Grow Seed Inc. ("Sure Grow"), an indirect subsidiary of
D&PL, gave notice to Ozbugday Tarim Isletmeleri ve Tohumculuk A.S. ("OTIT"), a
Turkish seed company, of termination (effective at the end of the 2001 crop
year) of OTIT's exclusive distributorship for cottonseed of Sure Grow varieties
in the Republic of Turkey. OTIT refused to acknowledge the validity of this
termination. In October 2002, Sure Grow and the Turkish Branch of Turk
Deltapine, Inc. ("Turk Deltapine'"), D&PL's local affiliate in Turkey, commenced
a civil action in a Turkish commercial court seeking an injunction against
continued sales of Sure Grow varieties by OTIT. OTIT filed a counterclaim
seeking an injunction against Turk Deltapine's marketing of seed of Sure Grow
varieties in alleged violation of OTIT's exclusive distribution rights and
monetary damages for lost profits in an amount to be determined. In June 2004, a
panel of legal experts appointed by the court in which the case is pending
rendered an advisory opinion that Turkish law should govern the termination of
OTIT's distributorship agreement and, that under Turkish law, the January 2001
notice of termination was not effective. In November 2004, the court rejected
the initial panel's advisory opinion and ordered the appointment of a new panel
of legal experts to decide what law governs the termination of the distribution
agreement. Both OTIT and Turk Deltapine have continued to distribute cotton
planting seed of Sure Grow varieties in Turkey.
In June 2004, D&PL filed an application with the Turkish Ministry of Agriculture
to gain intellectual property protection of certain of D&PL's proprietary cotton
varieties under Turkey's new law protecting breeders' rights for new plant
varieties, which was enacted in January 2004. On November 3, 2004, the Ministry
of Agriculture denied protection under Turkish law for all but one of these
varieties. In December 2004, D&PL filed a petition with the Ministry of
Agriculture requesting reconsideration of its decision denying protection. The
Ministry of Agriculture is still considering D&PL's petition. D&PL also filed a
petition in January 2005 in the Administrative Court of Ankara requesting a
decision granting intellectual property protection of D&PL's varieties. This
petition is currently pending before the Administrative Court.
In December 1999, Mycogen Plant Science, Inc. ("Mycogen") filed a suit in the
Federal Court of Australia alleging that Monsanto Australia Ltd., Monsanto's
wholly-owned Australian subsidiary, and Deltapine Australia have been infringing
two of Mycogen's Australian patents by making, selling, and licensing cotton
planting seed expressing insect resistance. The suit seeks an injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. Trial of this matter commenced on March 7, 2005,
and concluded on April 6, 2005. The Court will render a decision later.
Consistent with its commitments, Monsanto has agreed to defend D&PL in this suit
and to indemnify D&PL against damages, if any are awarded. Monsanto is providing
separate defense counsel for D&PL. D&PL is assisting Monsanto to the extent
reasonably necessary.
A corporation owned by the son of D&PL's former Guatemalan distributor sued in
1989 asserting that D&PL violated an agreement with it by granting to another
entity an exclusive license in certain areas of Central America and southern
Mexico. The suit seeks damages of 5,292,459 Guatemalan quetzales (approximately
$700,000 at March 31, 2005, exchange rates) and an injunction preventing D&PL
from distributing seed through any other licensee in that region. The Guatemalan
court, where this action is proceeding, has twice declined to approve the
injunction sought. D&PL continues to make seed available for sale in Central
America and Mexico.
D&PL vs. Monsanto Company and Pharmacia Corp.
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
effectively terminating Monsanto's efforts to gain government approval of the
merger of Monsanto with D&PL under the May 8, 1998, Merger Agreement. On
December 30, 1999, D&PL filed suit (the "December 30 Suit") in the First
Judicial District of Bolivar County, Mississippi, seeking, among other things,
the payment of the $81 million termination fee due pursuant to the merger
agreement, compensatory damages and punitive damages. On January 2, 2000, D&PL
and Monsanto reached an agreement whereby D&PL would withdraw the December 30
Suit without prejudice for the purpose of negotiating a settlement of D&PL's
claims, and Monsanto would immediately pay the $81 million. On January 3, 2000,
Monsanto paid to D&PL the termination fee of $81 million as required by the
merger agreement. On January 18, 2000, after unsuccessful negotiations, D&PL
filed a suit (the "January 18 Suit") reinstating essentially all of the
allegations contained in the December 30 Suit. The January 18 Suit by D&PL
against Monsanto seeks, among other things, in excess of $1 billion in
compensatory and $1 billion in punitive damages for breach of contract under the
merger agreement between the parties. D&PL alleges that Monsanto failed to use
its best efforts, commercially reasonable efforts, and/or reasonable best
efforts to obtain antitrust approval from the U.S. Department of Justice, as
required under the terms of the merger agreement. D&PL also seeks damages for
breach of the January 2, 2000, agreement pursuant to which the parties were to
negotiate for two weeks to resolve the dispute over failure of the merger to
close.
The parties litigated for several months in 2000 over the appropriate forum to
hear the case. On July 17, 2000, the Delaware Court of Chancery rejected
Monsanto's attempt to maintain the action in Delaware and returned the parties
to the Circuit Court for the First Judicial District of Bolivar County,
Mississippi.
On December 18, 2000, D&PL amended its complaint to include a claim for tortious
interference with prospective business relations on the grounds that Monsanto's
unreasonable delay prevented the consummation of the merger and kept D&PL from
being in a position to enter into transactions and relationships with others in
the industry. In light of the merger of Monsanto into Pharmacia & Upjohn, Inc.,
after the filing of the original complaint, D&PL named both Pharmacia Corp. (the
renamed existing defendant) and Monsanto Company as defendants in the amended
complaint.
