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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended May 31, 2004 or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from/to
Commission File Number: 000-21788
Exact name of registrant as specified in its charter:
DELTA AND PINE LAND COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification Number: 62-1040440
Address of Principal Executive Offices (including zip code):
One Cotton Row, Scott, Mississippi 38772
Registrant's telephone number, including area code:
(662) 742-4000
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES (x) NO ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES (x) NO ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.10 Par Value - 38,451,162 shares outstanding as of June 30,
2004.
5
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - May 31, 2004,
August 31, 2003, and May 31, 2003 3
Consolidated Statements of Operations - Three Months
Ended May 31, 2004 and May 31, 2003 4
Consolidated Statements of Operations - Nine Months
Ended May 31, 2004 and May 31, 2003 5
Consolidated Statements of Cash Flows - Nine Months
Ended May 31, 2004 and May 31, 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Business 24
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
May 31, August 31, May 31,
2004 2003 2003
------------------ ----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 148,651 $ 143,285 $ 116,385
Receivables, net 229,759 166,952 243,440
Inventories 30,469 32,231 34,204
Prepaid expenses 807 2,116 634
Deferred income taxes 10,755 10,677 11,225
------------------ ----------------- -----------------
Total current assets 420,441 355,261 405,888
PROPERTY, PLANT AND EQUIPMENT, NET 61,205 64,441 61,427
EXCESS OF COST OVER NET ASSETS OF
BUSINESSES ACQUIRED 4,183 4,183 4,183
INTANGIBLES, NET 5,350 5,470 5,489
INVESTMENT IN AFFILIATE - 328 753
OTHER ASSETS 1,660 1,869 1,946
------------------ ----------------- -----------------
TOTAL ASSETS $ 492,839 $ 431,552 $ 479,686
================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Notes payable $ - $ 40 $ 24
Accounts payable 12,574 17,966 9,119
Accrued expenses 209,432 176,150 208,209
Income taxes payable 20,789 9,894 22,988
------------------ ----------------- -----------------
Total current liabilities 242,795 204,050 240,340
------------------ ----------------- -----------------
LONG-TERM DEBT - 1,557 2,145
------------------ ----------------- -----------------
DEFERRED INCOME TAXES 4,183 5,220 3,129
------------------ ----------------- -----------------
MINORITY INTEREST IN SUBSIDIARIES 4,662 3,618 3,310
------------------ ----------------- -----------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.10 per share; 2,000,000 shares authorized;
Series A Junior Participating Preferred, par value $0.10 per share;
456,989 shares authorized; no shares issued or outstanding; - - -
Series M Convertible Non-Voting Preferred, par value $0.l0 per share;
1,066,667 shares authorized, issued and outstanding 107 107 107
Common stock, par value $0.10 per share; 100,000,000 shares authorized;
40,001,984, 39,525,116 and 39,474,723 shares issued;
38,441,718, 38,107,850 and 38,094,557 shares outstanding 4,000 3,953 3,947
Capital in excess of par value 61,700 54,850 53,974
Retained earnings 210,129 189,610 202,888
Accumulated other comprehensive loss (5,314) (5,442) (5,043)
Treasury stock, at cost; 1,560,266, 1,417,266 and 1,380,166 shares (29,423) (25,971) (25,111)
------------------ ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 241,199 217,107 203,762
------------------ ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 492,839 $ 431,552 $ 479,686
================== ================= =================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
May 31, May 31,
2004 2003
----------------- ------------------
NET SALES AND LICENSING FEES $ 185,119 $ 168,936
COST OF SALES 120,564 111,095
----------------- ------------------
GROSS PROFIT 64,555 57,841
----------------- ------------------
OPERATING EXPENSES:
Research and development 4,465 4,152
Selling 3,230 3,014
General and administrative 3,767 3,732
Special charges - 462
----------------- ------------------
11,462 11,360
----------------- ------------------
OPERATING INCOME 53,093 46,481
INTEREST INCOME, NET 262 160
OTHER EXPENSE, NET (3,650) (2,480)
EQUITY IN NET LOSS OF AFFILIATE (1,033) (551)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 25 522
----------------- ------------------
INCOME BEFORE INCOME TAXES 48,697 44,132
INCOME TAX EXPENSE 17,268 15,667
----------------- ------------------
NET INCOME 31,429 28,465
DIVIDENDS ON PREFERRED STOCK (128) (64)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 31,301 $ 28,401
================= ==================
BASIC EARNINGS PER SHARE $ 0.82 $ 0.75
================= ==================
NUMBER OF SHARES USED IN BASIC EARNINGS
PER SHARE CALCULATIONS 38,311 38,049
================= ==================
DILUTED EARNINGS PER SHARE $ 0.79 $ 0.72
================= ==================
NUMBER OF SHARES USED IN DILUTED EARNINGS
PER SHARE CALCULATIONS 39,799 39,598
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.12 $ 0.06
================= ==================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
May 31, May 31,
2004 2003
----------------- ------------------
NET SALES AND LICENSING FEES $ 287,240 $ 282,072
COST OF SALES 184,712 181,078
----------------- ------------------
GROSS PROFIT 102,528 100,994
----------------- ------------------
OPERATING EXPENSES:
Research and development 13,598 12,036
Selling 9,181 8,235
General and administrative 13,041 12,095
Special charges - 962
----------------- ------------------
35,820 33,328
----------------- ------------------
OPERATING INCOME 66,708 67,666
INTEREST INCOME, NET 961 742
OTHER EXPENSE, NET (9,973) (8,498)
EQUITY IN NET LOSS OF AFFILIATE (2,767) (1,492)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (2,380) (796)
----------------- ------------------
INCOME BEFORE INCOME TAXES 52,549 57,622
INCOME TAX EXPENSE 18,655 20,456
----------------- ------------------
NET INCOME 33,894 37,166
DIVIDENDS ON PREFERRED STOCK (363) (181)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 33,531 $ 36,985
================= ==================
BASIC EARNINGS PER SHARE $ 0.88 $ 0.97
================= ==================
NUMBER OF SHARES USED IN BASIC EARNINGS
PER SHARE CALCULATIONS 38,183 38,115
================= ==================
DILUTED EARNINGS PER SHARE $ 0.85 $ 0.94
================= ==================
NUMBER OF SHARES USED IN DILUTED EARNINGS
PER SHARE CALCULATIONS 39,685 39,554
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.34 $ 0.17
================= ==================
The accompanying notes are an integral part of these financial statements.
29
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(in thousands)
(Unaudited)
May 31, May 31,
2004 2003
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,894 $ 37,166
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,228 5,739
Loss (gain) on sale of assets 220 (28)
Equity in net loss of affiliate 2,767 1,492
Foreign exchange loss (gain) 125 (2)
Minority interest in earnings of subsidiaries 2,380 796
Change in deferred taxes (1,168) -
Changes in assets and liabilities:
Receivables (62,786) (97,364)
Inventories 1,923 5,567
Prepaid expenses 1,294 1,539
Intangibles and other assets 41 126
Accounts payable (5,506) (7,420)
Accrued expenses 33,063 64,236
Income taxes 13,652 11,127
------------------ -----------------
Net cash provided by operating activities 26,127 22,974
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,101) (3,302)
Sale of investments and property 64 76
Investment in affiliate (1,880) (1,550)
------------------ -----------------
Net cash used in investing activities (4,917) (4,776)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (277) (2,095)
Payments of long-term debt (1,607) -
Dividends paid (13,375) (6,659)
Proceeds from short-term debt 245 437
Minority interest in dividends paid by subsidiary (1,336) -
Payments to acquire treasury stock (3,452) (5,275)
Proceeds from exercise of stock options 4,097 1,784
------------------ -----------------
Net cash used in financing activities (15,705) (11,808)
------------------ -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES (139) 904
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,366 7,294
CASH AND CASH EQUIVALENTS, August 31 143,285 109,091
------------------ -----------------
CASH AND CASH EQUIVALENTS, May 31 $ 148,651 $ 116,385
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest $ 10 $ 50
Income taxes $ 5,600 $ 9,200
Noncash financing activities:
Tax benefit of stock option exercises $ 2,800 $ 600
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
the fair presentation of the consolidated financial statements have been
included. The business of Delta and Pine Land Company and its subsidiaries
("D&PL") is seasonal in nature; thus, the results of operations for the three
and nine month periods ended May 31, 2004 and 2003, or for any quarterly
period, are not necessarily indicative of the results to be expected for the
full year. D&PL's investment in 50%-owned affiliate DeltaMax Cotton, LLC
("DeltaMax") is accounted for using the equity method. For further information,
reference should be made to the consolidated financial statements and footnotes
thereto included in D&PL's Annual Report to Stockholders on Form 10-K for the
fiscal year ended August 31, 2003.
Reclassifications
In the consolidated income statement for the three and nine month periods ended
May 31, 2004, certain expenses historically classified as Research and
Development in Operating Expenses have been reclassified as Cost of Sales. These
expenses for the prior year period have also been reclassified for consistency.
The expenses relate to certain activities performed by the Technical Services
department. As the sales of transgenic varieties have increased as a percentage
of our Net Sales and Licensing Fees over the past several years, certain
technical services department activities have become more related to preparing
seed for sale than to Research and Development activities. The activities for
which expenses have been reclassified relate primarily to the increase of seed
quantities to allow us to offer certain varieties commercially and to late-stage
trials performed to ensure that varieties that have been chosen to be offered
commercially meet agronomic and transgenic requirements of our third-party
technology licenses. The amount of expenses reclassified for the three-month
periods ended May 31, 2004 and 2003 was $526,000 and $548,000,
respectively. The amount of expenses reclassified for the nine-month periods
ended May 31, 2004 and 2003 was $1,357,000 and $1,316,000, respectively.
Certain other prior year amounts have been reclassified to conform with the
current year presentation.
2. COMPREHENSIVE INCOME
Total comprehensive income for the three and nine months ended May 31, 2004 and
2003, was (in thousands):
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
May 31, May 31, May 31, May 31,
2004 2003 2004 2003
----------------- ----------------- ---------------- -----------------
Net income $ 31,429 $ 28,465 $ 33,894 $ 37,166
Other comprehensive (loss) income:
Foreign currency translation (losses)
gains (616) 861 203 1,135
Net realized and unrealized gain
(losses) on hedging instruments 283 (215) (75) (239)
Income tax benefit (expense) related
to other comprehensive income 120 (229) (33) (317)
----------------- ----------------- ---------------- -----------------
Other comprehensive (loss) income, net
of tax (213) 417 95 579
----------------- ----------------- ---------------- -----------------
Total comprehensive income $ 31,216 $ 28,882 $ 33,989 $ 37,745
================= ================= ================ =================
3. SEGMENT DISCLOSURES
D&PL is in a single line of business and operates in two business segments,
domestic and international. D&PL's reportable segments offer similar products;
however, the business units are managed separately due to the geographic
dispersion of their operations. D&PL breeds, produces, conditions and markets
proprietary varieties of cotton and soybean planting seed in the United States.
