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 29, 2004 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 - 38,291,629 shares outstanding as of March 31,
2004.
3
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - February 29, 2004,
August 31, 2003, and February 28, 2003 3
Consolidated Statements of Operations - Three Months
Ended February 29, 2004 and February 28, 2003 4
Consolidated Statements of Operations - Six Months
Ended February 29, 2004 and February 28, 2003 5
Consolidated Statements of Cash Flows - Six Months
Ended February 29, 2004 and February 28, 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Business 23
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
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 29, August 31, February 28,
2004 2003 2003
------------------ ----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 91,617 $ 143,285 $ 60,316
Receivables, net 99,773 166,952 128,152
Inventories 61,333 32,231 54,914
Prepaid expenses 1,687 2,116 1,365
Deferred income taxes 8,230 10,677 11,219
------------------ ----------------- -----------------
Total current assets 262,640 355,261 255,966
PROPERTY, PLANT AND EQUIPMENT, NET 62,914 64,441 62,476
EXCESS OF COST OVER NET ASSETS OF
BUSINESSES ACQUIRED 4,183 4,183 4,187
INTANGIBLES, NET 5,382 5,470 4,993
INVESTMENT IN AFFILIATE - 328 354
OTHER ASSETS 1,735 1,869 2,025
------------------ ----------------- -----------------
TOTAL ASSETS $ 336,854 $ 431,552 $ 330,001
================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Notes payable $ 248 $ 40 $ 173
Accounts payable 16,130 17,966 7,786
Accrued expenses 90,674 176,150 97,691
Income taxes payable 6,078 9,894 12,351
------------------ ----------------- -----------------
Total current liabilities 113,130 204,050 118,001
------------------ ----------------- -----------------
LONG-TERM DEBT 1,581 1,557 1,973
------------------ ----------------- -----------------
DEFERRED INCOME TAXES 4,304 5,220 3,129
------------------ ----------------- -----------------
MINORITY INTEREST IN SUBSIDIARIES 5,600 3,618 3,832
------------------ ----------------- -----------------
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;
39,811,148, 39,525,116 and 39,391,105 shares issued;
38,250,882, 38,107,850 and 38,030,939 shares outstanding 3,982 3,953 3,939
Capital in excess of par value 59,114 54,850 52,662
Retained earnings 183,440 189,610 176,774
Accumulated other comprehensive loss (4,981) (5,442) (5,689)
Treasury stock, at cost; 1,560,266, 1,417,266 and 1,360,166 shares (29,423) (25,971) (24,727)
------------------ ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 212,239 217,107 203,066
------------------ ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 336,854 $ 431,552 $ 330,001
================== ================= =================
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 29, February 28,
2004 2003
----------------- ------------------
NET SALES AND LICENSING FEES $ 88,276 $ 107,537
COST OF SALES 56,112 65,695
----------------- ------------------
GROSS PROFIT 32,164 41,842
----------------- ------------------
OPERATING EXPENSES:
Research and development 4,997 4,327
Selling 3,209 2,802
General and administrative 4,533 4,703
----------------- ------------------
12,739 11,832
----------------- ------------------
OPERATING INCOME 19,425 30,010
INTEREST INCOME, NET 326 194
OTHER EXPENSE, NET (3,511) (3,984)
EQUITY IN NET LOSS OF AFFILIATE (1,319) (481)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (416) (861)
----------------- ------------------
INCOME BEFORE INCOME TAXES 14,505 24,878
INCOME TAX EXPENSE 5,062 8,746
----------------- ------------------
NET INCOME 9,443 16,132
DIVIDENDS ON PREFERRED STOCK (128) (64)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 9,315 $ 16,068
================= ==================
BASIC EARNINGS PER SHARE $ 0.24 $ 0.42
================= ==================
NUMBER OF SHARES USED IN BASIC EARNINGS
PER SHARE CALCULATIONS 38,138 38,124
================= ==================
DILUTED EARNINGS PER SHARE $ 0.24 $ 0.41
================= ==================
NUMBER OF SHARES USED IN DILUTED EARNINGS
PER SHARE CALCULATIONS 39,768 39,556
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.12 $ 0.06
================= ==================
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 29, February 28,
2004 2003
----------------- ------------------
NET SALES AND LICENSING FEES $ 102,121 $ 113,136
COST OF SALES 64,148 69,983
----------------- ------------------
GROSS PROFIT 37,973 43,153
----------------- ------------------
OPERATING EXPENSES:
Research and development 9,133 7,884
Selling 5,951 5,221
General and administrative 9,274 8,363
Special charges - 500
----------------- ------------------
24,358 21,968
----------------- ------------------
OPERATING INCOME 13,615 21,185
INTEREST INCOME, NET 699 582
OTHER EXPENSE, NET (6,323) (6,018)
EQUITY IN NET LOSS OF AFFILIATE (1,734) (941)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (2,405) (1,318)
----------------- ------------------
INCOME BEFORE INCOME TAXES 3,852 13,490
INCOME TAX EXPENSE 1,387 4,789
----------------- ------------------
NET INCOME 2,465 8,701
DIVIDENDS ON PREFERRED STOCK (235) (117)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 2,230 $ 8,584
================= ==================
BASIC EARNINGS PER SHARE $ 0.06 $ 0.23
================= ==================
NUMBER OF SHARES USED IN BASIC EARNINGS
PER SHARE CALCULATIONS 38,118 38,150
================= ==================
DILUTED EARNINGS PER SHARE $ 0.06 $ 0.22
================= ==================
NUMBER OF SHARES USED IN DILUTED EARNINGS
PER SHARE CALCULATIONS 39,711 39,551
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.22 $ 0.11
================= ==================
The accompanying notes are an integral part of these financial statements.