In January, 2001, Monsanto filed a motion for summary judgment on the breach of
contract claims, alleging that D&PL suffered no cognizable damages as a result
of the failed merger. Monsanto also filed a motion to dismiss (or in the
alternative for summary judgment) with respect to the tortious interference
claim, arguing that it was entitled to 1) dismissal of the action on the grounds
that D&PL's amended complaint did not satisfy any of the elements of a tortious
interference claim and, thus, did not state a viable claim; and 2) summary
judgment because D&PL has not suffered any damages as a result of Monsanto's
actions. On November 15, 2001, the Circuit Court denied the defendants' motion
for summary judgment on the breach of contract claims, holding that the case
presents issues for trial by jury including the existence and extent of
benefit-of-the-bargain damages. The Court also denied defendants' motion to
dismiss or for summary judgment on D&PL's claim for tortious interference with
business relationships.
In June, 2003, the original trial judge to whom this case was assigned, retired
and the case was assigned to a new trial court judge.
On September 12, 2003, Monsanto amended its answer to include four counterclaims
against D&PL, alleging breach of contract, fraudulent inducement, and negligent
misrepresentation. The fraudulent inducement and negligent misrepresentation
claims allege that D&PL misrepresented the status of the Department of Justice's
investigation into D&PL's 1996 acquisition of the Sure Grow companies prior to
the signing of the merger agreement. The breach of contract claim alleges that
D&PL failed to notify Monsanto that D&PL had sustained a material adverse
change, where the alleged material adverse change relates to some of the matters
for which D&PL seeks consequential damages in this litigation. The breach of
contract claim also alleges that D&PL failed to use its contractually-required
efforts to inform Monsanto that Monsanto was not using contractually-required
efforts to complete the transaction. Monsanto is seeking unspecified damages for
its counterclaims, including the $81 million paid by Monsanto to D&PL as a
termination fee and related expenses. D&PL answered the counterclaims, denying
all liability, and intends to vigorously defend against these counterclaims. On
December 21, 2004, Monsanto filed a motion to amend its answer to withdraw two
of its four counterclaims, specifically the fraudulent inducement and negligent
misrepresentations counterclaims.
On December 5, 2003, Monsanto filed a motion for partial summary judgment
relating to one method that D&PL had used to calculate its damages, and on
October 8, 2004, the Court granted Monsanto's motion. D&PL sought an
interlocutory appeal of this ruling to the Mississippi Supreme Court. On
February 14, 2005, the Mississippi Supreme Court granted D&PL's petition to hear
its appeal. The Mississippi Supreme Court also agreed to hear D&PL's appeal of a
discovery ruling relating to documents that Monsanto claimed to be immune from
disclosure under the attorney-client privilege and work product doctrine. The
original trial judge had ordered Monsanto to produce the documents and the new
trial judge has ordered D&PL to return them.
On January 3, 2005, Monsanto filed two additional motions for partial summary
judgment. Both motions seek summary judgment on certain aspects of D&PL's
damages. On February 17, 2005, D&PL filed a motion with the trial court to amend
its complaint to add a claim against Monsanto for fraudulently inducing D&PL to
extend the deadline to complete the merger with Monsanto. The Mississippi
Supreme Court has stayed the proceedings in the trial court pending the
resolution of the two interlocutory appeals.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In February 2000, the Board of Directors authorized a program for the repurchase
of up to $50 million of D&PL's common stock. The shares repurchased under this
program are to be used to provide for option exercises, conversion of D&PL's
Series M Convertible Non-Voting Preferred shares and for other general corporate
purposes.
There were no shares purchased in the quarter ended February 28, 2005 pursuant
to the February 2000 stock repurchase plan or for any other reason. As of
February 28, 2005, the approximate dollar value of shares that may yet be
purchased under the February 2000 stock repurchase plan is $20.4 million.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders of Delta and Pine Land Company was held
on January 11, 2005. The following matters were brought to a vote with the noted
results:
Item For Against Abstain Non-Voted
1. Re-election of Class III Director
Jon E. M. Jacoby 33,222,146 0 3,276,530 0
2. Re-election of Class III Director
F. Murray Robinson 33,956,915 0 2,541,761 0
3. Ratify appointment of KPMG LLP as the
independent public accountants for the
fiscal year ending August 31, 2005 36,169,554 315,479 13,643 0
4. Adopt the Delta and Pine Land Company
2005 Omnibus Stock Plan 23,599,242 7,111,528 119,001 5,668,905
Item 5. Other Information
Domestic
Delta and Pine Land Company, a Delaware corporation, and subsidiaries ("D&PL")
is primarily engaged in the breeding, production, conditioning and marketing of
proprietary varieties of cotton planting seed in the United States and other
cotton producing nations. We also breed, produce, condition and market soybean
planting seed in the United States.
Since 1915, we have bred, produced and/or marketed upland picker varieties of
cotton planting seed for cotton varieties that are grown primarily east of Texas
and in Arizona. We have used our extensive classical plant breeding programs to
develop a gene pool necessary for producing cotton varieties with improved
agronomic traits important to farmers (such as crop yield) and to textile
manufacturers (such as enhanced fiber characteristics).
In 1980, we added soybean seed to our product line. In 1996, we commenced
commercial sales in the United States of cotton planting seed containing
Bollgard(R) ("Bollgard") gene technology licensed from Monsanto which expresses
a protein toxic to certain lepidopteran pests. Since 1997, we have marketed in
the U.S. cotton planting seed that contains a gene that provides tolerance to
glyphosate-based herbicides, commonly referred to as Roundup Ready(R) ("Roundup
Ready") Cotton. In 1997, we commenced commercial sales in the U.S. of soybean
planting seed that contains a gene that provides tolerance to glyphosate-based
herbicides ("Roundup Ready Soybeans"). In 1998, we commenced sales of cotton
planting seed of varieties containing both the Bollgard and Roundup Ready genes.
International
During the 1980's, as a component of our long-term growth strategy, we began to
market our products, primarily cottonseed, internationally. Over a period of
years, we have strengthened and expanded our international staff in order to
support our expanding international business. In foreign countries, cotton
acreage is often planted with farmer-saved seed which has not been delinted or
treated and is of low overall quality. We believe that we have an attractive
opportunity to penetrate foreign markets because of our widely adaptable,
superior cotton varieties, technological know-how in producing and conditioning
high-quality seed and our brand name recognition. Furthermore, Monsanto's
Bollgard and Roundup Ready gene technologies (that we either have licensed or
have options to license) are effective in many countries and could bring value
to farmers.
