UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
------- Exchange Act of 1934 for the fiscal year ended August 31, 2006
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
DELTA AND PINE LAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware 62-1040440
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Cotton Row, Scott, Mississippi 38772
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (662) 742-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $0.10 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes X No ___
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes _____ No X
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.
Large accelerated filer X Accelerated filer____ Non-accelerated filer _____
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes_____ No X
The aggregate market value of Common Stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
28, 2006, as reported on the New York Stock Exchange, was approximately
$715,700,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of October 31, 2006, Registrant had 36,457,476 outstanding shares of Common
Stock.
DOCUMENTS TO BE INCORPORATED BY REFERENCE
Registrant incorporates by reference portions of the Delta and Pine Land Company
Proxy Statement for the Annual Meeting of Stockholders to be held on February
19, 2007. (Items 10, 11, 12, 13 and 14 of Part III).
PART I
ITEM 1. 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 market soybean
planting seed in the United States.
1
In August 2006, we entered into a definitive Merger Agreement with Monsanto,
whereby Monsanto will acquire us in a cash transaction for $42 per share of our
common stock. See "Merger with Monsanto Company" below for more information.
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. D&PL also breeds and markets varieties of stripper cottonseed,
which are grown primarily in the Texas High Plains, and Acala and Pima
cottonseed, which are grown primarily in California. We have used our extensive
classical plant breeding programs to develop a gene pool necessary for producing
cotton varieties with improved agronomic traits important to farmers (such as
crop yield) and to textile manufacturers (such as enhanced fiber
characteristics).
In 1980, we added soybean seed to our product line. In 1996, we commenced
commercial sales in the United States of cotton planting seed containing
Bollgard(R) ("Bollgard") gene technology licensed from Monsanto which expresses
a protein toxic to certain lepidopteran pests. Since 1997, in the United States
we have sold cotton planting seed containing a gene licensed from Monsanto that
provides tolerance to glyphosate-based herbicides, commonly referred to as
Roundup Ready(R) ("Roundup Ready") Cotton. In 1997, we commenced commercial
sales in the United States 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. In 2003, we began selling cotton varieties
containing Bollgard II(R), Monsanto's insect resistance technology which
contains two genes conferring resistance to lepidopteran insects. In 2006, we
began selling cotton varieties containing Roundup Ready Flex(R), Monsanto's
second generation glyphosate-tolerance technology and varieties containing
Bollgard II and Roundup Ready Flex.
International
Since the 1980's, we have marketed 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 and hybrids, technological know-how
in producing and conditioning high-quality seed and our brand name recognition.
Furthermore, Monsanto's Bollgard, Bollgard II, Roundup Ready and Roundup Ready
Flex gene technologies (that we either have licensed or have options to license)
are effective in many countries and could bring value to farmers.
---------------------------
1 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 March 31, 2000, Monsanto Company consummated a merger with Pharmacia
& Upjohn Inc. and changed its name to Pharmacia Corporation. On August 31, 2002,
Pharmacia distributed to its shareholders its remaining interest in the new
Monsanto Company. Pursuant to the closing of a merger on April 16, 2003,
Pharmacia Corporation merged with and into a wholly-owned subsidiary of Pfizer
Inc. Pharmacia survived the merger as a wholly-owned subsidiary of Pfizer Inc.
In this document, with respect to events occurring on or before March 31, 2000,
the term "Monsanto" refers to the entity then designated Monsanto Company and
renamed Pharmacia Corporation on that date. With respect to events occurring
between March 31, 2000 and April 16, 2003, this entity is referred to as
"Pharmacia". With respect to events occurring after April 16, 2003, the entity
referred to as "Pharmacia" is that entity which on that date became a
wholly-owned subsidiary of Pfizer Inc. With respect to events occurring after
March 31, 2000, the entity formed as Monsanto Ag Company and renamed Monsanto
Company (NYSE: MON) on March 31, 2000, is referred to as "Monsanto".
We sell our products in foreign countries through (i) export sales to
distributors and (ii) direct in-country operations through either joint ventures
or wholly-owned subsidiaries. The method varies and evolves, depending on our
assessment of the potential size and profitability of the market, governmental
policies, currency and credit risks, sophistication of the target country's
agricultural economy, and costs (as compared to risks) of commencing physical
operations in a particular country. In 2006, the majority of international sales
came from direct in-country operations (primarily Argentina, Australia, Brazil,
China, South Africa and Turkey).
See Note 13 of the Notes to Consolidated Financial Statements in Part II, Item 8
for further details about business segments.
Merger with Monsanto Company
On August 14, 2006, we entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Monsanto and its wholly-owned subsidiary, Monsanto Sub, Inc.,
pursuant to which Monsanto Sub, Inc., will be merged with and into us and we
will become a wholly-owned subsidiary of Monsanto.
Under the terms of the Merger Agreement, upon consummation of the merger, each
outstanding share of our common and preferred stock (except shares held by us or
by Monsanto and its subsidiaries) will be converted into a right to receive
$42.00 per share in cash, without interest, provided that stockholders who so
elect have the right to seek payment of the appraised value of their shares
under Section 262 of the Delaware General Corporation Law.
The Merger Agreement is subject to approval by our stockholders. The date of the
stockholders meeting has been set for December 21, 2006. Our board of directors
has unanimously approved and recommended that the stockholders approve the
Merger Agreement.
The closing of the merger is subject to the expiration of the waiting periods
under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976 (the "H-S-R
Act"). On September 27, 2006, the United States Department of Justice, Antitrust
Division (the "USDOJ"), requested additional information and documents from
Monsanto and us under the H-S-R Act (the "Second Request"). This Second Request
extends the waiting period under the H-S-R Act during which the parties are
prohibited from closing the merger until 30 days after both parties
substantially comply with the Second Request, unless the waiting period is
terminated earlier by the USDOJ or is extended with our and Monsanto's consent.
We and Monsanto are in the process of complying with the USDOJ's Second Request.
Pursuant to the Merger Agreement, we have agreed that, until the merger is
consummated or the Merger Agreement is earlier terminated (except as otherwise
expressly permitted by the terms of the Merger Agreement), we will, and we will
cause our subsidiaries to, (i) carry on our business in the ordinary course,
(ii) use reasonable best efforts to preserve intact our current business
organization and goodwill, (iii) keep available the services of our current
officers and employees, and (iv) preserve our relationships with suppliers,
distributors, customers and others.
In addition, we have agreed that neither us nor, where applicable, our
subsidiaries, will, without Monsanto's prior written consent or as otherwise
permitted under the Merger Agreement: (a) amend our certificate of
incorporation, bylaws or other organizational documents; (b) split, combine,
reclassify, repurchase, redeem or otherwise acquire outstanding shares, or
declare, set aside or pay any dividend payable in cash, stock or property with
respect to the same, provided that we may declare and pay regular quarterly
dividends of not more than $0.17 per share for quarters ending after August 31,
2006; (c) issue or agree to issue any additional shares of, or rights to acquire
shares of, capital stock other than (i) the issuance of shares of capital stock
of a subsidiary to us, (ii) issuance of our shares issuable upon exercise of
existing stock options, or (iii) subject to annual limitations, the grant of
restricted common stock or restricted common stock rights to employees, officers
and directors in accordance with past practice and the terms of our stock option
plans; (d) enter into or agree to enter into (except with respect to the
People's Republic of China) any new or amended contract or agreement with any
labor unions; (e) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into an agreement in principle or an
agreement with respect to any merger, consolidation or business combination
(other than the merger with Monsanto), or any acquisition or disposition of any
assets (other than (i) acquiring or disposing of inventory or other assets in
the ordinary course of business consistent with past practice and (ii)
acquisitions or dispositions of assets outside the ordinary course of business
not exceeding, in either case, $10 million in the aggregate); (f) enter into or
amend any employment, severance or change-in-control agreement, or benefit plan
except as required by law or regulations, or as expressly provided by the Merger
Agreement, or make any contribution to any such plan or grant any salary
increase, except in the ordinary course of business consistent with past
practice; (g) (i) except in the ordinary course of business consistent with past
practice (including the renewal or replacement of existing debt), create, incur
or assume any debt other than under existing lines of credit or to fund
out-of-pocket costs incurred in connection with the transactions contemplated by
the Merger Agreement, (ii) assume, guarantee, endorse or otherwise become liable
or responsible for the obligations of any other person except our majority owned
subsidiaries in the ordinary course of business or (iii) make any loans,
advances or capital contributions, or investments in, any other person (other
than to its subsidiaries) except for trade credit, customary advances and
short-term investments in the ordinary course of business; (h) amend the 1996
D&PL Shareholder Rights Plan, as previously amended (the "Rights Plan"), except
to amend the Rights Plan so that the Rights Plan will not be applicable to this
Merger Agreement, or redeem any of the rights granted under the Rights Plan; (i)
settle or compromise any material litigation, arbitration or claims, except for
litigation, arbitration and claims between us and Monsanto; (j) grant or permit
liens (other than permitted liens) upon material assets; or (k) agree to take
any action that we are prohibited from taking under applicable sections of the
Merger Agreement or that would constitute a breach of any covenant or agreement
set forth in the Merger Agreement.
In the Merger Agreement, we, on the one hand, and Monsanto and Monsanto Sub,
Inc., on the other hand, have made representations and warranties to each other
that are customary in merger transactions and/or that concern specific aspects
of our respective businesses. The obligations to close the merger are
conditioned upon these representations and warranties being true and correct as
of the effective time of closing (other than those representations and
warranties which address matters as of a certain date), except to the extent
that such failures would not, individually or in the aggregate, have a material
adverse effect or, in regard to representations and warranties about our
capitalization and rights and obligations as to intellectual property and
germplasm, exceed specified monetary limits.
We have agreed, subject to the fiduciary duties of our board of directors, to
recommend that our stockholders approve and adopt the Merger Agreement and to
use reasonable best efforts to obtain the necessary stockholder approval.
However, our board of directors may, if it determines in good faith, after
consultation with outside legal counsel, that failure to do so would result in a
breach of its fiduciary duties to stockholders: (i) recommend the approval of
any other merger, consolidation or other business combination; (ii) determine
that the Merger Agreement or other merger with Monsanto is no longer advisable;
(iii) withdraw (or modify in a manner adverse to Monsanto) the approval of the
Merger Agreement; (iv) recommend that our stockholders reject the Merger
Agreement, the merger with Monsanto or any of the transactions contemplated by
the Merger Agreement; or (v) resolve, agree or publicly propose to take any of
these actions. At the same time, the foregoing actions may only be taken (a) as
a result of the occurrence of a material unforeseen change in our business or
financial condition or the market price of our common stock, or (b) in response
to a proposed acquisition transaction (other than the Monsanto merger) or
expression of interest from another party which has not been solicited by us or
our board of directors.
The Merger Agreement provides that we will not, and will not authorize or permit
any of our subsidiaries or any of our directors, officers, employees, agents or
representatives, directly or indirectly, to solicit, initiate or encourage any
inquiries about an alternative acquisition transaction, nor negotiate, explore
or otherwise engage in discussions with any person (other than Monsanto and its
directors, officers, employees, agents and representatives) with respect to an
acquisition transaction or enter into any agreement with respect to an
alternative acquisition transaction. Despite these prohibitions, prior to the
shareholder meeting to approve the Merger Agreement with Monsanto, and in
response to a bona fide unsolicited written proposal or expression of interest
from a credible third party that is not subject to any material financing
uncertainties and that our board of directors determines, in good faith, after
consultation with outside legal counsel and our financial advisor, constitutes
or could reasonably result in a proposal superior to the Merger Agreement with
Monsanto (a "Superior Proposal"), we may disclose non-public information and
negotiate, explore and discuss an alternative transaction with such third party.
If in addition, prior to the shareholder meeting to approve this Merger
Agreement, and in response to such a bona fide unsolicited written proposal,
that our board of directors determines, in good faith, after consultation with
its outside legal counsel and its financial advisor to be a Superior Proposal,
we may enter into an agreement with a third party with respect to such
alternative acquisition transaction. Under such circumstances, Monsanto must be
kept informed and given an opportunity to respond to such a proposal by making
revisions to the terms of the existing Merger Agreement.
In the Merger Agreement, we and Monsanto agree to use our respective best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper and advisable under applicable laws and
regulations, to cooperate with each other to complete the merger. Specifically
in regard to approvals from the USDOJ and any other applicable anti-trust
authorities, Monsanto agrees to use its reasonable best efforts so that no
requirement for a waiver, consent or approval from the USDOJ or any other
government entity, no decree, judgment, injunction or order, nor any other
matter relating to anti-trust laws would prevent completion of the merger by
February 14, 2007, unless, by that date, any regulatory waiting periods under
the H-S-R Act have not expired, in which case this date will be automatically
extended to August 14, 2007, solely for the purpose of Monsanto satisfying its
obligations with respect to obtaining anti-trust approvals (February 14, 2007,
and August 14, 2007, respectively being referred to as the "Outside Date").
Pursuant to the Merger Agreement, Monsanto has committed to defend any
litigation which would prevent completion of the merger by the Outside Date and
we have agreed to use our reasonable best efforts to cooperate with Monsanto in
connection with such litigation.
If the Merger Agreement is terminated (i) because the merger has not been
completed by the Outside Date and, at that time, the waiting periods under the
H-S-R Act have not expired or been terminated; (ii) because the merger has not
been completed by the Outside Date and any United States federal or state law,
rule or regulation or court order, injunction or legal restraint related to
anti-trust or competition would prevent the completion of the merger; or (iii) a
law related to anti-trust competition makes the merger illegal or prohibited,
Monsanto will pay us $600 million in cash (the "Monsanto Termination Payment").
Upon Monsanto making this payment, the litigation arising from the failure to
close the May 8, 1998, Merger Agreement between Monsanto and us (the "1998
Merger Litigation") will be terminated with prejudice and Monsanto will have no
other obligations to us under the current Merger Agreement.
In addition to possible termination because of impediments under anti-trust and
competition laws, the Merger Agreement may be terminated under certain other
conditions:
o We can terminate in the event Monsanto or Monsanto Sub, Inc.,
materially breaches certain covenants and agreements and does not cure
the breach within twenty days after notice from us, in which case
Monsanto must pay us the Monsanto Termination Payment and the 1998
Merger Litigation will be dismissed with prejudice.
o Monsanto can terminate in the event we materially breach certain
covenants and agreements and do not cure the breach within twenty days
after written notice from Monsanto, in which case the 1998 Merger
Litigation is dismissed with prejudice and Monsanto does not owe the
Monsanto Termination Payment.
o Monsanto can terminate if, prior to our shareholders' approval of the
Merger Agreement, our board of directors withdraws, modifies or changes
its recommendation and approval of the Merger Agreement and, at that
time, we have not received a written proposal or indication of interest
from another party regarding an alternative acquisition transaction, in
which case we must pay Monsanto a termination payment of $15 million,
Monsanto does not owe us any termination payment, the stay of the 1998
Merger Litigation is lifted and the parties are permitted to pursue
their rights with respect to that litigation.
o Monsanto or we can terminate if, prior to our shareholders' approval of
the Merger Agreement, our board of directors approves or endorses any
alternative acquisition transaction or enters into an agreement with
respect to an acquisition with another party that constitutes a
Superior Proposal, in which case neither we nor Monsanto owes any
termination payment and the 1998 Merger Litigation is dismissed with
prejudice.
o Monsanto can terminate in the event we materially breach our
representations and warranties and do not cure within twenty days after
written notice from Monsanto or in the event the merger has not been
closed by the Outside Date and we have been subject to a Material
Adverse Change (as defined in the Merger Agreement) in which case the
stay is lifted in the 1998 Merger Litigation and the parties are
permitted to pursue their rights and remedies in that litigation, no
termination payment is due from either party and Monsanto's royalty
percentage under certain licenses with us is decreased from 71% to 60%
pertaining to the use of Bollgard technology and from 70% to 60%
pertaining to the use of Roundup Ready technology.
o In the case of termination of the Merger Agreement by mutual agreement
of us and Monsanto, or in the event of any other termination, no
termination payment is due by either party and the stay of the 1998
Merger Litigation is lifted and the parties may pursue their rights and
remedies with respect to that litigation.
The Merger Agreement and related Settlement Agreements executed on August 14,
2006, provide certain litigation and arbitrations between Monsanto and us and
our subsidiaries were thereupon to be dismissed with prejudice (which dismissals
have now occurred) and that the 1998 Merger Litigation and certain other
arbitrations and dispute resolution proceedings are stayed for a period of up to
twelve months pending the closing of the current Merger Agreement by the Outside
Date. These stayed proceedings are subject to revival under specific
circumstances if the merger pursuant to the Merger Agreement is not closed by
the Outside Date (See Item 3. Legal Proceedings and Item 17. Commitments and
Contingencies).
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 100% 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
Cotton Seed Technology Company Ltd. ("Ji Dai") with parties in Hebei Province,
one of the major cotton producing regions in the People's Republic of China. Ji
Dai is 67% owned by D&PL China and 33% owned by Chinese parties. In June 1997,
Ji Dai commenced construction of a cottonseed conditioning and storage facility
in Shijiazhuang, Hebei, China, pursuant to the terms of the joint venture
agreement. The new facility was completed in December 1997 and seed processing
and sales of seed of D&PL cotton varieties containing Monsanto's Bollgard
technology commenced in 1998.
In October 1997, D&M International, LLC formed a joint venture with Ciagro
S.R.L. ("Ciagro"), a distributor of agricultural inputs in the Argentine cotton
region, for the production and sale of genetically improved cottonseed. CDM
Mandiyu S.R.L. ("CDM") is owned 60% by D&M International, LLC, and 40% by
Ciagro. In September 1998, CDM began construction of a cottonseed conditioning
and storage facility in Avia Terai, Chaco, Argentina. Construction was completed
in June 1999. CDM has been licensed to sell our cotton varieties containing
Monsanto's Bollgard and Roundup Ready gene technologies. Sales of Bollgard
varieties commenced in 1999 and sales of Roundup Ready varieties began in 2003.
In July 1998, D&PL China and the Anhui Provincial Seed Corporation formed a
joint venture company, 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") is 51% owned by D&M International, LLC and 49% owned by Maeda
Agroindustrial S/A (formerly Maeda Administracao e Participacoes Ltda). MDM
produces, conditions and sells our varieties of acid-delinted cotton planting
seed. In 2000, MDM began selling our conventional cotton varieties. On March 17,
2005, the Brazilian government announced approval of the Bollgard trait for sale
in cotton. We have received approval to commercialize one Bollgard cottonseed
variety and sold limited quantities for seed production purposes in 2006. MDM
will introduce transgenic cottonseed varieties containing the Roundup Ready gene
technology in the Brazilian market as soon as all required government approvals
are obtained. Monsanto is responsible for obtaining and maintaining government
approvals for Bollgard and Roundup Ready traits.
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. 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. We plan to
continue to expand our business in China through our existing joint ventures, Ji
Dai and An Dai.
In May 2002, we established DeltaMax Cotton, LLC ("DeltaMax"), a limited
liability company jointly owned with Verdia, Inc. ("Verdia"), which was
purchased by DuPont's subsidiary Pioneer Hi-Bred International, Inc. ("Pioneer")
on July 2, 2004. DeltaMax was formed to create, develop and commercialize
value-enhancing traits for the cottonseed market that will complement and/or
compete with traits available today. It is currently focusing on
herbicide-tolerance and insect-resistance strategies for use in cotton.
Commercialization of new traits developed by this venture is not expected until
2011 at the earliest. DeltaMax will contract research and development activities
to Pioneer, third parties and D&PL when appropriate, and license its products to
D&PL and potentially to others. D&PL and Verdia each own 50% of DeltaMax.
Subsidiaries
D&PL South Africa, Inc. ("D&PL South Africa"), our wholly-owned subsidiary,
through a South African branch, commercializes cottonseed varieties containing
Monsanto's Bollgard and Roundup Ready technologies in South Africa. In addition,
D&PL South Africa maintains winter nursery facilities, produces cottonseed
varieties for export to other countries and processes foundation seed grown in
that country.
D&PL Semillas Ltda., our wholly-owned subsidiary, maintains a winter nursery and
foundation seed operation in Canas, Costa Rica and has a delinting plant there
to process foundation seed for export to the United States. Multiple winter
nursery locations are used to manage seed production risks. The use of 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 growing season.
Deltapine Australia Pty. Ltd., our wholly-owned Australian subsidiary, breeds,
produces, conditions and markets cotton planting seed in Australia. Certain
varieties developed in Australia are well adapted to other major cotton
producing countries and Australian-developed varieties are exported to those
areas. We sell seed of both conventional and transgenic varieties, containing
Monsanto's Bollgard II and Roundup Ready technologies, in Australia.
Turk Deltapine, Inc. ("Turk Deltapine"), our wholly-owned subsidiary, through a
Turkish branch, produces, conditions and markets cotton planting seed in Turkey.
In addition, Turk Deltapine produces conventional cottonseed varieties for sale
in Turkey and Europe.
In September 2004, we established D&PL India Seed Private Ltd. ("Deltapine
India"), a wholly owned subsidiary. Deltapine India was formed to breed, test,
produce, market and sell agricultural seeds and services in India.
In December 2005, we acquired Vikki's Agrotech Pvt. Ltd. ("Vikki's), an Indian
cottonseed company, through our wholly-owned Mauritian entity, D&PL Mauritius
Ltd. Vikki's has licenses to Monsanto's Bollgard and Bollgard II technologies
for India as well as rights to commercialize Bt genes from other another party.
Vikki's commercialized Bollgard hybrids in small quantities in India in 2006.
Employees
As of October 31, 2006, we employed a total of 533 full-time employees
worldwide, excluding approximately 127 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
Monsanto Company
Collaborative biotechnology licensing agreements, which were executed with
Monsanto in March 1992 and subsequently revised in April 1993, October 1993,
February 1996, December 1999, January 2000, March 2003 and August 2006, provide
for the commercialization of Monsanto's Bollgard ("Bacillus thuringiensis" or
"Bt") gene technology in our varieties in the United States. The selected Bt
gene is from a bacterium found naturally in soil and produces proteins toxic to
certain lepidopteran larvae, the principal cotton pests in many cotton growing
areas. Monsanto created a transgenic cotton plant by inserting Bt genes into
cotton plant tissue. The resulting transgenic plant tissue is lethal to certain
lepidopteran larvae that consume it. The gene and related technology were
patented or licensed from others by Monsanto and were licensed to us for use
under the trade name Bollgard. In our primary markets, the cost of insecticides
is a major expenditure for many cotton growers. The insect resistant
capabilities of transgenic cotton containing the Bollgard gene may reduce the
amount of insecticide required to be applied by cotton growers using planting
seed containing the Bollgard gene. In October 1995, the United States
Environmental Protection Agency ("EPA") completed its initial registration of
the Bollgard gene technology. In 1996, we sold commercially for the first time
two Deltapine varieties, which contained the Bollgard gene, in accordance with
the terms of the Bollgard Gene License and Seed Services Agreement (the
"Bollgard Agreement") among D&PL, Monsanto and D&M Partners. This initial EPA
registration had been set to expire on January 1, 2001, but was extended,
initially through 2006, and more recently through 2009. Monsanto is responsible
for obtaining and maintaining regulatory approvals for Bollgard.
Pursuant to the terms of the Bollgard Agreement, farmers must buy a limited use
sublicense for the technology from D&M Partners, a partnership owned 90% by D&PL
and 10% by Monsanto, 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 13%. After the dealers and distributors are compensated,
D&M Partners pays Monsanto a royalty equal to 71% of the net sublicense fees
(technology sublicensing fees less certain distributor/dealer payments), and we
receive the remainder of net sublicense revenue for our services. The expiration
date of the Bollgard Agreement is determined by the last to expire of the patent
rights licensed under that agreement. On that basis (unless we terminate sooner,
as is permitted after October 11, 2008), the expiration date of the Bollgard
Agreement will be June 13, 2012, the date the last of the presently issued
patents will expire. This date may be extended in the event additional relevant
patents issue that have expiration dates later than June 13, 2012.
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 United States regulatory clearance for Bollgard II, which
would have expired after the 2006 crop year, but was recently granted a
non-expiring re-registration by the EPA. Monsanto is responsible for obtaining
and maintaining regulatory approvals for Bollgard II. We have commercialized
limited quantities of our Bollgard II cotton varieties in the United States
beginning in fiscal 2003. The expiration date of the Bollgard II Agreement is
determined by the last to expire of the patent rights licensed under that
Agreement. On that basis (unless we terminate sooner, as is permitted after
October 11, 2008), the expiration date of the Bollgard II Agreement will be
November 4, 2018, the date the last of the presently issued patents will expire.
This date may be extended in the event additional relevant patents issue that
have expiration dates later than November 4, 2018.
Syngenta Crop Protection AG
In August 2004, we executed a License Acquisition Agreement with Syngenta Crop
Protection AG ("Syngenta") under which D&PL acquired worldwide licenses for the
commercialization of Syngenta's VIP3A and Cry1Ab insect resistance genes in
cotton (the "VipCot Gene Licenses"). D&PL agreed to pay $46.8 million for these
licenses, payable in installments, of which $9.2 million represents contingent
payments. These licenses provide for commercialization of insect resistant
cotton varieties containing Syngenta insect resistance genes in the United
States and in other countries, subject to government approval of the
technologies. Syngenta is responsible for obtaining such government approval in
the United States and, if instructed by D&PL, in other countries. Syngenta is
required to consult with D&PL and to assist and support commercialization of
D&PL's products containing Syngenta's insect resistance genes.
Pursuant to the VipCot Gene Licenses, farmers will be sublicensed by D&PL to use
seed containing Syngenta's insect resistance technologies. The VipCot
technologies will be marketed on a competitive basis with alternative insect
control costs and other available technologies. After dealers and distributors
are compensated for their services, and after deduction of certain marketing
expenses and other costs, D&PL will pay Syngenta a royalty equal to 30% of the
net revenue obtained from sublicensing of the VipCot gene technologies. D&PL
retains the balance of such net sublicense revenue. Provisions for payment of
royalties under the VipCot Gene Licenses generally continue until the expiration
of the last to expire of Syngenta's applicable patent rights on a
country-by-country basis or for a minimum of ten years after the first
commercial sale of a licensed product in the subject country, after which D&PL
will hold a permanent paid-up license to Syngenta's licensed patent rights for
use in cotton. D&PL has the rights to sublicense its affiliates (and, in
countries outside the United States, third parties) to commercialize Syngenta's
insect resistance technologies. In the event D&PL elects not to make the
contingent payments, and upon other termination events, D&PL will retain rights
to commercialize products containing VipCot events which have then received
government approval for sale in the United States.
The VipCot Gene Licenses make D&PL the primary licensee of Syngenta's insect
resistance technology. To retain this status, D&PL must meet milestones for
development of VipCot cotton varieties, produce seed for commercial sale in the
United States and meet and maintain certain sales objectives.
Pursuant to the VipCot Gene Licenses, Syngenta is responsible for obtaining
required intellectual property rights and for defense of claims of patent
infringement. The costs of defense and indemnification are borne either by
Syngenta alone or by Syngenta and D&PL proportionately based on the nature of
the claim. D&PL is responsible for managing the defense of grower claims
alleging failure of performance of a licensed gene. Syngenta and D&PL will bear
the cost of product performance claims in proportion to each party's share of
net sublicense fees. The product performance indemnity from Syngenta only covers
claims involving failure of performance of the Syngenta insect resistance genes
and not claims arising from other causes.