32
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
(in thousands)
(Unaudited)
February 29, February 28,
2004 2003
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,465 $ 8,701
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 4,042 3,755
Loss (gain) on sale of assets 49 (11)
Equity in net loss of affiliate 1,734 941
Foreign exchange gain (131) (92)
Minority interest in earnings of subsidiaries 2,405 1,318
Change in deferred taxes 1,510 -
Changes in assets and liabilities:
Receivables 67,300 18,385
Inventories (29,223) (14,971)
Prepaid expenses 417 1,268
Intangibles and other assets 120 (295)
Accounts payable (1,988) (8,702)
Accrued expenses (85,457) (46,143)
Income taxes (2,266) 230
------------------ -----------------
Net cash used in operating activities (39,023) (35,616)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,244) (2,358)
Sale of investments and property 47 33
Investment in affiliate (1,140) (600)
------------------ -----------------
Net cash used in investing activities (3,337) (2,925)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (40) (1,887)
Dividends paid (8,635) (4,308)
Proceeds from short-term debt 245 410
Minority interest in dividends paid by subsidiary (424) -
Payments to acquire treasury stock (3,452) (4,891)
Proceeds from exercise of stock options 2,670 815
------------------ -----------------
Net cash used in financing activities (9,636) (9,861)
------------------ -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES 328 (373)
NET DECREASE IN CASH AND CASH EQUIVALENTS (51,668) (48,775)
CASH AND CASH EQUIVALENTS, August 31 143,285 109,091
------------------ -----------------
CASH AND CASH EQUIVALENTS, February 29 and February 28 $ 91,617 $ 60,316
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the six months for:
Interest $ 10 $ 20
Income taxes $ 1,800 $ 4,800
Noncash financing activities:
Tax benefit of stock option exercises $ 1,600 $ 300
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 29, 2004 and February 28, 2003, 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, 2003.
Reclassifications
In the consolidated income statement for the three and six month periods ended
February 29, 2004, certain expenses historically classified as Research and
Development in Operating Expenses have been reclassified as Cost of Sales. These
expenses for the prior year period have also been reclassified for consistency.
The expenses relate to certain activities performed by the Technical Services
department. As the sales of transgenic varieties have increased as a percentage
of our Net Sales and Licensing Fees over the past several years, certain
technical services department activities have become more related to preparing
seed for sale than to Research and Development activities. The activities for
which expenses have been reclassified relate primarily to the increase of seed
quantities to allow us to offer certain varieties commercially and to late-stage
trials performed to ensure that varieties that have been chosen to be offered
commercially meet agronomic and transgenic requirements of our third party
technology licenses. The amount of expenses reclassified for the three-month
periods ended February 29, 2004 and February 28, 2003 was $347,000 and $319,000,
respectively. The amount of expenses reclassified for the six-month periods
ended February 29, 2004 and February 28, 2003 was $831,000 and $768,000,
respectively.
Certain 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 29, 2004
and February 28, 2003, was (in thousands):
Three Months Ended Six Months Ended
------------------------------------ -----------------------------------
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
----------------- ----------------- ---------------- -----------------
Net income $ 9,443 $ 16,132 $ 2,465 $ 8,701
Other comprehensive (loss) income:
Foreign currency translation gains 190 214 819 274
Net realized and unrealized losses on
hedging instruments (606) (142) (358) (24)
Income tax benefit (expense) related
to other comprehensive income 150 (26) (153) (87)
----------------- ----------------- ---------------- -----------------
Other comprehensive (loss) income,
net of tax (266) 46 308 163
----------------- ----------------- ---------------- -----------------
Total comprehensive income $ 9,177 $ 16,178 $ 2,773 $ 8,864
================= ================= ================ =================
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, 2003.
Information about D&PL's segments for the three and six month periods ended
February 29, 2004 and February 28, 2003, is as follows (in thousands):
Three Months Ended Six Months Ended
------------------------------------ -----------------------------------
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
----------------- ----------------- ---------------- -----------------
Net sales and licensing fees (by segment)
Domestic $ 76,882 $ 92,714 $ 77,722 $ 93,140
International 11,394 14,823 24,399 19,996
----------------- ----------------- ---------------- -----------------
$ 88,276 $ 107,537 $ 102,121 $ 113,136
================= ================= ================ =================
Net sales and licensing fees
Cottonseed $ 77,845 $ 99,984 $ 90,778 $ 104,940
Soybean seed 9,182 5,623 9,186 5,629
Other 1,249 1,930 2,157 2,567
----------------- ----------------- ---------------- -----------------
$ 88,276 $ 107,537 $ 102,121 $ 113,136
================= ================= ================ =================
Operating income
Domestic $ 17,536 $ 26,388 $ 8,478 $ 17,355
International 1,889 3,622 5,137 3,830
----------------- ----------------- ---------------- -----------------
$ 19,425 $ 30,010 $ 13,615 $ 21,185
================= ================= ================ =================
4. SIGNIFICANT CHANGES IN ASSETS AND LIABILITIES FROM AUGUST 31, 2003
Accounts receivable decreased approximately $67,179,000 to $99,773,000 at
February 29, 2004 from $166,952,000 at August 31, 2003. This decrease is
primarily related to the collection of the 2003 technology sublicense fees in
September 2003. The corresponding decrease in accrued expenses is primarily
related to the royalty payments made by the Company for the Bollgard and Roundup
Ready licensing fees on fiscal year 2003 sales in September 2003.
Inventories increased approximately $29,102,000 to $61,333,000 at February 29,
2004 from $32,231,000 at August 31, 2003. 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 29, 2004 from August 31, 2003 is primarily related to those events and
is consistent with the Company's historical experience.
5. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - An Interpretation of ARB No. 51,". In December
2003, the FASB published a revision to Interpretation No. 46(46R) to clariy
some of the provisions of the original Interpretation. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. Under the new guidance, special
effective date provisions apply to enterprises that have fully or partially
applied Interpretation 46 prior to issusance of this revised Interpretation.
Otherwise, application of Interpretation 46R is required in financial statements
of public entities that have interests in structures that are commonly referred
to as apecial-purpose entities for periods ending after December 15, 2003.
Application by public entities, other than small business issuers, for all other
types of variable interest entities is required in financial statements for
periods ending after March 15, 2004. The Company does not have any VIEs and,
therefore, the adoption of this statement did not have a material
impact on D&PL's consolidated financial position or results of operations.
Statement of Financial Accounting Standards ("SFAS") No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
requires additional annual disclosures about pension plan assets, benefit
obligations, cash flows, benefit costs and related information. SFAS No. 132
(Revised 2003) also requires companies to disclose various elements of pension
and postretirement benefit costs in interim-period financial statements for
quarters beginning after December 15, 2003. D&PL will be required to present
this interim disclosure in its May 31, 2004 quarterly financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity," provides guidance on how to classify and
measure certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. D&PL adopted this
statement for financial instruments entered into after May 31, 2003 and
otherwise adopted this statement September 1, 2003. The adoption of this
statement did not have a material impact on D&PL's consolidated financial
position or results of operations.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure -- an Amendment of FASB Statement No. 123," was issued in December
2002. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation under which compensation cost for stock options is recognized. In
addition, this statement amends the disclosure requirements of FASB Statement
No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. This required disclosure is
included in Note 6.