We sell our products in foreign countries through (i) export sales to
distributors and (ii) direct in-country operations through either joint ventures
or wholly-owned subsidiaries. The method varies and evolves, depending on our
assessment of the potential size and profitability of the market, governmental
policies, currency and credit risks, sophistication of the target country's
agricultural economy, and costs (as compared to risks) of commencing physical
operations in a particular country. In 2004, the majority of international sales
came from direct in-country operations (primarily Argentina, Australia, Brazil,
China, South Africa and Turkey).
See Note 3 of the Notes to Consolidated Financial Statements in Part I, Item 1
for further details about business segments.
Joint Ventures
In March 1995, D&PL and Monsanto formed D&M International, LLC to introduce
cotton planting seed in international markets combining our acid delinting
technology and elite germplasm (cottonseed varieties) with Monsanto's Bollgard
and Roundup Ready gene technologies. In May 2002, Pharmacia activated a cross
purchase provision in the operating agreement for D&M International, LLC, and we
elected to have D&M International, LLC redeem Pharmacia's 50% interest in D&M
International, LLC. As a result of the redemption of Pharmacia's interest, we
now own all of D&M International, LLC.
In November 1995, D&M International, LLC formed a subsidiary, D&PL China Pte
Ltd. ("D&PL China"). D&PL China is 80% owned by D&M International, LLC, and 20%
owned by a Singaporean entity. In November 1996, D&PL China formed Hebei Ji Dai
Cottonseed Technology Company Ltd. ("Ji Dai") with parties in Hebei Province,
one of the major cotton producing regions in the People's Republic of China. Ji
Dai is 67% owned by D&PL China and 33% owned by Chinese parties. In June 1997,
Ji Dai commenced construction of a cottonseed conditioning and storage facility
in Shijiazhuang, Hebei, China, pursuant to the terms of the joint venture
agreement. The new facility was completed in December 1997 and seed processing
and sales of seed of D&PL cotton varieties containing Monsanto's Bollgard
technology commenced in 1998.
In December 1997, D&M International, LLC formed a joint venture with Ciagro
S.R.L. ("Ciagro"), a distributor of agricultural inputs in the Argentine cotton
region, for the production and sale of genetically improved cottonseed. CDM
Mandiyu S.R.L. ("CDM") is owned 60% by D&M International, LLC, and 40% by
Ciagro. In September 1998, CDM began construction of a cottonseed conditioning
and storage facility in Avia Terai, Chaco, Argentina. Construction was completed
in June 1999. CDM has been licensed to sell our cotton varieties containing
Monsanto's Bollgard and Roundup Ready gene technologies. Sales of Bollgard
varieties commenced in 1999 and sales of Roundup Ready varieties began in 2003.
In July 1998, D&PL China and the Anhui Provincial Seed Corporation formed a
joint venture, Anhui An Dai Cotton Seed Technology Company, Ltd. ("An Dai")
which is located in Hefei City, Anhui, China. An Dai is 49% owned by D&PL China
and 51% owned by Chinese parties. Under the terms of the joint venture
agreement, An Dai produces, conditions and sells our varieties of acid-delinted
cottonseed, which contain Monsanto's Bollgard gene. Commercial sales of our
cotton varieties containing the Bollgard gene technology began in 2000. In
January 2002, An Dai began construction of a cottonseed conditioning and storage
facility in Hefei City, Anhui, China. Construction was completed in October 2003
and the facility is now operational.
In November 1998, D&M International, LLC and Maeda Administracao e Participacoes
Ltda, an affiliate of Agropem - Agro Pecuria Maeda S.A., formed a joint venture
in Minas Gerais, Brazil. The joint venture, MDM Sementes De Algodao, Ltda.
("MDM"), produces, conditions and sells our varieties of acid-delinted cotton
planting seed. In 2000, we began selling our conventional cotton varieties. MDM
will introduce transgenic cottonseed varieties containing both Bollgard and
Roundup Ready gene technologies in the Brazilian market as soon as all required
government approvals are obtained. Monsanto is responsible for obtaining
government approvals for Bollgard and Roundup Ready traits. On March 17, 2005,
the Brazilian government announced approval of the Bollgard trait for sale in
cotton. Once Bollgard cottonseed varieties are registered, MDM will begin sales
of these products, which may not occur until 2007. MDM is 51% owned by D&M
International, LLC and 49% owned by Maeda Administracao e Participacoes S/A
(formerly Maeda Administracao e Participacoes Ltda).
In October 2001, we announced that we had signed Letters of Intent with two
parties in China to form two new joint ventures there, one each in Hubei and
Henan provinces. These two new potential markets contain approximately 4.5
million acres of cotton planted in 2001 which is almost 2.5 times the size of
the combined Hebei and Anhui markets. A joint venture agreement was negotiated
and agreed to with the parties in Henan province and the agreement was submitted
to the Chinese government authorities for approval. However, in April 2002,
China announced rules prohibiting new foreign investment in seed companies that
intend to sell genetically modified seed, which will restrict the ability of
non-Chinese companies, including us, from investing in such joint ventures.
However, our joint venture in Hebei province, Ji Dai, signed a distribution
agreement with a party in the Henan province and distributed seed there
beginning in fiscal 2003. We expect to continue to expand our business in China
through our existing joint ventures, Ji Dai and An Dai.
In May 2002, we established DeltaMax Cotton, LLC ("DeltaMax"), a limited
liability company jointly owned with Verdia, Inc. ("Verdia"), which was
purchased by DuPont on July 2, 2004. DeltaMax was formed to create, develop and
commercialize value-enhancing traits for the cottonseed market that will
complement and/or compete with traits available today. It is currently focusing
on glyphosate-tolerant, insect-resistance and nematode-resistance strategies for
use in cotton. Commercialization of new traits developed by this venture is not
expected until after 2010. DeltaMax will contract research and development
activities to Verdia, third parties and D&PL when appropriate, and license its
products to D&PL and potentially to others. D&PL and Verdia each own 50% of
DeltaMax.