In the event that Monsanto acquires us, we or our successor are obligated within
30 days after such change in control of us (i)to pay Syngenta $50 million and
(ii)to make an election whether (a) to continue the VipCot Gene Licenses and to
make the installment payments of the license purchase price as they come due or
(b) terminate the VipCot Gene Licenses. If we or our successor elects to
terminate the VipCot Gene Licenses, we must make an additional lump-sum payment
to Syngenta equal to the license purchase payments otherwise due over the next
18 months (which at present would be $3.2 million) plus reimburse Syngenta for
the incurred and irrevocably committed costs of obtaining and maintaining
certain governmental approvals (which at present would be an insignificant
amount). If upon a change in control to Monsanto, we or our successor elects
not to terminate the VipCot Gene Licenses, the installment payments of the
license purchase price will be payable as scheduled (which at present would
total $12.4 through October 15, 2010), subject to a one-time option in February
2008 to terminate the VipCot Gene Licenses, thereby canceling subsequent
installment payments of the license purchase price and obtaining a refund from
Syngenta of $14 million.
Dow AgroSciences
In January 2003, we announced a collaboration agreement with Dow AgroSciences
LLC ("DAS") under which we would develop, test and evaluate elite cotton
varieties containing DAS insect resistance traits. We continue to work with DAS
insect resistant traits. On October 4, 2004, DAS announced it had received full
EPA registration for its WideStrikeTM Insect Protection technology and would
introduce products from its subsidiary in 2005. We may commercialize varieties
containing DAS insect resistance technology if we reach a commercialization
agreement. To date, no such agreement has been reached. The collaboration
agreement currently expires December 31, 2006.
Herbicide Tolerance for Cotton
Monsanto Company
In February 1996, D&PL, Monsanto and D&M Partners executed the Roundup Ready
Gene License and Seed Services Agreement (the "Roundup Ready Agreement"), which
provides for the commercialization of Roundup Ready cottonseed. Pursuant to the
collaborative biotechnology licensing agreements executed in 1996 and amended in
July 1996, December 1999, January 2000, March 2003 and August 2006, we have also
developed transgenic cotton varieties that are tolerant to Roundup(R), a
glyphosate-based herbicide sold by Monsanto. In 1996, such Roundup Ready plants
were approved by the Food and Drug Administration, the USDA, and the EPA. The
Roundup Ready Agreement grants a license to D&PL and certain of our affiliates
the right in the United States to sell cottonseed of our varieties that contain
Monsanto's Roundup Ready gene. The Roundup Ready gene makes cotton plants
tolerant to contact with Roundup herbicide applications made during a finite
early season growth period. Similar to the Bollgard Agreement, farmers must
execute limited use sublicenses in order to purchase seed containing the Roundup
Ready gene. Monsanto determines the licensing fee growers pay for use of Roundup
Ready technology. Growers may receive discounts and/or rebates of licensing fees
under certain crop destruct, crop replant and other programs. The
distributors/dealers who coordinate the farmer licensing process receive a
portion of the technology sublicensing fee, presently approximately 13%. After
the dealers and distributors are compensated, D&M Partners pays Monsanto a
royalty equal to 70% of the net sublicense fees (technology sublicensing fees
less certain distributor/dealer payments), and we receive the remainder of net
sublicense revenue for our services. The expiration date of the Roundup Ready
Agreement is determined by the last to expire of the patent rights licensed
under that agreement. On that basis (unless we terminate sooner, as is permitted
after October 11, 2008), the expiration date of the Roundup Ready Agreement will
be April 18, 2017, the date the last of the presently issued patents will
expire. This date may be extended in the event additional relevant patents issue
that have expiration dates later than April 18, 2017.
Pursuant to the Roundup Ready Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto will also indemnify us against the cost of
inventory that becomes unsaleable because of patent infringement claims, but
Monsanto is not required to indemnify us against lost profits on such unsaleable
seed. In contrast with the Bollgard Agreement, where the cost of gene
performance claims will be shared in proportion to the division of net
sublicense revenue, Monsanto must defend and must bear the full cost of any
claims of failure of performance of the Roundup Ready Gene. Pharmacia remains
liable for Monsanto's performance under these defense and indemnity agreements.
In both agreements, generally, we are responsible for varietal/seed performance
issues, and Monsanto is responsible for failure of the genes.
On January 7, 2005, D&PL executed the Roundup Ready Flex Gene License and Seed
Services Agreement (the "Roundup Ready Flex Agreement") for Monsanto's advanced
herbicide tolerance product. The Roundup Ready Flex Agreement contains
essentially the same terms, including compensatory terms, as the existing
Roundup Ready Agreement between D&PL and Monsanto. The expiration date of the
Roundup Ready Flex Agreement is determined by the last to expire of the patent
rights under this Agreement which cover the licensed gene. On that basis (unless
we terminate sooner, as is permitted after October 11, 2008), assuming that all
of the patents identified by Monsanto in the addendum to the Roundup Ready Flex
Agreement cover the licensed gene, the expiration date of the Roundup Ready Flex
Agreement will be December 15, 2020, the date the last of the presently issued
patents will expire. This date may be extended in the event additional relevant
patents issue that have expiration dates later than December 15, 2020.
On March 15, 2005, Monsanto announced it had obtained United States regulatory
clearance for Roundup Ready Flex technology. We began full commercial
introduction of varieties containing the Roundup Ready Flex technology in 2006.
DuPont, Pioneer and Verdia
On June 30, 2006, we acquired non-exclusive licenses from E. I.
duPont de Nemours & Company ("DuPont") and DuPont's affiliates, Pioneer Hi-Bred
International, Inc. ("Pioneer") and Verdia, Inc. ("Verdia"), for the
Optimum(TM) GAT(TM) trait in cotton. The licenses contain certain
restrictions on commercialization, including, but not limited to, receipt of
certain regulatory approvals. The Optimum GAT trait, developed by DuPont,
makes plants tolerant to both glyphosate and ALS herbicides, including
sulfonylurea herbicides.
The Optimum GAT trait for cotton license is on a worldwide, royalty-bearing
basis through DeltaMax Cotton, LLC ("DeltaMax"), a limited liability
company jointly-owned by us and Verdia. The costs of research, development
and regulatory approvals for the Optimum GAT trait in cotton are borne by
DuPont, Pioneer and/or Verdia. We expect to commercialize the Optimum
GAT trait in our cotton varieties in 2011 or thereafter depending on when
developmental and regulatory timelines are met. After deduction of
distributor commissions, incentives and other customary marketing expenses,
we will receive the same royalty fee revenue as previously established for other
traits developed by DeltaMax.
We, Pioneer and Verdia are responsible for obtaining intellectual property
rights required for the use of the Optimum GAT trait in cotton and for defense
of any claims of patent infringement. Expenses of accessing third party
patents are borne solely by DuPont for patents issued before the delivery of
the Optimum GAT trait to DeltaMax and by DeltaMax with respect to any third
party patents that may be issued thereafter.
Our licenses from DeltaMax for the Optimum GAT trait survive a change of
control of our business, provided that upon acquisition of control of us by
Monsanto, Verdia would have the right to terminate the DeltaMax collaboration
agreement and to obtain a refund, with interest, of the capital contributions
Verdia has made to DeltaMax, plus additional payments with respect to traits
under development by DeltaMax based on their then stage of development
at the time of the change in control. At present, the amount due to Verdia
upon acquisition of control of us by Monsanto and assuming that Verdia
terminated the collaboration would be approximately $15 to $25 million
depending on various factors. In certain circumstances, both we and Verdia
would then have rights to non-exclusive worldwide licenses to all traits
developed or under development by DeltaMax, subject, in each case, to
payment of a royalty equal to 15% of the net technology fee revenue to the
opposite party.
D&PL made a payment of $20.5 million to DuPont in connection with this
transaction (including the acquisition of certain soybean licenses, as
discussed below).
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 (except India) for any gene that may be
commercialized by Monsanto that enhances the fiber characteristics of cotton.
The terms of such licenses must be offered and negotiated in good faith. All
such licenses that are non-exclusive must provide us most favored licensee
status. The Option Agreement remains in effect so long as the Bollgard Agreement
and Roundup Ready Agreement for the United States remain in effect. Pursuant to
the Option Agreement, Monsanto and D&PL (or D&PL's affiliates or joint venture
companies) have entered into exclusive Bollgard licenses for seven countries
(Argentina, Brazil, China, Colombia, Mexico, South Africa, and Thailand) outside
the United States and a non-exclusive license for lepidopteran active genes for
Australia, as well as non-exclusive Roundup Ready licenses for five countries
(Argentina, Australia, Brazil, Colombia and South Africa) outside the United
States. In December 2005, we acquired ownership of Vikki's Agrotech Ltd., an
Indian company which is sublicensed by Mahyco Monsanto Biotech Ltd., an Indian
affiliate of Monsanto, to develop, produce and sell hybrid cotton planting seed
containing Bollgard and Bollgard II in the Republic of India.
Herbicide Tolerance for Soybeans
Monsanto Company
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, replacing an earlier agreement. 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.
DuPont/Pioneer
In addition to the license for Optimum GAT in cotton, Pioneer granted us
non-exclusive, royalty bearing licenses to commercialize the Optimum GAT trait
in soybeans in the country-regionplaceUnited States and to commercialize certain
Pioneer soybean germplasm containing Optimum GAT genes. Pioneer has the right
to terminate our license to Pioneer soybean germplasm upon a change in control
of us to Monsanto. We also acquired the right to use Pioneer's Optimum GAT
soybean event for research and development purposes in order to develop new
Deltapine soybean seed varieties. The royalty due from us for use of the
Optimum GAT trait in soybeans is to be set annually by Pioneer but will not be
greater than royalty owed by certain other Pioneer licensees for use of the
Optimum GAT trait in soybeans. We expect to commercialize Optimum GAT soybeans
in 2010 or thereafter, depending on regulatory approval and development
timelines being met.
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 United
States 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. We believe this transformation
method uses techniques and plant parts that are not covered by currently issued
plant transformation United States 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, 2006 and 2005:
2006 2005
-------------- ---------------
Cotton
Conventional 7 11
Bollgard 1 2
Roundup Ready 12 14
Roundup Ready Flex 5 1
Bollgard/Roundup Ready 12 15
Bollgard II/Roundup Ready 2 2
Bollgard II/Roundup Ready Flex 5 2
-------------- ---------------
44 47
============== ===============
Soybeans
Conventional 1 1
Roundup Ready 19 18
STS 2 2
Roundup Ready/STS 5 2
--------------- ---------------
27 23
=============== ===============
In addition to the varieties indicated above, we have many experimental cotton
and soybean varieties in late stage development prior to commercialization. We
also have experimental cotton hybrids that are being developed for certain
cotton markets in the world (primarily China and India).
Seed of all commercial plant species is either varietal or hybrid. Most of our
cotton and all of our 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 generally varietal and, therefore, can be grown from seed of
parent plants saved by the growers, most farmers in our primary domestic market
purchase seed from commercial sources each season because cottonseed requires
delinting prior to seed treatment with crop protection products 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, United States patent laws make unlawful any unauthorized planting
of seed containing patented technology, such as Bollgard, Bollgard II, Roundup
Ready, and Roundup Ready Flex, saved from prior crops. In addition, we have
patented many of our cotton varieties which makes unauthorized planting or use
of such varieties unlawful.
We farm approximately 5,600 acres globally, primarily for research purposes and
for production of cotton and soybean foundation seed. Additionally, we have
annual agreements with various growers to produce seed for cotton and soybeans.
The growers plant parent seed purchased from us and follow quality assurance
procedures required for seed production. If the grower adheres to our
established quality assurance standards throughout the growing season and if the
seed meets our standards upon harvest, we may be obligated to purchase specified
minimum quantities of seed, usually in our first and second fiscal quarters, at
prices equal to the commodity market price of the seed plus a grower premium. We
then condition the seed for sale.
The majority of our sales are made from late in our second quarter through the
end of our third 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, Bollgard II, Roundup Ready, and Roundup Ready Flex
licensing fees are recognized when the seed is shipped. Domestically, the
licensing fees charged to farmers for Bollgard, Bollgard II, Roundup Ready, and
Roundup Ready Flex cottonseed are based on pre-established planting rates for
nine geographic regions.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. International export sales are not subject to return
except in limited cases in Mexico and Colombia. All other international revenues
from the sale of planting seed, less estimated reserves for returns, are
recognized when the seed is shipped, except in Australia where certain
immaterial revenues are recognized when collected.
Domestically, we promote our cotton and soybean seed directly to farmers and
sell our seed through distributors and dealers. All of our domestic seed
products (including those containing Bollgard, Bollgard II, Roundup Ready, and
Roundup Ready Flex 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, Bollgard II, Roundup Ready, and Roundup Ready
Flex 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 us 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 our
second, third, and fourth quarters. Essentially all material claims under these
programs have occurred or are accounted for by our year end.
Availability of Information on Our Website
Additional information (including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) and 15(d) of the Exchange
Act) is available free of charge at our website at www.deltaandpine.com under
Media & News, as soon as reasonably practicable after we electronically file
such material with or furnish such material to the Securities and Exchange
Commission.
ITEM 1A. RISK FACTORS
Various statements included herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on current expectations and are indicated
by words or phrases such as "anticipate," "estimate," "expect," "project,"
"believe," "is or remains optimistic," "currently envisions" and similar words
or phrases and involve known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Forward-looking statements include
statements relating to such matters as anticipated financial performance
(including when earnings estimates are discussed), existing products, technical
developments, new products, new technologies, research and development
activities, and similar matters. These forward-looking statements are based
largely on our expectations and are subject to a number of risks and
uncertainties, many of which are beyond our control. Actual results could differ
materially from these forward-looking statements as a result of, among others,
changes in the competitive marketplace, including the introduction of new
products or pricing changes by our competitors, changes in the economy and other
similar events. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, we cannot assure
you that the forward-looking information contained herein will in fact
transpire. The risks and uncertainties that may affect the operations,
performance, development and results of our business include those noted
elsewhere herein and the following:
Merger with Monsanto
Our contemplated merger with Monsanto is subject to shareholder approval as
well as approval by government agencies. The inability to complete this
merger may have a material effect on D&PL. However, such effect cannot be
known at this time.
Demand for and supply of planting seed
Demand for our seed will be affected by government programs and policies
and by weather in all countries where we sell products and operate. 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. Weather impacts
crop yields, commodity prices and the planting decisions that farmers make
regarding both original planting commitments and, when necessary,
replanting levels. These factors all also influence the cost and
availability of seed for subsequent seasons.
Competition
The planting seed market is highly competitive, and our products face
competition from a number of seed companies, diversified crop protection
product companies, agricultural biotechnology companies, governmental
agencies and academic and scientific institutions. In addition, several of
our distributors/customers have also entered the cotton planting seed
business. These competitors launched in 2006 varieties containing the
Bollgard II and Roundup Ready Flex technologies at the same time we
launched those technologies in our varieties. A number of crop protection
product 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, Bollgard II, Roundup
Ready and Roundup Ready Flex gene technologies of Monsanto, our principal
licensor of such technology. Our seed products and technologies contained
therein may encounter substantial competition from technological advances
by others or products from new market entrants. Many of our competitors
are, or are affiliated with, large diversified companies that have
substantially greater resources than we have.
Litigation and other legal matters
We have initiated arbitration proceedings with Monsanto, the principal
licensor of our cotton technologies concerning our rights to exclusive
licenses to Monsanto's insect resistance technology in Brazil, Egypt and
Burkina Faso. Each of these arbitration proceedings are currently stayed
pending the approval and completion of the merger between us and Monsanto.
If this merger should not be completed, the stay of these arbitration
proceedings would be lifted. The result of these arbitrations, if adversely
determined to us, could materially affect our future operations in these
three countries. All other arbitration proceedings with Monsanto, including
the arbitration in which Monsanto sought to terminate licenses between our
companies, have been dismissed with prejudice, barring revival of the
claims asserted in those proceedings.
The litigation with Monsanto arising from Monsanto's failure to consummate
the 1998 Merger Agreement (the "1998 Merger Litigation") has been stayed.
This litigation will be terminated upon completion of the merger between
our Company and Monsanto pursuant to the 2006 Merger Agreement or upon any
termination by us or by Monsanto of the 2006 Merger Agreement without
completion of the merger except in specific circumstances, in particular,
(i) where our board of directors withdraws, modifies or changes its
recommendation or approval of the 2006 Merger Agreement and, at that time,
our board of directors has not received a written proposal or indication of
interest from another person regarding an acquisition transaction, (ii) by
Monsanto if we breach representations and warranties in a material respect
and fail to cure within twenty days after Monsanto informs us in writing of
the breach, (iii) where the merger has not been completed by the Outside
Date (as defined in the Merger Agreement) and a material adverse change in
our Company has occurred as of the effective date of termination or (iv)
for reasons other than those specified in the 2006 Merger Agreement. Under
these circumstances, the stay of the 1998 Merger Litigation will be lifted
and we or Monsanto would be permitted to pursue any and all rights and
remedies with respect to this litigation. Under these circumstances, the
results of this litigation (and the process of litigating) may materially
affect the results of our business. (See Part I, Item 3, of D&PL's Annual
Report on Form 10-K for the year ended August 31, 2006.)
New technologies
There is no assurance that new technologies such as the DeltaMax, DuPont
and Syngenta technologies will result in commercially viable products or
that such technologies will be developed in the time frame or for the
amounts estimated to complete development. Also, there is no assurance that
regulatory approval will be obtained for the products.
Governmental policies
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign governments
and shipping disruptions. Particular policies which may affect our domestic
and international operations include the use of and the acceptance of
products that were produced from plants that have been genetically
modified, the testing, quarantine and other restrictions relating to the
import and export of plants and seed products, and the availability (or
lack thereof) of proprietary protection for plant products. The absence or
lack of enforcement of intellectual property laws may lead to counterfeit
and farmer-saved seed which negatively impacts our sales. In addition,
United States government policies, particularly those affecting foreign
trade and investment, may impact our international operations.
Regulatory matters
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 2006, approximately 96% of our cottonseed that was sold
in the United States contained one or more of Monsanto's Bollgard, Bollgard
II, Roundup Ready and Roundup Ready Flex gene technologies, and 96% 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. In addition, regulatory approvals for Monsanto's
Bollgard and Bollgard II technologies expired in 2006. On July 7, 2006,
Monsanto announced that the United States Environment Protection Agency had
extended the registration of the Bollgard technology through the 2009
growing season. Also, Bollgard II has was recently granted a non-expiring
re-registration by the EPA. Monsanto is responsible for obtaining and
maintaining regulatory approvals for the technologies we license from them.
International operating risks
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, actions taken by the United States government,
including that taken by the United States military, the wars in Iraq and
Afghanistan, and conflicts between major cotton producing nations, may
serve to further complicate our ability to execute our long range ex-United
States 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.
Subsidies and trade agreements
Our farmer customers in many markets, including the United States, benefit
from government subsidy programs. The Farm Security and Rural Investment
Act of 2002 expires on January 1, 2007 (although the bill includes the 2007
cotton planting season), and future United States farm subsidy programs are
uncertain. Various other countries, including Brazil, have challenged, and
may continue to challenge, the appropriateness of United States farm
subsidies through the World Trade Organization ("WTO") or other forums. In
particular, the WTO has ruled in Brazil's favor in its challenge that
certain United States subsidies violate the provisions of the WTO. It is
not clear if, when, or to what extent, United States subsidies will be
modified as a result of this ruling. However, in the event changes to
subsidies are made, they may negatively impact United States farmers which
could result in a decline in planted cotton acreage. Also, in WTO
discussions in Hong Kong in late December 2005, United States negotiators
committed to reduce cotton export subsidies (the "Step 2" program) in 2007,
and to reduce overall agricultural export subsidies by 2013. United States
farm programs, including government subsidies, and WTO rulings impacting
such programs may materially affect the results of our business. In
addition, the United States Congress, in an attempt to reduce the United
States government's budget deficit, may also revise the farm subsidy
program and/or its agricultural policy.
Other
Overall profitability will depend on the factors noted above, as well as
worldwide commodity prices, our ability to successfully open new
international markets, the technology partners' ability to obtain timely
government approval (and maintain such approval) for existing and for
additional biotechnology products on which they and us are working, the
terms of such government approvals, our technology partners' ability to
successfully defend challenges to proprietary technologies licensed to us
and our ability to produce sufficient commercial quantities of high quality
planting seed of these products. Any delay in or inability to successfully
complete these projects may affect future profitability. In addition,
earnings forecasts do not consider the impact of potential transactions,
their related accounting and other factors, that may be under consideration
by the Company, but have not yet been completed or their effect determined
at the date of a particular filing.
ITEM 2. PROPERTIES
We maintain facilities primarily used for research, delinting, conditioning,
storage and distribution. Our world headquarters is located in Scott,
Mississippi. This location is used for corporate offices, quality assurance,
research and development, sales and marketing, seed production, and cottonseed
delinting, conditioning and storage.
Our other owned cottonseed delinting, conditioning and storage facilities in the
United States are in: Eloy, Arizona; Hollandale and Indianola, Mississippi; and
Aiken, Texas. We have additional leased storage facilities in Lubbock, Texas and
Greenville, Mississippi and own an additional storage facility in Lubbock,
Texas. We own a soybean processing plant in Harrisburg, Arkansas. We also own
cottonseed delinting facilities in Narromine, New South Wales, Australia;
Groblersdal, South Africa; Canas, Costa Rica; Shijiazhuang, Hebei, China
(through a Chinese joint venture); Hefei City, Anhui, China (through a Chinese
joint venture); and Avia Terai, Chaco, Argentina (through an Argentine joint
venture). We have an additional leased storage facility in Adana, Turkey. We
also own a facility in Tunica, Mississippi that is not currently in use.
Our plant breeders conduct research at eight company-owned facilities in the
United States. We also own research facilities in Australia, Brazil and India
and lease additional research facilities in Brazil, Greece and India. In
connection with our foundation seed program, we lease land in the United States,
Argentina, Australia, Brazil, China, Costa Rica, South Africa, and Turkey.
All owned properties are free of encumbrances. We also may lease warehouse space
in other locations. We believe that all of our facilities, including our
conditioning, storage and research facilities, are well maintained and generally
adequate to meet our needs for the foreseeable future. (See "Liquidity and
Capital Resources" in Item 7).
PRINCIPAL COMPANY LOCATIONS, AFFILIATES AND SUBSIDIARIES:
World Headquarters Operations Facilities
------------------ ---------------------
Scott, Mississippi, USA Scott, Mississippi, USA
Hollandale, Mississippi, USA
Research Centers Indianola, Mississippi, USA
---------------- Eloy, Arizona, USA
Scott, Mississippi, USA Harrisburg, Arkansas, USA
Winterville, Mississippi, USA Aiken, Texas, USA
Maricopa, Arizona, USA Lubbock, Texas, USA
Tifton, Georgia, USA Avia Terai, Chaco, Argentina
Hartsville, South Carolina, USA Narromine, New South Wales, Australia
Hale Center, Texas, USA Canas, Costa Rica
Haskell, Texas, USA Hefei City, Anhui, People's Republic of China
Lubbock, Texas, USA Shijiazhuang, Hebei, People's Republic of China
Narrabri, New South Wales, Australia Groblersdal, South Africa
Uberlandia, Minas Gerais, Brazil Adana, Turkey
Canas, Costa Rica
Larissa, Greece
Hyderabad, India Foreign Offices
Aurangabad, India ---------------
Abohar, India Narrabri, New South Wales, Australia
Uberlandia, Minas Gerais, Brazil
Canas, Costa Rica
Thessaloniki, Greece
Mexicali, Mexico
Mexico City, Mexico
Wassenaar, The Netherlands
Beijing, People's Republic of China
Groblersdal, South Africa
Seville, Spain
Izmir, Turkey
Adana, Turkey
Hyderabad, India
ITEM 3. LEGAL PROCEEDINGS
The following sets forth all known pending litigation in which D&PL is
named as a defendant and a description of other legal matters other than two
auto accidents for which the Company maintains third-party insurance.
Product Claims
D&PL and Monsanto were named as defendants in a lawsuit filed in the 106th
Judicial District Court of Gaines County, Texas, on April 27, 2000. In this case
the plaintiff alleges, among other things, that certain cottonseed acquired from
D&PL that contained the Roundup Ready gene did not perform as the farmer had
anticipated. D&PL and Monsanto are investigating the claims to determine the
cause or causes of the alleged problem. Pursuant to the terms of the February 2,
1996 Roundup Ready Gene License and Seed Service Agreement (the "Roundup Ready
Agreement"), D&PL has tendered the defense of this claim to Monsanto and
requested indemnity. Pursuant to the Roundup Ready Agreement, Monsanto is
contractually obligated to defend and indemnify D&PL against all claims arising
out of the failure of the Roundup Ready gene and Monsanto has agreed to do so.
D&PL will not have a right of indemnification from Monsanto, however, for any
claim involving defective varietal characteristics separate from or in addition
to the herbicide tolerance gene and such claims are contained in this
litigation.
D&PL was named in two lawsuits filed in the Circuit Court of Holmes County,
Mississippi. One was filed March 14, 2002, and the second was filed on August
19, 2002. Both cases include numerous plaintiffs who allege that certain
cottonseed sold by D&PL was improperly mixed and blended and failed to perform
as advertised. On December 14, 2004, an Order was entered in the March 14, 2002
case severing the individual claims of the fifty-seven original plaintiffs into
fifty-seven separate actions. Fourteen of the fifty-seven cases will remain in
Holmes County, Mississippi. The venue to which the other cases will be
transferred has not yet been determined. On January 24, 2005, the Supreme Court
of the State of Mississippi granted D&PL's interlocutory appeal of the trial
court's denial of D&PL's motion to dismiss the claims of seven plaintiffs for
failure to comply with the Mississippi Seed Arbitration Act. On April 20, 2006,
the Supreme Court denied D&PL's Interlocutory Appeal and returned these cases to
the trial court for further proceedings. Motions are now pending in the August
19, 2002 case identical to those filed in the March 14, 2002 case. It is
anticipated that the trial court will withhold ruling on those motions until
such time as the Mississippi Supreme Court decides the interlocutory appeal of
the March 14, 2002 case. Neither of these lawsuits alleges that the Monsanto
gene technology failed, and accordingly, it does not appear that D&PL has a
claim for indemnity or defense under the terms of any of the gene licenses with
Monsanto.
In December 2002, D&PL filed a suit in the Circuit Court of Holmes County,
Mississippi, against Nationwide Agribusiness and other insurance companies
seeking a declaration that the allegations of the Holmes County, Mississippi
lawsuit filed March 14, 2002, are covered by D&PL's comprehensive general
liability and umbrella liability policies. This case was removed by the
defendants to the United States District Court for the Southern District of
Mississippi. In this litigation, D&PL seeks a declaration that its insurers are
responsible for the cost of defending such actions, and full indemnification of
D&PL in the event a judgment is rendered against it based upon the seed mix
claim alleged by plaintiffs. D&PL alleges in this litigation that the
allegations of plaintiffs' complaint are covered by one or more of D&PL's
insurance policies issued by the defendant insurance companies. On March 31,
2006, the District Judge entered an Order Denying D&PL's Summary Judgment Motion
and Granting Nationwide's Summary Judgment Motion. On April 26, 2006, D&PL filed
a Notice of Appeal of the District Court's decision to the United States
District Court of Appeals for the 5th Circuit. On September 21, 2006, D&PL filed
the Appellant's Brief in this matter. It is anticipated that the briefing
process and final conclusion will take six to nine months.