The international segment offers cottonseed in several foreign countries through
both export sales and in-country operations. D&PL develops its proprietary seed
products through research and development efforts in the United States and
certain foreign countries.
D&PL's chief operating decision maker utilizes revenue information in assessing
performance and making overall operating decisions and resource allocations.
Profit and loss information is reported by segment to the chief operating
decision maker and D&PL's Board of Directors. The accounting policies of the
segments are substantially the same as those described in the summary of
significant accounting policies in D&PL's Form 10-K filed for the year ended
August 31, 2003.
Information about D&PL's segments for the three and nine month periods ended May
31, 2004 and 2003, is as follows (in thousands):
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
May 31, May 31, May 31, May 31,
2004 2003 2004 2003
----------------- ----------------- ---------------- -----------------
Net sales and licensing fees (by segment)
Domestic $ 173,863 $ 162,593 $ 251,586 $ 255,733
International 11,256 6,343 35,654 26,339
----------------- ----------------- ---------------- -----------------
$ 185,119 $ 168,936 $ 287,240 $ 282,072
================= ================= ================ =================
Net sales and licensing fees
Cottonseed $ 169,030 $ 154,902 $ 259,808 $ 259,842
Soybean seed 15,495 12,918 24,681 18,547
Other 594 1,116 2,751 3,683
----------------- ----------------- ---------------- -----------------
$ 185,119 $ 168,936 $ 287,240 $ 282,072
================= ================= ================ =================
Operating income (loss)
Domestic $ 51,622 $ 47,619 $ 60,100 $ 64,974
International 1,471 (1,138) 6,608 2,692
----------------- ----------------- ---------------- -----------------
$ 53,093 $ 46,481 $ 66,708 $ 67,666
================= ================= ================ =================
4. SIGNIFICANT CHANGES IN ASSETS AND LIABILITIES FROM AUGUST 31, 2003
Accounts receivable increased approximately $62,807,000 to $229,759,000 at May
31, 2004 from $166,952,000 at August 31, 2003. This increase is primarily
related to fiscal year 2004 sales partially offset by the collection of the 2003
technology sublicense fees in September 2003.
Accrued expenses increased approximately $33,282,000 to $209,432,000 at May 31,
2004 from $176,150,000 at August 31, 2003. This increase is primarily related to
the reserve for returns for the fiscal year 2004.
Accounts payable decreased approximately $5,392,000 to $12,574,000 at May 31,
2004 from $17,966,000 at August 31, 2003. This decrease is primarily
attributable to payments made on accounts payable related to customer returns
for fiscal year 2003 sales offset by payables due on current year raw material
purchases.
5. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - An Interpretation of ARB No. 51". In December 2003,
the FASB published a revision to Interpretation No. 46 (46R) to clarify some of
the provisions of the original Interpretation. This Interpretation addresses the
consolidation by business enterprises of variable interest entities as defined
in the Interpretation. Under the new guidance, special effective date provisions
apply to enterprises that have fully or partially applied Interpretation 46
prior to issuance of this revised Interpretation. Otherwise, application of
Interpretation 46R is required in financial statements of public entities that
have interests in structures that are commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of variable
interest entities is required in financial statements for periods ending after
March 15, 2004. The Company does not have any VIEs and, therefore, the adoption
of this statement did not have a material impact on D&PL's consolidated
financial position or results of operations.
Statement of Financial Accounting Standards ("SFAS") No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
requires additional annual disclosures about pension plan assets, benefit
obligations, cash flows, benefit costs and related information. SFAS No. 132
(Revised 2003) also requires companies to disclose various elements of pension
and postretirement benefit costs in interim-period financial statements for
quarters beginning after December 15, 2003. This required disclosure is included
in Note 14.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity," provides guidance on how to classify and
measure certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. D&PL adopted this
statement for financial instruments entered into after May 31, 2003 and
otherwise adopted this statement September 1, 2003. The adoption of this
statement did not have a material impact on D&PL's consolidated financial
position or results of operations.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure -- an Amendment of FASB Statement No. 123," was issued in December
2002. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation under which compensation cost for stock options is recognized. In
addition, this statement amends the disclosure requirements of FASB Statement
No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. This required disclosure is
included in Note 6.
6. STOCK-BASED COMPENSATION PLANS
As permitted by both SFAS No. 123, "Accounting for Stock-Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure -- an Amendment of FASB Statement No. 123," D&PL applies Accounting
Principles Board Opinion 25 in accounting for its employee stock option plans.
Therefore, no compensation expense for stock options is deducted in determining
net income, as all options granted had an exercise price equal to the fair
market value of the underlying common stock on the grant date. For further
information about D&PL's employee stock option plans, reference should be made
to the consolidated financial statements and footnotes thereto included in
D&PL's Annual Report to Stockholders on Form 10-K for the fiscal year ended
August 31, 2003.
The following table illustrates the effect on net income and earnings per share
if D&PL had recorded compensation expense in accordance with the fair value
provisions of SFAS No. 123.
Three Months Ended Nine Months Ended
--------------------------------------- ------------------------------------
May 31, May 31, May 31, May 31,
2004 2003 2004 2003
------------------ ------------------ ---------------- -----------------
Net income:
As reported $ 31,429 $ 28,465 $ 33,894 $ 37,166
Less: Total stock-based compensation expense
determined under the fair value based
method for all awards, net of related tax
effects (788) (902) (2,388) (2,672)
------------------ ------------------ ---------------- ----------------
Pro forma $ 30,641 $ 27,563 $ 31,506 $ 34,494
================== ================== ================ =================
Basic earnings per share:
As reported $ 0.82 $ 0.75 $ 0.88 $ 0.97
================== ================== ================ =================
Pro forma $ 0.80 $ 0.72 $ 0.82 $ 0.90
================== ================== ================ =================
Diluted earnings per share:
As reported $ 0.79 $ 0.72 $ 0.85 $ 0.94
================== ================== ================ =================
Pro forma $ 0.77 $ 0.70 $ 0.80 $ 0.88
================== ================== ================ =================
7. INVENTORIES
Inventories consisted of the following as of (in thousands):
May 31, August 31, May 31,
2004 2003 2003
------------------ ----------------- -----------------
Finished goods $ 25,355 $ 21,476 $ 24,642
Raw materials 20,802 17,062 20,578
Growing crops 585 1,199 610
Supplies 805 733 723
------------------ ----------------- -----------------
47,547 40,470 46,553
Less reserves (17,078) (8,239) (12,349)
------------------ ----------------- -----------------
$ 30,469 $ 32,231 $ 34,204
================== ================= =================
Finished goods and raw material inventory is valued at the lower of average cost
or market. Growing crops are recorded at cost. Elements of cost in inventories
include raw materials, direct production costs, manufacturing overhead and
immaterial general and administrative expenses. Inventory reserves relate to
estimated excess and obsolete inventory. The provision recorded for excess and
obsolete inventory for the nine-month periods ended May 31, 2004 and
2003 were $12,522,000 and $7,375,000, respectively. See Note 11 for a
description of hedging activities.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of (in thousands):
May 31, August 31, May 31,
2004 2003 2003
------------------ ----------------- -----------------
Land and improvements $ 5,363 $ 5,124 $ 5,120
Buildings and improvements 42,223 41,272 40,015
Machinery and equipment 57,108 56,202 55,358
Germplasm 7,500 7,500 7,500
Breeder and foundation seed 2,019 2,000 2,000
Construction in progress 2,989 5,464 2,720
------------------ ----------------- -----------------
117,202 117,562 112,713
Less accumulated depreciation (55,997) (53,121) (51,286)
------------------ ----------------- -----------------
$ 61,205 $ 64,441 $ 61,427
================== ================= =================
9. INTANGIBLES AND EXCESS OF COST OVER NET ASSETS OF BUSINESS ACQUIRED
The components of identifiable intangible assets follow as of (in thousands):
May 31, 2004 August 31, 2003 May 31, 2003
------------------------------- ----------------------------------- -----------------------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
Trademarks $ 3,182 $ (859) $ 3,182 $ (800) $ 3,160 $ (778)
Commercialization
agreements 400 (86) 400 (65) 400 (58)
Licenses 1,100 (55) 1,100 - 1,100 -
Patents 592 (94) 426 (84) 385 (82)
Other 1,930 (760) 1,959 (648) 1,969 (607)
----------- --------------- -------------- ---------------- ------------- -------------
$ 7,204 $ (1,854) $ 7,067 $ (1,597) $ 7,014 $ (1,525)
=========== =============== ============== ================ ============= =============
Amortization expense for identifiable intangible assets during the three- and
nine-month periods ended May 31, 2004 was approximately $90,000 and $270,000,
respectively. Identifiable intangible asset amortization expense is estimated to
be $110,000 for the remainder of 2004 and $400,000 in each of the fiscal years
from 2005 through 2008 and $300,000 in 2009.
During the fourth quarter of fiscal 2003, "EXCESS OF COST OVER NET ASSETS OF
BUSINESS ACQUIRED" ("goodwill") attributable to the domestic segment was tested
for impairment by comparing its implied fair value to its carrying value. Based
on management's impairment test, management determined that none of the goodwill
recorded was impaired.
10. INVESTMENT IN AFFILIATE
D&PL owns a 50% interest in DeltaMax, a limited liability company jointly owned
with Verdia, Inc.(formerly known as MaxyAg, Inc.). Verdia was acquired by DuPont
on July 2, 2004. Established in May 2002, the DeltaMax joint venture was formed
to create, develop and commercialize herbicide tolerant and insect resistant
traits for the cottonseed market. D&PL has licensed from DeltaMax the developed
traits for commercialization in both the U.S. and other cotton-producing
countries in the world. For the quarters ended May 31, 2004 and 2003, D&PL's
equity in the net loss of DeltaMax was $1,033,000 and $551,000, respectively.
For the nine months ended May 31, 2004 and 2003, D&PL's equity in the net loss
of DeltaMax was $2,767,000 and $1,492,000, respectively.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Accumulated other comprehensive loss includes the following related to the
Company's soybean hedging program for the nine-month periods ended May 31, 2004
and 2003 (in thousands):
2004 2003
------------------- -------------------
Deferred net gain, as of August 31 $ 262 $ 304
Net gains on hedging instruments arising during the nine months 80 137
Reclassification adjustment of gains on hedging instruments to
earnings (155) (376)
------------------- -------------------
Net change in accumulated other comprehensive loss (75) (239)
------------------- -------------------
Deferred net gain on derivative instruments included in accumulated
other comprehensive loss at May 31 $ 187 $ 65
=================== ===================
The net gain of $187,000 included in accumulated other comprehensive loss at May
31, 2004 consists of net unrealized gains which 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 nine-month periods ended May 31, 2004 and 2003, D&PL recorded no gains
or losses in earnings as a result of hedge ineffectiveness or discontinuance of
cash flow hedges related to soybeans.