Subsidiaries
D&PL South Africa, Inc. ("D&PL South Africa"), our wholly-owned subsidiary,
through a South African branch, commercializes cottonseed varieties containing
Monsanto's Bollgard and Roundup Ready technologies in South Africa. In addition,
D&PL South Africa maintains winter nursery facilities, produces cottonseed
varieties for export to other countries and processes foundation seed grown in
that country.
D&PL Semillas Ltda., our wholly-owned subsidiary, maintains a winter nursery and
foundation seed operation in Canas, Costa Rica and has a delinting plant there
to process foundation seed for export to the United States. Multiple winter
nursery locations are used to manage seed production risks. The use of Southern
Hemisphere winter nurseries and seed production programs such as these may
accelerate the introduction of new varieties because we can raise at least two
crops per year by taking advantage of the Southern Hemisphere growing season.
Deltapine Australia Pty. Ltd., our wholly-owned Australian subsidiary, breeds,
produces, conditions and markets cotton planting seed in Australia. Certain
varieties developed in Australia are well adapted to other major cotton
producing countries and Australian-developed varieties are exported to those
areas. We sell seed of both conventional and transgenic varieties, containing
Monsanto's Bollgard II(R) and Roundup Ready technologies, in Australia.
Turk DeltaPine, Inc. ("Turk DeltaPine"), our wholly-owned subsidiary, through a
Turkish branch, produces, conditions and markets cotton planting seed in Turkey.
In addition, Turk DeltaPine produces conventional cottonseed varieties for sale
in Turkey and Europe.
In September 2004, D&PL established, through Indian nominee shareholders,
Deltapine India Seed Private Ltd. ("Deltapine India"). This company will be
wholly-owned by D&PL (by itself or through wholly-owned affiliates), pending
formal transfer of ownership from the nominee shareholders. Deltapine India was
formed with the intent to breed, test, produce, market and sell agricultural
seeds and services in India.
Employees
As of April 1, 2005, we employed a total of 538 full-time employees worldwide.
In addition, our foreign joint ventures employ approximately 100 employees. Due
to the nature of our business, we utilize seasonal employees in our delinting
plants and our research and foundation seed programs. The maximum number of
seasonal employees approximates 175 and typically occurs in October and November
of each year. We consider our employee relations to be good.
Biotechnology
Insect Resistance for Cotton
Monsanto Company
Collaborative biotechnology licensing agreements, which were executed with
Monsanto in March 1992 and subsequently revised in April 1993, October 1993,
February 1996, December 1999, January 2000 and March 2003, provide for the
commercialization of Monsanto's Bollgard ("Bacillus thuringiensis" or "Bt") gene
technology in our varieties in the United States. The selected Bt gene is from a
bacterium found naturally in soil and produces proteins toxic to certain
lepidopteran larvae, the principal cotton pests in many cotton growing areas.
Monsanto created a transgenic cotton plant by inserting Bt genes into cotton
plant tissue. The resulting transgenic plant tissue is lethal to certain
lepidopteran larvae that consume it. The gene and related technology were
patented or licensed from others by Monsanto and were licensed to us for use
under the trade name Bollgard. In our primary markets, the cost of insecticides
is a major expenditure for many cotton growers. The insect resistant
capabilities of transgenic cotton containing the Bollgard gene may reduce the
amount of insecticide required to be applied by cotton growers using planting
seed containing the Bollgard gene. In October 1995, the United States
Environmental Protection Agency ("EPA") completed its initial registration of
the Bollgard gene technology. In 1996, we sold commercially for the first time
two Deltapine varieties, which contained the Bollgard gene, in accordance with
the terms of the Bollgard Gene License and Seed Services Agreement (the
"Bollgard Agreement") among D&PL, Monsanto and D&M Partners. This initial EPA
registration had been set to expire on January 1, 2001 but was updated to expire
January 1, 2002. In September 2001, the EPA renewed the registration for an
additional five years, at which time the EPA will, among other things,
reevaluate the effectiveness of the insect resistance management plan and decide
whether to convert the registration to a non-expiring (and/or unconditional)
registration.
Pursuant to the terms of the Bollgard Agreement, farmers must buy a limited use
sublicense for the technology from D&M Partners, a partnership of D&PL (90%) and
Monsanto (10%), in order to purchase seed containing the Bollgard gene
technology. Monsanto determines the licensing fee growers pay for use of
Bollgard technology. Growers may receive discounts and/or rebates of licensing
fees under certain crop destruct, crop replant and other programs. D&M Partners
contracts the billing and collection activities for Bollgard and Roundup Ready
licensing fees to Monsanto. The distributor/dealers who coordinate the farmer
licensing process receive a portion of the technology sublicensing fee,
presently approximately 15%. After the dealers and distributors are compensated,
D&M Partners pays Monsanto a royalty equal to 71% of the net sublicense fee
(technology sublicensing fees less certain distributor/dealer payments), and we
receive the remainder of net sublicense revenue for our services. The expiration
date of the Bollgard Agreement is determined by the last to expire of the patent
rights licensed under that agreement. On that basis (unless we terminate sooner,
as is permitted after October 11, 2008), the expiration date of the Bollgard
Agreement will be June 13, 2011, the date the last of the presently issued
patents will expire. This date may be extended in the event additional relevant
patents issue that have expiration dates later than June 13, 2011.
Pursuant to the Bollgard Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto must also indemnify us against (a) costs of
inventory and (b) lost profits on inventory which becomes unsaleable because of
patent infringement claims. Monsanto must defend any claims of failure of
performance of a Bollgard gene. Monsanto and D&PL share the cost of any product
performance claims in proportion to each party's share of the net sublicense
fees. The indemnity from Monsanto only covers performance claims involving
failure of performance of the Bollgard gene and not claims arising from other
causes. Pharmacia remains liable for Monsanto's performance under these defense
and indemnity agreements.
In December 2000, D&PL and Monsanto executed the Bollgard II Gene License and
Seed Services Agreement (the "Bollgard II Agreement") for Monsanto's subsequent
insect resistance product. The Bollgard II Agreement contains essentially the
same terms as the Bollgard Agreement. On December 23, 2002, Monsanto announced
that it had received U.S. regulatory clearance for Bollgard II. We have
commercialized limited quantities of our Bollgard II cotton varieties in the
U.S. beginning in fiscal 2003. The expiration date of the Bollgard II Agreement
is determined by the last to expire of the patent rights licensed under that
Agreement. On that basis (unless we terminate sooner, as is permitted after
October 11, 2008), the expiration date of the Bollgard II Agreement will be
November 4, 2018, the date the last of the presently issued patents will expire.