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, 2003.
The following table illustrates the effect on net income and earnings 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 29, February 28, February 29, February 28,
2004 2003 2004 2003
---------------- ----------------- ------------------- -----------------
Net income:
As reported $ 9,443 $ 16,132 $ 2,465 $ 8,701
Less: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effects (788) (887) (1,600) (1,770)
---------------- ----------------- ------------------- -----------------
Pro forma $ 8,655 $ 15,245 $ 865 $ 6,931
================ ================= =================== ==================
Basic earnings per share:
As reported $ 0.24 $ 0.42 $ 0.06 $ 0.23
================ ================= =================== ==================
Pro forma $ 0.22 $ 0.40 $ 0.02 $ 0.18
================ ================= =================== ==================
Diluted earnings per share:
As reported $ 0.24 $ 0.41 $ 0.06 $ 0.22
================ ================= =================== ==================
Pro forma $ 0.22 $ 0.39 $ 0.02 $ 0.18
================ ================= =================== ==================
7. INVENTORIES
Inventories consisted of the following as of (in thousands):
February 29, August 31, February 28,
2004 2003 2003
------------------ ----------------- -----------------
Finished goods $ 35,785 $ 21,476 $ 36,163
Raw materials 32,345 17,062 28,641
Growing crops 187 1,199 138
Supplies 1,076 733 657
------------------ ----------------- -----------------
69,393 40,470 65,599
Less reserves (8,060) (8,239) (10,685)
------------------ ----------------- -----------------
$ 61,333 $ 32,231 $ 54,914
================== ================= =================
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 six-month periods ended February 29, 2004 and
February 28, 2003 were $2,988,000 and $3,394,000, respectively. See Note 11 for
description of hedging activities.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of (in thousands):
February 29, August 31, February 28,
2004 2003 2003
------------------ ----------------- -----------------
Land and improvements $ 5,197 $ 5,124 $ 5,070
Buildings and improvements 42,343 41,272 37,898
Machinery and equipment 60,234 56,202 55,754
Germplasm 7,500 7,500 7,500
Breeder and foundation seed 2,000 2,000 2,000
Construction in progress 3,143 5,464 3,431
------------------ ----------------- -----------------
120,417 117,562 111,653
Less accumulated depreciation (57,503) (53,121) (49,177)
------------------ ----------------- -----------------
$ 62,914 $ 64,441 $ 62,476
================== ================= =================
9. INTANGIBLES AND EXCESS OF COST OVER NET ASSETS OF BUSINESS ACQUIRED
The components of identifiable intangible assets follow as of (in thousands):
February 29, 2004 August 31, 2003 February 28, 2003
----------- --- --------------- -------------- --- ---------------- ------------- -- ----------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
Trademarks $ 3,182 $ (839) $ 3,182 $ (800) $ 3,182 $ (761)
Commercialization
agreements 400 (79) 400 (65) 400 (51)
Licenses 1,100 (28) 1,100 - 1,100 -
Patents 502 (90) 426 (84) 322 (78)
Other 1,973 (739) 1,959 (648) 1,410 (531)
----------- --------------- -------------- ---------------- ------------- ----------------
$ 7,157 $ (1,775) $ 7,067 $ (1,597) $ 6,414 $ (1,421)
=========== =============== ============== ================ ============= ================
Amortization expense for identifiable intangible assets during the three- and
six-month periods ended February 29, 2004 was approximately $100,000 and
$180,000, respectively. Identifiable intangible asset amortization expense is
estimated to be $210,000 for the remainder of 2004 and $400,000 in each of the
fiscal years from 2005 through 2008 and $300,000 in 2009.
During the fourth quarter of fiscal 2003, "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. (formerly known as MaxyAg, Inc.), a wholly-owned subsidiary of
Maxygen, Inc. 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 29, 2004, and February 28, 2003,
D&PL's equity in the net loss of DeltaMax was $1,319,000 and $481,000,
respectively. For the six months ended February 29, 2004, and February 28, 2003,
D&PL's equity in the net loss of DeltaMax was $1,734,000 and $941,000,
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 29,
2004 and February 28, 2003 (in thousands):
2004 2003
------------------- -------------------
Deferred net gain, as of August 31 $ 262 $ 304
Net (losses) gains on hedging instruments arising during the
six months (208) 123
Reclassification adjustment of gains on hedging instruments to
earnings (150) (147)
------------------- -------------------
Net change in accumulated other comprehensive loss (358) (24)
------------------- -------------------
Deferred net (loss) gain on derivative instruments included in
accumulated other comprehensive loss at February 29 and
February 28 $ (96) $ 280
=================== ===================
The net loss of $96,000 included in accumulated other comprehensive loss at
February 29, 2004 consists of net unrealized losses of $245,000 and net realized
gains of $149,000. The net unrealized losses of $245,000 will be recognized in
earnings within the next twelve months; however, the actual amount that will be
charged to earnings may vary as a result of changes in market conditions. The
net realized gains of $149,000 will be reclassified into earnings in D&PL's
third quarter.
For the six-month periods ended February 29, 2004 and February 28, 2003, 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(R) and/or Roundup Ready(R) 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) cotton seed 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. Deltapine Australia is responding to the suit,
denying infringement and asserting affirmative defenses.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners pertaining to four matters under the
Bollgard and Roundup Ready Licenses for the United States and two matters
under license agreements for Argentina and the Republic of South Africa,
respectively. Monsanto's notice of dispute asserts that D&PL's failure to
address these issues would be a breach of D&PL obligations under the relevant
agreements and reserves all of Monsanto's rights under these agreements. In
August 2003, D&PL and D&M Partners responded to Monsanto's positions on each
issue and notified Monsanto of three 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 have been submitted to a panel of senior executives.
Monsanto has subsequently withdrawn from the executive panel the issue involving
the license agreements for the Republic of South Africa and has 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 have been resolved and are no longer in dispute. D&PL is committed to
participating in good faith resolution of the remaining issues in dispute. Any
issues not resolved by the executive panel may be submitted to binding
arbitration as provided in the relevant agreements.
In July 2002, Syngenta Biotechnology, Inc. ("SBI") brought suit in the U.S.
District Court in Delaware alleging that D&PL's making, using, selling and
offering to sell cotton planting seed containing Monsanto's insect-resistant Bt
genes, being sold under the trade name Bollgard, and Monsanto's herbicide
tolerance genes, being sold under the trade name Roundup Ready, infringed U.S.