12. CONTINGENCIES
Product Claims
D&PL is named as a defendant in various lawsuits that allege, among other
1
things, that certain of D&PL's products (including those containing Monsanto's
technology) did not perform as the farmer had anticipated or expected. In some
of these cases, Monsanto and/or the dealer or distributor who sold the seed are
also named as defendants. In all cases where the seed sold contained either or
both of Monsanto's Bollgard(R) and/or Roundup Ready(R) gene technologies, and
where the farmer alleged a failure of one or more of those technologies, D&PL
- --------
1. On March 31, 2000, Monsanto Company consummated a merger with Pharmacia &
Upjohn Inc. and changed its name to Pharmacia Corporation. On February 9, 2000,
Monsanto Company formed a new subsidiary corporation, Monsanto Ag Company,
which, on March 31, 2000, changed its name to Monsanto Company. On August 31,
2002, Pharmacia distributed to its shareholders its remaining interest in the
new Monsanto Company. Pursuant to the closing of a merger on April 16, 2003,
Pharmacia Corporation merged with and into a wholly-owned subsidiary of Pfizer
Inc. Pharmacia survived the merger as a wholly-owned subsidiary of Pfizer Inc.
In this document, with respect to events occurring on or before March 31, 2000,
the term "Monsanto" refers to the entity then designated Monsanto Company and
renamed Pharmacia Corporation on that date. With respect to events occurring
between March 31, 2000 and April 16, 2003, this entity is referred to as
"Pharmacia". With respect to events occurring after April 16, 2003, the entity
referred to as "Pharmacia" is that entity which on that date became a
wholly-owned subsidiary of Pfizer Inc. With respect to events occurring after
March 31, 2000, the entity formed as Monsanto Ag Company and renamed Monsanto
Company (NYSE: MON) on March 31, 2000, is referred to as "Monsanto".
has tendered the defense of the case to Monsanto and requested indemnity.
Pursuant to the terms of the February 2, 1996 Bollgard Gene License and Seed
Services Agreement (the "Bollgard Agreement") and the February 2, 1996 Roundup
Ready Gene License and Seed Services Agreement (the "Roundup Ready Agreement")
(both as amended December 1999, January 2000 and March 2003 and the Roundup
Ready Agreement as additionally amended July 1996), D&PL has a right to be
contractually indemnified by Monsanto against all claims arising out of the
failure of Monsanto's gene technology. Pharmacia remains liable for Monsanto's
performance under these indemnity agreements. Some of the product liability
lawsuits contain varietal claims which are aimed solely at D&PL. D&PL does not
have a right to indemnification from Monsanto for any claims involving varietal
characteristics separate from or in addition to the failure of the Monsanto
technology. D&PL believes that the resolution of these matters will not have a
material impact on the consolidated financial statements. D&PL intends to
vigorously defend itself in these matters.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II(R) cotton seed infringes Bayer's Australian patent
that claims an alleged invention entitled "Prevention of Bt Resistance
Development." The suit seeks an injunction, damages and other relief against
Deltapine Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners, a partnership of D&PL (90%) and Monsanto
(10%), pertaining to four matters under the Bollgard and Roundup Ready Licenses
for the United States and two matters under license agreements for Argentina and
the Republic of South Africa, respectively. Monsanto's notice of dispute asserts
that D&PL's failure to address these issues would be a breach of D&PL
obligations under the relevant agreements and reserves all of Monsanto's rights
under these agreements. In August 2003, D&PL and D&M Partners responded to
Monsanto's positions on each issue and notified Monsanto of three additional
disputes, each concerning Monsanto's compliance with its obligations under the
Bollgard and Roundup Ready Licenses for the United States. In accordance with
the dispute resolution provisions of the subject agreements, the issues raised
in Monsanto, D&PL and D&M Partners' notices have been submitted to a panel of
senior executives (the "Executive Panel"). Monsanto has subsequently withdrawn
from the Executive Panel the issue involving the license agreements for the
Republic of South Africa and has submitted to the Executive Panel one additional
issue of interpretation of the Bollgard and Roundup Ready Licenses for the
United States. Issues arising from operations in Argentina have been resolved
and are no longer in dispute. D&PL is committed to participating in good faith
resolution of the remaining issues in dispute. Any issues not resolved by the
Executive Panel may be submitted to binding arbitration as provided in the
relevant agreements. On May 20, 2004, Monsanto submitted to arbitration before
the American Arbitration Association two issues: whether D&M Partners has paid
Monsanto all royalties due and whether D&PL has made unauthorized transfers of
materials containing Monsanto technology. In this arbitration proceeding,
Monsanto seeks an adjudication of its alleged right to terminate the Bollgard
and Roundup Ready Licenses, to dissolve D&M Partners, to obtain an accounting
and to receive monetary damages and a return or destruction of materials
containing Monsanto technologies. D&PL denies the claims asserted by Monsanto in
the arbitration filing and has filed appropriate responses and counterclaims to
Monsanto's claims. Other issues remain pending before the Executive Panel.
In July 2002, Syngenta Biotechnology, Inc. ("SBI") brought suit in the U.S.
District Court in Delaware alleging that D&PL's making, using, selling and
offering to sell cotton planting seed containing Monsanto's insect-resistant Bt
genes, being sold under the trade name Bollgard, and Monsanto's herbicide
tolerance genes, being sold under the trade name Roundup Ready, infringed U.S.
Patent 6,051,757 entitled "Regeneration of Plants Containing Genetically
Engineered T-DNA". This suit was dismissed with prejudice by a Stipulation of
Dismissal filed February 20, 2004, with no material impact to D&PL.
In May 2002, Pharmacia Corporation filed a suit in state court in Missouri
against D&PL International Technology Corp. ("DITC"), D&PL's subsidiary, seeking
a declaratory judgment that it was entitled to invoke the cross purchase
provision in the Operating Agreement for D&M International, LLC, a limited
liability company jointly owned by Pharmacia and DITC. In March 2004, the
parties agreed to settle the matter without material financial impact to the
Company. An order of dismissal was entered on April 27, 2004.
In December 1999, Mycogen Plant Science, Inc. ("Mycogen") filed a suit in the
Federal Court of Australia alleging that Monsanto Australia Ltd., Monsanto's
wholly-owned Australian subsidiary, and Deltapine Australia have been infringing
two of Mycogen's Australian patents by making, selling, and licensing cotton
planting seed expressing insect resistance. The suit seeks injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. The litigation is currently in discovery and
pretrial proceedings. Consistent with its commitments, Monsanto has agreed to
defend D&PL in this suit and to indemnify D&PL against damages, if any are
awarded. Monsanto is providing separate defense counsel for D&PL. D&PL is
assisting Monsanto to the extent reasonably necessary.
A corporation owned by the son of D&PL's former Guatemalan distributor sued in
1989 asserting that D&PL violated an agreement with it by granting to another
entity an exclusive license in certain areas of Central America and southern
Mexico. The suit seeks damages of 5,292,459 Guatemalan quetzales (approximately
$687,000 at June 30, 2004 exchange rates) and an injunction preventing D&PL from
distributing seed through any other licensee in that region. The Guatemalan
court, where this action is proceeding, has twice declined to approve the
injunction sought. D&PL continues to make available seed for sale in Central
America and Mexico.
13. EARNINGS PER SHARE
Dilutive common share equivalents consist of both D&PL's Series M Convertible
Non-Voting Preferred shares and the outstanding options to purchase D&PL's
common stock that have been issued under the 1993 Stock Option Plan and the 1995
Long-Term Incentive Plan. Approximately 551,000 and 1,126,000 outstanding stock
options were not included in the computation of diluted earnings per share for
the three months ended May 31, 2004 and 2003, respectively, and approximately
551,000 and 1,179,000 outstanding stock options were not included in the
computation of diluted earnings per share for the nine months ended May 31, 2004
and 2003, respectively, because the exercise price exceeded the average market
price of D&PL's common stock for each respective reporting date. These excluded
options expire at various dates from 2007 to 2014.
The table below reconciles the basic and diluted per share computations:
Three Months Ended Nine Months Ended
(in thousands, except per share amounts) May 31, May 31, May 31, May 31,
2004 2003 2004 2003
-------------- ------------- --------------- --------------
Income:
Net income $ 31,429 $ 28,465 $ 33,894 $ 37,166
Less: Preferred stock dividends (128) (64) (363) (181)
-------------- ------------- --------------- --------------
Net income for basic EPS 31,301 28,401 33,531 36,985
Effect of Dilutive Securities:
Convertible Preferred Stock Dividends 128 64 363 181
-------------- ------------- --------------- --------------
Net income available to common
stockholders plus assumed conversions
(for diluted EPS) $ 31,429 $ 28,465 $ 33,894 $ 37,166
============== ============= =============== ==============
Shares:
Basic EPS Shares 38,311 38,049 38,183 38,115
Effect of Dilutive Securities:
Options to purchase stock 421 482 435 372
Convertible preferred stock 1,067 1,067 1,067 1,067
-------------- ------------- --------------- --------------
Diluted EPS Shares 39,799 39,598 39,685 39,554
============== ============= =============== ==============
Per Share Amounts:
Basic $ 0.82 $ 0.75 $ 0.88 $ 0.97
============== ============= =============== ==============
Diluted $ 0.79 $ 0.72 $ 0.85 $ 0.94
============== ============= =============== ==============
14. EMPLOYEE BENEFIT PLANS
Substantially all full-time employees are covered by a noncontributory defined
benefit plan (the "Plan"). Benefits are paid to employees, or their
beneficiaries, upon retirement, death or disability based on their final average
compensation over the highest consecutive five years. D&PL's funding policy is
to make contributions to the Plan that are at least equal to the minimum amounts
required to be funded in accordance with the provisions of ERISA. Effective
January 1992, D&PL adopted a Supplemental Executive Retirement Plan (the
"SERP"), which will pay supplemental pension benefits to certain employees whose
benefits from the Plan were decreased as a result of certain changes made to the
Plan. The benefits from the SERP will be paid in addition to any benefits the
participants may receive under the Plan and will be paid from Company assets,
not Plan assets. For further information about D&PL's employee benefit plans,
reference should be made to Note 10 to the consolidated financial statements
contained in D&PL's Annual Report on Form 10-K for the year ended August 31,
2003.