This date may be extended in the event additional relevant patents issue that
have expiration dates later than November 4, 2018.
Syngenta Crop Protection AG
In August 2004, we executed a License Acquisition Agreement with Syngenta Crop
Protection AG ("Syngenta") under which D&PL acquired worldwide licenses for the
commercialization of Syngenta's VIP3A and Cry1Ab insect resistance genes in
cotton (the "VipCot Gene Licenses"). D&PL agreed to pay $46.8 million for these
licenses, payable in installments, of which $9.2 million represents contingent
payments. These licenses provide for commercialization of insect resistant
cotton varieties containing Syngenta insect resistance genes in the United
States and in other countries, subject to government approval of the
technologies. Syngenta is responsible for obtaining such government approval in
the United States and, if instructed by D&PL, in other countries. Syngenta is
required to consult with D&PL and to assist and support commercialization of
D&PL's products containing Syngenta's insect resistance genes.
Pursuant to the VipCot Gene Licenses, farmers will be sublicensed by D&PL to use
seed containing Syngenta's insect resistance technologies. The VipCot
technologies will be marketed on a competitive basis with alternative insect
control costs and other available technologies. After dealers and distributors
are compensated for their services, and after deduction of certain marketing
expenses and other costs, D&PL will pay Syngenta a royalty equal to 30% of the
net revenue obtained from sublicensing of the VipCot gene technologies. D&PL
retains the balance of such net sublicense revenue. Provisions for payment of
royalties under the VipCot Gene Licenses generally continue until the expiration
of the last to expire of Syngenta's applicable patent rights on a
country-by-country basis or for a minimum of ten years after the first
commercial sale of a licensed product in the subject country, after which D&PL
will hold a permanent paid-up license to Syngenta's licensed patent rights for
use in cotton. D&PL has the rights to sublicense its affiliates (and, in
countries outside the United States, third parties) to commercialize Syngenta's
insect resistance technologies. In the event D&PL elects not to make the
contingent payments, and upon other termination events, D&PL will retain rights
to commercialize products containing VipCot events which have then received
government approval for sale in the United States.
The VipCot Gene Licenses make D&PL the primary licensee of Syngenta's insect
resistance technology. To retain this status, D&PL must meet milestones for
development of VipCot cotton varieties, produce seed for commercial sale in the
United States and meet and maintain certain sales objectives.
Pursuant to the VipCot Gene Licenses, Syngenta is responsible for obtaining
required intellectual property rights and for defense of claims of patent
infringement. The costs of defense and indemnification are borne either by
Syngenta alone or by Syngenta and D&PL proportionately based on the nature of
the claim. D&PL is responsible for managing the defense of grower claims
alleging failure of performance of a licensed gene. Syngenta and D&PL will bear
the cost of product performance claims in proportion to each party's share of
net sublicense fees. The product performance indemnity from Syngenta only covers
claims involving failure of performance of the Syngenta insect resistance genes
and not claims arising from other causes.
Dow AgroSciences
In January 2003, we announced a collaboration agreement with Dow AgroSciences
LLC ("DAS") under which we would develop, test and evaluate elite cotton
varieties containing DAS insect resistance traits. We continue to work with DAS
insect resistant traits. On October 4, 2004, DAS announced it had received full
EPA registration for its WideStrikeTM Insect Protection technology and would
introduce products from its subsidiary in 2005. We may commercialize varieties
containing DAS insect resistance technology if we reach a commercialization
agreement. To date, no such agreement has been reached.
Herbicide Tolerance for Cotton
Monsanto Company
In February 1996, D&PL, Monsanto and D&M Partners executed the Roundup Ready
Gene License and Seed Services Agreement (the "Roundup Ready Agreement"), which
provides for the commercialization of Roundup Ready cottonseed. Pursuant to the
collaborative biotechnology licensing agreements executed in 1996 and amended in
July 1996, December 1999, January 2000 and March 2003, we have also developed
transgenic cotton varieties that are tolerant to Roundup(R), a glyphosate-based
herbicide sold by Monsanto. In 1996, such Roundup Ready plants were approved by
the Food and Drug Administration, the USDA, and the EPA. The Roundup Ready
Agreement grants a license to D&PL and certain of our affiliates the right in
the United States to sell cottonseed of our varieties that contain Monsanto's
Roundup Ready gene. The Roundup Ready gene makes cotton plants tolerant to
contact with Roundup herbicide applications made during a finite early season
growth period. Similar to the Bollgard Agreement, farmers must execute limited
use sublicenses in order to purchase seed containing the Roundup Ready gene.
Monsanto determines the licensing fee growers pay for use of Roundup Ready
technology. Growers may receive discounts and/or rebates of licensing fees under
certain crop destruct, crop replant and other programs. The distributors/dealers
who coordinate the farmer licensing process receive a portion of the technology
sublicensing fee. After the dealers and distributors are compensated, D&M
Partners pays Monsanto a royalty equal to 70% of the net sublicense fee
(technology sublicensing fees less certain distributor/dealer payments), and we
receive the remainder of net sublicense revenue for our services. The expiration
date of the Roundup Ready Agreement is determined by the last to expire of the
patent rights licensed under that agreement. On that basis (unless we terminate
sooner, as is permitted after October 11, 2008), the expiration date of the
Roundup Ready Agreement will be April 18, 2017, the date the last of the
presently issued patents will expire. This date may be extended in the event
additional relevant patents issue that have expiration dates later than April
18, 2017.
Pursuant to the Roundup Ready Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto will also indemnify us against the cost of
inventory that becomes unsaleable because of patent infringement claims, but
Monsanto is not required to indemnify us against lost profits on such unsaleable
seed. In contrast with the Bollgard Agreement, where the cost of gene
performance claims will be shared in proportion to the division of net
sublicense revenue, Monsanto must defend and must bear the full cost of any
claims of failure of performance of the Roundup Ready Gene. Pharmacia remains
liable for Monsanto's performance under these defense and indemnity agreements.