In connection with the August 19, 2002, Holmes County lawsuit, D&PL has filed a
third party Complaint against Nationwide Agribusiness and other insurers
alleging they are responsible for the cost of defending the action and for full
indemnification of D&PL in the event a Judgment is entered against it. The third
party defendants removed this case to the United States District Court for the
Southern District of Mississippi, but on September 28, 2004, the case was
remanded to Holmes County, Mississippi where it remains pending.
All lawsuits related to product claims seek monetary damages. See Note 17 of the
Notes to Consolidated Financial Statements in Part II, Item 8 for further
details about product claims.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II cottonseed infringes Bayer's Australian patent that
claims an alleged invention entitled "Prevention of Bt Resistance Development."
The suit seeks an injunction, damages and other relief against Deltapine
Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings.
Since July 2003, D&PL and Monsanto have been involved in alternative dispute
resolution proceedings and arbitration pertaining to matters under, among other
agreements, the Bollgard and Roundup Ready Licenses for the United States. On
August 14, 2006, Monsanto, D&PL and D&M Partners entered into an Arbitration
Settlement Agreement under which certain provisions in the Bollgard and Roundup
Ready Licenses and the Marketing Services Agreement were amended to resolve
issues in dispute and all claims and counterclaims alleged in this arbitration
(including Monsanto's claims to terminate the license rights of D&PL and D&M
Partners) were released and dismissed with prejudice. No monetary payments were
required from any of Monsanto, D&PL or D&M Partners for the settlement.
On February 17, 2006, D&PL initiated a dispute resolution proceeding under the
1996 Option Agreement and the 2002 Bollgard Gene License on the issue of whether
Monsanto's implementation of a farmer licensing system for the Bollgard gene
technology in Brazil violates D&PL's and its local affiliate's rights to an
exclusive license to develop, produce and sell Bollgard planting seed in Brazil.
On March 27, 2006, D&PL submitted this issue to arbitration before the American
Arbitration Association ("AAA"). As part of this arbitration, D&PL sought to
enjoin Monsanto's implementation of its farmer licensing system and is seeking
damages incurred by D&PL and its affiliates. In July 2006, the Arbitration Panel
denied a preliminary injunction without prejudice to granting a permanent
injunction upon final hearing. On August 14, 2006, Monsanto and D&PL entered
into an agreement under which further proceedings in this arbitration are stayed
pending the proposed merger between Monsanto and D&PL and/or a mutually agreed
resolution of this dispute, provided that net technology fees collected under
the farmer licensing system during the period of stay will be divided between
Monsanto and its affiliates and D&PL and its affiliates in a ratio of 56%/44%,
respectively. Pursuant to the settlement agreement, litigation by D&PL against
Monsanto in New Castle County, Delaware, and by Monsanto against D&PL and its
affiliates in St. Louis County, Missouri, related to this arbitration was
dismissed with prejudice. MDM Sementes de Algodao Limitada, D&PL's affiliate in
Brazil, is proceeding with a planned launch of sales of cotton seed containing
Bollgard gene technology in Brazil in the 2007 sales season.
On June 16, 2006, D&PL submitted to arbitration before the AAA the issues
involving D&PL's rights to exclusive rights to Bollgard technology in two
additional Ex-United States countries and D&PL's rights to more favorable
license terms under its United States Bollgard and Bollgard II Licenses.
Pursuant to settlement agreements entered into on August 14, 2006, the
arbitration with respect to the exclusive licenses in the two Ex-United States
countries and a dispute resolution proceeding involving the confidentiality
provisions of the Bollgard and Roundup Ready Licenses were stayed pending the
merger between Monsanto and D&PL. The arbitration of the issue involving most
favored licensee provisions was dismissed with prejudice.
On February 28, 2006, D&PL filed suit in the Circuit Court of Dunklin County,
Missouri, seeking to recover Soybean Seed Services Fees in the amount of
approximately $2.2 million which Monsanto had refused to pay D&PL with respect
to soybean seed containing Monsanto's Roundup Ready technology sold by D&PL
during the 2005 planting season. The suit also sought a declaratory judgment
that D&PL's payments of royalties under its Roundup Ready Soybean License have
been correctly calculated and paid during the years 2002 to 2005. Pursuant to a
settlement agreement entered into August 14, 2006, Monsanto paid D&PL the $2.2
million in dispute; payments under the Roundup Ready Soybean License for the
2006 growing season were made under the existing terms of that license; for the
2007 and subsequent growing seasons, this license was amended with respect to
payments of royalties on seed sold for replanting; and this litigation was
dismissed with prejudice.
In January 2001, Sure Grow Seed Inc. ("Sure Grow"), an indirect subsidiary of
D&PL, gave notice to Ozbugday Tarim Isletmeleri ve Tohumculuk A.S. ("OTIT"), a
Turkish seed company, of termination (effective at the end of the 2001 crop
year) of OTIT's exclusive distributorship for cottonseed of Sure Grow varieties
in the Republic of Turkey. OTIT refused to acknowledge the validity of this
termination. In October 2002, Sure Grow and the Turkish Branch of Turk
Deltapine, Inc. ("Turk Deltapine'"), D&PL's local affiliate in Turkey, commenced
a civil action in a Turkish commercial court seeking an injunction against
continued sales of Sure Grow varieties by OTIT. OTIT filed a counterclaim
seeking an injunction against Turk Deltapine's marketing of seed of Sure Grow
varieties in alleged violation of OTIT's exclusive distribution rights and
monetary damages for lost profits in an amount to be determined. In May 2005,
the Hatay 3rd Court of First Instance in which the case was then pending,
reversing a prior advisory opinion, held that the law of the State of Alabama
governs the termination of OTIT's distributorship and the January 2001 notice of
termination was timely and effective. Consistent with this decision, the court
rejected OTIT claims that Turk Deltapine has been involved in unfair competition
against OTIT. The decision of the 3rd Court of First Instance was appealed by
OTIT. In May 2006, the High Court of Appeals confirmed the decision of the Hatay
3rd Court of First Instance. OTIT has objected to the decision of the High Court
of Appeals and requested a correction of the decision. Presently, the case is
pending at the High Court of Appeals. Both OTIT and Turk Deltapine have
continued to distribute cotton planting seed of Sure Grow varieties in Turkey.
In June 2004, D&PL filed an application with the Turkish Ministry of Agriculture
to gain intellectual property protection of certain of D&PL's proprietary cotton
varieties under Turkey's new law protecting breeders' rights for new plant
varieties, which was enacted in January 2004. On November 3, 2004, the Ministry
of Agriculture denied protection under Turkish law for all but one of these
varieties. D&PL filed a petition in January 2005 in the Administrative Court of
Ankara requesting a decision granting intellectual property protection of D&PL's
varieties. In September 2006, the court ruled that the Ministry of Agriculture
was correct to deny protection for these varieties. This decision has now been
appealed by D&PL to the Presidency of Council of State, the applicable appellate
tribunal.
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 quetzals (approximately
$695,800 at October 31, 2006 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.
On February 7, 2006, Product Services Company and Ted Dickerson (collectively
"Product Services") filed suit in the Circuit Court of Hinds County, Mississippi
against D&PL and International Paper Company ("IP") alleging that D&PL
wrongfully terminated an agreement under which D&PL delivered waste cotton seed
to Product Services for incineration as an alternative fuel source at IP's paper
mill. The suit alleges wrongful termination of contract, misappropriation of
trade secrets, tortuous interference with contractual relations and related
claims and seeks damages in an unspecified amount. D&PL believes the contract
involved was appropriately terminated and that the claims asserted by Product
Services are without merit. D&PL filed a response demanding that this suit be
dismissed. IP has moved for a change of venue to another Mississippi county.
D&PL joined in the motion for change of venue which is presently under
consideration by the court.
D&PL vs. Monsanto Company and Pharmacia Corporation
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the H-S-R 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 (the "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 1998 Merger Agreement, compensatory damages
and punitive damages. On January 2, 2000, D&PL and Monsanto reached an agreement
whereby D&PL would withdraw the December 30 Suit without prejudice for the
purpose of negotiating a settlement of D&PL's claims, and Monsanto would
immediately pay the $81 million. On January 3, 2000, Monsanto paid to D&PL the
termination fee of $81 million as required by the 1998 Merger Agreement. On
January 18, 2000, after unsuccessful negotiations, D&PL re-filed its suit (the
"1998 Merger Litigation"). D&PL seeks in excess of $1 billion in compensatory
and $1 billion in punitive damages for breach of the 1998 Merger Agreement.
On September 12, 2003, Monsanto amended its answer to include four
counterclaims against D&PL. Monsanto is seeking an unspecified amount of 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. On December 21, 2004, Monsanto filed a motion to amend its answer
to withdraw two of its four counterclaims. On February 17, 2005, D&PL filed a
motion with the trial court to amend its complaint to add a claim against
Monsanto for fraudulently inducing D&PL to extend the deadline to complete the
merger with Monsanto. The Mississippi Supreme Court has stayed the proceedings
in this case pending the resolution of two interlocutory appeals filed by D&PL.
Pursuant to the Merger Agreement between Monsanto, Monsanto Sub, Inc. and D&PL,
entered into on August 14, 2006, (the "2006 Merger Agreement") Monsanto and D&PL
have agreed to take steps necessary to stay the 1998 Merger Litigation for a
period of up to twelve months. On August 27, 2006, the Mississippi Supreme Court
entered an Order staying proceedings in the 1998 Merger Litigation through
February 27, 2007. The 2006 Merger Agreement provides the 1998 Merger Litigation
will be dismissed with prejudice upon certain circumstances including (1)
completion of the merger, (2) the merger is not completed by the Outside Date
(as defined in the 2006 Merger Agreement) and certain regulatory approvals have
not been obtained, or the completion of the merger is prevented by a law or
order related to anti-trust or completion law, (3) Monsanto breaches any
covenant or agreement in the 2006 Merger Agreement in a material respect and
fails to cure upon notice, (4) D&PL's board of directors approves, or D&PL
enters into, an acquisition transaction with a party other than Monsanto, or (5)
D&PL breaches the covenants and agreements in the 2006 Merger Agreement in a
material respect and fails to cure upon notice. (In the circumstances described
in items (2) and (3), Monsanto is required to pay D&PL $600 million in cash.) In
the following circumstances, the stay of the 1998 Merger Litigation will
terminate and the parties may then pursue any and all rights in that litigation:
(1) D&PL's board of directors modifies or changes its recommendation or approval
of the merger and at that time D&PL's board of directors has not received a
proposal from a party other than Monsanto regarding an acquisition, (2) D&PL
breaches its representations or warranties under the 2006 Merger Agreement and
fails to cure upon notice, (3) the merger has not been completed by the Outside
Date and there has been a material adverse change with respect to D&PL, or (4)
the 2006 Merger Agreement is terminated by agreement of D&PL and Monsanto or for
any reason other than as specified above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our stock trades on the New York Stock Exchange (the "NYSE") under the trading
symbol DLP. The range of closing prices for these shares for the last two fiscal
years, as reported by the NYSE, was as follows:
Common Stock Data 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
----------------- ----------- ----------- ------------ -----------
FYE August 31, 2006
Market Price Range - Low $23.40 $22.49 $25.78 $27.20
- High 26.41 25.67 30.90 40.63
FYE August 31, 2005
Market Price Range - Low $25.22 $26.16 $24.76 $24.70
- High 27.48 30.49 28.82 27.48
Dividends totaling $0.60 and $0.51 per share on common and preferred shares were
paid in 2006 and 2005, respectively. The board of directors increased the
dividend rate to $0.17 per share for the first quarter of 2007 and anticipates
that quarterly dividends of $0.17 per share will continue to be paid in the
future; however, the board of directors reviews this policy quarterly. Aggregate
dividends paid on common shares in 2006 were $21.6 million and should
approximate $24.8 million in 2007. Aggregate dividends paid on preferred shares
in 2006 were $0.6 million and should approximate $0.7 million in 2007. Pursuant
to the Merger Agreement executed with Monsanto, our board of directors is
precluded from increasing the quarterly dividend rate above $0.17 per share.
On October 31, 2006, there were approximately 13,500 shareholders of our
36,457,476 outstanding common shares.
Equity Compensation Plan Information
The following table reflects the described information as of August 31, 2006:
Number of securities
to be issued upon Weighted-average Number of securities
exercise of exercise price remaining available for
outstanding options, of outstanding options, future issuance under equity
Plan category warrants and rights warrants and rights compensation plan
---------------------------------- ------------------------ --------------------------- -----------------------------
Equity compensation plans
approved by security holders:
Stock Options 2,720,067 $ 23.49 2,323,736
Restricted Stock &
Restricted Stock Units 109,951 - 1,923,866
Equity compensation plans not
approved by security holders - - -
Issuer Purchases of Equity Securities
On June 30, 2005, our board of directors authorized a new share repurchase
program to buy up to an additional $50 million of the Company's common stock.
During 2006, our repurchases were made via open market purchases. Pursuant to
the Merger Agreement executed with Monsanto, we are precluded from future
repurchases or issuances of our own shares except our board of directors has
authorized the issuance of approximately 155,000 shares of Restricted Stock or
Restricted Stock Units to our directors, officers and key employees in
accordance with the provisions of the 2005 Omnibus Stock Plan. These shares of
Restricted Stock and Restricted Stock Units, if issued, will vest over a three
year period. However, at the effective time of the merger, those shares of
Restricted Stock and Restricted Stock Units will become immediately vested and
will be converted into the right to receive $42.00 per share in cash without
interest and less any applicable withholding tax. If the merger does not close,
these instruments will vest 40% on the first anniversary of their issuance, 30%
on the second anniversary of their issuance and the remaining 30% on the third
anniversary of their issuance.
The following table presents the number of shares purchased monthly under our
stock repurchase program for the three-month period ended August 31, 2006:
Approximate Dollar
Total Total Number of Shares Value of Shares that
Number of Average Purchased as Part of May Yet Be
Shares Price Paid Publicly Announced Purchased Under the
Period Purchased per Share Plan Plan
----------------------------------------- ------------ ------------ -------------------------- -----------------------
June
(June 1, 2006 to June 30, 2006) 86,900 $27.95 86,900 $ 27,431,337
July
(July 1, 2006 to July 31, 2006) - - - -
August
(August 1, 2006 to August 31, 2006) - - - -
------------ -------------------------- -----------------------
Total 86,900 $27.95 86,900 $ 27,431,337
============ ========================== =======================
There were no shares purchased in the quarter other than those authorized
pursuant to the June 2005 stock repurchase plan.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS (In thousands, except per share amounts)
As of and for the Years Ended August 31,
--------------------------------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ------------ ------------ ----------- -------------
Operating Results:
Net sales and licensing fees $417,633 $366,085 $312,765 $283,799 $259,509
Special charges and unusual
items (1) - - - (962) -
In-process research and development
and related transaction costs (2) (27,585) - (38,532) - -
Net income 20,219 42,557 5,316 27,805 30,339
Balance Sheet Summary:
Current assets $409,267 $356,679 $375,475 $355,261 $308,468
Current liabilities 325,116 263,013 226,225 204,050 174,124
Working capital 84,151 93,666 149,250 151,211 134,344
Total assets 506,254 439,184 457,023 431,552 383,142
Long-term debt 1,455 7,271 16,486 1,557 1,176
Stockholders' equity (3) 174,656 164,023 209,726 217,107 202,207
Per Share Data:
Net income - Diluted $0.54 $1.08 $0.13 $0.70 $0.76
Book value 4.86 4.32 5.48 5.70 5.27
Cash dividends per common share 0.60 0.51 0.46 0.27 0.20
Weighted-average number of shares
used in net income per share
calculation -
Diluted 37,209 39,370 39,670 39,594 39,781
--------------------------------------------------------------------------------------------------------------------------
(1) In 2003, we reported (a) a $0.6 million special charge for the closings of
two United States locations and (b) a $0.4 million special charge for
reductions in the number of employees at an international wholly-owned
subsidiary and an international joint venture.
(2) In 2006, we recorded a $7.0 million charge for a write-off of acquired
in-process research and development ("IPR&D") related to our May 15, 2006
acquisition of Syngenta's global cottonseed assets. Also in 2006, we
recorded a $20.5 million charge for the write-off of acquired IPR&D related
to our June 30, 2006 acquisition of technology licenses from DuPont to
develop and commercialize DuPont's herbicide resistance technology in
cottonseed and soybean seed. Transaction expenses related to these two
items approximated $100,000. In 2004, we recorded a $38.5 million charge
for the write-off of acquired IPR&D and related transaction expenses
related to our August 24, 2004 acquisition of global licenses to develop
and commercialize Syngenta's insect resistance technology in cottonseed.
(3) The decrease in Stockholder's equity over the five-year period presented
above is the result of purchases of our own common stock that we have made
under various stock repurchase plans.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our 2006 revenues represented a record for the Company and is the third
consecutive year that we have set such a record. These record revenues were
driven by a 19% increase in sales in our domestic segment during 2006 over 2005.
Domestic sales increases were driven by volume increases, higher unit sales of
stacked gene products, higher trait fees due to trait fee price increases
enacted by Monsanto, and the introduction of additional premium seed treatments,
primarily the AVICTA(TM) Complete Pak from Syngenta. Since we recognize greater
revenue and profitability from stacked gene products, our business has continued
to benefit greatly from increased purchases of these products over cottonseed
products containing either an insect-resistant trait or a herbicide-tolerant
trait alone. We also saw an increase in sales of our higher value products, such
as DP 555 BG/RR, DP 444 BG/RR and DP 445 BG/RR. For the second consecutive year,
these products were the most widely planted cottonseed varieties, making up
approximately one-third of all cotton acres planted in the United States,
according to the USDA and Doane Marketing Research, Inc. According to a
September 2006 USDA report, United States cotton plantings increased to 15.3
million acres in 2006, as compared to 14.2 million acres in 2005. Approximately
one-half of this increase occurred in areas east of Texas while the other half
occurred in Texas. Our volume increases were attributable to the areas east of
Texas. However, the 2006 growing season was plagued by early season cool and wet
conditions which gave way to record drought conditions across much of the cotton
belt. These weather conditions attributed to record crop loss and replants by
our farmer customers which adversely affects our profitability. Soybean seed
sales and profitability for 2006 were slightly higher than 2005, primarily due
to higher prices, offset by lower sales units and slightly higher costs.
International operations resulted in a loss from operations in 2006 due to
decreased volumes in Brazil, Australia and Mexico as compared to the prior year.
Lower cotton acreage led to the decline in Brazil, while competitive
pressures negatively impacted our sales in Australia. Regulatory issues in
Mexico delayed our ability to import transgenic seed, resulting in lost sales.
Strategic Transactions and Events
Merger with Monsanto. On August 14, 2006, we signed the 2006 Merger Agreement
whereby Monsanto will acquire us for $42 per share of our common stock, for a
total purchase price of approximately $1.5 billion in cash. Many of our
strategic initiatives discussed below involve technology that may compete with
that of Monsanto's depending on its performance. Until the merger is consummated
we cannot predict what Monsanto's ultimate strategy will be with regards to
competing technologies; nor can we predict what impact the pending merger will
have on our relationships with our current strategic partners.
Acquisition of Syngenta's Global Cottonseed Assets. In May 2006, we purchased
selected assets of Syngenta's global cottonseed business for $7.0 million, which
was comprised of certain cottonseed germplasm in the United States, India and
certain other countries and certain equipment and a sublease of buildings and
land at Syngenta India Ltd.'s research farm at Aurangabad, India, and agreed to
make employment offers to four employees of Syngenta India Ltd.'s cotton
breeding program.
Syngenta retained rights to use two specific cotton lines for transgenic trait
development. In addition to usual corporate warranties, Syngenta warranted (with
specific exceptions) exclusive ownership and freedom to use the acquired
products and the absence of transgenes not intended to be components of the
acquired products.
See "Acquired In-Process Research and Development" located in this Item 7 for
further discussion.
Acquisition of Technology Licenses from DuPont. On June 30, 2006, we acquired
licenses from DuPont and DuPont's affiliates, Pioneer and Verdia, for the
Optimum GAT trait in cotton and soybeans. The Optimum GAT trait, developed by
DuPont, will provide farmers with expanded weed control options and help
optimize yield. This herbicide tolerance technology makes plants tolerant to
both glyphosate and ALS herbicides, including sulfonylurea herbicides.
Previously, DuPont announced plans to commercialize Optimum GAT in Pioneer(R)
brand corn and soybeans and also secured significant outlicense agreements. We
and DuPont, through its Pioneer subsidiary, are partners in the DeltaMax joint
venture, which was initially formed to develop and commercialize glyphosate-only
tolerant cotton and insect resistant cotton. We paid $20.5 million in connection
with this transaction. Technology fee sharing for the Optimum GAT technology is
essentially consistent with the existing terms in the DeltaMax Collaboration
agreement. We also reached an agreement to license soybean lines suitable for
planting in the Southern soybean market through the involvement of GreenLeaf
Genetics LLC.
For the year ended August 31, 2006, we recorded a charge of $20.5 million
related to the write-off of acquired IPR&D and related transaction costs. These
technologies have not yet reached technological feasibility and have no
alternative future use. Accordingly, the amount paid for the licenses was
expensed in the 2006 Consolidated Statement of Income on the acquisition date.
See "Acquired In-Process Research and Development" located in this Item 7 for
further discussion.
Acquisition of Technology Licenses from Syngenta. In August 2004, we announced
the acquisition of global licenses to develop and commercialize innovative
insect resistance technology in cotton from Syngenta Crop Protection AG
("Syngenta"). In addition, we obtained licenses to a wide range of other
Syngenta enabling technologies that may be used to develop new products in both
cottonseed and soybean seed. In return for these licenses, we agreed to pay
Syngenta $46.8 million in installments due primarily through the first quarter
of 2008. To date we have made $34.4 million of such payments (including a
payment made in October 2006). A portion of the $46.8 million represents
contingent payments. Once the licensed traits are commercialized, we will
receive 70% of the net licensing revenues generated from these products. In the
fall of 2005 we decided to focus our development efforts on a dual gene insect
resistance system rather than a single gene system. We expect the dual gene
system to be a combination of VIP3A and Cry1Ab genes which will result in a
one-year delay in launch. Depending on the timing of regulatory approval, we
plan to have a limited quantity of seed containing these traits available for
sale as early as 2008. We expect to commercialize the dual insect traits with a
glyphosate tolerance trait beginning in 2009, subject to regulatory approval.
We expect to incur incremental expenses of approximately $4.0 million related to
development of VipCot products in 2007. See "Acquired In-Process Research and
Development" located in this Item 7 for further discussion.
Collaboration Agreement with Dow AgroSciences LLC. 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
resistant traits. We are continuing to work with these traits. In October 2004,
DAS announced it had received full EPA registration for its WideStrike Insect
Protection technology. DAS commercialized the first cottonseed products
containing WideStrike in PhytoGen(TM) germplasm in 2005. We may commercialize
varieties containing DAS insect resistance technology if we reach a
commercialization agreement. To date no such commercialization agreement has
been reached.
DeltaMax Cotton LLC. In May 2002, we established DeltaMax, a limited liability
company jointly owned with Verdia, a subsidiary of Maxygen, Inc. In July, 2004,
Verdia was acquired by DuPont's subsidiary Pioneer, which we believe brings
potential for additional investment capital, strategic focus and critical mass
to our collaboration, which is aimed at developing value-added traits for
cotton. We are currently developing traits for insect-resistance and herbicide
tolerance for cotton. We are currently transforming cotton plants for both the
insect resistance and herbicide tolerance traits. We expect to invest up to $20
million over the next five to eight years to fund our portion of DeltaMax.
Other Matters
We are continuing to rapidly develop new product offerings containing Monsanto's
second generation traits, Bollgard II and Roundup Ready Flex. We sold 12 new
products containing either or both of the Bollgard II or Roundup Ready Flex
genes in 2006. We sold sufficient seed of these varieties in 2006 to plant
approximately 700,000 acres and we expect to have sufficient quantities
available for sale to plant 3 to 3.5 million acres in 2007. The actual seed
quantities available of these new products will depend on a number of factors,
including final raw material purchases and quality assurance data. In addition,
we continued to develop products containing Syngenta's VipCot technology and
expanded field testing of VipCot products in 2006. We are focusing our efforts
on developing varieties containing dual insect genes from Syngenta and plan a
limited commercial launch of these varieties in 2008, depending on when full
regulatory approval is obtained. In addition, DeltaMax, our joint venture with
Verdia, continues development of novel cotton traits in the areas of herbicide
tolerance and insect resistance.
We continue to seek opportunities to expand our International business into new
markets, including India and parts of Africa. On December 29, 2005, we acquired
Vikki's Agrotech Pvt. Ltd. ("Vikki's), an Indian cottonseed company, through our
wholly-owned Mauritian entity, D&PL Mauritius Ltd. Vikki's has licenses to
Monsanto's Bollgard and Bollgard II technologies for India as well as rights to
commercialize Bt genes from other another party. Vikki's commercialized Bollgard
hybrids in India in 2006. Our subsidiary, D&PL India Seed Private Ltd., has
expanded research and testing of our hybrid products throughout India in 2006.
In addition, we recently have started a new cotton research program in the
Punjab region of Northern India. Results of our testing programs from 2005 and
2006 have shown many of our products are competitive in India in terms of both
yield and fiber quality.
We purchased 808,000 shares of our common stock at a cost of $19.8 million
during 2006. The Merger Agreement with Monsanto precludes us from making further
stock repurchases. On October 20, 2006, the Board declared a dividend of $0.17
per share for the 2007 first quarter, payable on December 14, 2006, to
shareholders of record on November 30, 2006.
Outlook for 2007 and Beyond
Future growth in sales and earnings will be dependent on (a) cotton acreage in
the United States and around the world, (b) the successful development and
launch of varieties containing second generation traits from Monsanto, Bollgard
II and Roundup Ready Flex, (c) our ability to develop and commercialize
varieties that have increased yield potential and enhanced fiber qualities, (d)
our ability to profitably expand our international operations, (e) the
successful development and launch of the Syngenta insect resistance technology,
and (f) our ability to successfully develop and launch technologies such as
those being developed by DeltaMax. Due to our market position in the United
States, United States cotton acreage has a significant effect on our sales and
earnings. With respect to the development of new technologies, the VipCot and
Optimum GAT technologies are still under development and the commercial launch
of these technologies are dependent on many factors outside of our control. For
example, transgenic event selection must be completed, regulatory approval
obtained, and the genes introgressed into our germplasm. Historically we have
experienced delays in, and had to revise, our launch date estimates. In 2005 we
shifted to a dual gene strategy for VipCot which will delay the initial launch
by one year assuming all other milestones are achieved. We presently expect
to commercialize the Optimum GAT trait in our cotton varieties in 2011 or
thereafter depending on when developmental and regulatory timelines are met.
Even though the risks of transgenic product development are high, so is the
potential return and that is why we continue to develop these technologies.