The components of net periodic pension cost for D&PL's Plan and SERP follow as
of (in thousands):
Pension SERP
Three Months Ended Three Months Ended
--------------------------------------- ------------------------------------
May 31, May 31, May 31, May 31,
2004 2003 2004 2003
------------------ ------------------ ------------------ ---------------
Service cost $ 208,000 $ 160,000 $ 2,000 $ 2,000
Interest cost 247,000 229,000 9,000 10,000
Expected return on assets (230,000) (172,000) (7,000) (8,000)
Amortization of prior service cost 1,000 1,000 - -
Recognized net actuarial loss 118,000 66,000 12,000 46,000
------------------ ------------------ ------------------ ---------------
Net periodic pension cost $ 344,000 $ 284,000 $ 16,000 $ 50,000
================== ================== ================== ===============
Pension SERP
Nine Months Ended Nine Months Ended
--------------------------------------- ------------------------------------
May 31, May 31, May 31, May 31,
2004 2003 2004 2003
------------------ ------------------ ------------------ ---------------
Service cost $ 624,000 $ 479,000 $ 7,000 $ 6,000
Interest cost 742,000 686,000 27,000 29,000
Expected return on assets (691,000) (515,000) (21,000) (24,000)
Amortization of prior service cost 3,000 3,000 - -
Recognized net actuarial loss 354,000 198,000 37,000 139,000
------------------ ------------------ ------------------ ---------------
Net periodic pension cost $ 1,032,000 $ 851,000 $ 50,000 $ 150,000
================== ================== ================== ===============
As of May 31, 2004, D&PL had contributed $1,400,000 to the Pension Plan. D&PL
contributed $1,300,000 to the Pension Plan in June 2004 and does not anticipate
making any additional contributions in 2004.
As of May 31, 2004, no contributions have been made to the SERP. D&PL presently
does not anticipate contributing any amounts to the SERP in 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW/OUTLOOK
During the third quarter, we shipped the bulk of our cotton and soybean seed
units for the 2004 fiscal year to customers in the U.S. market. Domestic
cottonseed sales were higher for the 2004 third quarter compared to the 2003
third quarter due to an increase in both units shipped and in selling prices.
Units shipped increased in the current year period due to an expected shift of
shipments from the second quarter to the third quarter as a result of our
inventory management strategy whereby shipments to distributors were more
closely timed with orders from farmers to the distributors. We are very pleased
with the strong sales of our newer cottonseed products, including DP 555 BG/RR
and DP 444 BG/RR. DP 555 BG/RR was the most popular variety planted in the U.S.
in 2003, the first year of commercial launch, and our 2004 unit sales increased
by approximately 50% over last year. Likewise, DP 444 BG/RR sales were very
strong in 2004, the first year of wide-scale commercial sales. We believe DP 444
BG/RR sales could have been higher had we not been limited by our seed supply of
this variety. Soybean seed sales for the 2004 third quarter were significantly
improved over last year due to the introduction of new products, good
performance in 2003 of existing products, and an increase in soybean plantings.
Production costs related to our cottonseed sales were higher this year due to
higher raw materials costs and freight related to sourcing seed production from
the western United States and, in some cases, Australia. In addition, cost of
sales increased due to increased inventory provisions for obsolete inventory.
Normally, a higher percentage of products are produced in the Mid-South, but
inclement weather destroyed most of the 2003 Mid-South cottonseed production
prompting us to shift some production to other areas for this year. The
increased cottonseed costs partially offset the effect of our increase in
cottonseed selling prices.
On June 30, 2004, the USDA released its planted acreage report, which reflected
13.9 million acres of overall cotton plantings in the U.S., a 3% increase over
last year. The report also reflected a reduction in cotton plantings in many
states east of Texas where high value picker-type cottonseed is planted, and an
increase in acreage in Texas. Our estimates of overall U.S. cotton plantings are
in the range of 13.2 to 13.5 million acres and we believe a larger reduction in
acreage occurred east of Texas than the USDA has reported. The reduction in
cotton plantings in these states resulted in fewer sales than we had
anticipated. In addition, our sales suffered in the Texas High Plains due to not
having sufficient quantities of new products available to farmers who have
recently adopted picker-type varieties over the stripper-type varieties that
have traditionally been planted in this area.
International sales for the quarter almost doubled over the same prior year
quarter, primarily due to increased export sales to Colombia, Mexico and Turkey
and a shift of sales to Greece from the second quarter to the third quarter of
the current year. In Colombia, the government approved the sale of products
containing Monsanto's Roundup Ready genes after approval of products containing
Monsanto's Bollgard genes last year. These events should increase revenues from
Colombia as farmers adopt these products.
Due to the reduction in planted acreage in D&PL's key picker markets (primarily
east of Texas) and lower than expected U.S. cotton plantings from our original
estimates of 14.5 million acres, the Company now expects to report earnings per
diluted share in the range of $0.67 to $0.75 for fiscal 2004. Legal expenses
associated with the Monsanto/Pharmacia litigation are expected to range from
$0.19 to $0.21 per diluted share. This new guidance is based on estimated
overall U.S. cotton plantings of approximately 13.2 to 13.5 million acres and
includes a reduction in acres planted in D&PL's key picker markets (primarily
east of Texas) as compared to 2003 cotton plantings. In addition, this earnings
estimate anticipates lower technology fee rebates under crop loss and replant
programs than was experienced in 2003. Crop loss and replant program rebates are
generally finalized in the fourth quarter.
Other Matters
1 1
We are continuing to pursue the litigation against Monsanto and Pharmacia. The
judge in the case has temporarily suspended the dates for the completion of
discovery until motions that are pending before the Court are decided.
Separately, on May 20, 2004, Monsanto submitted to arbitration before the
American Arbitration Association two issues that have been in dispute with us
since July, 2003. Monsanto has alleged that we violated certain provisions of
the Bollgard and Roundup Ready licenses and the D&M Partnership Agreement and is
seeking a determination of its alleged right to terminate our Bollgard and
Roundup Ready licenses, as well as damages. We do not believe we have violated
these agreements and we have filed appropriate responses and counterclaims
to Monsanto's claims. See Part II, Item I for more information.
In addition to continuing to work with Monsanto's insect resistance and
herbicide tolerance traits, we are also seeking to secure alternative
technologies for our cottonseed products such as insect resistance, herbicide
tolerance and other technologies. We expect that access to new technologies will
be gained either through licenses, joint ventures or outright purchase. In
connection with this, we are continuing to work with third-party trait providers
to develop, test and evaluate elite cotton varieties containing insect resistant
genes. If appropriate testing indicates these third-party traits combined with
our germplasm are competitive, if commercialization agreements are reached, and
if U.S. government regulatory approval is received, our elite varieties
containing these traits may be available for introduction to growers. In
addition, we continue to have discussions with potential partners to enter new
markets as a part of executing our international growth strategy. We expect to
form joint ventures, take positions in established businesses, and/or develop
businesses ourselves depending on the potential benefit of each alternative. In
addition, our joint venture with Verdia, Inc., DeltaMax Cotton, LLC
("DeltaMax"), continues to perform cotton transformations with proprietary
glyphosate tolerant and insect resistance genes. On July 2, 2004, Verdia was
acquired by DuPont, a multinational agricultural chemicals and seed
conglomerate.
Pursuant to our previously announced share repurchase program, from September 1,
2003 to June 30, 2004 we repurchased in the open market 218,000 shares of our
stock at an aggregate purchase price of $5.0 million. We will continue to
purchase our shares from time to time depending on market conditions and other
factors.
Results of Operations
Due to the seasonal nature of our business, we typically incur losses in our
first and fourth fiscal quarters because the majority of our domestic sales are
made in our second and third quarters. Sales in the first and fourth quarters
are generally limited to those made to export markets and those made by our
non-U.S. joint ventures and subsidiaries located primarily in the Southern
hemisphere.
- --------------
1. On March 31, 2000, Monsanto Company consummated a merger with Pharmacia &
Upjohn Inc. and changed its name to Pharmacia Corporation. On February 9, 2000,
Monsanto Company formed a new subsidiary corporation, Monsanto Ag Company,
which, on March 31, 2000, changed its name to Monsanto Company. On August 31,
2002, Pharmacia distributed to its shareholders its remaining interest in the
new Monsanto Company. Pursuant to the closing of a merger on April 16, 2003,
Pharmacia Corporation merged with and into a wholly-owned subsidiary of Pfizer
Inc. Pharmacia survived the merger as a wholly-owned subsidiary of Pfizer Inc.
In this document, with respect to events occurring on or before March 31, 2000,
the term "Monsanto" refers to the entity then designated Monsanto Company and
renamed Pharmacia Corporation on that date. With respect to events occurring
between March 31, 2000 and April 16, 2003, this entity is referred to as
"Pharmacia". With respect to events occurring after April 16, 2003, the entity
referred to as "Pharmacia" is that entity which on that date became a
wholly-owned subsidiary of Pfizer Inc. With respect to events occurring after
March 31, 2000, the entity formed as Monsanto Ag Company and renamed Monsanto
Company (NYSE: MON) on March 31, 2000, is referred to as "Monsanto".
The following sets forth selected operating data of D&PL (in thousands):
For the Three Months Ended For the Nine Months Ended
-------------------------------------- ----------------------------------
May 31, May 31, May 31, May 31,
2004 2003 2004 2003
------------------ ----------------- ----------------- ----------------
Operating results-
Net sales and licensing fees $ 185,119 $ 168,936 $ 287,240 $ 282,072
Gross profit 64,555 57,841 102,528 100,994
Operating expenses 11,462 11,360 35,820 33,328
Operating income 53,093 46,481 66,708 67,666
Income before income taxes 48,697 44,132 52,549 57,622
Net income applicable to common shares 31,301 28,401 33,531 36,985
The following sets forth selected balance sheet data of D&PL at the following
dates (in thousands):
May 31, August 31, May 31,
2004 2003 2003
------------------ ----------------- -----------------
Balance sheet summary-
Current assets $ 420,441 $ 355,261 $ 405,888
Current liabilities 242,795 204,050 240,340
Working capital 177,646 151,211 165,548
Property, plant and equipment, net 61,205 64,441 61,427
Total assets 492,839 431,552 479,686
Outstanding borrowings - 1,597 2,169
Stockholders' equity 241,199 217,107 203,762
Three months ended May 31, 2004, compared to three months ended May 31, 2003:
For the quarter ended May 31, 2004, we reported net income of $31.4 million,
compared to net income of $28.5 million reported in the comparable prior year
quarter. This increase was due primarily to higher sales in our domestic and
international segments, partially offset by an increase in Other Expense
relating to the Monsanto/Pharmacia litigation.