In both agreements, generally, we are responsible for varietal/seed performance
issues, and Monsanto is responsible for failure of the genes.
On January 7, 2005, D&PL executed the Roundup Ready Flex Gene License and Seed
Services Agreement (the "Roundup Ready Flex Agreement") for Monsanto's advanced
herbicide tolerance product. The Roundup Ready Flex Agreement contains
essentially the same terms, including compensatory terms, as the existing
Roundup Ready Agreement between D&PL and Monsanto. The expiration date of the
Roundup Ready Flex Agreement is determined by the last to expire of the patent
rights under this Agreement which cover the licensed gene. On that basis (unless
we terminate sooner, as is permitted after October 11, 2008), assuming that all
of the patents identified by Monsanto in the addendum to the Roundup Ready Flex
Agreement cover the licensed gene, the expiration date of the Roundup Ready Flex
Agreement will be December 15, 2020, the date the last of the presently issued
patents will expire. This date may be extended in the event additional relevant
patents issue that have expiration dates later than December 15, 2020.
In November 2004, Monsanto notified D&PL that Monsanto would license contract
seed production by D&PL in 2005. On March 15, 2005, Monsanto announced it had
obtained U.S. regulatory clearance for Roundup Ready Flex technology. We are
preparing to commercialize limited quantities of Roundup Ready Flex cotton
varieties in the U.S. beginning in fiscal 2006.
Cotton Technology Licenses for Countries Outside the United States
In February 1996, D&PL and Monsanto executed an Option Agreement (subsequently
amended in December 1999) which provides us with option rights for an exclusive
license for Monsanto's Bollgard and other genes active against lepidopteran
insects in each country outside the United States where Monsanto commercializes
such genes in cotton (except for Australia where we have an option for a
non-exclusive license to such genes and India where we have no option rights to
such genes), option rights to non-exclusive licenses to Roundup Ready genes in
cotton in all countries outside the United States, and option rights to
non-exclusive licenses for all countries for any gene that may be commercialized
by Monsanto that enhances the fiber characteristics of cotton. The terms of such
licenses must be offered and negotiated in good faith. All such licenses that
are non-exclusive must provide us most favored licensee status. The Option
Agreement remains in effect so long as the Bollgard Agreement and Roundup Ready
Agreement for the United States remain in effect. Pursuant to the Option
Agreement, Monsanto and D&PL (or D&PL's affiliates or joint venture companies)
have entered into exclusive Bollgard licenses for seven countries (Argentina,
Brazil, China, Colombia, Mexico, South Africa, and Thailand) outside the United
States and a non-exclusive license for lepidopteran active genes for Australia,
as well as non-exclusive Roundup Ready licenses for four countries (Argentina,
Australia, Brazil, and South Africa) outside the United States.
Herbicide Tolerance for Soybeans
In February 1997, D&PL and Monsanto executed a Roundup Ready Soybean License
Agreement which provided for commercialization of Roundup Ready soybean seed.
Effective September 1, 2001, D&PL and Monsanto executed a new Roundup Ready
Soybean License and Seed Services Agreement (the "Roundup Ready Soybean
Agreement") for 2001 and future years. The Roundup Ready Soybean Agreement
grants a non-exclusive license to D&PL to produce and to sell in the United
States soybean seed containing Monsanto's Roundup Ready gene. The Roundup Ready
gene makes soybean plants tolerant to contact with Roundup herbicide
applications when used in accordance with product instructions. Similar to the
Bollgard Agreement and the Roundup Ready Agreement for cotton, farmers must
execute limited use sublicenses in order to purchase soybean seed containing the
Roundup Ready gene. The royalty charged to the seed partners, including D&PL, is
set annually by Monsanto. We receive a portion of the royalty for our services
under the Roundup Ready Soybean Agreement and may receive additional incentives
based on a separate licensee incentive agreement. We have the right to terminate
the Roundup Ready Soybean Agreement at our option upon 90 days notice to
Monsanto; Monsanto may terminate the agreement only for cause. Unless terminated
sooner, the Roundup Ready Soybean Agreement will expire December 31, 2012.
Since 1987, we have conducted research to develop soybean plants that are
tolerant to certain DuPont Sulfonylurea herbicides. Such plants enable farmers
to apply these herbicides for weed control without significantly affecting the
agronomics of the soybean plants. Since soybean seed containing the STS(R)
herbicide-tolerant trait is not genetically engineered, sale of this seed does
not require government approval, although the herbicide to which they express
tolerance must be EPA approved.
Transformation, Enabling and Other Technologies
In March 1998, D&PL and the United States of America, as represented by the
Secretary of Agriculture (USDA) were granted United States Patent No. 5,723,765,
entitled "Control Of Plant Gene Expression". Subsequently, two other patents
(United States Patent Nos. 5,925,808 and 5,977,441) were granted under the same
title. These patents for the Technology Protection System resulted from a
concept developed by research scientists employed by both D&PL and the U.S.
Department of Agriculture's Agricultural Research Service ("USDA-ARS"). The
patents broadly cover all species of plants and seed, both transgenic and
conventional, for a system designed to allow control of progeny seed viability
without harming the crop. One application of the technology could be to control
unauthorized planting of seed of proprietary varieties (sometimes called "brown
bagging") by making such a practice non-economic since unauthorized saved seed
will not germinate, and, therefore, would be useless for planting. Another
application of the technology would be to prevent the unlikely possibility of
transfer of transgenes, through pollen, to closely related species of plants.
These patents have the prospect of opening significant worldwide seed markets to
the sale of transgenic technology in varietal crops in which crop seed currently
is saved and used in subsequent seasons as planting seed. D&PL and the USDA
executed a commercialization agreement on July 6, 2001, for this technology
giving us the exclusive right to market this technology. Once developed, we
intend licensing of this technology to be widely available to other seed
companies.