As we have previously announced, we expect to provide 2007 earnings guidance
once the harvest is complete and 2007 United States cotton planting estimates
have been made. The commodity price of cotton has been lower in 2006 over price
levels for most of 2005. We anticipate 2006 cotton yields to be near record
levels again despite difficult weather conditions during the growing season
(hot, dry weather) and at harvest in much of the United States market. We
believe it is too early to estimate 2007 cotton plantings at this time, however,
if current commodity prices hold at Spring planting time, we believe that more
corn, wheat, and soybeans and fewer cotton acres could be planted in 2007. We
expect to have adequate supplies of seed of most of our popular cotton varieties
for 2007 plantings, despite the impact of inclement weather conditions during
harvest this year. Due to inclement weather during soybean harvesting in our
Mid-South and Illinois soybean seed production areas, supplies of some popular
soybean varieties may be limited. However, final cottonseed and soybean seed
supply amounts are not yet available as processing and quality assurance testing
have not yet occurred for most of the 2007 product offerings.
Internationally, we continue to expand our global reach and we seek to improve
the operating results of our existing ex-United States operations. In 2006, we
incurred an operating loss in our international division due to decreased sales
at most of our international locations. We expect 2007 operating results to be
slightly better, with increased sales anticipated in Brazil, China and Mexico.
We believe that an improvement in cotton lint prices and the introduction of
transgenic traits in Brazil will increase the acres planted to cotton, which
will help improve our Brazilian sales. We expect to sell two varieties
containing the Bollgard technology in Brazil in 2007. We also anticipate the
Brazilian government will approve Monsanto's Roundup Ready gene in cotton. Once
the Roundup Ready gene is approved, we will seek approval of Roundup Ready
varieties for sale in Brazil. In China, we anticipate that sales of hybrid
cotton seed at one of our joint ventures there will increase revenues during
2007. In Mexico, regulatory issues resulted in lower acres of cotton being
planted in 2006, which reduced our sales. We anticipate that these issues will
not occur during 2007 and that cotton acreage will increase, thereby improving
our sales in Mexico.
Offsetting these international sales increases are anticipated sales reductions
in Australia, Greece and Spain. Water restrictions and competitive pressures are
causing a reduction in our sales in Australia. Large carryover inventories of
our seed purchased by our distributors in Greece and Spain will reduce our sales
to those distributors in 2007. These carryover inventories are partly the result
of EU subsidy reforms that are putting pressure on farmer input costs, such as
seed.
Cottonseed sales and farmer plantings have only just begun in our Southern
Hemisphere markets and in the Northern Hemisphere will not occur until the
Spring and Summer of 2007. Thus, it is too early to accurately forecast
International results for 2007. We will continue to develop new businesses in
markets such as India, Pakistan and portions of Africa.
We continue to develop and test varieties containing new technologies from
multiple sources. We are developing products with Monsanto's second generation
traits, Bollgard II and Roundup Ready Flex. In addition, we continue to work
with Syngenta's VipCot traits so that these products may be commercialized as
quickly as regulatory approval is received. Both Monsanto and Syngenta traits
are being introgressed into our most elite cotton germplasm. We believe we are
uniquely positioned to rapidly introduce new technologies to both United States
and ex-United States cotton farmers due to the strength and breadth of our
breeding programs and germplasm base, our technical services capabilities,
know-how, brand recognition and market position.
Share Repurchase Program/Dividend Policy
Pursuant to the Merger Agreement executed with Monsanto, we are precluded from
making future purchases of our outstanding shares or increasing the quarterly
dividend rate above $0.17 per share.
In February 2000, the board of directors authorized a program for the repurchase
of up to $50 million of D&PL's common stock. The shares repurchased under this
program were used to provide for option exercises, the potential conversion of
D&PL's Series M Convertible Non-Voting Preferred shares and for other general
corporate purposes. At August 31, 2005, D&PL had repurchased 2,229,900 shares at
an aggregate purchase price of approximately $47,505,000 under this program.
This repurchase plan was terminated and replaced by the June 2005 repurchase
program discussed below.
On May 24, 2005, we completed the purchase of 2,374,940 shares of its common
stock pursuant to a modified "Dutch auction" tender offer that was announced on
April 20, 2005, under a new plan separately approved by the board of directors.
The shares were purchased for $27.00 per share for an aggregate purchase price
of $64,123,380. The Company also incurred associated expenses of approximately
$675,000 in connection with the acquisition of these shares (primarily related
to legal and advisory services) that have been recorded as a component of
treasury stock.
On June 30, 2005, our board of directors authorized a new share repurchase
program to buy up to an additional $50 million of the Company's common stock.
The adoption of the June 2005 repurchase program replaced the February 2000
program. At August 31, 2006, D&PL had repurchased 918,494 shares at an aggregate
purchase price of approximately $22.6 million under this plan.
During 2006, the quarterly dividend was $0.15 per share. The board of directors
reviews the dividend policy quarterly, and increased the dividend to $0.17 per
share for the 2007 first quarter. Assuming the $0.17 dividend rate is maintained
through 2007, the aggregate payments will be $24.8 million to the holders of the
36.5 million common shares outstanding and $0.7 million to the holder of the 1.1
million preferred shares outstanding. In addition, the board of directors
continues to review uses of the Company's cash position and alternatives for
maximizing its value to shareholders. See "Risks and Uncertainties" located in
this Item 7.
RESULTS OF OPERATIONS
Net Sales and Licensing Fees
In 2006, our consolidated net sales and licensing fees increased 14.1% to $417.6
million from 2005 sales of $366.1 million. Domestic revenues increased over the
prior year due to increased cotton acreage, which resulted in an increase in
units sold. In addition, higher technology fees per unit, a shift in our sales
mix to more premium-priced, stacked-trait products, and premium seed treatment
revenues, partially offset by an increase in rebates made under crop loss and
replant programs, contributed to this net increase. Historically, we have earned
a fee on sales of some of the third-party cottonseed treatments that we use,
which was recorded as a component of Net Sales and Licensing Fees, while we
invoiced our customers for premium seed treatments. However, beginning in 2006,
we invoiced our customers for all seed treatments (which is recorded as
revenue), just as we have done with our premium seed treatments in the past, and
remit a portion of that revenue to the manufacturer of the seed treatments
(which is recorded as cost of goods sold). Our revenues from premium seed
treatments were also higher due to the introduction of the AVICTA Complete Pak
from Syngenta. International revenues were lower primarily in South America,
Australia, and Mexico. Sales in South America were lower primarily due to a
reduction in the cotton acreage in Brazil and the decrease in sales in Australia
is due to lower volumes resulting from competitive pressures. Sales to Mexico
were lower due to issues surrounding the revision of laws governing the planting
of transgenic crops in Mexico that delayed our ability to import certain
transgenic varieties.
In 2005, our consolidated net sales and licensing fees increased 17.0% to $366.1
million from 2004 sales of $312.8 million. This increase was primarily driven by
the following: (a) an increase in the licensing fees charged per bag, an
increase in sales of stacked-gene picker products and lower payments on crop
loss and replant programs, (b) an increase in cottonseed prices and higher sales
of our higher-priced, elite varieties, (c) a slight increase in cottonseed units
sold, and (d) an increase in international revenues, primarily from in-country
sales in Australia and Brazil and from export sales to Mexico, Greece and Spain.
Sales in Australia increased due to the introduction of additional Bollgard II
varieties and an increase in the area planted to cotton. Sales in Brazil
increased due to stronger demand for our products and higher prices. Mexico's
sales increase was primarily attributable to an increase in demand for
stacked-gene products and higher cotton acreage, and the increase in Greece and
Spain was due to stronger sales to our distributors.
Gross Profit
Our consolidated gross profit increased to $142.0 million in 2006 compared to
$132.0 million in 2005. Consolidated gross profit as a percentage of
consolidated net sales and licensing fees decreased to 34.0% in the current
year, from 36.1% in 2005. The gross profit margin percentage that we earn on the
premium cottonseed treatments discussed above is lower than what we have
traditionally earned on cottonseed sales, which contributed to the decrease, as
well as higher payments under crop loss and replant programs due to the severe
drought experienced throughout much of the cotton belt during the season, and
higher cottonseed production costs. The negative impacts of these items on gross
profit percentage were partially offset by the revenue increase attributable to
the sales mix shift and increased licensing fees.
Our consolidated gross profit increased to $132.0 million in 2005 compared to
$109.0 million in 2004. Consolidated gross profit as a percentage of
consolidated net sales and licensing fees increased to 36.1% in 2005, from 34.9%
in 2004. The revenue increase attributable to price increases and the adoption
of higher priced products and increased licensing fees was partially offset by
lower margins on soybean sales caused by higher costs of soybean raw materials,
as well as an increase in cottonseed production costs.
Operating Expenses
Operating expenses increased $39.5 million to $99.8 million in 2006 from $60.3
million in 2005. This increase primarily relates to charges of $27.6 million
related to the write-off of acquired IPR&D and related transaction costs related
to the acquisition of technology licenses from DuPont and Syngenta's global
cottonseed assets, increased expenses of $9.4 million over the prior year due to
higher professional services fees associated primarily with the various Monsanto
arbitration issues, and compensation costs, primarily related to an increase in
stock-based compensation expense. Higher spending on research and development
activities and advertising also contributed to the increase in operating
expenses.
Operating expenses decreased to $60.3 million in 2005 from $87.4 million in
2004. The decrease in operating expenses in 2005 versus 2004 was approximately
$27.1 million. This decrease primarily relates to a $38.5 million charge for
IPR&D costs related to the acquisition of technology licenses included in 2004,
offset by higher research and development costs associated with new research
programs and new technology testing and higher general and administrative costs,
primarily related to higher professional fees for legal matters and
Sarbanes-Oxley compliance, and additional compensation costs.
Research and Development Expenses
Research and development expenses increased 8.7% to $25.0 million in 2006 from
$23.0 million in 2005. The increase was primarily attributable to higher
compensation costs, including stock-based compensation. We also experienced
higher costs due to the operation of new greenhouses that we constructed during
the prior year.
Research and development expenses increased 25% to $23.0 million in 2005 from
$18.4 million in 2004. The increase was primarily attributable to increased
costs of working with new breeding programs and new technologies (Bollgard II,
Roundup Ready Flex and VipCot), including the addition of new personnel,
increased testing program expenses and related compensation costs.
Selling Expenses
Selling expenses increased 5.2% to $14.2 million in 2006 from $13.5 million in
2005. This increase was primarily attributable to an increase in spending on
print and television advertising, and increased compensation costs related to
stock-based compensation expense.
Selling expenses increased 15.4% to $13.5 million in 2005 from $11.7 million in
2004. This increase was primarily attributable to higher advertising,
promotional and compensation costs.
General and Administrative Expenses
General and administrative expenses increased 39.1% to $33.1 million in 2006
from $23.8 million in 2005. This increase primarily related to an approximate
$8.8 million increase in professional fees related to various arbitration
proceedings with Monsanto (other than the 1998 Merger Litigation), and an
increase of approximately $1.9 million related to compensation costs (e.g.,
stock-based compensation, pension, etc.).
General and administrative expenses increased 26.6% to $23.8 million in 2005
from $18.8 million in 2004. The increase primarily related to an increase in
professional fees incurred, mainly due to legal matters and Sarbanes-Oxley
compliance, and additional compensation costs.
In-Process Research and Development and Related Transaction Costs
In 2006, we recorded IPR&D charges of $27.6 million associated with the June 30,
2006 acquisition of technology licenses from DuPont for $20.5 million, and the
May 15, 2006 acquisition of Syngenta's global cottonseed assets for $7.0
million. We also incurred approximately $100,000 in expenses related to these
transactions, primarily legal and accounting fees.
In 2004, we recorded a $38.5 million IPR&D charge related to our August 24, 2004
acquisition of global licenses to develop and commercialize Syngenta insect
resistance technology in cottonseed.
See "Acquired In-Process Research and Development" located in this Item 7 for
further information on these transactions.
Interest Income
Net interest income in 2006 remained flat with 2005 at $2.2 million. In 2006,
interest income was $3.5 million (versus $3.3 million in 2005) and interest
expense was $1.3 million (versus $1.1 million in 2005). A reduction in interest
expense from a lower accretion of debt discount on the Syngenta note was offset
by interest expense incurred on our borrowings from our line of credit.
Net interest income increased to $2.2 million in 2005, compared to net interest
income of $1.5 million in 2004. In 2004, interest income was $1.9 million and
interest expense was $0.4 million. Higher interest rates earned on our cash
balances resulted in higher interest income during 2005. Interest expense
increased due to a note payable to Syngenta related to the 2004 IPR&D
transaction.
Other Expense, net
Other expense increased to $11.1 million in 2006, compared to $4.3 million in
2005. This increase is primarily attributable to costs incurred related to the
2006 Monsanto Merger, offset by lower 1998 Merger Litigation expenses. We
incurred approximately $8.0 million, or $0.15 per diluted share, related to the
2006 Monsanto Merger costs. These costs primarily consisted of professional
services fees and other incremental costs associated directly with the 2006
Monsanto Merger. We also incurred expenses of approximately $3.0 million, or
$0.06 per diluted share, related to the 1998 Merger Litigation. In 2005, we
incurred expenses of $4.3 million, or $0.07 per diluted share, related to the
1998 Merger Litigation.
Other expense decreased to $4.3 million in 2005, compared to $10.5 million in
2004. This decrease was primarily attributable to decreased legal expenses
related to the 1998 Merger Litigation. In 2005, we incurred expenses of $4.3
million, or $0.07 per diluted share, related to the 1998 Merger Litigation,
compared to $10.9 million, or $0.18 per diluted share, in 2004. In 2005, these
expenses decreased due in part to the Mississippi Supreme Court staying the
proceedings pending the resolution of two matters.
See Part 1, Item 1 for more information related to the Monsanto merger and Part
I, Item 3 for more information related to the 1998 Merger Litigation.
Net Income and Earnings Per Share
Net income applicable to common shares was $19.6 million, $42.0 million, and
$4.8 million in 2006, 2005, and 2004, respectively. Net income per share
(diluted) was $0.54, $1.08, and $0.13 in 2006, 2005, and 2004, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently utilize off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS (AMOUNTS IN THOUSANDS)
We have certain obligations and commitments to make future payments under
contracts. Current estimates of our future payments under these obligations are
shown in the following table.
Payments Due in Fiscal Years Ending August 31,
----------------------------------------------------------------------------------------------
2012
and
Total 2007 2008 2009 2010 2011 beyond
------------- ------------- --------- ---------- -------- ------- --------
Long-Term Obligations (1) $ 9,500 $ 7,050 $ 2,450 $ - $ - $ - $ -
Operating Lease Obligations 2,244 1,512 455 244 34 - -
Purchase Obligations (2) 6,935 6,935 - - - - -
------------- ------------- --------- ---------- -------- ------- --------
Total $ 18,679 $ 15,497 $ 2,905 $ 244 $ 34 $ - $ -
============= ============= ========= ========== ======== ======= ========
(1) Long-Term Obligations are comprised of payments related to the Syngenta
transaction (see "Acquired In-Process Research and Development" located in this
Item 7 for information concerning non-contingent payments related to the
Syngenta transaction) and payments required under research and license contracts
with other third parties.
(2) The amount reported as "Purchase Obligations" for 2007 relates to payments
to be made to cotton growers and producers for a portion of seed that we will
purchase in the first and second quarters of 2007. At August 31, 2006, we had
open purchase contracts with many cotton and soybean growers, producers and
conditioners that may require us to purchase minimum amounts of cotton and
soybean seed if that seed meets our quality assurance standards. The amount that
we will pay for the seed that we accept is based on market prices that
fluctuate. The amount of seed that we will accept and the unit prices that we
will pay cannot be known until that seed is delivered to us (which should occur
in the first and second quarters of 2007) and is tested for quality.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 this Annual Report on Form
10-K for the fiscal year ended August 31, 2006. 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, Bollgard II, Roundup Ready and Roundup Ready Flex
licensing fees are recognized when the seed is shipped. Domestically, the
licensing fees charged to farmers for Bollgard, Bollgard II, Roundup Ready and
Roundup Ready Flex cottonseed are based on pre-established planting rates for
each of nine geographic regions.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. International export sales are not subject to return
except in limited cases in Mexico and Colombia. All other international revenues
from the sale of planting seed, less estimated reserves for returns, are
recognized when the seed is shipped, except in Australia where certain
immaterial revenues are recognized when collected.
All of our domestic seed products (including those containing Bollgard, Bollgard
II, Roundup Ready and Roundup Ready Flex 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, Bollgard II, Roundup Ready and Roundup Ready Flex 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, or
all, in certain circumstances, 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 us 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 our
second, third, and fourth quarters. Essentially all material claims under these
programs have occurred or are accounted for by year end.
Provision for Damaged, Obsolete and Excess Inventory
Each year, we record a provision to adjust our reserves related to inventory
based on our estimate of seed that will not pass our quality assurance ("QA")
standards at year end, or is deemed excess based on our desired seed stock level
for a particular variety ("dump seed"). Seed can fail QA standards based on
physical defects (i.e., cut seed, moisture content, discoloration, etc.),
germination rates, or transgenic purities. The amount recorded as inventory
provision in a given year is calculated based on the total quantity of inventory
that has not passed QA standards at any fiscal year end, any seed that is
expected to deteriorate before it can be sold and seed deemed to be excess. In
establishing the provision, we consider the scrap value of the seed to be
disposed. An initial estimate of the needed provision is made at the beginning
of each year and recorded over the course of the year. Adjustments for changes
in our estimates are made monthly, if necessary.
See Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8
for further details about inventory reserves.
Deferred Income Taxes
Deferred income taxes are estimated based upon temporary differences between the
income and loss that we report in our financial statements and our taxable
income and loss 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 approximately 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 August 31, 2006, we
had recorded net deferred tax assets of approximately $30.0 million primarily
related to capitalizing the licenses acquired from Syngenta in 2004 and from
DuPont in 2006, and the acquisition of Syngenta's global cottonseed assets in
2006, for income tax reporting purposes. We estimate that we will generate
sufficient future taxable income to realize our deferred tax assets; therefore,
we have not recorded any valuation allowances as of August 31, 2006.
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.
See Note 8 of the Notes to Consolidated Financial Statements in Part II, Item 8
for further details about income taxes.
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. We estimate our contingent liabilities based on management's estimates
about the probability of outcomes and our 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 Internal Revenue Service 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.
ACQUIRED IN-PROCESS RESEARCH & DEVELOPMENT
DuPont Technology Licenses. On June 30, 2006, we acquired licenses from DuPont
and DuPont's affiliates, Pioneer and Verdia, for the Optimum GAT trait in cotton
and soybeans. The Optimum GAT trait, developed by DuPont, will provide farmers
with expanded weed control options and help optimize yield. This herbicide
tolerance technology makes plants tolerant to both glyphosate and ALS
herbicides, including sulfonylurea herbicides. Previously, DuPont announced
plans to commercialize Optimum GAT in Pioneer(R) brand corn and soybeans and
also secured significant outlicense agreements. We and DuPont, through its
Pioneer subsidiary, are partners in the DeltaMax joint venture, which was
initially formed to develop and commercialize glyphosate-only tolerance in
cotton. We paid $20.5 million in connection with this transaction. Technology
fee sharing for the Optimum GAT technology is essentially consistent with the
existing terms in the DeltaMax collaboration agreement. We also reached an
agreement to license soybean lines suitable for planting in the Southern
soybean market through the involvement of GreenLeaf Genetics LLC.
For the year ended August 31, 2006, we recorded a charge of $20.5 million
related to the write-off of acquired IPR&D and related transaction costs. These
technologies have not yet reached technological feasibility and have no
alternative future use. Accordingly, the amount paid for the licenses was
expensed in the 2006 Consolidated Statement of Income on the acquisition date.
The Optimum GAT projects represent new technologies that may compete with
herbicide tolerance technologies currently on the market, including technologies
that are currently contained in cottonseed and soybean seed varieties sold by
us. We estimate that we will incur the following costs to complete the projects:
2007 - $300,000; 2008 - $1.1 million; 2009 - $2.1 million; 2010 - $500,000.
These projects will also require regulatory approval from the Food and Drug
Administration (FDA), the United States Department of Agriculture (USDA), and
the United States Environmental Protection Agency (EPA) before commercialization
can begin. If the regulatory approval process proceeds as expected, we may begin
limited introduction of the Optimum GAT technologies in 2011. Once
commercialization begins, technology fee sharing for the Optimum GAT technology
is essentially consistent with the existing terms in the DeltaMax Collaboration
agreement.
There is no assurance that these technologies will result in commercially viable
products or that such technologies are developed in the time frame or for the
amounts estimated to complete. Also, there is no assurance that regulatory
approval will be obtained for the products.
Syngenta Global Cottonseed Assets. In May 2006, we purchased selected assets of
Syngenta's global cottonseed business for $7.0 million, which was comprised of
certain cottonseed germplasm in the United States, India and certain other
countries and certain equipment and a sublease of buildings and land at Syngenta
India Ltd.'s research farm at Aurangabad, India, and agreed to make employment
offers to four employees of Syngenta India Ltd.'s cotton breeding program.
Syngenta retained rights to use two specific cotton lines for transgenic trait
development. In addition to usual corporate warranties, Syngenta warranted (with
specific exceptions) exclusive ownership and freedom to use the acquired
Products and the absence of transgenes not intended to be components of the
acquired Products.
The hybrid germplasm acquired in India will require regulatory approval in that
country before it can be offered for commercial sale. The germplasm acquired in
the United States contains Syngenta's VipCot technology, which we acquired a
license to in 2004 (see below), and which also requires regulatory approval in
the United States before commercial sales can begin. Therefore, since these
assets have no alternative future use if such regulatory approvals are not
obtained, the entire purchase price was expensed in the 2006 Consolidated
Statements of Income on the acquisition date as the write-off of acquired IPR&D.
There is no assurance that these assets will result in commercially viable
products or that regulatory approval will be obtained for the products.
Syngenta Technology Licenses. In August 2004, we entered into an agreement with
Syngenta to purchase global licenses to develop and commercialize Syngenta's
insect resistance genes (known as VIP3A and Cry1Ab) in cottonseed. In addition,
we purchased licenses to other Syngenta enabling technologies that may be useful
in developing valuable new products for use in cottonseed and soybean seed. In
return for the licenses, D&PL is to pay Syngenta $46.8 million. The purchase
price is being paid in installments over seven years. Fixed payments of $37.6
million will have been made in installments through the first quarter of 2008.
In February 2008, D&PL will make certain decisions which will determine whether
the additional $9.2 million in contingent payments will be made. If we do not
elect to continue with the development of the Syngenta insect resistance genes,
Sygenta must refund $14 million to us.
For the year ended August 31, 2004, we recorded a charge of approximately $38.5
million related to the write-off of the acquired IPR&D and related transaction
costs. Approximately $36.2 million of the purchase price represents the fair
value of the non-contingent payments related to the acquired IPR&D projects that
had not yet reached technological feasibility and had no alternative future use.
Accordingly, this amount was expensed in the 2004 Consolidated Statements of
Income on the acquisition date. The remaining $2.3 million of the charge
incurred represents the related transaction costs, primarily professional fees.
The assigned value of each of the technologies acquired was as follows: VIP3A -
$19.1 million; Cry1Ab - $16.8 million; Other - $300,000.
The VIP3A and Cry1Ab projects ("VipCot") represent new technologies that are
expected to compete with insect resistance technologies currently on the market,
including technologies that are currently contained in varieties sold by us. The
VIP3A and Cry1Ab genes produce proteins that are toxic to certain lepidopteran
larvae, the principal cotton pests in many cotton growing areas. The acquired
VIP3A gene provides for a novel mode of action (for attacking larvae that
consume the protein). VipCot will require further development by us, including
the introgression into our elite germplasm. We estimate that we will expense as
incurred the following costs to complete the projects: 2007 - $4.0 million; 2008
- $4.5 million; 2009 - $5.5 million; 2010 - $4.0 million. These projects will
also require regulatory approval from the FDA, the USDA, and the EPA before
commercialization can begin. Syngenta is responsible for United States
regulatory approval. Syngenta has advised us that they expect United States
regulatory approval to be obtained for the selected VIP3A/Cry1Ab combination of
events in 2008. If the regulatory approval process proceeds as expected, we may
begin limited introduction of the VIP3A/Cry1Ab combination of events in 2008.
Once commercialization begins, we will owe Syngenta a royalty equal to 30% of
the net license fees received, after deduction of certain expenses, from these
technologies. We will retain the remaining 70% of the net license fees.
There is no assurance that these technologies will result in commercially viable
products or that such technologies are developed in the time frame or for the
amounts estimated to complete. Also, there is no assurance that regulatory
approval will be obtained for the products.
LIQUIDITY AND CAPITAL RESOURCES
In the United States, we purchase seed from contract growers in our first and
second quarters. Seed conditioning, treating and packaging commence late in our
first quarter and continue through our third quarter. Seasonal cash needs
normally begin to increase in our first quarter and cash needs peak in our third
quarter. Cash is generated and loan repayments, if applicable, normally begin in
the middle of our third quarter and are typically completed by our first 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 United States, we record revenue and accounts receivable for technology
licensing fees on transgenic seed sales upon shipment, usually in our second and
third fiscal quarters. Receivables from seed sales generally become due in May
and June. The licensing fees are due in September, at which time we receive
payment. We then pay Monsanto its royalty for the Bollgard, Bollgard II, Roundup
Ready and Roundup Ready Flex licensing fees, which is recorded as a component of
cost of sales. As a result of the timing of these events, licensing fees
receivable and royalties payable peak at our fiscal year end, August 31.
The seasonal nature of our business significantly impacts cash flow and working
capital requirements. Historically, we have maintained credit facilities, and
used early payments by customers and cash from operations to fund working
capital needs. In the past, we have borrowed on a short-term basis to meet
seasonal working capital needs. From 2002 through 2005, we used cash generated
from operations and other available cash to meet working capital needs. In 2006,
we utilized our credit facility to fund working capital needs, in addition to
early payments from customers and cash from operations. We continue to evaluate
potential uses of our cash for purposes other than for working capital needs.
Other potential uses of our cash in the future may be the acquisition of, or
funding of, alternative technologies (such as, or in addition to, DeltaMax, and
the acquisition of technology licenses from DuPont and Syngenta) that could be
used to enhance our product portfolio and ultimately our long-term earnings
potential and/or an investment in new markets outside the United States such as
India. The Merger Agreement restricts us from authorizing, recommending or
proposing, or entering into an agreement in principle or an agreement with
respect to any merger, consolidation or business combination (other than the
Monsanto merger) or any acquisition or disposition of any assets, except that in
the case of the acquisition or disposition of assets, the Merger Agreement does
not prevent us and our subsidiaries from:
o acquiring or disposing of assets outside of the ordinary course of
business consistent with past practice so long as the aggregate amount
of those assets to be acquired or disposed of does not exceed
$10 million; or
o acquiring or disposing of assets in the ordinary course of business
consistent with past practice.
However, the Merger Agreement does prohibit us, without Monsanto's prior written
consent, from purchasing, redeeming, or otherwise acquiring our outstanding
shares, or increasing our quarterly dividend rate above $0.17 per share.