Net sales and licensing fees increased approximately $16.1 million to $185.1
million from $169.0 million in the comparable period in the prior year. The
increase in net sales and licensing fees is primarily attributable to an
anticipated shift of domestic cottonseed sales into the third quarter from our
continuing transition to a new inventory management strategy whereby inventory
shipments to distributors are more closely matched to farmer orders. The
increase was also partially attributable to higher soybean seed sales and an
increase in international revenues, primarily from an increase in export sales
to Mexico and Colombia, and a shift of sales to Greece from the second quarter
to the third quarter.
Gross profit increased approximately $6.8 million to $64.6 million from $57.8
million. Gross profit as a percentage of net sales and licensing fees increased
slightly to 35% from 34% in the same quarter of the prior year. This slight
increase resulted from higher domestic cottonseed prices being offset by higher
cottonseed costs and lower soybean seed margins.
Operating expenses increased approximately $0.1 million to $11.5 million from
$11.4 million in the third quarter of 2003. Operating expenses for the prior
year third quarter included special charges of $0.5 million. Excluding the
special charges recorded in the prior year quarter, the increase in operating
expenses in the current year quarter is primarily related to an increase in
professional services fees.
We reported net Other Expense of approximately $3.7 million for the quarter
ended May 31, 2004, compared to net Other Expense of approximately $2.5 million
for the same period in the prior year. This increase is primarily due to an
increase in Monsanto/Pharmacia litigation expenses in the current year period.
For the quarter ended May 31, 2004, we incurred $3.2 million, or $0.05 per
diluted share, related to Monsanto/Pharmacia litigation expenses, compared to
$2.4 million, or $0.04 per diluted share, in the quarter ended May 31, 2003.
Nine months ended May 31, 2004, compared to nine months ended May 31, 2003:
For the nine-month period ended May 31, 2004, we reported net income of $33.9
million, compared to net income of $37.2 million reported in the comparable
prior year period. This decrease was due primarily to lower domestic cottonseed
sales, higher operating expenses, and an increase in Monsanto/Pharmacia
litigation expenses. These items were partially offset by a significant increase
in international revenues and operating income.
Net sales and licensing fees increased approximately $5.1 million to $287.2
million from $282.1 million in the comparable period in the prior year. The
increase in net sales and licensing fees is primarily attributable to an
increase in international revenues, primarily from in-country sales in Australia
and Brazil and from export sales to Mexico and Colombia. Domestic revenues were
lower for the current year period, due to lower cottonseed sales offset by
higher soybean sales.
Gross profit increased approximately $1.5 million to $102.5 million from $101.0
million. Gross profit as a percentage of net sales and licensing fees for the
period remained constant with that of the prior year period at 36%.
Operating expenses increased approximately $2.5 million to $35.8 million from
$33.3 million in the same period in 2003. Operating expenses for the prior year
period included special charges of $1.0 million. Excluding the special charges
recorded in the prior year period, the increase in operating expenses in the
current year period related primarily to higher research and development costs
and an increase in professional services fees.
We reported net Other Expense of approximately $10.0 million for the nine-month
period ended May 31, 2004, compared to net Other Expense of approximately $8.5
million for the same period in the prior year. This is due to an increase in
Monsanto/Pharmacia litigation expenses in the current year period. For the
nine-month period ended May 31, 2004, we incurred $9.7 million, or $0.16 per
diluted share, related to Monsanto/Pharmacia litigation expenses, compared to
$8.5 million, or $0.14 per diluted share, in the nine-month period ended May 31,
2003.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Overview
Management's discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing in Item 8 of our Annual Report on Form
10-K for the fiscal year ended August 31, 2003. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
We have identified below the accounting policies that involve those estimates
and assumptions that we believe are critical to an understanding of our
financial statements. Our management has discussed the development and selection
of each critical accounting estimate with the Audit Committee of our Board of
Directors, and the Audit Committee has reviewed the related disclosures below.
Since application of these accounting policies involves the exercise of judgment
and use of estimates, actual results could differ from those estimates.
Revenue Recognition
Revenues from domestic seed sales are recognized when the seed is shipped.
Revenues from Bollgard(R) and Roundup Ready(R) licensing fees are recognized
when the seed is shipped. Domestically, the licensing fees charged to farmers
for Bollgard and Roundup Ready cottonseed are based on pre-established planting
rates for each of nine geographic regions and consider the estimated number of
seed contained in each bag for years prior to 2004 which may vary by variety,
location grown, and other factors. Effective this year, picker and stripper
cottonseed products were sold in bags containing approximately 250,000 seed.
Acala and Pima cottonseed products continue to be sold in 50-pound bags.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. International export sales are not subject to return
except in limited cases in Mexico and Colombia. All other international revenues
from the sale of planting seed, less estimated reserves for returns, are
recognized when the seed is shipped, except in Australia and South Africa where
certain immaterial revenues are recognized when collected.
All of our domestic seed products (including those containing Bollgard and
Roundup Ready technologies) are subject to return and credit risk, the effects
of which vary from year to year. The annual level of returns and, ultimately,
net sales are influenced by various factors, principally commodity prices and
weather conditions occurring in the spring planting season during our third and
fourth quarters. We provide for estimated returns as sales occur. To the extent
actual returns differ from estimates, adjustments to our operating results are
recorded when such differences become known, typically in our fourth quarter.
All significant returns occur or are accounted for by fiscal year end.
Therefore, the application of this estimate could affect our quarterly
information.
Domestically, we promote our cotton and soybean seed directly to farmers and
sell our seed through distributors and dealers. We also offer various sales
incentive programs for seed and participate in such programs related to the
Bollgard and Roundup Ready technology fees offered by Monsanto. Under these
programs, if a farmer plants his seed and the crop is lost (usually due to
inclement weather) by a certain date, a portion of the price of the seed and
technology fees are forgiven or rebated to the farmer if certain conditions are
met. The amount of the refund and the impact to D&PL depends on a number of
factors including whether the farmer can replant the crop that was destroyed. We
record monthly estimates to account for these programs. The majority of program
rebates occur during the second and third quarters. Essentially all material
claims under these programs have occurred or are accounted for by fiscal year
end.
Provision for Damaged, Obsolete and Excess Inventory
Each year, we record a provision related to inventory based on our estimate of
seed that will not pass our quality assurance ("QA") standards at year end, or
is deemed excess based on our desired seed stock level for a particular variety
("dump seed"). Seed can fail QA standards based on physical defects (i.e., cut
seed, moisture content, discoloration, etc.), germination rates, or transgenic
purities. The amount recorded as inventory provision in a given year is
calculated based on the total quantity of inventory that has not passed QA
standards at any fiscal year end, any seed that is expected to deteriorate
before it can be sold and seed deemed to be excess. In establishing the
provision, we consider the scrap value of the seed to be disposed. An initial
estimate of the needed provision is made at the beginning of each year and
recorded over the course of the year. Adjustments for changes in our estimates
are made monthly, if necessary.
See Note 7 of the Notes to Consolidated Financial Statements in Item 1 for
further details about inventory reserves.
Deferred Income Taxes
Deferred income taxes are estimated based upon temporary differences between the
income and losses that we report in our financial statements and our taxable
income and losses as determined under applicable tax laws. We estimate the value
of deferred income taxes based on existing tax rates and laws, and our
expectations of future earnings. For deferred income taxes, we applied a
composite statutory income tax rate of 38%.
We are required to evaluate the likelihood of our ability to generate sufficient
future taxable income that will enable us to realize the value of our deferred
tax assets. If, in our judgment, we determine that we will not realize deferred
tax assets, then valuation allowances are recorded. As of May 31, 2004, we had
recorded net deferred tax assets of approximately $6.6 million. We estimate that
our deferred tax assets will be realized; therefore, we have not recorded any
valuation allowances as of May 31, 2004.
We use management judgment and estimates when estimating deferred taxes. If our
judgments and estimates prove to be inadequate, or if certain tax rates and laws
should change, our financial results could be materially adversely impacted in
future periods.
Contingent Liabilities
A liability is contingent if the amount is not presently known, but may become
known in the future as a result of the occurrence of some uncertain future
event. D&PL estimates its contingent liabilities based on management's estimates
about the probability of outcomes and its ability to estimate the range of
exposure. Accounting standards require that a liability be recorded if
management determines that it is probable that a loss has occurred and the loss
can be reasonably estimated. In addition, it must be probable that the loss will
be confirmed by some future event. As part of the estimation process, management
is required to make assumptions about matters that are by their nature highly
uncertain. The assessment of contingent liabilities, including legal
contingencies and income tax liabilities, involves the use of critical
estimates, assumptions and judgments. Management's estimates are based on their
belief that future events will validate the current assumptions regarding the
ultimate outcome of these exposures. However, there can be no assurance that
future events, such as court decisions or I.R.S. positions, will not differ from
management's assessments. Whenever practicable, management consults with third
party experts (attorneys, accountants, claims administrators, etc.) to assist
with the gathering and evaluation of information related to contingent
liabilities.
LIQUIDITY AND CAPITAL RESOURCES
In the United States, we purchase seed from contract growers in our first and
second fiscal quarters. Seed conditioning, treating and packaging commence late
in the first fiscal quarter and continue through the third fiscal quarter.
Seasonal cash needs normally begin to increase in the first fiscal quarter and
cash needs peak in the third fiscal quarter. Cash is generated and loan
repayments, if applicable, normally begin in the middle of the third fiscal
quarter and are typically completed by the first fiscal quarter of the following
year. In some cases, we offer customers financial incentives to make early
payments. To the extent we attract early payments from customers, bank
borrowings, if any, are reduced.
In the U.S., we record revenue and accounts receivable for licensing fees on
Bollgard and Roundup Ready seed sales upon shipment, usually in our second and
third fiscal quarters. Receivables from seed sales are generally due from May to
July. The licensing fees are due in September, at which time we receive payment.
We then pay Monsanto its royalty for the Bollgard and Roundup Ready licensing
fees, which is recorded as a component of cost of sales. As a result of the
timing of these events, licensing fees receivable and royalties payable peak at
fiscal year end.
The seasonal nature of our business significantly impacts cash flow and working
capital requirements. Historically, we have maintained credit facilities, and
used early payments by customers and cash from operations to fund working
capital needs. In the past, we have borrowed on a short-term basis to meet
seasonal working capital needs. However, in fiscal years 2002 and 2003, we used
cash generated from operations and other available cash to meet working capital
needs. We continue to evaluate potential uses of our cash for purposes other
than for working capital needs. Potential uses of our cash may be the
acquisition of, or funding of, alternative technologies (such as, or in addition
to, DeltaMax) that could be used to enhance our product portfolio and ultimately
our long-term earnings potential and/or an investment in new markets outside the
U.S. Another potential use is the repurchase in the open market of our shares
pursuant to our previously announced share repurchase program. Once the
evaluation of certain transactions that are currently being considered is
completed, we may consider other potential uses of the remaining cash, including
increasing the dividend rate or repurchasing shares more aggressively depending
on market considerations and other factors.