In July 1999, United States Patent No. 5,929,300, entitled "Pollen Based
Transformation System Using Solid Media," was issued to the United States of
America as represented by the Secretary of Agriculture (USDA). This patent
covers transformation of plants. The patent for the Pollen Transformation System
resulted from a research program conducted pursuant to a Cooperative Research
and Development Agreement between D&PL and the USDA-ARS in Lubbock, Texas. D&PL
and the USDA executed on December 18, 2000, a commercialization agreement,
providing us exclusive rights to market this technology to third parties,
subject to certain rights reserved to the USDA. This transformation method uses
techniques and plant parts that are not covered by currently issued plant
transformation U.S. patents held by others. It is a method which should be more
efficient and effective than many other plant transformation techniques
currently available. This patent and the marketing rights apply to all plant
species on which this method of transformation is effective.
The technologies described above resulted from basic research and will require
further development in order to be used in commercial seed. We estimate that it
will be several years before either of these technologies could be available
commercially. In addition, we have rights to other transformation, enabling and
other technologies that are useful to our research and commercial efforts and,
in some cases, may be sublicensed to others.
Other
We have licensing, research and development, confidentiality and material
transfer agreements with providers of technology that we are evaluating for
potential commercial applications and/or introduction. We also contract with
third parties to perform research on our behalf for enabling and other
technologies that we believe have potential commercial applications in varietal
crops around the world.
Commercial Seed
The following table presents the number of commercial cottonseed and soybean
seed varieties we sold in the years ended August 31, 2004 and 2003:
2004 2003
--------------- ---------------
Cotton
Conventional 11 20
Bollgard 3 5
Roundup Ready 16 14
Bollgard/Roundup Ready 14 14
Bollgard II/Roundup Ready 1 2
--------------- ---------------
45 55
=============== ===============
Soybeans
Conventional 1 1
Roundup Ready 19 15
STS 2 2
--------------- ---------------
22 18
=============== ===============
In addition to the above, in 2004, we had 87 experimental cotton varieties and 6
experimental soybean varieties in late stage development prior to
commercialization. In 2003, we had 76 experimental cotton varieties and 6
experimental soybean varieties in late stage development prior to
commercialization.
Seed of all commercial plant species is either varietal or hybrid. Our cotton
and soybean seed are varietals. Varietal plants can be reproduced from seed
produced by a parent plant, with the offspring exhibiting only minor genetic
variations. The Plant Variety Protection Act of 1970, as amended in 1994, in
essence prohibits, with limited exceptions, purchasers of varieties protected
under the amended Act from selling seed harvested from these varieties without
permission of the plant variety protection certificate owner. Some foreign
countries provide similar legal protection for breeders of crop varieties.
Although cotton is varietal and, therefore, can be grown from seed of parent
plants saved by the growers, most farmers in our primary domestic markets
purchase seed from commercial sources each season because cottonseed requires
delinting prior to seed treatment with chemicals and in order to be sown by
modern planting equipment. Delinting and conditioning may be done either by a
seed company on its proprietary seed or by independent delinters for farmers.
Modern cotton farmers in upland picker areas generally recognize the greater
assurance of genetic purity, quality and convenience that professionally grown
and conditioned seed offers compared to seed they might save. Additionally, U.S.
patent laws make unlawful any unauthorized planting of seed containing patented
technology, such as Bollgard and Roundup Ready, saved from prior crops.
We farm approximately 5,500 acres globally, primarily for research purposes and
for production of cotton and soybean foundation seed. Additionally, we have
annual agreements with various growers to produce seed for cotton and soybeans.
The growers plant parent seed purchased from us and follow quality assurance
procedures required for seed production. If the grower adheres to our
established quality assurance standards throughout the growing season and if the
seed meets our standards upon harvest, we may be obligated to purchase specified
minimum quantities of seed, usually in our first and second fiscal quarters, at
prices equal to the commodity market price of the seed plus a grower premium. We
then condition the seed for sale.
The majority of our sales are made from late in the second fiscal quarter
through the end of the third fiscal quarter. Varying climatic conditions can
change the quarter in which seed is delivered, thereby shifting sales and our
earnings between quarters. Thus, seed production, distribution and sales are
seasonal and interim results will not necessarily be indicative of our results
for a fiscal year.
Revenues from domestic seed sales are recognized when the seed is shipped.
Revenues from Bollgard and Roundup Ready licensing fees are recognized when the
seed is shipped. Domestically, the licensing fees charged to farmers for
Bollgard and Roundup Ready cottonseed are based on pre-established planting
rates for nine geographic regions and, for years prior to 2004, considered the
estimated number of seed contained in each bag which varied by variety, location
grown, and other factors. Effective in 2004, picker and stripper cottonseed
products were sold in bags containing approximately 250,000 seed as well as bulk
boxes containing approximately 8,000,000 seeds. Acala and Pima cottonseed
products continue to be sold in 50-pound bags.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. International export sales are not subject to return
except in limited cases in Mexico and Colombia. All other international revenues
from the sale of planting seed, less estimated reserves for returns, are
recognized when the seed is shipped, except in Australia where certain
immaterial revenues are recognized when collected.
Domestically, we promote our cotton and soybean seed directly to farmers and
sell our seed through distributors and dealers. All of our domestic seed
products (including those containing Bollgard and Roundup Ready technologies)
are subject to return and credit risk, the effects of which vary from year to
year. The annual level of returns and, ultimately, net sales are influenced by
various factors, principally commodity prices and weather conditions occurring
in the spring planting season during our third and fourth quarters. We provide
for estimated returns as sales occur. To the extent actual returns differ from
estimates, adjustments to our operating results are recorded when such
differences become known, typically in our fourth quarter. All significant
returns occur and are accounted for by fiscal year end. We also offer various
sales incentive programs for seed and participate in such programs related to
the Bollgard and Roundup Ready technology fees offered by Monsanto. Under these
programs, if a farmer plants his seed and the crop is lost (usually due to
inclement weather) by a certain date, a portion of the price of the seed and
technology fees are forgiven or rebated to the farmer if certain conditions are
met. The amount of the refund and the impact to D&PL depends on a number of
factors including whether the farmer can replant the crop that was destroyed. We
record monthly estimates to account for these programs. The majority of program
rebates occur during the second, third, and fourth quarters. Essentially all
material claims under these programs have occurred or are accounted for by
fiscal year end.