On April 15, 2005, we entered into an unsecured $75 million credit agreement
(the "Credit Agreement") with Bank of America, N.A. (the "Bank"). The Credit
Agreement provides for unsecured revolving loans up to a maximum aggregate
amount outstanding of $75 million, plus Letters of Credit which were outstanding
prior to the execution of the Credit Agreement in the amount of approximately $2
million. Of the total commitment, $50 million represents a seasonal commitment
available from October to July of each year. The Credit Agreement was set to
expire on July 31, 2006, however, on December 5, 2005, pursuant to the Company's
request as provided for in the Credit Agreement, the Company and the Bank agreed
to extend the Credit Agreement until July 31, 2007, at which time all
outstanding amounts under the Credit Agreement will be due and payable, subject
to the Company's right to request an additional one-year extension and the
Bank's acceptance of that request. Additionally, at the option of the Bank the
Credit Agreement can be terminated upon a change in control as defined in the
Credit Agreement.
In general, borrowings under the Credit Agreement bear interest at a rate
calculated according to a Eurodollar rate, plus 0.55%. The Eurodollar rate is
generally the 30-day, 60-day or 90-day LIBOR rate. We are also required to pay
unused fees of 0.125% annually calculated on the daily-unused portion of the
Credit Agreement. The primary financial covenant requires the Company's funded
indebtedness under the Credit Agreement to not exceed 50% of certain current and
long-term assets, defined in the Credit Agreement and determined as of the last
day of each fiscal quarter.
During the year ended August 31, 2006, the maximum we borrowed was $45 million,
which was repaid by August 31, 2006. As of August 31, 2006, there were no loans
outstanding under the Credit Agreement, other than the existing Letters of
Credit as discussed above.
Capital expenditures were $9.7 million, $6.7 million and $6.0 million in the
years ended August 31, 2006, 2005 and 2004, respectively. We anticipate that
capital expenditures will approximate $8.0 to $10.0 million in 2007.
Annual dividends of $0.60, $0.51, and $0.46 per share were paid in 2006, 2005,
and 2004, respectively. Aggregate dividends paid on common and preferred shares
in 2006, 2005, and 2004 were $22.2 million, $19.6 million, and $18.1 million,
respectively. On October 24, 2006, we announced that our board of directors had
declared a $0.17 per share dividend for the first quarter of 2007. The first
quarter dividend will be paid on December 14, 2006 to shareholders of record on
November 30, 2006. The Board anticipates that quarterly dividends of $0.17 per
share will continue to be paid in the future; however, the board of directors
reviews this policy quarterly. Based on a quarterly dividend of $0.17 per share
in 2007, aggregate preferred and common stock dividends should approximate $25.5
million in 2007.
We have purchased our common stock in the open market from time to time
depending on market conditions and other factors. The shares repurchased may be
used to provide for option exercises, conversion of our Series M Convertible
Non-Voting Preferred shares and for other general corporate purposes. From
September 1, 2005 to August 31, 2006, the Company purchased 808,494 shares of
its common stock at an aggregate purchase price of $19.8 million.
Cash provided from operations, cash on hand, early payments from customers and
borrowings under the credit facility, if necessary, should be sufficient to meet
our 2007 working capital needs.
Recently Issued Financial Accounting Standards
SFAS 154 - Accounting Changes and Error Corrections. In May 2005, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 154, "Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and SFAS No. 3". Among other changes, SFAS No.
154 requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented based on
the new accounting principle, unless it is impracticable to do so. SFAS No. 154
provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting principle, and (2) correction of errors
in previously issued financial statements should be termed a "restatement." SFAS
No. 154 is effective for accounting changes and correction of errors made in
fiscal years beginning after December 15, 2005. Therefore, the Company adopted
this standard beginning in September 2006. Since this standard applies to both
voluntary changes in accounting principles, as well as those that may be
mandated by standard-setting authorities, it is not possible to estimate the
impact that the adoption of this standard will have on our financial position
and results of operations.
SFAS 157 - Fair Value Measurements. In September 2006, the FASB issued SFAS No.
157, "Fair Value Measurements". This statement defines fair value, establishes a
framework for measuring fair value in accordance with United States generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for the fiscal year that begins after
November 15, 2007. The Company will adopt this standard beginning in September
2008. Currently, we are evaluating the impact that this new standard will have
on our financial position and results of operations.
SFAS 158 - Employers' Accounting for Defined Benefit Pension and Other
Postretirement Benefits, an Amendment of FASB Statements 87, 88, 106 and 132(R).
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Benefits, an Amendment of FASB
Statements 87, 88, 106, and 132(R)". This statement requires an employer with a
defined benefit pension plan to (1) recognize the funded status of the benefit
plan in its statement of financial position, (2) recognize as a component of
other comprehensive income, net of tax, the gains or losses and prior service
costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost pursuant to FASB Statement No. 87 or
FASB Statement No. 106, (3) measure defined benefit plan assets and obligations
as of the date of the employer's fiscal year-end statement of financial
position, and (4) disclose in the notes to the financial statements additional
information about certain effects on net periodic benefit cost for the next
fiscal year that arise from delayed recognition of the gains or losses, prior
service costs or credits, and transition asset or obligation. Adoption of SFAS
No. 158 is required by the end of the fiscal year ending after December 15,
2006. Therefore, the Company will adopt this standard by August 31, 2007. We are
presently evaluating the impact that adopting SFAS 158 will have on our
financial position and results of operations.
FIN 48 - Accounting for Uncertainty in Income Taxes. In July 2006, FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"),
was issued. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes" by defining the criterion that
an individual tax position must meet in order to be recognized in the financial
statements. FIN 48 requires that the tax effects of a position be recognized
only if it is "more-likely-than-not" to be sustained based solely on the
technical merits as of the reporting date. FIN 48 further requires that interest
that the tax laws require to be paid on the underpayment of taxes should be
accrued on the difference between the amount claimed or expected to be claimed
on the return and the tax benefit recognized in the financial statements. FIN 48
also requires additional disclosures of unrecognized tax benefits, including a
reconciliation of the beginning and ending balances. FIN 48 is effective for
fiscal years beginning after December 15, 2006. Therefore, the Company expects
to implement FIN 48 beginning on September 1, 2007. We are presently evaluating
the impact that adopting FIN 48 will have on our financial position and results
of operations.
SAB 108 - Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. In September 2006, staff
from the Securities and Exchange Commission issued Staff Accounting Bulletin
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). This standard
provides guidance on the approach that companies must follow in quantifying
misstatements of its financial statements. Specifically, SAB 108 required
companies to apply two approaches when evaluating the materiality of
misstatements of the financial statements. First, SAB 108 requires companies to
evaluate materiality using a "roll-over approach" in which companies quantify a
misstatement based on the amount of the error originating in the current year
income statement, ignoring the effect of correcting the portion of the
current-year balance sheet misstatement that originated in prior years. Second,
SAB 108 requires companies to evaluate materiality using an "iron curtain
approach" in which companies quantify a misstatement based on the effects of
correcting the misstatement existing in the balance sheet at the end of the
current year, irrespective of the misstatement's year(s) of origination. SAB 108
is effective for fiscal years ending on or after November 15, 2006. We are still
evaluating the impact that adoption of this standard will have on our financial
position and results of operations.
ITEM 7A. 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. From time to
time we enter into various agreements that are considered derivatives to reduce
our soybean commodity price risk. During the year ended August 31, 2006,
derivative instruments have not been used to manage foreign currency or interest
rate risks. We do not enter into speculative hedges or purchase or hold any
derivative financial instruments for trading purposes.
A discussion of our accounting policies related to derivative financial
instruments is included in Note 1 of the Notes to Consolidated Financial
Statements in Part II, Item 8. Further information on our exposure to market
risk is included in Note 15 of the Notes to Consolidated Financial Statements in
Part II, Item 8.
The fair value of our net liability related to derivative commodity instruments
outstanding as of August 31, 2006, was $69,000. A 10% adverse change in the
underlying commodity prices upon which these contracts are based would result in
a $201,000 loss in future earnings (not including the gain on the underlying
commodities).
Our earnings are also affected by fluctuations in the value of the United States
dollar compared to foreign currencies as a result of transactions in foreign
markets. We conduct non-United States operations through subsidiaries and joint
ventures primarily in Argentina, Australia, Brazil, China, India, South Africa
and Turkey. At August 31, 2006, 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.
For the year ended August 31, 2006, 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 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Financial Statements Page(s)
The following consolidated financial statements of Delta and Pine Land Company
and subsidiaries are submitted in response to Part II, Item 8:
Reports of Independent Registered Public Accounting Firm................................................39
Management's Report.....................................................................................41
Consolidated Statements of Income - for each of the three years in the
period ended August 31, 2006.........................................................................42
Consolidated Balance Sheets - August 31, 2006 and 2005..................................................43
Consolidated Statements of Cash Flows - for each of the three years in the
period ended August 31, 2006.........................................................................44
Consolidated Statements of Stockholders' Equity and Comprehensive Income
- for each of the three years in the period ended August 31, 2006....................................45
Notes to Consolidated Financial Statements..............................................................46
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Delta and Pine Land Company:
We have audited the accompanying consolidated balance sheets of Delta and Pine
Land Company and subsidiaries (the Company) as of August 31, 2006 and 2005, and
the related consolidated statements of income, changes in stockholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended August 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Delta and Pine Land
Company and subsidiaries as of August 31, 2006 and 2005, and the results of
their operations and their cash flows for each of the years in the three-year
period ended August 31, 2006, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Delta and Pine
Land Company and subsidiaries' internal control over financial reporting as of
August 31, 2006, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated November 13, 2006 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
As discussed in Note 1 to the consolidated financial statements, effective
September 1, 2005 the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment.
/s/ KPMG LLP
Memphis, Tennessee
November 13, 2006
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Delta and Pine Land Company:
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting (see
Part II, Item 9A(c) of the August 31, 2006 Annual Report on Form 10-K of Delta
and Pine Land Company), that Delta and Pine Land Company and subsidiaries (the
Company) maintained effective internal control over financial reporting as of
August 31, 2006, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Delta and Pine Land Company and
subsidiaries maintained effective internal control over financial reporting as
of August 31, 2006, is fairly stated, in all material respects, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our opinion, Delta and Pine Land Company and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
August 31, 2006, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Delta and Pine Land Company and subsidiaries as of August 31, 2006 and 2005, and
the related consolidated statements of income, changes in stockholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ending August 31, 2006, and our report dated November 13, 2006 expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Memphis, Tennessee
November 13, 2006
MANAGEMENT'S REPORT:
Delta and Pine Land Company ("D&PL") is responsible for preparing the
consolidated financial statements and related information appearing in this
Annual Report on Form 10-K. Management believes that the financial statements
present fairly D&PL's financial position, its results of operations and its cash
flows in conformity with accounting principles generally accepted in the United
States. In preparing its financial statements, D&PL is required to include
amounts based on estimates and judgments that it believes are reasonable under
the circumstances.
D&PL maintains accounting and other systems designed to provide reasonable
assurance that financial records are reliable for purposes of preparing
financial statements and that assets are properly accounted for and safeguarded.
Compliance with these systems and controls is reviewed by executive management
and the accounting staff. Limitations exist in any internal control system,
recognizing that the system's cost should not exceed the benefits derived.
The board of directors pursues its responsibility for D&PL's financial
statements primarily through the efforts of its Audit Committee, which is
composed solely of "independent" directors who are not Company officers or
employees. The Audit Committee meets as often as it determines is necessary, but
at least four times per year. In addition, the Audit Committee meets with the
independent auditor at least quarterly. The Audit Committee also meets
periodically with management and the head of the internal audit function in
separate executive sessions. The independent auditors have direct access to the
Audit Committee, with and without the presence of management representatives.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED AUGUST 31,
(In thousands, except per share amounts)
2006 2005 2004
------------------ ----------------- -----------------
NET SALES AND LICENSING FEES $ 417,633 $ 366,085 $ 312,765
COST OF SALES (275,641) (234,064) (203,757)
------------------ ----------------- -----------------
GROSS PROFIT
141,992 132,021 109,008
------------------ ----------------- -----------------
OPERATING EXPENSES:
Research and development 24,965 23,015 18,436
Selling 14,182 13,531 11,693
General and administrative 33,112 23,760 18,787
In-process research and development and related transaction costs 27,585 - 38,532
------------------ ----------------- -----------------
Total operating expenses 99,844 60,306 87,448
------------------ ----------------- -----------------
OPERATING INCOME 42,148 71,715 21,560
INTEREST INCOME, NET 2,167 2,194 1,522
OTHER EXPENSE, NET (11,108) (4,310) (10,518)
EQUITY IN NET LOSS OF AFFILIATE (3,089) (2,787) (3,551)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (150) (1,609) (2,303)
------------------ ----------------- -----------------
INCOME BEFORE INCOME TAXES 29,968 65,203 6,710
PROVISION FOR INCOME TAXES (9,749) (22,646) (1,394)
------------------ ----------------- -----------------
NET INCOME 20,219 42,557 5,316
DIVIDENDS ON PREFERRED STOCK (640) (544) (491)
------------------ ----------------- -----------------
NET INCOME APPLICABLE TO COMMON SHARES $ 19,579 $ 42,013 $ 4,825
================== ================= =================
BASIC EARNINGS PER SHARE $ 0.55 $ 1.11 $ 0.13
================== ================= =================
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN PER SHARE CALCULATIONS - BASIC 35,907 37,958 38,250
================== ================= =================
DILUTED EARNINGS PER SHARE $ 0.54 $ 1.08 $ 0.13
================== ================= =================
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN PER SHARE CALCULATIONS - DILUTED 37,209 39,370 39,670
================== ================= =================
The accompanying notes are an integral part of these consolidated statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31,
(In thousands, except share and per share amounts)
2006 2005
----------------- ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 69,691 $ 93,075
Marketable securities 27,600 -
Receivables, net 270,354 228,800
Inventories 31,600 26,625
Prepaid expenses 2,173 1,874
Deferred income taxes 7,849 6,305
----------------- ------------------
Total current assets 409,267 356,679
PROPERTY, PLANT AND EQUIPMENT, NET 61,066 60,158
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED 4,183 4,183
INTANGIBLES, net of accumulated amortization of $3,042 and $2,458 8,276 5,960
OTHER ASSETS 1,079 1,446
DEFERRED INCOME TAXES 22,383 10,758
----------------- ------------------
TOTAL ASSETS $ 506,254 $ 439,184
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Notes payable and current maturities of long-term debt $ 6,428 $ 10,078
Accounts payable 28,866 18,218
Accrued expenses 275,643 221,824
Income taxes payable 14,179 12,893
----------------- ------------------
Total current liabilities 325,116 263,013
----------------- ------------------
LONG-TERM DEBT 1,455 7,271
----------------- ------------------
MINORITY INTEREST IN SUBSIDIARIES 5,027 4,877
----------------- ------------------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 17)
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;
501,989 and 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
Common stock, par value $0.10 per share; 100,000,000 shares authorized;
42,053,167 and 40,928,929 shares issued;
36,415,567 and 36,099,823 shares outstanding 4,205 4,093
Capital in excess of par value 112,099 81,640
Retained earnings 197,750 199,742
Accumulated other comprehensive loss (2,489) (4,305)
Treasury stock, at cost; 5,637,600 and 4,829,106 shares (137,016) (117,254)
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 174,656 164,023
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 506,254 $ 439,184
================= ==================
The accompanying notes are an integral part of these consolidated statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
(in thousands)
2006 2005 2004
------------------ ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,219 $ 42,557 $ 5,316
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 9,392 8,661 8,364
Loss on sale of assets 63 115 189
Noncash component of acquired in-process research and development - - 22,125
Excess tax benefits from stock-based compensation arrangements (3,114) - -
Equity in net loss of affiliate 3,089 2,787 3,551
Foreign exchange loss (gain) 267 (101) 124
Accretion of debt discount 453 777 -
Minority interest in earnings of subsidiaries 150 1,609 2,303
Stock-based compensation expense 3,255 508 -
Deferred income tax (benefit) expense (14,193) 2,043 (12,294)
Changes in assets and liabilities:
Receivables (41,490) (43,370) (17,693)
Inventories (5,050) 4,183 1,921
Prepaid expenses (306) 43 178
Intangibles and other assets (176) (540) (95)
Accounts payable 10,455 (6,068) 5,571
Accrued expenses 55,480 31,796 12,438
Income taxes payable 5,529 4,027 3,788
------------------ ----------------- -----------------
Net cash provided by operating activities 44,023 49,027 35,786
------------------ ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (41,600) - (60,000)
Sales of marketable securities 14,000 50,000 10,000
Purchases of property and equipment (9,691) (6,669) (6,049)
Sale of investments and property 97 451 161
Acquisition of Vikki's Agrotech Limited (2,620) - -
Investment in affiliate (3,125) (2,980) (2,630)
------------------ ----------------- -----------------
Net cash (used in) provided by investing activities (42,939) 40,802 (58,518)
------------------ ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (55,399) (5,800) (277)
Proceeds from short-term debt 45,474 247 245
Dividends paid (22,211) (19,623) (18,118)
Payments of long-term debt - - (1,607)
Minority interest in dividends paid by subsidiaries - (1,318) (1,336)
Payments to acquire treasury stock (19,762) (85,535) (5,748)
Proceeds from exercise of stock options 24,041 14,103 6,004
Excess tax benefits from stock-based compensation arrangements 3,114 - -
------------------ ----------------- -----------------
Net cash used in financing activities (24,743) (97,926) (20,837)
------------------ ----------------- -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES 275 1,585 (129)
------------------ ----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,384) (6,512) (43,698)
CASH AND CASH EQUIVALENTS, beginning of year 93,075 99,587 143,285
------------------ ----------------- -----------------
CASH AND CASH EQUIVALENTS, end of year $ 69,691 $ 93,075 $ 99,587
================== ================= =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest $ 244 $ - $ 10
Income taxes $ 18,088 $ 13,804 $ 8,904
The accompanying notes are an integral part of these consolidated statements.
DELTA AND PINE LAND COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED AUGUST 31, 2004, 2005 AND 2006
(In thousands, except per share data)
Accumulated
Capital in Other Total
Preferred Common Excess of Retained Comprehensive Treasury Stockholders'
Stock Stock Par Value Earnings Income/(Loss) Stock Equity
------------ ------------- ------------ ----------- ---------------- ----------- ------------
Balance at August 31, 2003 $ 107 $ 3,953 $ 54,850 $ 189,610 $ (5,442) $ (25,971) $ 217,107
------------
Net income - - - 5,316 - - 5,316
Minimum pension liability
adjustment, net of tax of $0.3 million - - - - 558 - 558
Foreign currency translation adjustment - - - - 1,544 - 1,544
Unrealized loss on hedging instruments - - - - (396) - (396)
------------
Total comprehensive income 7,022
------------
Exercise of stock options and tax benefit
of stock option exercises - 63 9,400 - - - 9,463
Cash dividends, $0.46 per share - - - (18,118) - - (18,118)
Purchase of common stock - - - - - (5,748) (5,748)
------------ ------------- ------------ ----------- ---------------- ----------- ------------
Balance at August 31, 2004 $ 107 $ 4,016 $ 64,250 $ 176,808 $ (3,736) $ (31,719) $ 209,726
------------
Net income - - - 42,557 - - 42,557
Minimum pension liability adjustment,
net of tax of $1.3 million - - - - (2,096) - (2,096)
Foreign currency translation adjustment - - - - 1,169 - 1,169
Unrealized gain on hedging instruments - - - - 358 - 358
------------
Total comprehensive income 41,988
------------
Exercise of stock options and tax benefit
of stock option exercises - 77 16,882 - - - 16,959
Amortization of deferred compensation 508 508
Cash dividends, $0.51 per share - - - (19,623) - - (19,623)
Purchase of common stock - - - - - (85,535) (85,535)
------------ ------------- ------------ ----------- ---------------- ----------- ------------
Balance at August 31, 2005 $ 107 $ 4,093 $ 81,640 $ 199,742 $ (4,305) $ (117,254) $ 164,023
------------
Net income - - - 20,219 - - 20,219
Minimum pension liability adjustment,
net of tax of $(1.0) million - - - - 1,678 - 1,678
Foreign currency translation adjustment - - - - 498 - 498
Unrealized loss on hedging instruments - - - - (360) - (360)
------------
Total comprehensive income 22,035
------------
Exercise of stock options and tax benefit
of stock option exercises - 112 27,204 - - - 27,316
Amortization of deferred compensation 3,255 3,255
Cash dividends, $0.60 per share - - - (22,211) - - (22,211)
Purchase of common stock - - - - - (19,762) (19,762)
------------ ------------- ------------ ----------- ---------------- ----------- ------------
Balance at August 31, 2006 $ 107 $ 4,205 $ 112,099 $ 197,750 $ (2,489) $ (137,016) $ 174,656
============ ============= ============ =========== ================ =========== ============
The accompanying notes are an integral part of these consolidated statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Delta and Pine Land Company and subsidiaries (the "Company" or "D&PL") breed,
produce, condition and market cotton and soybean planting seed. D&PL farms
approximately 5,600 acres largely for research purposes and the production of
cotton and soybean foundation seed.
D&PL has annual agreements with various growers to produce seed for cotton and
soybeans. The growers plant seed purchased from D&PL and follow quality
assurance procedures required for seed production. If the grower adheres to
established Company quality assurance standards throughout the growing season
and if the seed meets Company quality standards upon harvest, D&PL may be
obligated to purchase specified minimum quantities of seed at prices equal to
the commodity market price of the seed, plus a grower premium. D&PL then
conditions the seed for sale as planting seed.
1
Merger with Monsanto Company
On August 14, 2006, D&PL entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Monsanto and its wholly-owned subsidiary, Monsanto Sub,
Inc., pursuant to which Monsanto Sub, Inc. will be merged with and into D&PL and
D&PL will become a wholly-owned subsidiary of Monsanto.
Under the terms of the Merger Agreement, upon consummation of the merger, each
outstanding share of D&PL common and preferred stock (except shares held by D&PL
or by Monsanto and its subsidiaries) will be converted into a right to receive
$42.00 per share in cash, without interest, provided that stockholders who so
elect have the right to seek payment of the appraised value of their shares
under Section 262 of the Delaware General Corporation Law.
The Merger Agreement is subject to approval by D&PL's stockholders. The date of
the stockholders meeting has been set for December 21, 2006. D&PL's board of
directors has unanimously approved and recommended that the stockholders approve
the Merger Agreement.
The closing of the merger is subject to the expiration of the waiting periods
under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976 (the "H-S-R
Act"). On September 27, 2006, the United States Department of Justice, Antitrust
Division (the "USDOJ"), requested additional information and documents from
Monsanto and D&PL under the H-S-R Act (the "Second Request"). This Second
Request extends the waiting period under the H-S-R Act during which the parties
are prohibited from closing the merger until 30 days after both parties
substantially comply with the Second Request, unless the waiting period is
terminated earlier by the USDOJ or is extended with D&PL's and Monsanto's
consent. D&PL and Monsanto are in the process of complying with the USDOJ's
Second Request.
--------------------------------------------
1. 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 March 31, 2000, Monsanto Company consummated a merger with Pharmacia
& Upjohn Inc. and changed its name to Pharmacia Corporation. 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".
Pursuant to the Merger Agreement, D&PL agreed that, until the merger is
consummated or the Merger Agreement is earlier terminated (except as otherwise
expressly permitted by the terms of the Merger Agreement), it will, and it will
cause its subsidiaries to, (i) carry on its business in the ordinary course,
(ii) use reasonable best efforts to preserve intact its current business
organization and goodwill, (iii) keep available the services of its current
officers and employees, and (iv) preserve its relationships with suppliers,
distributors, customers and others.
The Company incurred approximately $8.0 million of expenses related to the
merger in 2006, including legal and advisory fees and other incremental costs
directly associated with the merger. These expenses are reported as a component
of Other Expense, Net in the Consolidated Statements of Income.
Basis of Presentation
The accompanying financial statements include the accounts of Delta and Pine
Land Company and its subsidiaries. Significant inter-company accounts and
transactions have been eliminated in consolidation. D&PL's investment in
50%-owned affiliate DeltaMax Cotton, LLC is accounted for using the equity
method.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 2006
presentation.
Cash Equivalents
Cash equivalents include overnight repurchase agreements and other short-term
investments having an original maturity of less than three months.
Marketable Securities
Marketable securities represent investments in auction rate securities ("ARS"),
which are classified as available-for-sale under the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). Accordingly, these investments are
"marked to market" at each period end, with any resulting change in value
recorded as a separate component of accumulated other comprehensive income/loss
in the Consolidated Balance Sheet, and not reported in the Consolidated
Statements of Income. For the years ended August 31, 2006, 2005 and 2004, there
was no unrealized change in fair value of the investments in ARS at any period
end, and accordingly, no amounts were recorded as a separate component of
accumulated other comprehensive income/loss. Income earned on these investments
(including realized gains and losses) is reported as a component of Interest
Income, Net, in the Consolidated Statements of Income.
At August 31, 2004, the Company had investments in ARS of $50 million, which
were previously reported as a component of Cash and Cash Equivalents in the
Consolidated Balance Sheets, due to the Company's assessment of the ARS being
readily convertible to cash. During the year ended August 31, 2005, the $50
million investment noted at August 31, 2004 was liquidated.
However, since the original maturities of these securities are long-term in
nature, the Company has corrected the 2005 and 2004 cash flow presentation of
this activity by presenting it as cash flows from investing activities in the
Consolidated Statements of Cash Flows. This change resulted in a $50 million
decrease in cash flows from investing activities for 2004 and a corresponding
$50 million increase in cash flows from investing activities for 2005 from the
amounts previously reported. Also, the Cash and Cash Equivalents balance at
August 31, 2004 on the Consolidated Statements of Cash Flows has been reduced to
reflect this change. This reclassification had no impact on our Consolidated
Statements of Income or Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided for financial reporting purposes using the straight-line method
over the estimated useful lives of the assets. Accelerated methods are used for
income tax purposes. The estimated useful lives of the various classes of
property, in years, are as follows:
Land improvements 5-20
Buildings and improvements 10-35
Machinery and equipment 3-15
Germplasm 10-15
Breeder and foundation seed 40
The germplasm, breeder and foundation seed were purchased as part of
acquisitions and include amounts for specifically identified varieties and for
breeding stocks. The amounts associated with specific varieties are amortized
over the expected commercial life of those varieties. Breeding stocks are
amortized over 40 years, since they can be revitalized from time to time and
remain viable indefinitely after such revitalization.
Intangible Assets
Identifiable intangible assets consist of trademarks, patents and other
intangible assets and are being amortized using the straight-line method over 5
to 40 years.
D&PL incurred in-process research and development ("IPR&D") and related
transaction costs of $27.6 million in 2006 and $38.5 million in 2004 associated
with the acquisitions of technology licenses and certain global cottonseed
assets (see Note 16). The value assigned to acquired in-process technology was
determined by identifying those acquired specific in-process research and
development projects that would be continued and for which (a) technology
feasibility had not been established at the acquisition date, (b) there was no
alternative future use, and (c) the fair value was estimable with reasonable
reliability. Cash paid for the acquisition of IPR&D is included in cash flows
from operating activities in the Consolidated Statements of Cash Flows.
Foreign Currency Translation
Financial statements of foreign operations where the local currency is the
functional currency are translated using exchange rates in effect at period end
for assets and liabilities and average exchange rates during the period for
results of operations. Translation adjustments are reported as a separate
component of stockholders' equity. Gains and losses from foreign currency
transactions are included in earnings.