In April 1998, we entered into a syndicated credit facility with three lenders,
which provided for aggregate borrowings of $110 million. This agreement expired
on April 1, 2001. D&PL and potential lenders have had discussions about a
replacement facility that will provide for aggregate borrowings sufficient to
meet our current working capital needs.
Capital expenditures were $3.1 million and $3.3 million in the nine months ended
May 31, 2004 and 2003, respectively. We anticipate that capital expenditures
will approximate $5.0 to $6.0 million in fiscal 2004.
Annual dividends of $0.27 and $0.20 per share were paid in 2003 and 2002,
respectively. Aggregate dividends paid on common and preferred shares in 2003
and 2002 were $10.6 million and $7.9 million, respectively. For the nine months
ended May 31, 2004, aggregate dividends of $13.4 million have been paid on
common and preferred shares. On July 14, 2004, we announced that our Board of
Directors had declared a $0.12 per share dividend for the fourth quarter. The
fourth quarter dividend, payable to shareholders of record on August 31, 2004,
will be paid on September 14, 2004. The Board anticipates that quarterly
dividends of $0.12 per share will continue to be paid in the future; however,
the Board of Directors reviews this policy quarterly. Aggregate preferred and
common dividends should approximate $18.1 million in 2004.
In February 2000, the Board of Directors authorized a program for the repurchase
of up to $50 million of our common stock. The shares repurchased under this
program are to be used to provide for option exercises, conversion of our Series
M Convertible Non-Voting Preferred shares and for other general corporate
purposes. At August 31, 2003, we had repurchased 1,303,000 shares at an
aggregate purchase price of approximately $23.8 million under this program.
During the year ended August 31, 2003, we purchased 310,100 shares at an
aggregate purchase price of $6.1 million under this plan. Between September 1,
2003 and June 30, 2004, we repurchased 218,000 shares at an aggregate purchase
price of $5.0 million.
Cash provided from operations, cash on hand, early payments from customers and
borrowings under a loan agreement, if necessary, should be sufficient to meet
the Company's 2004 working capital needs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure relative to fluctuations in the price of soybean raw material
inventory, foreign currency fluctuations and interest rate changes. For more
information about market risk and how we manage specific risk exposures, see
Notes 1 and 14 to our consolidated financial statements contained in our Annual
Report on Form 10-K for the year ended August 31, 2003. Also see Note 11 of the
Notes to Consolidated Financial Statements in Item 1 for further details about
our exposure to market risk.
The fair value of derivative commodity instruments outstanding as of May 31,
2004, was $190,000. A 10% adverse change in the underlying commodity prices upon
which these contracts are based would result in a $260,000 loss in future
earnings arising from these contracts (not counting the gain on the underlying
commodities).
Our earnings are also affected by fluctuations in the value of the U.S. dollar
compared to foreign currencies as a result of transactions in foreign markets.
We conduct non-U.S. operations through subsidiaries and joint ventures in,
primarily, Argentina, Australia, Brazil, China, South Africa and Turkey. At May
31, 2004, the result of a uniform 10% strengthening in the value of the dollar
relative to the currencies in which our transactions are denominated would not
cause a material impact on earnings.
For the nine months ended May 31, 2004, a 10% adverse change in the interest
rate that we earned on our excess cash that we invested would not have resulted
in a material change to our net interest income or cash flow.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
D&PL's chief executive officer and chief financial officer have evaluated the
effectiveness of the design and operation of D&PL's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of May 31, 2004. Based
on that evaluation, the chief executive officer and chief financial officer have
concluded that D&PL's disclosure controls and procedures are effective to ensure
that material information relating to D&PL and D&PL's consolidated subsidiaries
is made known to such officers by others within these entities, particularly
during the period this report was prepared, in order to allow timely decisions
regarding required disclosure.
(b) Changes in Internal Controls.
There have not been any changes in D&PL's internal control over financial
reporting or in other factors that have materially affected, or are reasonably
likely to materially affect, D&PL's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following sets forth known pending litigation and a description of other
legal matters.
Product Claims
D&PL and Monsanto are named as defendants in a lawsuit filed in Hockley County,
Texas, on April 14, 1999. This lawsuit was removed to the United States District
Court, Lubbock Division, but subsequently remanded back to the state court. This
case was tried to a jury in August 2002, and an adverse verdict was returned
against D&PL and Monsanto. On February 24, 2004, this case was reversed and
rendered in D&PL's favor by the 7th Appellate Court District (Amarillo Division)
of the Texas Court of Appeals. The plaintiff is presently appealing the decision
of the Texas Court of Appeals to the Texas Supreme Court. The Texas Supreme
Court has not yet issued a decision on whether or not they will accept
Certiorari on the case. In this case the plaintiff alleged that certain
cottonseed acquired from the Paymaster division of D&PL did not perform as the
farmer had anticipated and as allegedly represented to him.
D&PL and Monsanto were named as defendants in a lawsuit filed in the 106th
Judicial District Court of Gaines County, Texas, on April 27, 2000. In this case
the plaintiff alleges, among other things, that certain cottonseed acquired from
D&PL that contained the Roundup Ready gene did not perform as the farmer had
anticipated. D&PL and Monsanto are investigating the claims to determine the
cause or causes of the alleged problem. Pursuant to the terms of the February 2,
1996 Roundup Ready Gene License and Seed Service Agreement (the "Roundup Ready
Agreement"), D&PL has tendered the defense of this claim to Monsanto and
requested indemnity. Pursuant to the Roundup Ready Agreement, Monsanto is
contractually obligated to defend and indemnify D&PL against all claims arising
out of the failure of the Roundup(R) glyphosate tolerance gene and Monsanto has
agreed to do so. D&PL will not have a right of indemnification from Monsanto,
however, for any claim involving defective varietal characteristics separate
from or in addition to the herbicide tolerance gene and such claims are
contained in this litigation.
D&PL was named as a defendant in a lawsuit filed in the 110th Judicial District
Court of Floyd County, Texas, on November 21, 2002. In this multiple plaintiff
case, each plaintiff alleges that seed purchased from D&PL failed to perform as
represented and seeks compensatory damages for crop losses during the 2002
growing season. D&PL and the claimants in this case have now entered into an
agreement for binding arbitration of the claims pursuant to the arbitration
clause contained in the Monsanto Gene Licensing Agreement executed by the
growers. Although the claim involves a cotton variety that contains the Roundup
Ready gene, no claim against Monsanto was alleged, nor was there any allegation
that Monsanto technology caused or contributed to plaintiffs' alleged problems.
Thus, it does not presently appear that Monsanto is contractually obligated to
defend and/or indemnify D&PL in this case.
D&PL and various seed suppliers are named in five pending lawsuits in the State
of South Carolina. Two cases were filed on November 15, 1999, in the Court of
Common Pleas of Hampton County, South Carolina. The two 1999 state court
lawsuits were removed to the United States District Court for the District of
South Carolina but were subsequently remanded back to the state court in which
they were filed. The remaining three lawsuits were filed July 29, 2002, in the
Court of Common Pleas of Hampton County, South Carolina. The 2002 state court
filing of one of those cases was removed to United States District Court for the
District of South Carolina, Beaufort Division, but has now been remanded back to
Hampton County. In each of these cases the plaintiff alleges, among other
things, that certain seed acquired from D&PL which contained the Roundup Ready
gene and/or the Bollgard gene did not perform as the farmer had anticipated.
These lawsuits also include varietal claims aimed solely at D&PL. D&PL and
Monsanto are continuing to investigate the claims to determine the cause or
causes of the alleged problem. Pursuant to the terms of the Roundup Ready
Agreement and the Bollgard Agreement between D&PL and Monsanto, D&PL has a right
to be contractually indemnified against all claims arising out of the failure of
Monsanto's gene technology. D&PL will not have a right to indemnification,
however, from Monsanto for any claim involving varietal characteristics separate
from or in addition to the failure of the Monsanto technology and such claims
are contained in each of these lawsuits. By Order entered June 21, 2004, all of
the pending South Carolina cases were removed from the active docket in order to
give the parties adequate time to seek settlement of the cases.
D&PL was named in two lawsuits filed in the Circuit Court of Holmes County,
Mississippi. One was filed March 14, 2002, and the second was filed on August
19, 2002. Both cases include numerous plaintiffs who allege that certain cotton
seed sold by D&PL was improperly mixed and blended and failed to perform as
advertised. In the second Holmes County lawsuit, D&PL has filed a third party
Complaint and seeks a declaration that its insurers are responsible for the cost
of defending the action and for full indemnification of D&PL in the event a
judgment is entered against it. The third-party defendant removed the case to
the United States District Court for the Southern District of Mississippi,
Jackson Division, where a motion to remand is pending. Both cases are in the
preliminary stages, although it is anticipated dispositive motions will be filed
in this litigation shortly. Neither of these lawsuits alleges that the Monsanto
gene technology failed, and accordingly, it does not appear that D&PL has a
claim for indemnity or defense under the terms of any of the gene licenses with
Monsanto.
The pending lawsuit filed against D&PL and Monsanto on November 15, 1999, in the
Beaufort Division of the United States District Court, District of South
Carolina, has now been dismissed. This matter was resolved without material
financial impact on the company.
All lawsuits related to product claims seek monetary damages. See Note 12 of the
Notes to Consolidated Financial Statements in Item 1 for further details about
product claims.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II(R) cotton seed infringes Bayer's Australian patent
that claims an alleged invention entitled "Prevention of Bt Resistance
Development." The suit seeks an injunction, damages and other relief against
Deltapine Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners, a partnership of D&PL (90%) and Monsanto
(10%), pertaining to four matters under the Bollgard and Roundup Ready Licenses
for the United States and two matters under license agreements for Argentina and
the Republic of South Africa, respectively. Monsanto's notice of dispute asserts
that D&PL's failure to address these issues would be a breach of D&PL
obligations under the relevant agreements and reserves all of Monsanto's rights
under these agreements. In August 2003, D&PL and D&M Partners responded to
Monsanto's positions on each issue and notified Monsanto of three additional
disputes, each concerning Monsanto's compliance with its obligations under the
Bollgard and Roundup Ready Licenses for the United States. In accordance with
the dispute resolution provisions of the subject agreements, the issues raised
in Monsanto, D&PL and D&M Partners' notices have been submitted to a panel of
senior executives (the "Executive Panel"). Monsanto has subsequently withdrawn
from the Executive Panel the issue involving the license agreements for the
Republic of South Africa and has submitted to the Executive Panel one additional
issue of interpretation of the Bollgard and Roundup Ready Licenses for the
United States. Issues arising from operations in Argentina have been resolved
and are no longer in dispute. D&PL is committed to participating in good faith
resolution of the issues in dispute. Any issues not resolved by the Executive
Panel may be submitted to binding arbitration as provided in the relevant
agreements. On May 20, 2004, Monsanto submitted to arbitration before the
American Arbitration Association two issues: whether D&M Partners has paid
Monsanto all royalties due and whether D&PL has made unauthorized transfers of
materials containing Monsanto technology. In this arbitration proceeding,
Monsanto seeks an adjudication of its alleged right to terminate the Bollgard
and Roundup Ready Licenses, to dissolve D&M Partners, to obtain an accounting
and to receive monetary damages and a return or destruction of materials
containing Monsanto technologies. D&PL denies the claims asserted by Monsanto in
the arbitration filing and has filed appropriate responses and counterclaims to
Monsanto's claims. Other issues remain pending before the Executive Panel.