Patent 6,051,757 entitled "Regeneration Of Plants Containing Genetically
Engineered T-DNA". In July 2003, SBI added D&M Partners as an additional
defendant. The suit sought a preliminary and permanent injunction against D&PL,
Monsanto and D&M Partners against further acts of alleged infringement,
contributory infringement and inducement of infringement of SBI's patent and
recovery of damages for an unspecified amount including treble damages on
account of the defendants' alleged willful infringement. Monsanto agreed to
defend D&PL in this suit and to indemnify D&PL against damages, if any, which
might have been awarded. This suit was dismissed with prejudice by a Stipulation
of Dismissal filed February 20, 2004, with no material impact to D&PL.
In May 2002, Pharmacia Corporation filed a suit in state court in Missouri
against D&PL International Technology Corp. ("DITC"), D&PL's subsidiary, seeking
a declaratory judgment that it was entitled to invoke the cross purchase
provision in the Operating Agreement for D&M International, LLC, a limited
liability company jointly owned by Pharmacia and DITC. In the alternative,
Pharmacia sought a declaratory judgment that DITC was deemed to have consented
to Pharmacia's transfer of the Operating Agreement to Monsanto and its issuance
and transfer of shares of Monsanto's stock. DITC moved to dismiss on June 6,
2002, because the case was moot and did not present a justiciable controversy,
in that DITC had already invoked its rights under the cross purchase provision
and had caused Pharmacia's interest in D&M International, LLC to be redeemed.
Instead of answering DITC's motion, on or about June 13, 2002, Pharmacia filed
an amended petition, dropping all of its prior claims, and seeking a declaratory
judgment that DITC has no contractual rights to enjoin Pharmacia from selling
its shares of Monsanto or to seek damages for Pharmacia's prior initial public
offering of Monsanto's shares to the public. DITC moved to dismiss the suit,
since it had never threatened to enjoin the spin-off, and, in the alternative,
moved for a more definite statement. On October 12, 2002, the Court denied
DITC's motion to dismiss but granted DITC's motion for a more definite
statement. Pharmacia filed a Second Amended Petition on October 30, 2002, and
DITC filed a motion to dismiss the Second Amended Petition on November 19, 2002.
In March 2004, the parties agreed to settle the matter without material
financial impact to the Company. It is anticipated that the Court will enter
an order of dismissal.
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. The litigation is currently in discovery and
pretrial proceedings. 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
$671,000 at March 31, 2004 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.
The litigation filed against D&PL in the Circuit Court of Dunklin County,
Missouri, in July 2003, has now been resolved without material financial impact
to the company.
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 489,000 and 1,130,000 outstanding stock
options were not included in the computation of diluted earnings per share for
the three months ended February 29, 2004 and February 28, 2003, respectively,
and approximately 551,000 and 2,223,000 outstanding stock options were not
included in the computation of diluted earnings per share for the six months
ended February 29, 2004 and February 28, 2003, 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 2014.
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 29, February 28, February 29, February 28,
2004 2003 2004 2003
------------- ------------- --------------- --------------
Income:
Net income $ 9,443 $ 16,132 $ 2,465 $ 8,701
Less: Preferred stock dividends (128) (64) (235) (117)
-------------- ------------- --------------- -------------
Net income for basic EPS 9,315 16,068 2,230 8,584
Effect of Dilutive Securities:
Convertible Preferred Stock Dividends 128 64 235 117
-------------- -------------- --------------- -------------
Net income available to common stockholders
plus assumed conversions - for diluted EPS $ 9,443 $ 16,132 $ 2,465 $ 8,701
============== ============= =============== ==============
Shares:
Basic EPS Shares 38,138 38,124 38,118 38,150
Effect of Dilutive Securities:
Options to purchase stock 563 365 526 334
Convertible preferred stock 1,067 1,067 1,067 1,067
-------------- ------------- --------------- --------------
Diluted EPS Shares 39,768 39,556 39,711 39,551
============== ============= =============== ==============
Per Share Amounts:
Basic $ 0.24 $ 0.42 $ 0.06 $ 0.23
============== ============= =============== ==============
Diluted $ 0.24 $ 0.41 $ 0.06 $ 0.22
============== ============= =============== ==============
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW/OUTLOOK
At the time of this filing, we are processing and shipping our seed products to
our customers in the U.S. market. Cotton planting has recently commenced in the
major U.S. cotton growing states. The recent increase in soybean commodity
prices contrasts with a decline in cotton fiber prices and causes us concern
that some U.S. acreage initially expected to be planted with cotton may shift to
soybeans. On March 31, 2004, the USDA issued its "Prospective Plantings" report
for this crop season, which estimated U.S. cotton plantings of 14.4 million
acres. On March 29, 2004, Reuters news service released a poll of various cotton
industry insiders which reflected an average of cotton acreage estimates of
those individuals polled of 13.5 million acres. The difference in these two
reports may be attributable in part to the timing of the respective surveys and
other factors. However, both estimates are below the 14.5 million acre estimate
used by the Company in developing its earlier earnings guidance. Due to the
difficulty in accurately forecasting cotton plantings at present, the Company is
not releasing updated earnings guidance at this time. As more information
becomes available, we will consider the need to update the previously issued
guidance. As we have previously stated, for each 500,000 acre change in planted
cotton acreage in cotton planting states east of Texas, we estimate that our
earnings per share could be affected by approximately $0.10 per share. This
earnings sensitivity is based on the types of products sold (i.e., product mix)
and our market position in these states as well as other factors. In addition to
commodity prices, weather, as well as other factors, during the planting season
will affect not only the crops (for example, cotton, soybeans, etc.) that are
planted, but also the specific varieties of seed within crop species.
Over the last year, cotton fiber prices have increased from $0.56 per pound (at
June 3, 2003) to $0.86 per pound as recently as October 29, 2003, but have now
declined to the mid to high $0.60's per pound. However, we are optimistic that
cotton fiber prices could strengthen over the long term given that the U.S.
cotton "stocks-to-use" ratio is at an eight year low and the worldwide
"stocks-to-use" ratio is a ten year low. A lower "stocks-to-use" ratio could
potentially drive higher cotton fiber prices which may result in increased
U.S. cotton plantings in 2005.
Other Matters
We are continuing to work to secure alternative technologies for our cottonseed
products such as insect resistance, herbicide tolerance and other technologies.