Fair Value of Financial Instruments
The fair value of D&PL's financial instruments at August 31, 2006 and 2005,
which include cash, marketable securities, receivables, derivatives, accounts
payable, and payments to be made to Syngenta, approximates their carrying value.
Income Taxes
D&PL uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates and laws.
Revenue Recognition
Revenues from domestic seed sales are recognized when seed is shipped. Revenues
from Bollgard(R), Bollgard II(R), Roundup Ready(R), and Roundup Ready Flex(R)
licensing fees are recognized when the seed is shipped. Domestically, the
licensing fees charged to farmers for Bollgard, Bollgard II, Roundup Ready, and
Roundup Ready Flex cottonseed are based on pre-established planting rates for
each of nine geographic regions. International export revenues are recognized
upon the later of when seed is shipped or the date letters of credit (or other
instruments) are confirmed. Generally, international export sales are not
subject to return. Generally, all other international revenues from the sale of
planting seed, less estimated reserves for returns, are recognized when the seed
is shipped.
All of D&PL's domestic seed products (including those containing Bollgard,
Bollgard II, Roundup Ready, and Roundup Ready Flex technologies) are subject to
return and credit risk, the effects of which vary from year to year. D&PL
provides for estimated returns as sales occur. All significant returns occur or
are accounted for by fiscal year end. The Company records monthly estimates to
account for various sales incentive programs for seed and Monsanto's Bollgard,
Bollgard II, Roundup Ready, and Roundup Ready Flex technologies. The majority of
program rebates occur during the second, third and fourth quarters. Essentially
all material claims under these programs have occurred or are accounted for by
fiscal year end.
Research and Development
All research and development costs incurred to breed and produce experimental
seed are expensed. Costs incurred to produce sufficient quantities of planting
seed needed for commercialization are carried as inventory until such seed is
sold. Cotton lint and other by-products of seed production are also carried as
inventory until sold.
Accounting for Stock-Based Compensation
Effective September 1, 2005, the Company adopted Statement of Financial
Accounting Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No.
123R") utilizing the modified prospective approach. Under the modified
prospective approach, SFAS No. 123R applies to new awards and to awards that
were outstanding on September 1, 2005 and are subsequently modified or
cancelled. Additionally, compensation cost for the portion of awards for which
the requisite service had not been rendered as of September 1, 2005, will be
recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes previously under SFAS No. 123,
"Accounting for Stock-Based Compensation." ("SFAS No. 123") Prior periods were
not restated to reflect the impact of adopting SFAS No. 123R. The Company
elected to use the alternative (shortcut) method to determine the amount of
excess tax benefits that would have been recognized in additional paid-in
capital had the Company previously adopted SFAS No. 123 for recognition
purposes.
Prior to the adoption of SFAS No. 123R, the Company accounted for employee stock
options and other equity-based compensation awards using the intrinsic value
method of accounting prescribed by Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees."
Derivative Financial Instruments
D&PL uses various derivative financial instruments to mitigate its risk to
variability in cash flows related to soybean purchases and to effectively fix
the cost of a significant portion of its soybean raw material inventory. The
terms of the hedging derivatives used by D&PL are negotiated to approximate the
terms of the forecasted transaction; therefore, D&PL expects the instruments
used in hedging transactions to be highly effective in offsetting changes in
cash flows of the hedged items. Realized and unrealized hedging gains and losses
are recorded as a component of other comprehensive income and are reclassified
into cost of sales in the period in which the forecasted transaction affects
earnings (i.e., is sold or disposed of) which generally occurs during D&PL's
second and third fiscal quarters. Quantities hedged that do not exceed the
forecasted transactions are accounted for as cash flow hedges in the manner
discussed above. However, to the extent that the quantities hedged exceed the
forecasted transactions due to intra-season changes to the sales forecast where
it is probable that the originally forecasted transaction will no longer occur,
D&PL accounts for gains and losses on these derivative instruments as
discontinued cash flow hedges, whereby they are immediately recorded as a
component of net income. D&PL does not enter into any derivative instruments
that extend beyond the close of the following fiscal year. D&PL does not enter
into speculative hedges or purchase or hold any derivative financial instruments
for trading purposes.
Impairment of Long-Lived Assets
D&PL assesses recoverability and impairment of identifiable intangible assets
and other long-lived assets whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Recorded goodwill is tested
annually during the fourth quarter of each fiscal year for impairment by
comparing its implied fair value to its carrying value. Based on management's
impairment tests during the fourth quarters of 2006 and 2005, management
determined that none of the goodwill was impaired. For other long-lived assets,
D&PL determines if the unamortized balance can be recovered through projected
future operating cash flows. If the sum of the expected future cash flows is
less than the carrying amount of the asset, an impairment loss is recognized.
Otherwise, an impairment loss is not recognized, and D&PL continues to amortize
its other long-lived assets based on the remaining estimated useful life.
Use of Estimates
The preparation of D&PL's consolidated financial statements requires the use of
estimates and assumptions that affect the reported amounts of assets and
liabilities, the reported amounts of revenues and expenses and the disclosure of
contingent liabilities. Management makes its best estimate of the ultimate
outcome for these items based on historical trends and other information
available when the financial statements are prepared. Changes in estimates are
recognized in accordance with the accounting rules for the estimate, which is
typically in the period when new information becomes available to management.
Areas where the nature of the estimate makes it reasonably possible that actual
results could materially differ from amounts estimated include: damaged,
obsolete and excess inventory, income tax liabilities, allowances for sales
returns and marketing programs, allowance for doubtful accounts, employee
benefit plans and contingent liabilities.
Recently Issued Financial Accounting Standards
SFAS 154 - Accounting Changes and Error Corrections. In May 2005, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 154, "Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and SFAS No. 3". Among other changes, SFAS No.
154 requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented based on
the new accounting principle, unless it is impracticable to do so. SFAS No. 154
provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting principle, and (2) correction of errors
in previously issued financial statements should be termed a "restatement." SFAS
No. 154 is effective for accounting changes and correction of errors made in
fiscal years beginning after December 15, 2005. Therefore, the Company adopted
this standard beginning in September 2006. Since this standard applies to both
voluntary changes in accounting principles, as well as those that may be
mandated by standard-setting authorities, it is not possible to estimate the
impact that the adoption of this standard will have on D&PL's financial position
and results of operations.
SFAS 157 - Fair Value Measurements. In September 2006, the FASB issued SFAS No.
157, "Fair Value Measurements". This statement defines fair value, establishes a
framework for measuring fair value in accordance with United States generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for the fiscal year that begins after
November 15, 2007. The Company will adopt this standard beginning in September
2008. Currently, the Company is evaluating the impact that this new standard
will have on its financial position and results of operations.
SFAS 158 - Employers' Accounting for Defined Benefit Pension and Other
Postretirement Benefits, an Amendment of FASB Statements 87, 88, 106 and 132(R).
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Benefits, an Amendment of FASB
Statements 87, 88, 106, and 132(R)". This statement requires an employer with a
defined benefit pension plan to (1) recognize the funded status of the benefit
plan in its statement of financial position, (2) recognize as a component of
other comprehensive income, net of tax, the gains or losses and prior service
costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost pursuant to FASB Statement No. 87 or
FASB Statement No. 106, (3) measure defined benefit plan assets and obligations
as of the date of the employer's fiscal year-end statement of financial
position, and (4) disclose in the notes to the financial statements additional
information about certain effects on net periodic benefit cost for the next
fiscal year that arise from delayed recognition of the gains or losses, prior
service costs or credits, and transition asset or obligation. Adoption of SFAS
No. 158 is required by the end of the fiscal year that ends after December 15,
2006. Therefore, the Company will adopt this standard by August 31, 2007. The
Company is presently evaluating the impact that adopting SFAS 158 will have on
its financial position and results of operations.
FIN 48 - Accounting for Uncertainty in Income Taxes. In July 2006, FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"),
was issued. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes" by defining the criterion that
an individual tax position must meet in order to be recognized in the financial
statements. FIN 48 requires that the tax effects of a position be recognized
only if it is "more-likely-than-not" to be sustained based solely on the
technical merits as of the reporting date. FIN 48 further requires that interest
that the tax laws require to be paid on the underpayment of taxes should be
accrued on the difference between the amount claimed or expected to be claimed
on the return and the tax benefit recognized in the financial statements. FIN 48
also requires additional disclosures of unrecognized tax benefits, including a
reconciliation of the beginning and ending balances. FIN 48 is effective for
fiscal years beginning after December 15, 2006. Therefore, the Company expects
to implement FIN 48 beginning on September 1, 2007. The Company is presently
evaluating the impact that adopting FIN 48 will have on its financial position
and results of operations.
SAB 108 - Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. In September 2006, staff
from the Securities and Exchange Commission issued Staff Accounting Bulletin
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). This standard
provides guidance on the approach that companies must follow in quantifying
misstatements of their financial statements. Specifically, SAB 108 requires
companies to apply two approaches when evaluating the materiality of
misstatements of the financial statements. First, SAB 108 requires companies to
evaluate materiality using a "roll-over approach" in which companies quantify a
misstatement based on the amount of the error originating in the current year
income statement, ignoring the effect of correcting the portion of the
current-year balance sheet misstatement that originated in prior years. Second,
SAB 108 requires companies to evaluate materiality using an "iron curtain
approach" in which companies quantify a misstatement based on the effects of
correcting the misstatement existing in the balance sheet at the end of the
current year, irrespective of the misstatement's year(s) of origination. SAB 108
is effective for fiscal years ending on or after November 15, 2006. The Company
is still evaluating the impact that adopting this standard may have on its
financial position and results of operations.
2. INVENTORIES
Inventories at August 31, consisted of the following (in thousands):
2006 2005
------------------- -------------------
Finished goods $ 22,102 $ 19,713
Raw materials 17,353 13,156
Growing crops 1,844 818
Supplies 805 1,101
------------------- -------------------
42,104 34,788
Less reserves (10,504) (8,163)
------------------- -------------------
$ 31,600 $ 26,625
=================== ===================
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 damaged, obsolete and excess inventory. The provision recorded for
damaged, obsolete and excess inventory for the years ended August 31, 2006, 2005
and 2004 was approximately $11,300,000, $12,997,000, and $12,299,000,
respectively. See Note 15 for a description of inventory hedging activities
related to soybeans.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at August 31, consisted of the following (in
thousands):
2006 2005
------------------- -------------------
Land and improvements $ 6,501 $ 6,263
Buildings and improvements 45,282 43,018
Machinery and equipment 67,635 63,142
Germplasm 7,500 7,500
Breeder and foundation seed 2,000 2,000
Construction in progress 2,974 2,564
------------------- -------------------
131,892 124,487
Less accumulated depreciation (70,826) (64,329)
------------------- -------------------
$ 61,066 $ 60,158
=================== ===================
Depreciation expense was approximately $8,842,000, $8,250,000 and $7,980,000 in
2006, 2005, and 2004, respectively.
4. INTANGIBLES
The components of identifiable intangible assets at August 31, consisted of the
following (in thousands):
2006 2005
------------------------------------ ------------------------------------
Gross Accumulated Gross Accumulated
Carrying Amount Amortization Carrying Amount Amortization
----------------- ----------------- ----------------- -----------------
Trademarks $ 3,182 $ (1,037) $ 3,182 $ (958)
Commercialization agreements 400 (149) 400 (121)
Licenses 3,388 (417) 1,100 (192)
Patents 2,309 (245) 1,640 (116)
Other 2,039 (1,194) 2,096 (1,071)
----------------- ----------------- ----------------- -----------------
$ 11,318 $ (3,042) $ 8,418 $ (2,458)
================= ================= ================= =================
Amortization expense for identifiable intangible assets during the years ended
August 31, 2006, 2005, and 2004 was approximately $550,000, $410,000, and
$380,000, respectively. Identifiable intangible asset amortization expense is
estimated to be $360,000 from 2007 to 2009 and $350,000 in 2010 and 2011.
On December 29, 2005, D&PL acquired Vikki's Agrotech Pvt. Ltd. ("Vikki's), an
Indian cottonseed company, for cash of approximately $2.6 million. The results
of Vikki's operations have been included in D&PL's Consolidated Statements of
Operations from the date of acquisition. The allocation of the purchase price
resulted in approximately $2.3 million allocated to licenses. Pro forma results
of operations for the year ended August 31, 2006, if the acquisition had
occurred at the beginning of the year, would not have been materially different
than reported results for the year.
5. INVESTMENT IN AFFILIATE
D&PL owns a 50% interest in DeltaMax Cotton, LLC, a limited liability company
jointly owned with Verdia, Inc. Verdia was acquired by DuPont on July 2, 2004.
Established in May 2002, the DeltaMax joint venture was formed to create,
develop and commercialize herbicide tolerant and insect resistant traits for the
cottonseed market. D&PL has licensed from DeltaMax the developed traits for
commercialization in both the United States. and other cotton-producing
countries in the world. For the years ended August 31, 2006, 2005 and 2004,
D&PL's equity in the net loss of DeltaMax was $3,089,000, $2,787,000, and
$3,551,000, respectively.
6. LONG-TERM DEBT
The amounts reported in the Consolidated Balance Sheets as "Current Maturities
of Long-Term Debt" and "Long-Term Debt" at August 31, 2006 primarily relate to
payments to be made to Syngenta Crop Protection AG ("Syngenta") related to the
acquisition of certain licenses in 2004. See Note 16 for more information on the
transaction.
7. ACCRUED EXPENSES
Accrued expenses at August 31, consisted of the following (in thousands):
2006 2005
------------------ ------------------
Bollgard(R), Bollgard II(R), Roundup
Ready(R), and Roundup Ready
Flex(R) royalties and related
expenses due to Monsanto $ 211,368 $ 179,412
Sales allowances 26,865 15,106
Dividends 5,462 5,419
Other accrued expenses 31,948 21,887
------------------ ------------------
$ 275,643 $ 221,824
================== ==================
8. INCOME TAXES
The provisions for income taxes for the years ended August 31, consisted of the
following (in thousands):
2006 2005 2004
------------------ ------------------ -----------------
Current-
Federal $ 21,217 $ 18,606 $ 12,078
State 2,725 1,997 1,226
Deferred-
Federal (12,464) 1,813 (10,232)
State (1,729) 230 (1,678)
------------------ ------------------ -----------------
$ 9,749 $ 22,646 $ 1,394
================== ================== =================
The differences between the statutory federal income tax rate and the effective
tax rate are as follows:
2006 2005 2004
----------------- ------------------ ------------------
Statutory rate 35.0% 35.0% 35.0%
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit 2.2 2.2 (4.4)
Federal tax incentives (5.5) (1.1) (9.3)
Foreign activities (0.6) (1.0) (3.1)
Nondeductible merger costs 2.7 - -
Other (1.3) (0.4) 2.6
----------------- ------------------ ------------------
Effective tax rate 32.5% 34.7% 20.8%
================= ================== ==================
The effective tax rate was reduced in 2004 primarily due to the impact of the
IPR&D charge (see Note 16). State taxes resulted in a net benefit in 2004 due to
state income tax credits and the recognition of certain state net operating
losses that had not previously been benefited.
Deferred income taxes at August 31, consisted of the following (in thousands):
2006 2005
------------------- -------------------
Deferred tax assets:
Inventory $ 3,815 $ 2,954
Pension 463 1,984
Reserves 4,207 2,194
Capitalized licenses and intangibles 22,273 12,965
Other 1,303 191
------------------- -------------------
$ 32,061 $ 20,288
=================== ===================
Deferred tax liabilities:
Property $ (1,656) $ (3,172)
Other (173) (53)
------------------- -------------------
(1,829) (3,225)
------------------- -------------------
Net deferred income taxes $ 30,232 $ 17,063
=================== ===================
The Company has not provided for income taxes on the undistributed earnings of
certain foreign subsidiaries where the earnings are expected to be permanently
reinvested outside the United States. However, if taxes were provided on these
earnings, such taxes are not expected to be material to the Company's
consolidated financial statements.
9. LEASES
D&PL leases a portion of the real estate and machinery and equipment used in its
operations under operating lease arrangements. Substantially all rent expense is
recorded as cost of sales. D&PL does not have any capital leases. Approximate
future minimum rental payments after 2006 under operating leases with initial or
remaining non-cancelable terms in excess of one year are as follows:
2007 $ 995,000
2008 $ 455,000
2009 $ 244,000
2010 $ 34,000
2011 $ -
Rent and lease expense approximated $3,150,000, $3,059,000, and $2,558,000 in
2006, 2005 and 2004, respectively.
10. Credit Facility
On April 15, 2005, Delta and Pine Land Company and certain of its subsidiaries
entered into an unsecured $75 million credit agreement (the "Credit Agreement")
with Bank of America, N.A. (the "Bank"). The Credit Agreement provides for
unsecured revolving loans up to a maximum aggregate amount outstanding of $75
million, plus Letters of Credit which were outstanding prior to the execution of
the Credit Agreement in the amount of approximately $2 million. Of the total
commitment, $50 million represents a seasonal commitment available from October
to July of each year. The Credit Agreement was set to expire on July 31, 2006,
however, on December 5, 2005, pursuant to the Company's request as provided for
in the Credit Agreement, the Company and the Bank agreed to extend the Credit
Agreement until July 31, 2007, at which time all outstanding amounts under the
Credit Agreement will be due and payable, subject to the Company's right to
request an additional one-year extension and the Bank's acceptance of that
request.
In general, borrowings under the Credit Agreement bear interest at a rate
calculated according to a Eurodollar rate, plus 0.55%. The Eurodollar rate is
generally the 30-day, 60-day or 90-day LIBOR rate. The Company is also required
to pay an annual fee of 0.125% of the daily-unused portion of the Credit
Agreement. The primary financial covenant requires the Company's funded
indebtedness under the Credit Agreement to not exceed 50% of certain current and
long-term assets, defined in the Credit Agreement and determined as of the last
day of each fiscal quarter.
During the year ended August 31, 2006, the maximum amount borrowed was $45
million under the Credit Agreement, which was repaid by August 31, 2006. As
such, other than the existing Letters of Credit discussed above, there were no
loans outstanding under the Credit Agreement as of August 31, 2006.
11. EMPLOYEE BENEFIT PLANS
Defined Benefit Plan
Substantially all full-time employees are covered by a noncontributory defined
benefit plan (the "Plan"). Benefits are paid to employees, or their
beneficiaries, upon retirement, death or disability based on their final average
compensation over the highest consecutive five years. D&PL's funding policy is
to make contributions to the Plan that is at least equal to the minimum amounts
required to be funded in accordance with the provisions of ERISA. D&PL expects
to contribute approximately $2 million to the Plan in 2007.
Effective January 1992, D&PL adopted a Supplemental Executive Retirement Plan
(the "SERP"), which will pay supplemental pension benefits to certain employees
whose benefits from the Plan were decreased as a result of certain changes made
to the Plan. The benefits from the SERP will be paid in addition to any benefits
the participants may receive under the Plan and will be paid from Company
assets, not Plan assets. D&PL did not contribute funds to the SERP in 2006 and
does not expect to contribute funds to the SERP in 2007.
The measurement of Plan and SERP assets and obligations was performed as of June
30. The following table provides a reconciliation of the changes in the Plan's
and SERP's benefit obligations and fair value of assets over the two-year period
ended August 31, 2006, and a statement of the funded status as of August 31,
2006 and 2005.
Plan SERP
-------------------------------------- ---------------------------------------
2006 2005 2006 2005
----------------- ----------------- ------------------ ------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at beginning of year $ 22,264,000 $ 17,866,000 $ 633,000 $ 607,000
Service cost 1,092,000 853,000 - -
Interest cost 1,150,000 1,094,000 32,000 36,000
Actuarial (gain) loss (2,454,000) 3,142,000 (51,000) 39,000
Benefits paid (693,000) (691,000) (55,000) (49,000)
----------------- ----------------- ------------------ ------------------
Benefit obligation at end of year $ 21,359,000 $ 22,264,000 $ 559,000 $ 633,000
================= ================= ================== ==================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 14,293,000 $ 13,215,000 $ 299,000 $ 339,000
Actual return on plan assets 832,000 356,000 21,000 10,000
Company contributions 3,700,000 1,500,000 - -
Benefits paid (693,000) (691,000) (55,000) (49,000)
Expenses (133,000) (87,000) (1,000) (1,000)
----------------- ----------------- ------------------ ------------------
Fair value of plan assets at end of year $ 17,999,000 $ 14,293,000 $ 264,000 $ 299,000
================= ================= ================== ==================
Funded status $ (3,359,000) $ (7,971,000) $ (295,000) $ (334,000)
Unrecognized prior service cost - 15,000 - -
Unrecognized net loss (gain) 6,661,000 9,354,000 (48,000) 56,000
----------------- ----------------- ------------------ ------------------
Prepaid (accrued) pension cost $ 3,302,000 $ 1,398,000 $ (343,000) $ (278,000)
================= ================= ================== ==================
Plan SERP
-------------------------------------- ---------------------------------------
2006 2005 2006 2005
----------------- ----------------- ------------------ ------------------
AMOUNTS REFLECTED IN THE BALANCE SHEET AT
AUGUST 31:
Prepaid (accrued) benefit cost $ 3,302,000 $ 1,398,000 $ (343,000) $ (278,000)
Minimum pension liability (4,436,000) (7,104,000) - (56,000)
Accumulated other comprehensive loss 4,436,000 7,089,000 - 56,000
Intangible asset - 15,000 - -
----------------- ----------------- ------------------ ------------------
$ 3,302,000 $ 1,398,000 $ (343,000) $ (278,000)
================= ================= ================== ==================
The accumulated benefit obligation for the Plan was $19,133,000 and $19,999,000
as of August 31, 2006 and 2005, respectively. The accumulated benefit obligation
for the SERP was $559,000 and $633,000 as of August 31, 2006 and 2005,
respectively.
Periodic Pension Expense:
Plan SERP
----------------------------------------- -----------------------------------------
2006 2005 2004 2006 2005 2004
------------ ------------ ------------- ------------ ------------- ------------
Service cost $ 1,092,000 $ 853,000 $ 832,000 $ - $ - $ 9,000
Interest cost on projected
benefit obligation 1,150,000 1,094,000 989,000 32,000 36,000 35,000
Expected return on assets (1,179,000) (1,088,000) (921,000) (23,000) (26,000) (28,000)
Recognized loss (gain) 718,000 406,000 472,000 56,000 (2,000) 50,000
Amortization of prior service
cost 15,000 3,000 3,000 - - -
------------ ------------ ------------- ------------ ------------- ------------
Net periodic pension expense $ 1,796,000 $ 1,268,000 $ 1,375,000 $ 65,000 $ 8,000 $ 66,000
============ ============ ============= ============ ============= ============
Company contributions $ 3,700,000 $ 1,500,000 $ 2,700,000 $ - $ - $ -
============ ============ ============= ============ ============= ============
Plan SERP
-------------------------------------- ---------------------------------------
2006 2005 2006 2005
----------------- ------------------ ------------------ ------------------
Weighted-average assumptions used to determine
benefit obligations at August 31:
Discount rate 6.25% 5.25% 6.25% 5.25%
Rate of compensation increases 3.50% 3.50% 3.50% 3.50%
Weighted-average assumptions used to determine
net periodic benefit cost for years ended
August 31:
Discount rate 5.25% 6.25% 5.25% 6.25%
Expected long-term return on plan assets 8.50% 8.50% 8.50% 8.50%
Rate of compensation increase 3.50% 4.00% 3.50% 4.00%
The expected long-term rate of return assumptions for each asset class are
selected based on historical relationships between the asset classes and the
economic and capital market environments updated for current conditions.
D&PL's Plan and SERP asset allocations as of the measurement dates of June 30,
2006 and 2005 are as follows:
Plan SERP
-------------------------------------- ---------------------------------------
2006 2005 2006 2005
----------------- ----------------- ------------------ ------------------
Asset Category
Common stocks 80% 70% 69% 73%
Preferred stocks 16% 15% 25% 26%
Temporary investments 4% 15% 6% 1%
----------------- ----------------- ------------------ ------------------
Total 100% 100% 100% 100%
================= ================= ================== ==================
The Plan and SERP plan assets are managed by independent portfolio managers as
balanced accounts with assets invested in fixed income securities (including
preferred stocks, corporate bonds and debentures) and equities (including common
stocks). The target range for asset allocation is 20% to 40% for fixed income
securities and 60% to 80% for equities.
A primary risk control is the limiting of any one equity position to no more
than 8% of the value of the equity portion of the portfolio. No derivatives are
used in portfolio construction. No Plan or SERP assets were invested in D&PL
common stock at June 30, 2006 or 2005.
At August 31, 2006, total future Plan and SERP benefits are estimated as
follows:
Plan SERP
----------------- -----------------
2007 $ 789,000 $ 59,000
2008 834,000 59,000
2009 905,000 59,000
2010 989,000 59,000
2011 999,000 59,000
Years 2012-2016 5,765,000 295,000
Defined Contribution Plan
D&PL sponsors a defined contribution plan under Section 401(k) of the Internal
Revenue Code which covers substantially all full-time employees of D&PL. D&PL,
at its option, may elect to make matching contributions to the Plan. No matching
contributions were made in 2006, 2005 or 2004.
12. MAJOR CUSTOMERS
In 2006, 2005 and 2004, seed sales to each of four customers and the related
licensing fees ultimately billed to farmers for sales made by these customers
for transgenic products comprised more than 10% of total sales and licensing
fees. The table below presents the approximate amount of annual sales and
licensing fees to each of the customers. These amounts were reported in D&PL's
domestic segment.
Customer 2006 2005 2004
--------------- ------------------ ------------------- -------------------
A $53,398,000 $41,245,000 $38,820,000
B 94,834,000 77,865,000 66,156,000
C 82,628,000 69,306,000 55,388,000
D 41,094,000 22,173,000 20,327,000
13. BUSINESS SEGMENT INFORMATION
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.
Information about D&PL's segments for the years ended August 31, is as follows
(in thousands):
2006 2005 2004
--------------- --------------- ---------------
Net sales and licensing fees
Domestic $ 388,824 $ 325,621 $ 276,410
International 28,809 40,464 36,355
--------------- --------------- ---------------
$ 417,633 $ 366,085 $ 312,765
=============== =============== ===============
Net sales and licensing fees
Cottonseed $ 394,062 $ 342,918 $ 282,233
Soybean seed 21,210 21,051 26,951
Other 2,361 2,116 3,581
--------------- --------------- ---------------
$ 417,633 $ 366,085 $ 312,765
=============== =============== ===============
Operating income
Domestic $ 44,132 $ 64,786 $ 17,199
International (1,984) 6,929 4,361
--------------- --------------- ---------------
$ 42,148 $ 71,715 $ 21,560
=============== =============== ===============
Capital expenditures
Domestic $ 8,423 $ 4,200 $ 4,240
International 1,268 2,469 1,809
--------------- --------------- --------------
$ 9,691 $ 6,669 $ 6,049
=============== =============== ==============
Depreciation and amortization
Domestic $ 7,376 $ 6,836 $ 6,762
International 2,016 1,825 1,602
--------------- --------------- --------------
$ 9,392 $ 8,661 $ 8,364
=============== =============== ==============
Information about the financial position of D&PL's segments as of August 31, is
as follows (in thousands):
2006 2005
--------------- ---------------
Long-term assets
Domestic $ 78,689 $ 65,898
International 18,298 16,607
--------------- ---------------
$ 96,987 $ 82,505
=============== ===============
Total assets
Domestic $ 477,393 $ 408,784
International 28,861 30,400
--------------- ---------------
$ 506,254 $ 439,184
=============== ===============
14. RELATED PARTY TRANSACTIONS
During 2006, 2005 and 2004, a partner of a law firm that represents D&PL was
also a stockholder and D&PL's corporate secretary. D&PL paid legal fees to this
firm of approximately $1,577,000, $962,000, and $929,000 in 2006, 2005 and 2004,
respectively.