Availability of Information on Our Website
Additional information (including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) and 15(d) of the Exchange
Act) is available free of charge at our website at www.deltaandpine.com under
Investor Relations, as soon as reasonably practicable after we electronically
file such material with or furnish such material to the Securities and Exchange
Commission.
RISKS AND UNCERTAINTIES
From time to time, we may publish forward-looking statements relating to such
matters as anticipated financial performance (including when earnings estimates
are discussed), existing products, technical developments, new products, new
technologies, research and development activities, and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, we note that a variety of factors could cause our actual results and
experience to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of our business include those noted elsewhere in this filing and the
following:
Demand for our seed will be affected by government programs and policies
and by weather. Demand for seed is also influenced by commodity prices, the
cost of other crop inputs, and the demand for a crop's end-uses such as
textiles, animal feed, cottonseed oil, food and raw materials for
industrial use. These factors, along with weather, influence the cost and
availability of seed for subsequent seasons. Weather impacts crop yields,
commodity prices and the planting decisions that farmers make regarding
both original planting commitments and, when necessary, replanting levels.
The planting seed market is highly competitive, and our products face
competition from a number of seed companies, diversified chemical
companies, agricultural biotechnology companies, governmental agencies and
academic and scientific institutions. A number of chemical and
biotechnology companies have seed production and/or distribution
capabilities to ensure market access for new seed products and new
technologies that may compete with the Bollgard and Roundup Ready gene
technologies of Monsanto, our principal licensor of such technology. Our
seed products and technologies contained therein may encounter substantial
competition from technological advances by others or products from new
market entrants. Many of our competitors are, or are affiliated with, large
diversified companies that have substantially greater resources than we
have.
We currently are engaged in a dispute resolution and arbitration process
with Monsanto, the principal licensor of our cotton technology. In the
arbitration, Monsanto is seeking a determination by the arbitrators of its
right to terminate certain agreements between our companies, including the
Bollgard and Roundup Ready licenses. In addition, we are currently engaged
in litigation with Monsanto (the January 18 Suit) concerning the failed
merger of the companies. The result of this litigation (and the process of
litigating) may materially affect the results of our business. (See Part
II, Item 1.)
There is no assurance that new technologies such as the DeltaMax and the
Syngenta technologies will result in commercially viable products or that
such technologies are developed in the time frame or for the amounts
estimated to complete. Also, there is no assurance that regulatory approval
will be obtained for the products.
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign governments
and shipping disruptions. Particular policies which may affect our domestic
and international operations include the use of and the acceptance of
products that were produced from plants that have been genetically
modified, the testing, quarantine and other restrictions relating to the
import and export of plants and seed products and the availability (or lack
thereof) of proprietary protection for plant products. In addition, United
States government policies, particularly those affecting foreign trade and
investment, may impact our international operations.
The publicity related to genetically modified organisms ("GMOs") or
products made from plants that contain GMOs may have an effect on our sales
in the future. In 2004, approximately 94% of our cottonseed that was sold
in the United States contained either or both of Monsanto's Bollgard and
Roundup Ready gene technologies, and 95% of our soybean seed sales
contained the Roundup Ready gene technology. Although many farmers have
rapidly adopted these technologies, the concern of some customers and
governmental entities over finished products that contain GMOs could impact
demand for crops (and ultimately seed) raised from seed containing such
traits.
Due to the varying levels of agricultural and social development of the
international markets in which we operate and because of factors within the
particular international markets we target, international profitability and
growth may be less stable and predictable than domestic profitability and
growth. Furthermore, recent action taken by the U.S. government, including
that taken by the U.S. military in the aftermath of the tragic events of
September 11, 2001, the war in Iraq, and conflicts between major cotton
producing nations, may serve to further complicate our ability to execute
our long range ex-U.S. business plans because those plans include future
expansion into Uzbekistan, Pakistan and India. World health concerns about
infectious diseases also affect the conduct of our international business.
Our customers in many markets, including the U.S., benefit from government
subsidy programs. The Farm Security and Rural Investment Act of 2002
expires on January 1, 2007(although the bill includes the 2007 cotton
planting season), and future U.S. farm subsidy programs are uncertain.
Various other countries have challenged, and may continue to challenge, the
appropriateness of U.S. farm subsidies through the World Trade Organization
("WTO") or other forums. The outcome of these challenges has not yet been
determined, but may negatively impact U.S. farmers. U.S. farm programs and
WTO rulings impacting such programs may materially affect the results of
our business.
Overall profitability will depend on the factors noted above as well as
weather conditions, government policies in all countries where we sell
products and operate, worldwide commodity prices, our ability to
successfully open new international markets, our ability to develop the
Texas High Plains market, the technology partners' ability to obtain timely
government approval (and maintain such approval) for existing and for
additional biotechnology products on which they and D&PL are working, our
technology partners' ability to successfully defend challenges to
proprietary technologies licensed to us and our ability to produce
sufficient commercial quantities of high quality planting seed of these
products. Any delay in or inability to successfully complete these projects
may affect future profitability. In addition, earnings forecasts do not
consider the impact of potential transactions, their related accounting and
other factors, that may be under consideration by the Company, but have not
yet been completed or their effect determined at the date of a particular
filing.
The risks and uncertainties that may affect the operations, performance,
development and results of our business include those noted elsewhere in this
Item and in "Risks and Uncertainties" in Item 7 of D&PL's Form 10-K filed for
the year ended August 31, 2004.
Item 6. Exhibits.
Exhibits.
10.33 Roundup Ready Flex Gene License and Seed Services Agreement dated December
22, 2004
31.01 Section 302 Certification of Chief Executive Officer
31.02 Section 302 Certification of Chief Financial Officer
32.01 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section
1350 by Principal Executive Officer
32.02 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section
1350 by Principal Financial and Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTA AND PINE LAND COMPANY
Date: April 11, 2005 /s/ W. Thomas Jagodinski
-----------------------------------------------
W. Thomas Jagodinski
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: April 11, 2005 /s/ R. D. Greene
-----------------------------------------------
R. D. Greene
Vice President - Finance, Treasurer and
Assistant Secretary
(Principal Financial and Accounting Officer)