We expect that this access will be gained either through licenses, joint
ventures or outright purchase. In connection with this, we are continuing
to work with third-party trait providers to develop, test and evaluate elite
cotton varieties containing insect resistant genes. If appropriate testing
indicates these third-party traits combined with our germplasm is competitive,
if commercialization agreements are reached, and if U.S. government regulatory
approval is received, our elite varieties containing these traits may be
available for introduction to growers. In addition, we continue to have
discussions with potential partners to enter new markets as a part of executing
our international growth strategy. We expect to form joint ventures, take
positions in established businesses, or develop businesses ourselves depending
on the potential benefit of each alternative. In addition, our joint venture
with Verdia, Inc., DeltaMax Cotton, LLC ("DeltaMax"), has initiated cotton
transformation of proprietary glyphosate tolerant and insect resistance genes.
1 1
With respect to our suit against Monsanto and Pharmacia, the parties remain in
discovery. A new trial date has not yet been scheduled, but the Court ordered on
September 8, 2003, an April 2004 fact-discovery deadline as well as other
deadlines from that date until April 15, 2005, when pre-trial statements are due
to the Court. Therefore, the trial is not expected to occur prior to April 15,
2005. On September 12, 2003, Monsanto amended its response to our lawsuit to
include four counterclaims against us. Monsanto is seeking unspecified damages
--------------
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".
for its counterclaims, including the $81 million paid by Monsanto to D&PL as a
termination fee and related expenses. We have answered Monsanto's counterclaims
and do not believe we have any liability. We continue to vigorously pursue our
lawsuit and defend Monsanto's counterclaims. See Part II, Item 1 for further
discussion.
Pursuant to our previously announced share repurchase program, we repurchased
143,000 shares of our stock in the open market from September 1, 2003 to March
31, 2004.
In August 2003, we announced that we would begin packaging our cottonseed
varieties in bags containing approximately 250,000 seed in the 2004 selling
season, as compared to historically packaging our cottonseed varieties in
50-pound bags. Pima and Acala varieties will continue to be packaged in 50-pound
bags. This is intended to simplify pricing and production planning, and will
help standardize technology fees and make inventory management for our
distribution partners and farmers more precise.
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 29, February 28, February 29, February 28,
2004 2003 2004 2003
------------------ --------------- --------------------- --------------------
Operating results-
Net sales and licensing fees $ 88,276 $ 107,537 $ 102,121 $ 113,136
Gross profit 32,164 41,842 37,973 43,153
Operating expenses 12,739 11,832 24,358 21,968
Operating income 19,425 30,010 13,615 21,185
Income before income taxes 14,505 24,878 3,852 13,490
Net income applicable to common shares 9,315 16,068 2,230 8,584
The following sets forth selected balance sheet data of D&PL at the following
dates (in thousands):
February 29, August 31, February 28,
2004 2003 2003
------------------ ----------------- -----------------
Balance sheet summary-
Current assets $ 262,640 $ 355,261 $ 255,966
Current liabilities 113,130 204,050 118,001
Working capital 149,510 151,211 137,965
Property, plant and equipment, net 62,914 64,441 62,476
Total assets 336,854 431,552 330,001
Outstanding borrowings 1,829 1,597 2,146
Stockholders' equity 212,239 217,107 203,066
Three months ended February 29, 2004, compared to three months ended February
28, 2003:
For the quarter ended February 29, 2004, we reported net income of $9.4 million,
compared to net income of $16.1 million reported in the comparable prior year
quarter. This decrease was due primarily to lower sales in our domestic and
international segments, higher operating expenses and an increase in the net
loss of 50%-owned DeltaMax. These items were partially offset by a decrease in
litigation expenses incurred in our lawsuit against Monsanto/Pharmacia, which
are reported in Other Expense.
Net sales and licensing fees decreased approximately $19.2 million to $88.3
million from $107.5 million in the comparable period in the prior year. The
decrease in net sales and licensing fees is primarily attributable to an
anticipated shift of domestic cottonseed sales into the third quarter from our
continuing transition to a new inventory management strategy whereby inventory
shipments to distributors are more closely matched to farmer orders. The
decrease in domestic cottonseed sales was partially offset by an increase in
soybean sales over the prior year quarter. International revenues were lower due
primarily to sales in China occurring in this year's first quarter versus the
second quarter of last year. Sales were also lower in Greece due to an
anticipated shift in shipments to the third quarter, and in Spain. These
reductions were partially offset by increased sales in Mexico and at our joint
venture in Brazil.
Gross profit decreased approximately $9.6 million to $32.2 million from $41.8
million. Gross profit as a percentage of net sales and licensing fees decreased
to 36% from 39% in the same quarter of the prior year. This decrease is due to
higher raw material costs for both cottonseed and soybean seed, and to a higher
percentage of our sales in the current year quarter coming from soybean seed, on
which we earn a lower gross profit percentage, as compared to the prior year
quarter. Also, the reduction of sales to Greece in the current year quarter
reduced the gross profit percentage of the international segment.
Operating expenses increased approximately $0.9 million to $12.7 million from
$11.8 million in the second quarter of 2003. This increase related primarily to
higher research and development costs, and an increase in professional fees.
We reported net other expense of approximately $3.5 million for the quarter
ended February 29, 2004, compared to net other expense of approximately $4.0
million for the same period in the prior year. The decrease is due to a
reduction in Monsanto/Pharmacia litigation expenses in the current year quarter.
For the quarter ended February 29, 2004, we incurred $3.5 million, or $0.06 per
diluted share, related to Monsanto/Pharmacia litigation expenses, compared to
$4.1 million, or $0.07 per diluted share, in the quarter ended February 28,
2003.
Six months ended February 29, 2004, compared to six months ended February 28,
2003:
For the six-month period ended February 29, 2004, we reported net income of $2.5
million, compared to net income of $8.7 million reported in the comparable prior
year period. This decrease was due primarily to lower sales in our domestic
segment, higher operating expenses and an increase in the net loss of 50%-owned
DeltaMax Cotton LLC. These items were slightly offset by an increase in
international sales.
Net sales and licensing fees decreased approximately $11.0 million to $102.1
million from $113.1 million in the comparable period in the prior year. The
decrease in net sales and licensing fees is primarily attributable to an
anticipated shift of domestic cottonseed sales into the third quarter from our
continuing transition to a new inventory management strategy whereby inventory
shipments to distributors are more closely matched to farmer orders. The
decrease in domestic cottonseed sales was partially offset by an increase in
soybean sales over the prior year period. International revenues slightly
increased due to higher sales in Australia, Brazil, Mexico and Turkey. These
improvements were partially offset by decreased sales in Greece, which we
anticipate will occur in the third quarter.