During 2006, 2005 and 2004, DeltaMax paid Temasek Life Science Laboratory
("TLL") approximately $1,929,000, $1,465,000 and $1,118,000, respectively, for
research activities TLL conducted for DeltaMax. TLL is a related party of
Temasek Capital and Temasek Holdings. Dr. Chua, a member of the board of
directors of D&PL, was the Chief Scientific Advisor of Temasek Capital from
April 2001 to March 2003 and was appointed to be Corporate Advisor to Temasek
Holdings in April 2003 through March 2006, and has advised TLL since April 2004.
Dr. Chua has been a paid consultant to Pioneer Hi-Bred International, Inc., a
DuPont subsidiary, for several years and continues in this capacity. In July
2004, DuPont acquired Verdia, Inc., which owns 50% of DeltaMax (see Note 5).
15. DERIVATIVE FINANCIAL INSTRUMENTS
Accumulated other comprehensive loss includes the following related to the
Company's soybean hedging program for the years ended August 31, 2006 and 2005
(in thousands):
2006 2005
------------------- -------------------
Deferred net gain (loss), beginning of year $ 224 $ (134)
Net losses on hedging instruments arising during the year (122) (116)
Reclassification adjustment of (gains) losses on hedging
instruments to earnings (238) 474
------------------- -------------------
Net change in accumulated other comprehensive loss (360) 358
------------------- -------------------
Deferred net (loss) gain, end of year $ (136) $ 224
=================== ===================
The deferred net loss of $136,000 included in accumulated other comprehensive
loss at August 31, 2006 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.
For the years ended August 31, 2006 and 2005, D&PL recorded no gains or losses
in earnings as a result of hedge ineffectiveness or discontinuance of cash flow
hedges.
16. IN-PROCESS RESEARCH AND DEVELOPMENT
DuPont Technology Licenses. On June 30, 2006, we acquired licenses from E.I.
duPont de Nemours & Company ("DuPont") and DuPont's affiliates, Pioneer Hi-Bred
International, Inc. ("Pioneer") and Verdia, Inc. ("Verdia"), for the Optimum GAT
trait in cotton and soybeans. The Optimum GAT trait, developed by DuPont, will
provide farmers with expanded weed control options and help optimize yield. This
herbicide tolerance technology makes plants tolerant to both glyphosate and ALS
herbicides, including sulfonylurea herbicides. Previously, DuPont announced
plans to commercialize Optimum GAT in Pioneer(R) brand corn and soybeans and
also secured significant outlicense agreements. We and DuPont, through its
Pioneer subsidiary, are partners in the DeltaMax joint venture, which was
initially formed to develop and commercialize glyphosate-only tolerance in
cotton. We paid $20.5 million in connection with this transaction. Technology
fee sharing for the Optimum GAT technology is essentially consistent with the
existing terms in the DeltaMax Collaboration agreement. We also reached an
agreement to license soybean lines suitable for planting in the Southern
soybean market through the involvement of GreenLeaf Genetics LLC.
For the year ended August 31, 2006, we recorded a charge of $20.5 million
related to the write-off of acquired IPR&D and related transaction costs. These
technologies have not yet reached technological feasibility and have no
alternative future use. Accordingly, the amount paid for the licenses was
expensed in the 2006 Consolidated Statements of Income on the acquisition date.
Syngenta Global Cottonseed Assets. In May 2006, D&PL purchased selected assets
of Syngenta's global cottonseed business for $7.0 million, which was comprised
of certain cottonseed germplasm in the United States, India and certain other
countries, and certain equipment and a sublease of buildings and land at
Syngenta India Ltd.'s research farm at Aurangabad, India, and agreed to make
employment offers to four employees of Syngenta India Ltd.'s cotton breeding
program.
Syngenta retained rights to use two specific cotton lines for transgenic trait
development. In addition to usual corporate warranties, Syngenta warranted (with
specific exceptions) exclusive ownership and freedom to use the acquired
Products and the absence of transgenes not intended to be components of the
acquired Products.
The hybrid germplasm acquired in India will require regulatory approval in that
country before it can be offered for commercial sale. The germplasm acquired in
the United States contains Syngenta's VipCot technology, which we acquired a
license to in 2004 (see below), and which also requires regulatory approval in
the United States. Since these assets have no alternative future use if such
regulatory approvals are not obtained, the entire purchase price was expensed in
the 2006 Consolidated Statements of Income on the acquisition date as the
write-off of acquired IPR&D.
Syngenta Technology Licenses. In August 2004, D&PL entered into an acquisition
agreement with Syngenta to purchase global licenses to develop and commercialize
Syngenta's insect resistance technology in cottonseed. In addition, D&PL
purchased licenses to a wide range of other Syngenta enabling technologies that
may be useful in developing new products for use in cottonseed and soybean seed.
In return for the licenses, D&PL is to pay Syngenta approximately $46.8 million
in installments due primarily through the first quarter of 2008. Under the
acquisition agreement, D&PL paid Syngenta $14.1 million at closing in 2004 and
paid Syngenta $5.8 million during 2005 and $10.15 million in 2006. D&PL is
further required to make future payments of $5.95 million in 2007, and $1.6
million in 2008. Of the $46.8 million purchase price, contingent payments of
$1.6 million in 2008, $3.1 million in 2009, $3.0 million in 2010, and $1.5
million in 2011 may also have to be made under the agreements.
At the purchase date, an amount equal to the present value of the payments
required to be made was capitalized as an intangible asset of $36.23 million,
and then expensed in the 2004 Consolidated Statements of Income, as the
technologies to which D&PL purchased licenses were IPR&D projects that had not
yet reached technological feasibility and had no alternative future use.
Payments to be made after the first quarter of 2008 are contingent on certain
events occurring, and thus were not included in the amount capitalized and then
written off as IPR&D. Related transaction costs of approximately $2.3 million,
primarily related to professional fees, are also included in the caption
"In-process research and development and related transaction costs" in the
Consolidated Statements of Income.
The present value of the amounts to be paid through the first quarter of 2008
was computed based on discount rates that approximated borrowing rates that D&PL
would incur on borrowings with similar maturities as the payments required to be
made. Accordingly, the discount rate used for the payments to be made one, two
and three and one-half years after the purchase date was 3.28%, 3.84% and 4.25%,
respectively. The amount due to Syngenta within the next twelve months is
reported in the Consolidated Balance Sheet as "Notes Payables and Current
Maturities of Long-Term Debt" under Current Liabilities. The balance of the
remaining payments due through the first quarter of 2008 is reported as
"Long-Term Debt."
17. COMMITMENTS AND CONTINGENCIES
Merger with Monsanto
The August 14, 2006 Merger Agreement signed by D&PL and Monsanto contains
various provisions related to the possible termination of the Merger Agreement
if certain events occur or do not occur, as the case may be. Depending upon the
termination event, one of the following may occur: (i) Monsanto may be required
to pay D&PL a termination payment of $600 million; (ii) the royalty paid to
Monsanto under certain licenses with D&PL may be reduced; or (iii) D&PL may be
required to pay Monsanto a termination payment of $15 million. The termination
events also impact various dispute and litigation issues pending between D&PL
and Monsanto, which are described more fully below in this footnote.
Product Liability Claims
D&PL is named as a defendant in various lawsuits that allege, among other
things, that certain of D&PL's products (including those containing Monsanto's
technology) did not perform as the farmer had anticipated or expected. In some
of these cases, Monsanto and/or the dealer or distributor who sold the seed are
also named as defendants. In all cases where the seed sold contained either or
both of Monsanto's Bollgard and/or Roundup Ready gene technologies, and where
the farmer alleged a failure of one or more of those technologies, D&PL has
tendered the defense of the case to Monsanto and requested indemnity. Pursuant
to the terms of the February 2, 1996 Bollgard Gene License and Seed Services
Agreement (the "Bollgard Agreement") and the February 2, 1996 Roundup Ready Gene
License and Seed Services Agreement (the "Roundup Ready Agreement") (both as
amended December 1999, January 2000, March 2003, and August 2006 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 adverse impact on the consolidated financial statements. D&PL intends
to vigorously defend itself in these matters.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II(R) cottonseed infringes Bayer's Australian patent
that claims an alleged invention entitled "Prevention of Bt Resistance
Development." The suit seeks an injunction, damages and other relief against
Deltapine Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings. Due to the status of this
matter, management is unable to determine the impact of this matter on the
consolidated financial statements.
Since July 2003, D&PL and Monsanto have been involved in alternative dispute
resolution proceedings and arbitration pertaining to matters under, among other
agreements, the Bollgard and Roundup Ready Licenses for the United States. On
August 14, 2006, Monsanto, D&PL and D&M Partners entered into an Arbitration
Settlement Agreement under which certain provisions in the Bollgard and Roundup
Ready Licenses and the Marketing Services Agreement were amended to resolve
issues in dispute and all claims and counterclaims alleged in this arbitration
(including Monsanto's claims to terminate the license rights of D&PL and D&M
Partners) were released and dismissed with prejudice. No monetary payments were
required from any of Monsanto, D&PL or D&M Partners for the settlement.
On February 17, 2006, D&PL initiated a dispute resolution proceeding under the
1996 Option Agreement and the 2002 Bollgard Gene License on the issue of whether
Monsanto's implementation of a farmer licensing system for the Bollgard gene
technology in Brazil violates D&PL's and its local affiliates' rights to an
exclusive license to develop, produce and sell Bollgard planting seed in Brazil.
On March 27, 2006, D&PL submitted this issue to arbitration before the American
Arbitration Association ("AAA"). As part of this arbitration, D&PL sought to
enjoin Monsanto's implementation of its farmer licensing system and is seeking
damages incurred by D&PL and its affiliates. In July 2006, the Arbitration Panel
conducted a preliminary hearing. The Panel denied a preliminary injunction
without prejudice to granting a permanent injunction upon final hearing. On
August 14, 2006, Monsanto and D&PL entered into a settlement agreement under
which further proceedings in this arbitration are stayed pending the proposed
merger between Monsanto and D&PL and/or a mutually agreed resolution of this
dispute, provided that net technology fees collected under the farmer licensing
system during the period of stay will be divided between Monsanto and its
affiliates and D&PL and its affiliates in a ratio of 56%/44%. Pursuant to this
settlement agreement, litigation by D&PL against Monsanto in New Castle County,
Delaware, and by Monsanto against D&PL and its affiliates in St. Louis County,
Missouri, related to this arbitration was dismissed with prejudice. MDM Sementes
de Algodao Limitada, D&PL's affiliate in Brazil, is proceeding with a planned
launch of sales of cotton seed containing Bollgard gene technology in Brazil in
the 2007 sales season.
On June 16, 2006, D&PL submitted to arbitration before the AAA issues involving
D&PL's rights to exclusive rights to Bollgard technology in two additional
Ex-United States countries and D&PL's rights to more favorable license terms
under its United States Bollgard and Bollgard II Licenses. Pursuant to
settlement agreements entered into on August 14, 2006, the arbitration with
respect to the exclusive licenses in the two Ex-United States countries and a
dispute resolution proceeding involving the confidentiality provisions of the
Bollgard and Roundup Ready Licenses were stayed pending the merger between
Monsanto and D&PL. The arbitration of the issue involving most favored licensee
provisions was dismissed with prejudice.
On February 28, 2006, D&PL filed suit in the Circuit Court of Dunklin County,
Missouri, seeking to recover Soybean Seed Services Fees in the amount of
approximately $2.2 million which Monsanto had refused to pay D&PL with respect
to soybean seed containing Monsanto's Roundup Ready technology sold by D&PL
during the 2005 planting season. The suit also sought a declaratory judgment
that D&PL's payments of royalties under its Roundup Ready Soybean License have
been correctly calculated and paid during the years 2002 to 2005. Pursuant to a
settlement agreement entered into on August 14, 2006, Monsanto paid D&PL the
$2.2 million in dispute; payments under the Roundup Ready Soybean License for
the 2006 growing season were made under the existing terms of that license; for
the 2007 and subsequent growing seasons, this license was amended with respect
to payments of royalties on seed sold for replanting; and this litigation was
dismissed with prejudice.
D&PL vs. Monsanto Company and Pharmacia Corporation
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("H-S-R
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 (the
"1998 Merger Agreement"). On December 30, 1999, D&PL filed suit in the First
Judicial District of Bolivar County, Mississippi, seeking, among other things,
the payment of the $81 million termination fee due pursuant to the 1998 Merger
Agreement, compensatory damages and punitive damages. On January 2, 2000, D&PL
and Monsanto reached an agreement whereby D&PL would withdraw the suit, without
prejudice, for the purpose of negotiating a settlement of D&PL's claims, and
Monsanto would immediately pay the $81 million. On January 3, 2000, Monsanto
paid to D&PL the termination fee of $81 million as required by the 1998 Merger
Agreement. On January 18, 2000, after unsuccessful negotiations, D&PL re-filed
its suit, (the "1998 Merger Litigation"). D&PL seeks in excess of $1 billion in
compensatory and $1 billion in punitive damages for breach of the 1998 Merger
Agreement.
On September 12, 2003, Monsanto amended its answer to include four counterclaims
against D&PL. Monsanto is seeking an unspecified amount of 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. On December 21, 2004, Monsanto filed a motion to amend its answer
to withdraw two of its four counterclaims. On February 17, 2005, D&PL filed a
motion with the trial court to amend its complaint to add a claim against
Monsanto for fraudulently inducing D&PL to extend the deadline to complete the
merger with Monsanto. The Mississippi Supreme Court has stayed the proceedings
in this case pending the resolution of two interlocutory appeals filed by D&PL.
Pursuant to the Agreement and Plan of Merger between Monsanto, Monsanto Sub,
Inc. and D&PL, entered into on August 14, 2006 (the "2006 Merger Agreement"),
Monsanto and D&PL have agreed to take steps necessary to stay the 1998 Merger
Litigation for a period of up to twelve months. On August 27, 2006, the
Mississippi Supreme Court entered an Order staying proceedings in the 1998
Merger Litigation through February 27, 2007. The 2006 Merger Agreement provides
the 1998 Merger Litigation will be dismissed with prejudice upon certain
circumstances including (1) completion of the merger, (2) the merger is not
completed by the Outside Date (as defined in the 2006 Merger Agreement) and
certain regulatory approvals have not been obtained, or the completion of the
merger is prevented by a law or order related to anti-trust or completion law,
(3) Monsanto breaches any covenant or agreement in the 2006 Merger Agreement in
a material respect and fails to cure upon notice, (4) D&PL's board of directors
approves, or D&PL enters into, an acquisition transaction with a party other
than Monsanto, or (5) D&PL breaches the covenants and agreements in the 2006
Merger Agreement in a material respect and fails to cure upon notice. (In the
circumstances described in items (2) and (3), Monsanto is required to pay D&PL
$600 million in cash.) In the following circumstances, the stay of the 1998
Merger Litigation will terminate and the parties may then pursue any and all
rights in that litigation: (1) D&PL's board of directors modifies or changes its
recommendation or approval of the merger and at that time D&PL's board of
directors has not received a proposal from a party other than Monsanto regarding
an acquisition, (2) D&PL breaches its representations or warranties under the
2006 Merger Agreement and fails to cure upon notice, (3) the merger has not been
completed by the Outside Date and there has been a material adverse change with
respect to D&PL, or (4) the 2006 Merger Agreement is terminated by agreement of
D&PL and Monsanto or for any reason other than as specified above.
18. STOCKHOLDERS' EQUITY
Preferred Stock
Pursuant to the 2006 Merger Agreement executed with Monsanto, the Company is
precluded from issuing additional shares of preferred stock.
Prior to the Merger Agreement executed with Monsanto, the board of directors of
D&PL was authorized, subject to certain limitations prescribed by law, without
further stockholder approval, to issue up to an aggregate of 2,000,000 shares of
Preferred Stock, in one or more series, and to determine or alter the
designations, preferences, rights and any qualifications, limitations or
restrictions on the shares of each such series thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
such series.
In August 1996, the board of directors adopted a Stockholder Rights Plan
("Rights Plan") and declared a dividend of one preferred stock purchase right
("right") for each outstanding share of D&PL's common stock. Similar rights have
been, and generally will be, issued in respect of common stock subsequently
issued. Each right becomes exercisable, upon the occurrence of certain events,
for one one-hundredth of a share of Series A Junior Participating Preferred
Stock, $0.10 par value, at a purchase price of $175 per one one-hundredth of a
Preferred Share, subject to adjustment. In the event that D&PL is acquired in a
merger or other business combination transaction not approved by the board of
directors, each holder of a right shall have the right to receive that number of
shares of common stock of the surviving company which would have a market value
of two times the exercise price of the right. Under the Rights Plan, 501,989
shares of Series A Junior Participating Preferred Stock have been reserved. The
rights currently are not exercisable and will be exercisable only if a person or
group acquires beneficial ownership of 15% or more of D&PL's outstanding shares
of common stock. The rights, which expire on August 30, 2016, are redeemable in
whole, but not in part, at D&PL's option at any time for a price of $0.01 per
right.
D&PL issued 1,066,667 shares (after effect of stock splits) of Series M
Convertible Non-Voting Preferred Stock, as consideration for the purchase in
1996 of Hartz Cotton, Inc. from Monsanto. The holders of Series M Preferred
Stock are entitled to receive dividends at the same rate per share as is paid
from time to time on each share of the Common Stock of D&PL, and no more, when
and as declared by the board of directors. In the event of any liquidation,
dissolution or winding up of D&PL, either voluntary or involuntary, the holders
of Series M Preferred Stock shall be entitled to receive, prior to and in
preference to any distribution to holders of Common Stock or any other class of
security of D&PL, $13.936 per share of Series M Preferred Stock. The Series M
Preferred Stock became convertible on February 2, 2003, the seventh anniversary
of the date on which the Series M Preferred Stock was issued.
Long-Term Incentive Plans
Share-Based Payments. Effective September 1, 2005, the Company adopted SFAS No.
123R utilizing the modified prospective approach. Under the modified prospective
approach, SFAS No. 123R applies to new awards and to awards that were
outstanding on September 1, 2005 and are subsequently modified or cancelled.
Additionally, compensation cost for the portion of awards for which the
requisite service had not been rendered as of September 1, 2005, will be
recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes previously under SFAS No. 123,
"Accounting for Stock-Based Compensation." Prior periods were not restated to
reflect the impact of adopting SFAS No. 123R. The Company elected to use the
alternative (shortcut) method to determine the amount of excess tax benefits
that would have been recognized in additional paid-in capital had the Company
previously adopted SFAS No. 123 for recognition purposes.
Prior to the adoption of SFAS No. 123R, the Company accounted for employee stock
options and other equity-based compensation awards using the intrinsic value
method of accounting prescribed by APB Opinion 25, "Accounting for Stock Issued
to Employees." No compensation expense was previously recognized related to the
Company's stock options because the number of shares was fixed at the grant date
and each option's exercise price was set at or above the stock's fair market
value on the date the option was granted. Under SFAS No. 123R, the Company
charged to income approximately $3.3 million of compensation expense for stock
options, Restricted Stock and Restricted Stock Units for the year ended August
31, 2006.
The 1995 Long-Term Incentive Plan, as amended and restated in March 2000 (the
"LTIP"), allows for the awarding of stock options to officers, key employees and
directors. Under the LTIP, options to purchase 5,120,000 shares (after effect of
stock splits) of common stock of D&PL were available for grant. Shares subject
to options and awards which expire unexercised are available for new option
grants and awards under the LTIP. The Compensation Committee of the board of
directors administers the Plan and has sole discretion regarding the
exercisability of the option grants.
The 2005 Omnibus Stock Plan ("2005 Stock Plan"), approved by the shareholders in
January 2005, provides for the grant of (a) incentive stock options as defined
in the Internal Revenue Code of 1986, as amended, (b) non-qualified stock
options, (c) Restricted Stock, and (d) Restricted Stock Units to D&PL's
employees, independent contractors and members of the board of directors for the
purpose of encouraging share ownership of D&PL. Up to 4,500,000 shares are
available for grants of awards under the Plan. The maximum number of shares
which may be issued for awards of Restricted Stock and Restricted Stock Units is
2,100,000 shares and the maximum for options is 2,400,000. The Compensation
Committee of the board of directors administers the Plan and has sole discretion
regarding the exercisability of the option grants. Any lapsed awards shall again
be available under this plan.
Options. The Company determines the fair value of stock option awards using the
Black-Scholes option-pricing model. Expected volatilities are based on the
historical volatility of the Company's common stock. The Company uses historical
data to estimate share option exercise and employee departure behavior used in
the Black-Scholes option-pricing model. The expected term of share options
granted is derived from the output of the option pricing model and represents
the period of time that share options granted are expected to be outstanding.
The risk-free rate is based on yields of United States Treasury securities with
similar terms as the expected life of the options.
The Company recognized gross compensation cost associated with all of its
outstanding stock option awards of $1.7 million, prior to a tax benefit of
$553,000, for the year ended August 31, 2006, versus $0 in the prior year. At
August 31, 2006, there was approximately $1.8 million of unrecognized
compensation cost related to stock option awards, prior to an anticipated tax
benefit of $685,000, which is expected to be recognized over the remaining
employees' service periods over a weighted-average period of two years.
All outstanding options have a contractual term of 7 to 10 years. All stock
option awards made prior to May 18, 2005 become exercisable ratably over a
five-year service period. Stock option awards made on May 18, 2005 become
exercisable 45 days after issuance. Stock option awards made subsequent to May
18, 2005 become exercisable ratably over a five-year service period. Under both
the LTIP and the 2005 Stock Plan, all outstanding stock options become
exercisable immediately upon a change in control of the Company. There were
approximately 2.3 million stock options available for grant at August 31, 2006.
There are no post-vesting restrictions related to outstanding stock options.
Additional information regarding stock options granted and outstanding is
summarized below:
Aggregate
Number of Intrinsic
Shares Price Range Value
-------------- ----------------------------- --------------------
Outstanding at August 31, 2003 3,983,982 $ 4.67 $ 47.31
Granted 35,332 22.61 25.50
Exercised (637,704) 4.67 22.36
Lapsed or canceled (51,977) 4.67 22.67
-------------- ------------ ----------
Outstanding at August 31, 2004 3,329,633 10.69 47.31
Granted 1,170,548 26.02 30.06
Exercised (766,109) 10.69 26.82
Lapsed or canceled (29,890) 17.78 26.82
-------------- ------------ ----------
Outstanding at August 31, 2005 3,704,182 10.69 47.31
Granted 99,740 22.51 29.75
Exercised (1,058,055) 10.69 30.06
Lapsed or canceled (25,800) 17.85 30.06
-------------- ------------ ----------
Outstanding at August 31, 2006 2,720,067 $ 16.91 $ 47.31 $ 46,168,780
============== ============ ========== =====================
Exercisable at August 31, 2006 2,373,343 $ 16.91 $ 47.31 $ 39,848,030
============== ============ ========== =====================
The weighted-average grant-date fair values of options granted in 2006, 2005 and
2004 were $6.15, $4.64, and $6.14 per share, respectively. The fair value for
these options was estimated at the date of grant, using a Black-Scholes
option-pricing-model with the following weighted-average assumptions:
2006 2005 2004
-------------- --------------- ---------------
Expected dividend yield 2.44% 1.48% 1.00%
Expected option lives 6 years 4 years 8 years
Expected volatility 24.51% 19.81% 16.01%
Risk-free interest rates 4.56% 3.96% 3.82%
The following table summarizes certain information about outstanding and
exercisable stock options at August 31, 2006:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Price Contractual Life Exercise Exercise
Range Number in Year Price Number Price
--------------------- ------------- ------------------- ------------- -------------- -------------
$10.69 to 19.99 1,268,240 4.3 $ 19.06 1,114,722 $ 19.13
$20.00 to 29.99 1,199,003 5.2 26.44 1,005,797 26.60
$30.00 to 39.99 250,824 4.8 31.61 250,824 31.61
$40.00 to 47.31 2,000 1.7 47.31 2,000 47.31
------------- --------------
2,720,067 4.7 23.49 2,373,343 23.68
============= ==============
Restricted Stock and Restricted Stock Units. For the year ended August 31, 2006,
12,350 shares of Restricted Stock or Restricted Stock Units were granted to
employees (11,840 shares of Restricted Stock) or directors (510 Restricted Stock
Units as dividends on previously issued Restricted Stock Units), with total
compensation cost of approximately $287,000, determined based on the market
price of the Company's common stock at the time of award and considering
dividend restrictions and expected forfeitures. Compensation cost will be
recognized as expense ratably over the three-year vesting period.
For the year ended August 31, 2006, the Company recognized gross compensation
cost associated with all of its Restricted Stock and Restricted Stock Units
awards of approximately $1.6 million, prior to a tax benefit of $520,000, versus
$508,000 in the prior year period, prior to a tax benefit of $181,000. At August
31, 2006, there was $2.4 million of unrecognized compensation cost related to
shares of Restricted Stock and Restricted Stock Units which is expected to be
recognized, prior to an anticipated tax benefit of $913,000, over a
weighted-average period of two years.
There were approximately 1.9 million shares available for grants of Restricted
Stock and Restricted Stock Units at August 31, 2006.
The following represents Restricted Stock and Restricted Stock Units activity
for the year ended August 31, 2006:
Restricted Stock Restricted Stock Units
------------------------------------ -----------------------------------------
Weighted-Avg. Weighted-Avg.
Number of Grant Date Fair Number of Grant Date Fair
Shares Value Shares Value
-------------- ----------------- ------------------ ------------------
Non-vested at August 31, 2005 142,448 $25.22 24,114 $26.31
Granted 11,840 24.20 510 25.88
Vested (56,367) 25.22 (9,816) 26.27
Forfeited (2,778) 25.22 - -
-------------- ------------------
Non-vested at August 31, 2006 95,143 $25.09 14,808 $26.32
============== ==================
Merger with Monsanto Company. Pursuant to the Merger Agreement with Monsanto,
the board of directors of D&PL has authorized the issuance of approximately
155,000 shares of Restricted Stock and Restricted Stock Units to the directors,
officers and key employees of D&PL in accordance with the provisions of the 2005
Stock Plan. These shares of Restricted Stock and Restricted Stock Units, if
issued, will vest over a three year period. However, at the effective time of
the merger, those shares of Restricted Stock and Restricted Stock Units will
become immediately vested and will be converted into the right to receive $42.00
per share in cash without interest and less any applicable withholding tax. If
the merger does not close, these instruments will vest 40% on the first
anniversary of their issuance, 30% on the second anniversary of their issuance
and the remaining 30% on the third anniversary of their issuance.
Pro Forma Presentation. The following table illustrates for the years ended
August 31, 2005, and 2004 the effect on operating results and per share
information had the Company accounted for share-based compensation in accordance
with SFAS No. 123 (in thousands).