In December 2002, D&PL filed a suit in the Circuit Court of Holmes County,
Mississippi, against Nationwide Agribusiness and other insurance companies
seeking a declaration that the allegations of the Holmes County, Mississippi
lawsuits referenced under "Product Claims" immediately above are covered by
D&PL's comprehensive general liability and umbrella liability policies. This
case was removed by the defendants to the United States District Court for the
Southern District of Mississippi. In this litigation, D&PL seeks a declaration
that its insurers are responsible for the cost of defending such actions, and
full indemnification of D&PL in the event a judgment is rendered against it
based upon the seed mix claim alleged by plaintiffs. D&PL alleges in this
litigation that the allegations of plaintiffs' complaint are covered by one or
more of D&PL's insurance policies issued by the defendant insurance companies.
In November 2002, D&PL filed suit in the Circuit Court of Washington County,
Mississippi, against its fire insurance carrier, Reliance Insurance Company of
Illinois. That suit seeks recovery of seed inventory lost, damaged or destroyed
during a fire that occurred in November 1999 at D&PL's Hollandale, Mississippi
facility. A Stay Order has now been entered in this case pursuant to the powers
of the Receiver of Reliance Insurance Company of Illinois, which is now in
liquidation.
In July 2002, Syngenta Biotechnology, Inc. ("SBI") brought suit in the U.S.
District Court in Delaware alleging that D&PL's making, using, selling and
offering to sell cotton planting seed containing Monsanto's insect-resistant Bt
genes, being sold under the trade name Bollgard, and Monsanto's herbicide
tolerance genes, being sold under the trade name Roundup Ready, infringed U.S.
Patent 6,051,757 entitled "Regeneration of Plants Containing Genetically
Engineered T-DNA." This suit was dismissed with prejudice by a Stipulation of
Dismissal filed February 20, 2004, with no material impact to D&PL.
In May 2002, Pharmacia Corporation filed a suit in state court in Missouri
against D&PL International Technology Corp. ("DITC"), D&PL's subsidiary, seeking
a declaratory judgment that it was entitled to invoke the cross purchase
provision in the Operating Agreement for D&M International, LLC, a limited
liability company jointly owned by Pharmacia and DITC. In March 2004, the
parties agreed to settle the matter without material financial impact to the
Company. An order of dismissal was entered on April 27, 2004.
In December 1999, Mycogen Plant Science, Inc. ("Mycogen") filed a suit in the
Federal Court of Australia alleging that Monsanto Australia Ltd., Monsanto's
wholly-owned Australian subsidiary, and Deltapine Australia have been infringing
two of Mycogen's Australian patents by making, selling, and licensing cotton
planting seed expressing insect resistance. The suit seeks an injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. The litigation is currently in discovery and
pretrial proceedings. Consistent with its commitments, Monsanto has agreed to
defend D&PL in this suit and to indemnify D&PL against damages, if any are
awarded. Monsanto is providing separate defense counsel for D&PL. D&PL is
assisting Monsanto to the extent reasonably necessary.
A corporation owned by the son of D&PL's former Guatemalan distributor sued in
1989 asserting that D&PL violated an agreement with it by granting to another
entity an exclusive license in certain areas of Central America and southern
Mexico. The suit seeks damages of 5,292,459 Guatemalan quetzales (approximately
$687,000 at June 30, 2004, exchange rates) and an injunction preventing D&PL
from distributing seed through any other licensee in that region. The Guatemalan
court, where this action is proceeding, has twice declined to approve the
injunction sought. D&PL continues to make seed available for sale in Central
America and Mexico.
D&PL vs. Monsanto Company and Pharmacia Corp.
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
effectively terminating Monsanto's efforts to gain government approval of the
merger of Monsanto with D&PL under the May 8, 1998, Merger Agreement. On
December 30, 1999, D&PL filed suit (the "December 30 Suit") in the First
Judicial District of Bolivar County, Mississippi, seeking, among other things,
the payment of the $81 million termination fee due pursuant to the merger
agreement, compensatory damages and punitive damages. On January 2, 2000, D&PL
and Monsanto reached an agreement whereby D&PL would withdraw the December 30
Suit, and Monsanto would immediately pay the $81 million. On January 3, 2000,
Monsanto paid to D&PL a termination fee of $81 million as required by the merger
agreement. On January 18, 2000, D&PL filed a suit (the "January 18 Suit")
reinstating essentially all of the allegations contained in the December 30
Suit. The January 18 Suit by D&PL against Monsanto seeks in excess of $1 billion
in compensatory and $1 billion in punitive damages for breach of contract under
the merger agreement between the parties. D&PL alleges that Monsanto failed to
make its best efforts, commercially reasonable efforts, and/or reasonable best
efforts to obtain antitrust approval from the U.S. Department of Justice, as
required under the terms of the merger agreement. D&PL also seeks damages for
breach of the January 2, 2000, agreement pursuant to which the parties were to
negotiate for two weeks to resolve the dispute over failure of the merger to
close.
The parties litigated for several months over the appropriate forum to hear the
case. A Delaware Court of Chancery ruling rejected Monsanto's attempt to
maintain the action in Delaware and returned the parties to the Circuit Court
for the First Judicial District of Bolivar County, Mississippi. Monsanto filed a
motion for summary judgment on the breach of contract claims alleging that D&PL
suffered no cognizable damages as a result of the failed merger. On December 18,
2000, D&PL amended its complaint to include a claim for tortious interference
with prospective business relations on the grounds that Monsanto's unreasonable
delay prevented the consummation of the merger and kept D&PL from being in a
position to enter into transactions and relationships with others in the
industry. In light of the merger of Monsanto into Pharmacia & Upjohn, Inc.,
after the filing of the original complaint, D&PL named both Pharmacia Corp. (the
renamed existing defendant) and Monsanto Company (a newly spun-off subsidiary)
as defendants in the amended complaint. D&PL filed two motions to compel
additional discovery from Monsanto. Pharmacia and Monsanto filed a motion for
summary judgment and a motion to dismiss the added claim of tortious
interference contained in the amended complaint. Pharmacia and Monsanto alleged
that they were entitled to 1) dismissal of the action on the grounds that D&PL's
amended complaint did not satisfy any of the elements of a tortious interference
claim and, thus, did not state a viable claim; and 2) summary judgment because
D&PL has not suffered any injury as a result of Monsanto's actions. On November
15, 2001, the Circuit Court denied the defendants' motion for summary judgment
on the breach of contract claims, holding that the case presents issues for
trial by jury. The Court also denied defendants' motion to dismiss or for
summary judgment on D&PL's claim for tortious interference with business
relationships. The Court also granted substantially all of the discovery sought
by D&PL in its motion to compel. The judge to whom this case was assigned has
retired and a new judge has been appointed. On September 12, 2003, Monsanto
amended its answer to include four counterclaims against D&PL, alleging breach
of contract, fraudulent inducement, and negligent misrepresentation. The
fraudulent inducement and negligent misrepresentation claims allege that D&PL
misrepresented the status of the Department of Justice's investigation into
D&PL's acquisition of the Sure Grow companies prior to the signing of the
Agreement. The breach of contract claim alleges that D&PL failed to notify
Monsanto that D&PL had sustained a material adverse change, where the alleged
adverse change resulted from the conduct that D&PL seeks damages for in this
litigation. The breach of contract claim also alleges that D&PL failed to use
requisite efforts to inform Monsanto that Monsanto was not using requisite
efforts to complete the transaction. Monsanto is seeking unspecified damages for
its counterclaims, including the $81 million paid by Monsanto to D&PL as a
termination fee and related expenses. D&PL answered the counterclaims, denying
all liability, and D&PL intends to vigorously defend against these
counterclaims. On December 5, 2003, Monsanto filed a motion for partial summary
judgment on a portion of D&PL's damage claims. D&PL has opposed this motion. The
parties are currently in discovery. The Court has temporarily suspended the
dates for the completion of discovery until motions that are pending before the
Court are decided. The trial is not expected to occur prior to April 15, 2005.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Business
Domestic
Delta and Pine Land Company, a Delaware corporation, and subsidiaries ("D&PL")
is primarily engaged in the breeding, production, conditioning and marketing of
proprietary varieties of cotton planting seed in the United States and other
cotton producing nations. We also breed, produce, condition and distribute
soybean planting seed in the United States.
Since 1915, we have bred, produced and/or marketed upland picker varieties of
cotton planting seed for cotton varieties that are grown primarily east of Texas
and in Arizona. We have used our extensive classical plant breeding programs to
develop a gene pool necessary for producing cotton varieties with improved
agronomic traits important to farmers (such as crop yield) and to textile
manufacturers (such as enhanced fiber characteristics).
In 1980, we added soybean seed to our product line. In 1996, we commenced
commercial sales in the United States of cotton planting seed containing
1
Bollgard ("Bollgard") gene technology licensed from Monsanto which expresses a
protein toxic to certain lepidopteran pests. Since 1997, we have marketed in the
U.S. cotton planting seed that contains a gene that provides tolerance to
glyphosate-based herbicides, commonly referred to as Roundup Ready ("Roundup
Ready") Cotton. In 1997, we commenced commercial sales in the U.S. of soybean
planting seed that contains a gene that provides tolerance to glyphosate-based
herbicides ("Roundup Ready Soybeans"). In 1998, we commenced sales of cotton
planting seed of varieties containing both the Bollgard and Roundup Ready genes.