Gross profit decreased approximately $5.2 million to $38.0 million from $43.2
million. Gross profit as a percentage of net sales and licensing fees decreased
to 37% from 38% in the same period of the prior year. This decrease is due to
higher raw material costs for both cottonseed and soybean seed, and to a higher
percentage of our sales in the current year period coming from soybean seed, on
which we earn a lower gross profit percentage, as compared to the prior year
period. Also, the reduction in sales to Greece in the current year period
reduced the gross profit percentage of the international segment.
Operating expenses increased approximately $2.4 million to $24.4 million from
$22.0 million in the second quarter of 2003. This increase related primarily to
higher research and development costs and an increase in professional fees.
During the six months ended February 28, 2003, we reported special charges of
$0.5 million related to the severance costs associated with the closing of our
facility in Centre, Alabama as well as a headcount reduction at our joint
venture in Hebei Province, People's Republic of China.
We reported net other expense of approximately $6.3 million for the six-month
period ended February 29, 2004, compared to net other expense of approximately
$6.0 million for the same period in the prior year. This is due to a slight
increase in Monsanto/Pharmacia litigation expenses in the current year period.
For the six-month period ended February 29, 2004, we incurred $6.4 million, or
$0.10 per diluted share, related to Monsanto/Pharmacia litigation expenses,
compared to $6.1 million, or $0.10 per diluted share, in the six-month period
ended February 28, 2003.
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, 2003. 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 Bollgard(R) and Roundup Ready(R) 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 each of nine geographic regions and consider the estimated number of
seeds contained in each bag for years prior to 2004 which may vary by variety,
location grown, and other factors. Effective this year, picker and stripper
cottonseed products will be sold in bags containing 250,000 seed. Acala and Pima
cottonseed products will 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 and South Africa 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 and third 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 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 29, 2004, we
had recorded net deferred tax assets of approximately $3.9 million. We estimate
that our deferred tax assets will be realized; therefore, we have not recorded
any valuation allowances as of February 29, 2004.
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 licensing fees on
Bollgard and Roundup Ready seed sales upon shipment, usually in our second and
third fiscal quarters. Receivables from seed sales are generally due from May to
July. 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
fiscal year end.
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, in fiscal years 2002 and 2003, we 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) 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 in the open market of our shares
pursuant to our previously announced share repurchase program. Once the
evaluation of certain transactions that are currently being considered is
completed, we may consider other potential uses of the remaining cash, including
increasing the dividend rate or repurchasing shares more aggressively depending
on market considerations and other factors.
In April 1998, we entered into a syndicated credit facility with three lenders,
which provided for aggregate borrowings of $110 million. This agreement expired
on April 1, 2001. D&PL and potential lenders have had discussions about a
replacement facility that will provide for aggregate borrowings sufficient to
meet our current working capital needs.
Capital expenditures were $2.2 million and $2.4 million in six months ended
February 29, 2004 and February 28, 2003, respectively. We anticipate that
capital expenditures will approximate $7.0 to $9.0 million in fiscal 2004.
Annual dividends of $0.27 and $0.20 per share were paid in 2003 and 2002,
respectively. Aggregate dividends paid on common and preferred shares in 2003
and 2002 were $10.6 million and $7.9 million, respectively. For the six months
ended February 29, 2004, aggregate dividends of $8.6 million have been paid on
common and preferred shares. On April 1, 2004, we announced that our Board of
Directors had declared a $0.12 per share dividend for the third quarter. The
third quarter dividend, payable to shareholders of record on May 31, 2004, will
be paid on June 14, 2004. 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. Aggregate preferred and common
dividends should approximate $18.1 million in 2004.
In February 2000, the Board of Directors authorized a program for the repurchase
of up to $50 million of our common stock. The shares repurchased under this
program 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. At August 31, 2003, we had repurchased 1,303,000 shares at an
aggregate purchase price of approximately $23.8 million under this program.
During the year ended August 31, 2003, we purchased 310,100 shares at an
aggregate purchase price of $6.1 million under this plan. Between September 1,
2003 and March 31, 2004, we repurchased 143,000 shares at an aggregate purchase
price of $3.5 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 2004 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, 2003. Also see Note 11 of the
Notes to Consolidated Financial Statements in Item 1 for further details about
our exposure to market risk.
The fair value of derivative commodity instruments outstanding as of February
29, 2004, was $250,000. A 10% adverse change in the underlying commodity prices
upon which these contracts are based would result in a $300,000 loss in future
earnings arising from these contracts (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 29, 2004, the result of a uniform 10% strengthening in the value of the
dollar relative to the currencies in which our transactions are denominated
would not cause a material impact on earnings.
We utilize fixed and variable-rate debt to maintain liquidity and fund our
business operations, with the terms and amounts based on business requirements,
market conditions and other factors. At February 29, 2004, a 100 basis point
change in interest rates (with all other variables held constant) on the portion
of our debt with variable interest rates would not result in a material change
to our interest expense or cash flow.
For the six months ended February 29, 2004, a 10% adverse change in the interest
rate that we earned on our excess 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 29, 2004.
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, particularly during the period this report was prepared, in order to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
There have not been any significant changes in D&PL's internal control over
financial reporting or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following sets forth known pending litigation and a description of other
legal matters.
Product Claims
D&PL and Monsanto are named as defendants in a lawsuit filed in Hockley County,
Texas, on April 14, 1999. This lawsuit was removed to the United States District
Court, Lubbock Division, but subsequently remanded back to the state court. This
case was tried to a jury in August 2002, and an adverse verdict was returned
against D&PL and Monsanto. On February 24, 2004, this case was reversed and
rendered in D&PL's favor by the 7th Appellate Court District (Amarillo Division)
of the Texas Court of Appeals. Although the original plaintiff has not attempted
to further appeal the case to the Texas Supreme Court, time for such appeal
remains available. In this case the plaintiff alleged that certain cottonseed
acquired from the Paymaster division of D&PL did not perform as the farmer had
anticipated and as allegedly represented to him.
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 as a defendant in a lawsuit filed in the 110th Judicial District
Court of Floyd County, Texas on November 21, 2002. In this multiple plaintiff
case, each plaintiff alleges that seed purchased from D&PL failed to perform as
represented and seeks compensatory damages for crop losses during the 2002
growing season. D&PL and the claimants in this case have now entered into an
agreement for binding arbitration of the claims pursuant to the arbitration
clause contained in the Monsanto Gene Licensing Agreement executed by the
growers. Although the claim involves a cotton variety that contains the Roundup
Ready gene, no claim against Monsanto was alleged, nor was there any allegation
that Monsanto technology caused or contributed to plaintiffs' alleged problems.