2005 2004
------------------ ------------------
Net income (in thousands):
As reported $ 42,557 $ 5,316
Add: Total stock-based compensation expense
included in reported net income, net of
related tax effects 327 -
Less: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effects (5,442) (2,979)
------------------ ------------------
Pro forma $ 37,442 $ 2,337
================== ==================
Basic earnings per share:
As reported $ 1.11 $ 0.13
================== ==================
Pro forma $ 0.97 $ 0.05
================== ==================
Diluted earnings per share:
As reported $ 1.08 $ 0.13
================== ==================
Pro forma $ 0.95 $ 0.06
================== ==================
Treasury Stock
In February 2000, the board of directors authorized a program for the repurchase
of up to $50 million of D&PL's common stock. The shares repurchased under this
program were used to provide for option exercises, the potential conversion of
D&PL's Series M Convertible Non-Voting Preferred shares and for other general
corporate purposes. At August 31, 2005, D&PL had repurchased 2,229,900 shares at
an aggregate purchase price of approximately $47,505,000 under this program.
This repurchase plan was terminated and replaced by the June 2005 repurchase
program discussed below.
On May 24, 2005, D&PL completed the purchase of 2,374,940 shares of its common
stock pursuant to a modified "Dutch auction" tender offer that was announced on
April 20, 2005, under a new plan separately approved by the board of directors.
The shares were purchased for $27.00 per share for an aggregate purchase price
of $64,123,380. The Company also incurred associated expenses of approximately
$675,000 in connection with the acquisition of these shares (primarily related
to legal and advisory services) that have been recorded as a component of
treasury stock.
On June 30, 2005, D&PL's board of directors authorized a new share repurchase
program to buy up to an additional $50 million of the Company's common stock.
This program replaces the program established in February 2000. At August 31,
2006, D&PL had repurchased 918,494 shares at an aggregate purchase price of
approximately $22,568,992 under this plan.
The Merger Agreement with Monsanto prohibits us, without Monsanto's prior
written consent, from purchasing, redeeming or otherwise acquiring our
outstanding shares.
Earnings Per Share
Dilutive common share equivalents consist of D&PL's Series M Convertible
Non-Voting Preferred shares, the outstanding options to purchase D&PL's common
stock that have been issued under the LTIP and the 2005 Stock Plan and the
outstanding Restricted Stock and Restricted Stock Units which have been issued
under the 2005 Stock Plan. Approximately 577,000, 599,000, and 551,000
outstanding common stock options were not included in the computation of diluted
earnings per share for the years ended August 31, 2006, 2005 and 2004,
respectively, because the effect of their exercise was anti-dilutive based on
the average market price of D&PL's common stock for each respective reporting
period. For the year ended August 31, 2006 and 2005, the Restricted Stock and
Restricted Stock Units were not included in the computation of diluted earnings
per share as they were anti-dilutive in the period presented. The number of
dilutive common share equivalents issued in the current year to include or
exclude in the computation of diluted earnings per share is calculated based on
the length of time they have been outstanding. The excluded options expire at
various dates from 2007 to 2015.
The table below reconciles the basic and diluted per share computations:
For the Years Ended August 31,
-------------------------------
2006 2005 2004
---------------- --------------- -------------
Income (in thousands):
Net income $ 20,219 $ 42,557 $ 5,316
Less: Preferred stock dividends (640) (544) (491)
---------------- --------------- -------------
Net income for basic EPS 19,579 42,013 4,825
Effect of Dilutive Securities:
Convertible Preferred Stock Dividends 640 544 491
---------------- --------------- -------------
Net income available to common
stockholders plus assumed conversions - for
diluted EPS $ 20,219 $ 42,557 $ 5,316
================ =============== =============
Shares (in thousands):
Basic EPS shares 35,907 37,958 38,250
Effect of Dilutive Securities:
Options to purchase common stock 235 345 353
Convertible preferred stock 1,067 1,067 1,067
---------------- --------------- -------------
Diluted EPS shares 37,209 39,370 39,670
================ =============== =============
Per Share Amounts:
Basic $ 0.55 $ 1.11 $ 0.13
================ =============== =============
Diluted $ 0.54 $ 1.08 $ 0.13
================ =============== =============
Shares Outstanding
Additional information regarding shares outstanding is summarized below:
Common Shares Number of
Shares
--------------
Outstanding at August 31, 2003 38,107,850
Exercises of stock options 637,704
Purchases of common stock (250,200)
--------------
Outstanding at August 31, 2004 38,495,354
Exercises of stock options 766,109
Purchases of common stock (3,161,640)
--------------
Outstanding at August 31, 2005 36,099,823
Exercises of stock options and
vesting of restricted stock 1,124,238
Purchases of common stock (808,494)
--------------
Outstanding at August 31, 2006 36,415,567
==============
19. UNAUDITED QUARTERLY FINANCIAL DATA
All of D&PL's domestic seed products (including those containing Bollgard,
Bollgard II, Roundup Ready and Roundup Ready Flex technologies) are subject to
return and credit risks, the effects of which vary from year to year. The annual
level of returns and, ultimately, net sales and net income, are influenced by
various factors, principally commodity prices and weather conditions occurring
in the spring planting season (during D&PL's third and fourth fiscal quarters).
D&PL provides for estimated returns as sales occur. To the extent actual returns
differ from estimates, adjustments to D&PL's operating results are recorded when
such differences become known, typically in D&PL's fourth quarter. All
significant returns occur or are accounted for by fiscal year end. D&PL also
offers various sales incentive programs for seed and participate in such
programs related to the Bollgard, Bollgard II, Roundup Ready and Roundup Ready
Flex technology fees offered by Monsanto. Generally, 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, or in some cases all, of the price of the seed and
technology fees are forgiven or rebated to the farmer. 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. D&PL records monthly estimates
to account for these programs. The majority of program rebates occur during the
second, third and fourth quarters. Essentially all material claims under these
programs have occurred or are accounted for by fiscal year end. Generally,
international sales are not subject to return. A substantial portion of Company
sales is concentrated in the second and third fiscal quarters. As a result, D&PL
generally expects to incur losses in the first and fourth quarters. Management
believes that such seasonality is common throughout the seed industry.
Summarized unaudited quarterly financial data is as follows:
(In thousands, except per share data)
----------------------------------------------------------------------------------------------------------
Fiscal 2006: Three months ended
November 30 February 28 May 31 August 31
----------------------------------------------------------------------------------------------------------
Net sales and licensing fees $ 9,825 $ 114,977 $ 286,618 $ 6,213
Gross profit 3,162 40,832 101,922 (3,924)
Net (loss) income applicable to
common shares (1) (9,812) 14,716 47,518 (32,843)
Net (loss) income per share-basic (1) (2) (0.27) 0.42 1.33 (0.91)
Weighted average number of shares used
in quarterly per share
calculations-basic 36,074 35,688 35,734 36,202
Net (loss) income per share-diluted (1)(2) (0.27) 0.40 1.28 (0.91)
Weighted-average number of shares used
in quarterly per share
calculations-diluted 36,074 36,914 37,123 36,202
----------------------------------------------------------------------------------------------------------
Fiscal 2005: Three months ended
November 30 February 28 May 31 August 31
----------------------------------------------------------------------------------------------------------
Net sales and licensing fees $ 17,454 $ 119,859 $ 203,320 $ 25,452
Gross profit 9,033 44,684 73,573 4,731
Net (loss) income applicable to
common shares (4,445) 19,032 36,156 (8,730)
Net (loss) income per share-basic (2) (0.12) 0.49 0.94 (0.24)
Weighted average number of shares used
in quarterly per share
calculations-basic 38,544 38,763 38,416 36,133
Net (loss) income per share-diluted (2) (0.12) 0.48 0.91 (0.24)
Weighted-average number of shares used
in quarterly per share
calculations-diluted 38,544 40,276 39,839 36,133
----------------------------------------------------------------------------------------------------------
Fiscal 2004: Three months ended
November 30 February 29 May 31 August 31
----------------------------------------------------------------------------------------------------------
Net sales and licensing fees $ 13,837 $ 88,643 $ 185,649 $ 24,636
Gross profit 5,809 32,164 64,555 6,480
Net (loss) income applicable to
common shares (1) (7,085) 9,315 31,301 (28,706)
Net (loss) income per share-basic (1)(2) (0.19) 0.24 0.82 (0.75)
Weighted average number of shares used
in quarterly per share
calculations-basic 38,099 38,138 38,311 38,451
Net (loss) income per share-diluted (1)(2) (0.19) 0.24 0.79 (0.75)
Weighted-average number of shares used
in quarterly per share
calculations-diluted 38,099 39,768 39,799 38,451
(1) In 2006, we recorded a $7.0 million charge for the write-off
of acquired IPR&D related to our May 15, 2006 acquisition of Syngenta's
global cottonseed assets. Also in 2006, we recorded a $20.5 million
charge for the write-off of acquired IPR&D related to our June 30, 2006
acquisition of technology licenses from DuPont to develop and
commercialize DuPont's herbicide resistance technology in cottonseed
and soybean seed. Transaction expense related to these two items
approximated $100,000. In 2004, we recorded a $38.5 million charge for
the write-off of IPR&D and related transaction expenses related to our
August 24, 2004 acquisition of global licenses to develop and
commercialize Syngenta's insect resistance technology in cottonseed.
(2) The sum of the quarterly net (loss) income per share amounts may
not equal the annual amount reported since per share amounts are
computed independently for each quarter, whereas annual earnings per
share are based on the annual weighted-average shares deemed
outstanding during the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
We have established disclosure controls and procedures, as such term is defined
in Rule 13a - 15(e) under the Securities Exchange Act of 1934. Our disclosure
controls and procedures are designed to ensure that material information
relating to us, including our consolidated subsidiaries, is made known to our
principal executive officer and principal financial officer by others within our
organization. Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our disclosure
controls and procedures as of August 31, 2006. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of August 31, 2006, to
ensure that the information required to be disclosed by us in the reports that
we file or submit under the Securities and Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Controls.
There have not been any changes in D&PL's internal control over financial
reporting or in other factors that have materially affected, or are reasonably
likely to materially affect, D&PL's internal control over financial reporting.
(c) Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a - 15(f)
under the Securities and Exchange Act of 1934. Under the supervision of and with
the participation of our management, including our principal executive officer
and principal financial officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting as of August 31, 2006, based on
the criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this evaluation, our management concluded that our internal control
over financial reporting was effective as of August 31, 2006. Our management's
assessment of the effectiveness of our internal control over financial reporting
as of August 31, 2006, has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their report which is included herein.
ITEM 9B. OTHER INFORMATION
The Board of Directors of D&PL has established February 19, 2007 as the next
Annual Meeting of Shareholders. Shareholders of record as of December 21, 2006
will be entitled to vote at that meeting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is set forth in D&PL's Proxy Statement for
the Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934 no later than December
29, 2006 and is incorporated herein by reference.
D&PL has adopted a written code of ethics, the "Delta and Pine Land Company Code
of Business Conduct and Ethics" which is applicable to all directors, officers
and employees of D&PL, including D&PL's principal executive officer, principal
financial officer, principal accounting officer or controller and other
executive officers identified pursuant to this Item 10 who perform similar
functions (collectively, the "Selected Officers"). In accordance with the rules
and regulations of the Securities and Exchange Commission, a copy of the code
has been posted on the Company's website. The Company intends to disclose any
changes in or waivers from its code of ethics applicable to any Selected Officer
on its website at http://www.deltaandpine.com or by filing a Current Report on
Form 8-K.
Stockholders may obtain a copy of D&PL's Nominating/Corporate Governance
Committee Charter, Compensation Committee Charter, Audit Committee Charter,
Corporate Governance Guidelines, and Code of Business Conduct and Ethics without
charge, by contacting: Kenneth M. Avery, Vice President - Chief Financial
Officer, Delta and Pine Land Company, One Cotton Row, Scott, Mississippi 38772,
via email at kenneth.m.avery@deltaandpine.com, or by accessing our website at
www.deltaandpine.com under About D&PL - Corporate Governance.
The Annual Certification of the Company's Chief Executive Officer required to be
furnished to the New York Stock Exchange pursuant to Section 302A.12(a) of the
NYSE Listed Company Manual was previously filed at the New York Stock Exchange
on February 15, 2006.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to these items is set forth in D&PL's Proxy Statement
for the Annual Meeting of Stockholders to be filed with the Commission pursuant
to Regulation 14A under the Securities Exchange Act of 1934 no later than
December 29, 2006 and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements - the following consolidated financial
statements of Delta and Pine Land Company and subsidiaries are
submitted in response to Part II, Item 8:
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Income - for each of the three
years in the period ended August 31, 2006
Consolidated Balance Sheets - August 31, 2006 and 2005
Consolidated Statements of Cash Flows - for each of the three
years in the period ended August 31, 2006
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income - for each of the three years in the
period ended August 31, 2006
Notes to Consolidated Financial Statements
2. Financial Statement Schedule - the following financial
statement schedule of Delta and Pine Land Company and
subsidiaries is submitted in response to Part IV, Item 15:
Report of Independent Registered Public Accounting Firm.......72
Schedule II - Consolidated Valuation and Qualifying Accounts..73
All other schedules have been omitted as not required, not
applicable or because all the data is included in the
financial statements.
3. Exhibits
The exhibits to the Annual Report of Delta and Pine Land
Company filed herewith are listed beginning on page 75.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DELTA AND PINE LAND COMPANY
(Registrant)
/s/ Jon E. M. Jacoby November 14, 2006
---------------------------
By: Jon E. M. Jacoby, Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ W. Thomas Jagodinski President, Chief Executive Officer, November 14, 2006
--------------------------- and Director
W. Thomas Jagodinski (Principal Executive Officer)
/s/ Kenneth M. Avery Vice President - Chief November 14, 2006
----------------------- Financial Officer and Assistant Secretary
Kenneth M. Avery (Principal Financial and
Accounting Officer)
/s/ F. Murray Robinson Vice Chairman and Director November 14, 2006
-----------------------
F. Murray Robinson
/s/ Stanley P. Roth Vice Chairman and Director November 14, 2006
---------------------------
Stanley P. Roth
/s/ Nam-Hai Chua Director November 14, 2006
-----------------------
Nam-Hai Chua
/s/ Joseph M. Murphy Director November 14, 2006
---------------------------
Joseph M. Murphy
/s/ Rudi E. Scheidt Director November 14, 2006
---------------------------
Rudi E. Scheidt
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Delta and Pine Land Company:
Under date of November 13, 2006, we reported on the consolidated balance sheets
of Delta and Pine Land Company and subsidiaries (the Company) as of August 31,
2006 and 2005, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended August 31, 2006, contained in the Annual
Report on Form 10-K for the year 2006, which are included in this Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule listed in Part IV, Item 15(a)2. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective
September 1, 2005, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment.
/s/ KPMG LLP
Memphis, Tennessee
November 13, 2006
SCHEDULE II
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
------------------------------------ ------------ ------------------------------ ------------- --------
Balance at Charged Balance
Beginning to Costs Charged to at End
of and Other of
Description Period Expenses Accounts Deductions Period
------------------------------------------------------------------------------------------------------------------------
Fiscal year ended August 31, 2004
Allowance for doubtful accounts $ 2,009 $ 263 $ - (a) $ (748) (c) $ 1,524
Fiscal year ended August 31, 2005
Allowance for doubtful accounts $ 1,524 $ 839 $ 119 (a) $ (698) (d) $ 1,784
Fiscal year ended August 31, 2006
Allowance for doubtful accounts $ 1,784 $ 870 $ 57 (a) $ (393) (b) $ 2,318
(a) Amount charged to cumulative translation adjustment for fluctuations in
non-United States dollar denominated reserves.
(b) Write-off of uncollectible accounts, net of recoveries.
(c) Amount includes $724 related to a write-off against the allowance for
doubtful accounts of amounts previously deemed uncollectible and provided for in
prior years. In addition, certain payables of a similar amount related to this
item were also reduced in the prior years.
(d) Amount represents write-off against the allowance for doubtful accounts
deemed uncollectible and provided for in prior years.
INDEX
EXHIBITS TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED AUGUST 31, 2006
DELTA AND PINE LAND COMPANY
Exhibits (1) Description
2.01 Agreement and Plan of Merger dated as of May 8, 1998, by and between
Monsanto Company and Delta and Pine Land
Company. (2)
2.02 Termination Option Agreement dated as of May 8, 1998, by and between
Monsanto, Company and Delta and Pine Land
Company. (2)
2.03 Agreement and Plan of Merger, dated as of August 14, 2006, among
Monsanto Company, Monsanto Sub, Inc., and Delta
and Pine Land Company. (25)
3.01 Restated Certificate of Incorporation of the Registrant dated
June 11, 1993.
3.02 Amended and Restated By-Laws of the Registrant dated April 26, 1993.
4.01 Certificate of Designation, Convertible Preferred Stock of Delta and
Pine Land Company. (3)
4.02 Specimen Certificate representing the Common Stock, par value $.10 per
share.
4.03 Reserved.
4.04 Rights Agreement, dated as of August 13, 1996, between Delta and Pine
Land Company and Harris Trust and Savings Bank, including the form of
Right Certificate and related form of Election to Purchase as Exhibit A
and the Summary of Rights to Purchase Preferred Shares as Exhibit B.
(4)
4.05 Amendment No. 1 to the Rights Agreement dated May 8, 1998, by and
between Delta and Pine Land Company and the
Harris Trust and Savings Bank. (2)
4.06 Amendment No. 2 to the Rights Agreement dated May 8, 1998 by and
between Delta and Pine Land Company and the
Harris Trust and Savings Bank. (13)
4.07.1 Certificate of Designations of the rights and privileges of the shares
of junior participating preferred stock created on August 13, 1996, to
be filed pursuant to Section 151 of the Delaware General
Corporation Law. (4)
4.08 Delta and Pine Land Company 2005 Omnibus Stock Plan. (5) (18)
4.09 Delta and Pine Land Company Defined Contribution Plan. (5) (22)
4.10 Notice of Removal of Rights Agent and Appointment of Successor Rights
Agent and Amendment No. 3 to the Rights Agreement. (23)
4.11 Amendment No. 4 to the Rights Agreement effective May 12, 2006. (24)
10.01 Incentive Bonus Program. (1) (5)
10.02 Delta and Pine Land Company Retirement Plan as amended and restated as
of January 1, 1997 and further amended by
Amendment No. 1 dated October 23, 2002, Amendment Nos. 2 and 3 dated
December 20, 2002. (14)
10.03 Supplemental Executive Retirement plan dated May 22, 1992, and
effective January 1, 1992. (1) (5)
10.04 1993 Stock Option Plan of Registrant, as adopted on
June 11, 1993. (1) (5)
10.05 Asset Purchase Agreement between Delta and Pine Land Company and
Cargill, Inc. dated May 2, 1994. (7)
10.06 Delta and Pine Land Company Savings Plan - Wells Fargo Bank Texas, N.A.
Defined Contribution Master Plan and Trust
Agreement, Adoption Agreement dated December 23, 2002, EGTRRA Amendment
to the Wells Fargo Bank Texas, N.A.
Defined Contribution Master Plan and Trust Agreement dated
November 1, 2001, Post-EGTRRA Amendment to the Wells
Fargo Bank Texas, N.A. Defined Contribution Master Plan and Trust
Agreement dated September 11, 2003. (14)
10.07 Hartz Cotton Acquisition Agreement dated February 2, 1996 among
Monsanto Company ("Monsanto"), Hartz Cotton, Inc.
("Hartz Cotton"), Delta and Pine Land Company (the "Company") and
Paymaster Technology Corp. ("PTC"). (3)
10.08 Trademark License Agreement dated February 2, 1996 between Monsanto
and D&PL. (3)
10.09 Registration Rights Agreement between D&PL and Monsanto dated
February 2, 1996. (3)
10.10 Reserved.
10.11 Reserved.
10.12 Reserved.
10.13 Reserved.
10.14 Partnership Agreement dated February 2, 1996 between D&PL and
Monsanto. (3)
10.15 Marketing Services Agreement dated February 2, 1996 between D&PL,
Monsanto and D&M Partners. (3)
10.16 Bollgard Gene License and Seed Services Agreement dated
February 2, 1996 between Monsanto, D&M Partners, and D&PL.(3)
10.17 Roundup Ready Gene License and Seed Services Agreement dated
February 2, 1996 between Monsanto, D&M Partners and
D&PL. (3)
10.18 Option Agreement dated February 2, 1996 between Monsanto and
D&PL. (3) (5)
10.19 Agreement between the D&PL Companies and the Sure Grow Companies,
Sure Grow Shareholders and Sure Grow Principals
dated May 20, 1996. (8)
10.20 Amended and Restated Delta and Pine Land Company 1995 Long-Term
Incentive Plan, as adopted on February 6, 1996. (5) (14)
10.21 Amendment to Agreements dated as of December 8, 1999, by and between
Monsanto Company, Registrant, D&M Partners,
a partnership of Monsanto and D&PL, and Paymaster Technology Corp. (11)
10.22 D&M International Operating Agreement on March 10, 1995, between Delta
and Pine Land Company, through its wholly-owned subsidiary D&PL
International Technology Corp. and Monsanto Company. (12)
10.23 Bollgard II Gene License and Seed Services Agreement dated
December 11, 2000. (10)
10.24 Roundup Ready Soybean License and Seed Services Agreement and the
Amended and Restated Licensee Incentive Agreement. (10)
10.25 Bollgard Gene License Agreement by and between Monsanto Company, Delta
and Pine Land Company, D&PL International Technology Corp., and D&M
International, L.L.C. and Amendment. (9)
10.26 Redemption Agreement dated as of May 28, 2002 among D&M International,
L.L.C., D&PL International Technology
Corp., Pharmacia Corporation, solely for the purposes of Section 1.2c
and Articles II and III thereof, and
Monsanto Company, and, solely for the purposes of Section 3.2 thereof,
Delta and Pine Land Company. (9)
10.27 Amendment to Bollgard Gene License and Seed Services Agreement of
February 2, 1996 dated March 26, 2003. (14)
10.28 Amendment to Roundup Ready Gene License and Seed Services Agreement of
February 2, 1996 dated March 26, 2003. (14)
10.29 Restated License Acquisition Agreement dated August 24, 2004 among
Syngenta Crop Protection AG and Delta and Pine
Land Company. (25) (*)
10.30 Restated VIP3A Gene License Agreement dated August 24, 2004 among
Syngenta Crop Protection AG and Delta and Pine
Land Company. (25) (*)
10.31 Restated Cry1Ab Gene License Agreement dated August 24, 2004 among
Syngenta Crop Protection AG and Delta and Pine
Land Company. (25) (*)
10.32 Credit agreement among Delta and Pine Land Company, as Borrower,
Certain of its Subsidiaries, as Guarantors, and Bank of America, N.A.,
as Lender, dated as of April 15, 2005 and related forms of Revolving
Note dated April 15, 2005 and Autoborrow Service Agreement dated April
15, 2005. (20)
10.33 Roundup Ready Flex Gene License and Seed Services Agreement dated
December 22, 2004. (19)
10.34 Form of Restricted Stock Unit Award - Member of the Board of Directors.
(5) (21)
10.35 Form of Restricted Stock Award - Member of the Board of Directors.
(5) (21)
10.36 Form of Restricted Stock Award - Employee. (5) (21)
10.37 Form of Non-Qualified Stock Option Award. (5) (21)
10.38 Employment Agreement between Delta and Pine Land Company and W. Thomas
Jagodinski effective September 1, 1997. (5)(17)
10.39 Settlement Agreement I, dated August 14, 2006, among Delta and Pine
Land Company, D&M International LLC, D&PL
International Technology Corp., and Monsanto Company. (25)
10.41 Settlement Agreement II, dated August 14, 2006, among Delta and Pine
Land Company, D&M Partners, and Monsanto Company. (25)
10.42 Arbitration Settlement Agreement, dated August 14, 2006, among Delta
and Pine Land Company, D&M Partners, and Monsanto Company. (25)
10.43 Amended and Restated Employment Agreement, dated August 25, 2006, by
and between Delta and Pine Land Company and W. Thomas
Jagodinski. (5) (26)
10.44 Severance Protection Agreement, dated August 23, 2006, by and between
Delta and Pine Land Company and Kenneth M. Avery. (5) (26)
10.45 Severance Protection Agreement, dated August 24, 2006, by and between
Delta and Pine Land Company and R.D. Greene. (5) (26)
10.46 Severance Protection Agreement, dated August 21, 2006, by and between
Delta and Pine Land Company and Charles R. Dismuke, Jr. (5) (26)
10.47 Severance Protection Agreement, dated August 24, 2006, by and between
Delta and Pine Land Company and William V. Hugie. (5) (26)
10.48 Form of Severance Protection Agreement, dated August 24, 2006, by and
between Delta and Pine Land Company and James H. Willeke, and as
entered into by and between Delta and Pine Land Company and certain
other executives. (5) (26)
14.00 Delta and Pine Land Company Code of Business Conduct and Ethics as
amended October 28, 2004. (16)
21.01 Subsidiaries of the Registrant. (27)
23.01 Consent of Independent Registered Public Accounting Firm. (27)
31.01 Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, by Principal Executive Officer. (27)
31.02 Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, by Principal Financial Officer. (27)
32.01 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by the Principal
Executive Officer. (27)
32.02 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002, by the Principal Financial and Accounting Officer. (27)
-------------------------
(1) All incorporated by reference from Registration Statement on Form S-1, File
No. 33-61568, filed June 29, 1993 except as otherwise noted herein.
(2) Incorporated by reference from Form 8-K filed May 14, 1998
(3) Incorporated by reference from Form 8-K, File No. 000-14136, filed February
19, 1996
(4) Incorporated by reference from Form 8-A, File No. 000-21293,
filed September 3, 1996
(5) Represents management contract or compensatory
plan
(6) Incorporated by reference from Form 10-Q, File No. 000-21788,
filed July 14, 1995
(7) Incorporated by reference from Form 8-K filed May
16, 1994
(8) Incorporated by reference from Form 8-K, File No. 000-21788,
filed June 4, 1996
(9) Incorporated by reference from Form 10-K filed
November 25, 2002
(10) Incorporated by reference from Form 10-K filed
November 29, 2001
(11) Incorporated by reference from Form 8-K filed May
18, 2000
(12) Incorporated by reference from Form 8-K filed September 14,
2000
(13) Incorporated by reference from Form 10-K filed November 24, 1998
(14) Incorporated by reference from Form 10-K filed November 26, 2003
(15) Incorporated by reference from Form 10-K filed November 15, 2004
(16) Incorporated by reference from Form 8-K filed November 1, 2004
(17) Incorporated by reference from Form 10-Q filed January 15, 1998
(18) Incorporated by reference from Form S-8 filed March 28, 2005
(19) Incorporated by reference from Form 10-Q filed April 11, 2005
(20) Incorporated by reference from Form 8-K filed April 20, 2005
(21) Incorporated by reference from Form 8-K filed May 24, 2005
(22) Incorporated by reference from Form S-8 filed April 4, 2006
(23) Incorporated by reference from Form 10-Q filed April 10, 2006
(24) Incorporated by reference from Form 8-K filed May 16, 2006
(25) Incorporated by reference from Form 8-K filed August 18, 2006
(26) Incorporated by reference from Form 8-K filed August 25, 2006
(27) Filed herewith
(*) The Company has applied for and received SEC approval for confidential
treatment for portions of this agreement. Accordingly, portions thereof have
been omitted and filed separately.