Thus, it does not presently appear that Monsanto is contractually obligated to
defend and/or indemnify D&PL in this case. D&PL has thoroughly investigated the
claims and anticipates these cases will be finally arbitrated within the next
three months.
D&PL and Monsanto and various retail seed suppliers were named in six pending
lawsuits in the State of South Carolina. One lawsuit was filed November 15,
1999, in the Beaufort Division of the United States District Court, District of
South Carolina; two of the other cases were filed on November 15, 1999, in the
Court of Common Pleas of Hampton County, South Carolina. The two 1999 state
court lawsuits were removed to the United States District Court for the District
of South Carolina but were subsequently remanded back to the state court in
which they were filed. The remaining three lawsuits were filed July 29, 2002, in
the Court of Common Pleas of Hampton County, South Carolina. The 2002 state
court filing of one of those cases was removed to United States District Court
for the District of South Carolina, Beaufort Division, but has now been remanded
back to Hampton County. In each of these cases the plaintiff alleges, among
other things, that certain seed acquired from D&PL which contained the Roundup
Ready gene and/or the Bollgard gene did not perform as the farmer had
anticipated. These lawsuits also include varietal claims aimed solely at D&PL.
D&PL and Monsanto are continuing to investigate the claims to determine the
cause or causes of the alleged problem. Pursuant to the terms of the Roundup
Ready Agreement and the Bollgard Agreement between D&PL and Monsanto, D&PL has a
right to be contractually indemnified against all claims arising out of the
failure of Monsanto's gene technology. D&PL will not have a right to
indemnification, however, from Monsanto for any claim involving varietal
characteristics separate from or in addition to the failure of the Monsanto
technology and such claims are contained in each of these lawsuits.
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 cotton
seed sold by D&PL was improperly mixed and blended and failed to perform as
advertised. In the second 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. Both cases are still pending and in the
discovery stages. 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.
The litigation previously filed against D&PL in the 110th Judicial District of
Floyd County, Texas on October 16, 2002, the Circuit Court of Webster County,
Mississippi on August 10, 2001, the Circuit Court of Noxubee County on August
12, 2002, the Middle District of Georgia, Albany Division, on April 5, 2002, and
the Superior Court of Fulton County, Georgia, on April 29, 2002, have all been
resolved. Individually and collectively, the resolution of these cases did not
have a material impact on D&PL.
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(R) cotton seed 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. Deltapine Australia is responding to the suit,
denying infringement and asserting affirmative defenses.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners pertaining to four matters under the
Bollgard and Roundup Ready Licenses for the United States and two matters under
license agreements for Argentina and the Republic of South Africa, respectively.
Monsanto's notice of dispute asserts that D&PL's failure to address these issues
would be a breach of D&PL obligations under the relevant agreements and reserves
all of Monsanto's rights under these agreements. In August 2003, D&PL and D&M
Partners responded to Monsanto's positions on each issue and notified Monsanto
of three 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 have been
submitted to a panel of senior executives. Monsanto has subsequently withdrawn
from the executive panel the issue involving the license agreements for the
Republic of South Africa and has 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 have been resolved
and are no longer in dispute. D&PL is committed to participating in good faith
resolution of the issues in dispute. Any issues not resolved by the executive
panel may be submitted to binding arbitration as provided in the relevant
agreements.
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
lawsuits referenced under "Product Claims" immediately above 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 November 2002, D&PL filed suit in the Circuit Court of Washington County,
Mississippi, against its fire insurance carrier, Reliance Insurance Company of
Illinois. That suit seeks recovery of seed inventory lost, damaged or destroyed
during a fire that occurred in November 1999 at D&PL's Hollandale, Mississippi
facility. A Stay Order has now been entered in this case pursuant to the powers
of the Receiver of Reliance Insurance Company of Illinois, which is now in
liquidation.
In July 2002, Syngenta Biotechnology, Inc. ("SBI") brought suit in the U.S.
District Court in Delaware alleging that D&PL's making, using, selling and
offering to sell cotton planting seed containing Monsanto's insect-resistant Bt
genes, being sold under the trade name Bollgard, and Monsanto's herbicide
tolerance genes, being sold under the trade name Roundup Ready, infringed U.S.
Patent 6,051,757 entitled "Regeneration Of Plants Containing Genetically
Engineered T-DNA." In July 2003, SBI added D&M Partners as an additional
defendant. The suit sought a preliminary and permanent injunction against D&PL,
Monsanto and D&M Partners against further acts of alleged infringement,
contributory infringement and inducement of infringement of SBI's patent and
recovery of damages for an unspecified amount including treble damages on
account of the defendants' alleged willful infringement. Monsanto agreed to
defend D&PL in this suit and to indemnify D&PL against damages, if any, which
might have been awarded. This suit was dismissed with prejudice by a Stipulation
of Dismissal filed February 20, 2004, with no material impact to D&PL.
In May 2002, Pharmacia Corporation filed a suit in state court in Missouri
against D&PL International Technology Corp. ("DITC"), D&PL's subsidiary, seeking
a declaratory judgment that it was entitled to invoke the cross purchase
provision in the Operating Agreement for D&M International, LLC, a limited
liability company jointly owned by Pharmacia and DITC. In the alternative,
Pharmacia sought a declaratory judgment that DITC was deemed to have consented
to Pharmacia's transfer of the Operating Agreement to Monsanto and its issuance
and transfer of shares of Monsanto's stock. DITC moved to dismiss on June 6,
2002, because the case was moot and did not present a justiciable controversy,
in that DITC had already invoked its rights under the cross purchase provision
and had caused Pharmacia's interest in D&M International, LLC to be redeemed.
Instead of answering DITC's motion, on or about June 13, 2002, Pharmacia filed
an amended petition, dropping all of its prior claims, and seeking a declaratory
judgment that DITC has no contractual rights to enjoin Pharmacia from selling
its shares of Monsanto or to seek damages for Pharmacia's prior initial public
offering of Monsanto's shares to the public. DITC moved to dismiss the suit,
since it had never threatened to enjoin the spin-off, and, in the alternative,
moved for a more definite statement. On October 12, 2002, the Court denied
DITC's motion to dismiss but granted DITC's motion for a more definite
statement. Pharmacia filed a Second Amended Petition on October 30, 2002, and
DITC filed a motion to dismiss the Second Amended Petition on November 19, 2002.
In March 2004, the parties agreed to settle the matter without material
financial impact to the Company. It is anticipated that the Court will enter an
order of dismissal.
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. The litigation is currently in discovery and
pretrial proceedings. 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
$671,000 at March 31, 2004, 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.
The litigation filed against D&PL in the Circuit Court of Dunklin County,
Missouri, in July of 2003, has now been resolved without material financial
impact to the company.
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, and Monsanto would immediately pay the $81 million. On January 3, 2000,
Monsanto paid to D&PL a termination fee of $81 million as required by the merger
agreement. On January 18, 2000, 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 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
make 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 over the appropriate forum to hear the
case. A Delaware Court of Chancery ruling 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. 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. 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 (a newly spun-off subsidiary)
as defendants in the amended complaint. D&PL filed two motions to compel
additional discovery from Monsanto. Pharmacia and Monsanto filed a motion for
summary judgment and a motion to dismiss the added claim of tortious
interference contained in the amended complaint. Pharmacia and Monsanto alleged
that they were 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 injury 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. The Court also denied defendants' motion to dismiss or for
summary judgment on D&PL's claim for tortious interference with business
relationships. The Court also granted substantially all of the discovery sought
by D&PL in its motion to compel. The judge to whom this case was assigned has
retired and a new judge has been appointed. 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 acquisition of the Sure Grow companies prior to the signing of the
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
adverse change resulted from the conduct that D&PL seeks damages for in this
litigation. The breach of contract claim also alleges that D&PL failed to use
requisite efforts to inform Monsanto that Monsanto was not using requisite
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 D&PL intends to vigorously defend against these
counterclaims. On December 5, 2003, Monsanto filed a motion for partial summary
judgment on a portion of D&PL's damage claims. D&PL has opposed this motion. The
parties are currently in discovery, and the Court has ordered an April 2004
fact-discovery deadline as well as other deadlines from that date until April
15, 2005, when pre-trial statements are due to the Court. Therefore, the trial
is not expected to occur prior to April 15, 2005.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
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 15, 2004. The following matters were brought to a vote with the noted
results:
Item For Against Abstain Non-Voted
1. Re-election of Class II Director
Joseph M. Murphy 34,057,748 0 1,196,125 0
2. Re-election of Class II Director
Rudi E. Scheidt 34,065,112 0 1,188,761 0
3. Ratify appointment of KPMG LLP as the
independent public accountants for the
fiscal year ending August 31, 2004 34,805,377 445,707 2,789 0
Item 5. Business
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 distribute
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 ("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 ("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, (ii) direct in-country operations through either joint ventures or
wholly-owned subsidiaries and (iii) to a lesser degree, licensees. 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
2003, 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 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 a D&PL cotton variety 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 gene technology. Sales of such varieties commenced in 1999.
CDM has also been licensed to sell Roundup Ready cottonseed varieties, which
received government approval in 2001. Roundup Ready cottonseed has been
available for sale in Argentina since October 2002.
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 government
approvals are obtained. Monsanto is responsible for obtaining these government
approvals and has announced approval may not occur until 2005. 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 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", formerly known as
MaxyAg, Inc.), a wholly-owned subsidiary of Maxygen, Inc. 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 2009. 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. We maintain a winter nursery and foundation seed operation in
Canas, Costa Rica and have 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 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.
Employees
As of March 31, 2004, we employed a total of 547 full time employees worldwide,
excluding approximately 110 employees of joint ventures. 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
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, thus clearing the way for commercial sales of seed
containing the Bollgard gene. 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 November 4, 2018.
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
commercialized limited quantities of our Bollgard II cotton varieties in the
U.S. during fiscal 2003 and have limited quantities available for sale this
year.
In May 2002, we signed a product development agreement with Syngenta Seed AG
("Syngenta") whereby we will perform development work, including
introgression, testing and evaluation, of Syngenta's insect resistance
technology in our elite cotton germplasm. We may commercialize varieties
containing Syngenta's insect resistance technology if we reach a
commercialization agreement and Syngenta obtains U.S. government regulatory
approval.
In January 2003, we announced a collaboration agreement with Dow AgroSciences
LLC ("DAS") under which we will develop, test and evaluate elite cotton
varieties containing DAS insect resistance traits. We may commercialize
varieties containing DAS insect resistance technology if we reach a
commercialization agreement and DAS obtains U.S. government regulatory approval.
Herbicide Tolerance for Cotton
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, 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 January 16, 2018.
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.
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 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
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, 2003 and 2002:
2003 2002
--------------- --------------
Cotton
Conventional 20 24
Bollgard 5 6
Roundup Ready 14 16
Bollgard/Roundup Ready 14 16
Bollgard II/Roundup Ready 2 -
--------------- --------------
55 62
=============== ==============
Soybeans
Conventional 1 2
Roundup Ready 15 10
STS 2 2
--------------- --------------
18 14
=============== ==============
In addition to the above, in 2003, we had 76 experimental cotton varieties and 6
experimental soybean varieties in late stage development prior to
commercialization. In 2002, we had 59 experimental cotton varieties and 11
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 3,000 acres in the U.S., 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 consider the estimated number of seeds
contained in each bag for years prior to 2004 which may vary by variety,
location grown, and other factors. Effective this year, picker and stripper
cottonseed products will be sold in bags containing 250,000 seed. Acala and Pima
cottonseed products will 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 and South Africa 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 and third 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 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, 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. We
currently are engaged in a dispute resolution process with Monsanto. (See
Part II, Item 1.) 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.
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.
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 2003, approximately 96% of our cottonseed that was sold
in the United States contained either or both of Monsanto's Bollgard and
Roundup Ready gene technologies, and 94% 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.
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
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.
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, 2003.
Item 6. Exhibits and Reports on Form 8-K
Exhibits.
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
Reports on Form 8-K.
On April 1, 2004, D&PL filed a report on Form 8-K dated April 1, 2004 under
Items 7 and 12 announcing a press release dated April 1, 2004, reporting results
of operations and financial condition for the quarter and six-months ended
February 29, 2004.
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 14, 2004 /s/ W. Thomas Jagodinski
------------------------------------------------
W. Thomas Jagodinski
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: April 14, 2004 /s/ R. D. Greene
------------------------------------------------
R. D. Greene
Vice President - Finance, Treasurer and
Assistant Secretary
(Principal Financial and Accounting Officer)