International
During the 1980's, as a component of our long-term growth strategy, we began to
market our products, primarily cottonseed, internationally. Over a period of
years, we have strengthened and expanded our international staff in order to
support our expanding international business. In foreign countries, cotton
acreage is often planted with farmer-saved seed which has not been delinted or
treated and is of low overall quality. We believe that we have an attractive
opportunity to penetrate foreign markets because of our widely adaptable,
superior cotton varieties, technological know-how in producing and conditioning
high-quality seed and our brand name recognition. Furthermore, Monsanto's
Bollgard and Roundup Ready gene technologies (that we either have licensed or
have options to license) are effective in many countries and could bring value
to farmers.
We sell our products in foreign countries through (i) export sales to
distributors, (ii) direct in-country operations through either joint ventures or
wholly-owned subsidiaries and (iii) to a lesser degree, licensees. The method
varies and evolves, depending on our assessment of the potential size and
profitability of the market, governmental policies, currency and credit risks,
sophistication of the target country's agricultural economy, and costs (as
compared to risks) of commencing physical operations in a particular country. In
2003, the majority of international sales came from direct in-country operations
(primarily Argentina, Australia, Brazil, China, South Africa and Turkey).
See Note 3 of the Notes to Consolidated Financial Statements in Item 1 for
further details about business segments.
Joint Ventures
In March 1995, D&PL and Monsanto formed D&M International, LLC to introduce
cotton planting seed in international markets combining our acid delinting
technology and elite germplasm (cottonseed varieties) with Monsanto's Bollgard
and Roundup Ready gene technologies. In May 2002, Pharmacia activated a cross
purchase provision in the operating agreement for D&M International, LLC, and we
elected to have D&M International, LLC redeem Pharmacia's 50% interest in D&M
International, LLC. As a result of the redemption of Pharmacia's interest, we
now own all of D&M International, LLC.
In November 1995, D&M International, LLC formed a subsidiary, D&PL China Pte
Ltd. ("D&PL China"). D&PL China is 80% owned by D&M International, LLC and 20%
owned by a Singaporean entity. In November 1996, D&PL China formed Hebei Ji Dai
Cottonseed Technology Company Ltd. ("Ji Dai") with parties in Hebei Province,
one of the major cotton producing regions in the People's Republic of China. Ji
Dai is 67% owned by D&PL China and 33% owned by Chinese parties. In June 1997,
Ji Dai commenced construction of a cottonseed conditioning and storage facility
in Shijiazhuang, Hebei, China, pursuant to the terms of the joint venture
agreement. The new facility was completed in December 1997 and seed processing
and sales of seed of a D&PL cotton variety containing Monsanto's Bollgard
technology commenced in 1998.
- --------------------
1. On March 31, 2000, Monsanto Company consummated a merger with Pharmacia &
Upjohn Inc. and changed its name to Pharmacia Corporation. On February 9, 2000,
Monsanto Company formed a new subsidiary corporation, Monsanto Ag Company,
which, on March 31, 2000, changed its name to Monsanto Company. On August 31,
2002, Pharmacia distributed to its shareholders its remaining interest in the
new Monsanto Company. Pursuant to the closing of a merger on April 16, 2003,
Pharmacia Corporation merged with and into a wholly-owned subsidiary of Pfizer
Inc. Pharmacia survived the merger as a wholly-owned subsidiary of Pfizer Inc.
In this document, with respect to events occurring on or before March 31, 2000,
the term "Monsanto" refers to the entity then designated Monsanto Company and
renamed Pharmacia Corporation on that date. With respect to events occurring
between March 31, 2000 and April 16, 2003, this entity is referred to as
"Pharmacia". With respect to events occurring after April 16, 2003, the entity
referred to as "Pharmacia" is that entity which on that date became a
wholly-owned subsidiary of Pfizer Inc. With respect to events occurring after
March 31, 2000, the entity formed as Monsanto Ag Company and renamed Monsanto
Company (NYSE: MON) on March 31, 2000, is referred to as "Monsanto".
In December 1997, D&M International, LLC formed a joint venture with Ciagro
S.R.L. ("Ciagro"), a distributor of agricultural inputs in the Argentine cotton
region, for the production and sale of genetically improved cottonseed. CDM
Mandiyu S.R.L. ("CDM") is owned 60% by D&M International, LLC, and 40% by
Ciagro. In September 1998, CDM began construction of a cottonseed conditioning
and storage facility in Avia Terai, Chaco, Argentina. Construction was completed
in June 1999. CDM has been licensed to sell our cotton varieties containing
Monsanto's Bollgard gene technology. Sales of such varieties commenced in 1999.
CDM has also been licensed to sell Roundup Ready cottonseed varieties, which
received government approval in 2001. Roundup Ready cottonseed has been
available for sale in Argentina since October 2002.
In July 1998, D&PL China and the Anhui Provincial Seed Corporation formed a
joint venture, Anhui An Dai Cotton Seed Technology Company, Ltd. ("An Dai")
which is located in Hefei City, Anhui, China. An Dai is 49% owned by D&PL China
and 51% owned by Chinese parties. Under the terms of the joint venture
agreement, An Dai produces, conditions and sells our varieties of acid-delinted
cottonseed, which contain Monsanto's Bollgard gene. Commercial sales of our
cotton varieties containing the Bollgard gene technology began in 2000. In
January 2002, An Dai began construction of a cottonseed conditioning and storage
facility in Hefei City, Anhui, China. Construction was completed in October 2003
and the facility is now operational.
In November 1998, D&M International, LLC and Maeda Administracao e Participacoes
Ltda, an affiliate of Agropem - Agro Pecuria Maeda S.A., formed a joint venture
in Minas Gerais, Brazil. The joint venture, MDM Sementes De Algodao, Ltda.
("MDM"), produces, conditions and sells our varieties of acid-delinted cotton
planting seed. In 2000, we began selling our conventional cotton varieties. MDM
will introduce transgenic cottonseed varieties containing both Bollgard and
Roundup Ready gene technologies in the Brazilian market as soon as government
approvals are obtained. Monsanto is responsible for obtaining these government
approvals and has announced approval may not occur until 2005 or thereafter. MDM
is 51% owned by D&M International, LLC and 49% owned by Maeda Administracao e
Participacoes S/A (formerly Maeda Administracao e Participacoes Ltda).
In October 2001, we announced that we had signed Letters of Intent with two
parties in China to form two new joint ventures there, one each in Hubei and
Henan provinces. These two new potential markets contain approximately 4.5
million acres of cotton planted in 2001 which is almost 2.5 times the size of
the combined Hebei and Anhui markets. A joint venture agreement was negotiated
and agreed to with the parties in Henan province and the agreement was submitted
to the Chinese government authorities for approval. However, in April 2002,
China announced rules prohibiting new foreign investment in seed companies that
intend to sell genetically modified seed, which will restrict the ability of
non-Chinese companies, including us, from investing in such joint ventures.
However, our joint venture in Hebei province, Ji Dai, signed a distribution
agreement with a party in the Henan province and distributed seed there in
fiscal 2003. We expect to continue to expand our business in China through our
existing joint ventures, Ji Dai and An Dai.
In May 2002, we established DeltaMax Cotton, LLC ("DeltaMax"), a limited
liability company jointly owned with Verdia, Inc. ("Verdia", formerly known as
MaxyAg, Inc.), which was purchased by DuPont on July 2, 2004. DeltaMax was
formed to create, develop and commercialize value-enhancing traits for the
cottonseed market that will complement and/or compete with traits available
today. It is currently focusing on glyphosate-tolerant, insect-resistance and
nematode-resistance strategies for use in cotton. Commercialization of new
traits developed by this venture is not expected until after 2009. DeltaMax will
contract research and development activities to Verdia, third parties and D&PL
when appropriate, and license its products to D&PL and potentially to others.
D&PL and Verdia each own 50% of DeltaMax.
Subsidiaries
D&PL South Africa, Inc. ("D&PL South Africa"), our wholly-owned subsidiary,
through a South African branch, commercializes cottonseed varieties containing
Monsanto's Bollgard and Roundup Ready technologies in South Africa. In addition,
D&PL South Africa maintains winter nursery facilities, produces cottonseed
varieties for export to other countries and processes foundation seed grown in
that country. We maintain a winter nursery and foundation seed operation in
Canas, Costa Rica and have a delinting plant there to process foundation seed
for export to the United States. Multiple winter nursery locations are used to
manage seed production risks. The use of Southern Hemisphere winter nurseries
and seed production programs such as these may accelerate the introduction of
new varieties because we can raise at least two crops per year by taking
advantage of the Southern Hemisphere growing season.
Deltapine Australia Pty. Ltd., our wholly-owned Australian subsidiary, breeds,
produces, conditions and markets cotton planting seed in Australia. Certain
varieties developed in Australia are well adapted to other major cotton
producing countries and Australian-developed varieties are exported to those
areas. We sell seed of both conventional and transgenic varieties, containing
Monsanto's Bollgard and Roundup Ready technologies, in Australia.
Turk DeltaPine, Inc. ("Turk DeltaPine"), our wholly-owned subsidiary, through a
Turkish branch, produces, conditions and markets cotton planting seed in Turkey.
In addition, Turk DeltaPine produces conventional cottonseed varieties for sale
in Turkey and Europe.
Employees
As of June 30, 2004, we employed a total of 545 full time employees worldwide,
excluding approximately 112 employees of joint ventures. Due to the nature of
our business, we utilize seasonal employees in our delinting plants and our
research and foundation seed programs. The maximum number of seasonal employees
approximates 175 and typically occurs in October and November of each year. We
consider our employee relations to be good.
Biotechnology
Insect Resistance for Cotton
Collaborative biotechnology licensing agreements, which were executed with
Monsanto in March 1992 and subsequently revised in April 1993, October 1993,
February 1996, December 1999, January 2000 and March 2003, provide for the
commercialization of Monsanto's Bollgard ("Bacillus thuringiensis" or "Bt") gene
technology in our varieties in the United States. The selected Bt gene is from a
bacterium found naturally in soil and produces proteins toxic to certain
lepidopteran larvae, the principal cotton pests in many cotton growing areas.
Monsanto created a transgenic cotton plant by inserting Bt genes into cotton
plant tissue. The resulting transgenic plant tissue is lethal to certain
lepidopteran larvae that consume it. The gene and related technology were
patented or licensed from others by Monsanto and were licensed to us for use
under the trade name Bollgard. In our primary markets, the cost of insecticides
is a major expenditure for many cotton growers. The insect resistant
capabilities of transgenic cotton containing the Bollgard gene may reduce the
amount of insecticide required to be applied by cotton growers using planting
seed containing the Bollgard gene. In October 1995, the United States
Environmental Protection Agency ("EPA") completed its initial registration of
the Bollgard gene technology, thus clearing the way for commercial sales of seed
containing the Bollgard gene. In 1996, we sold commercially for the first time
two Deltapine varieties, which contained the Bollgard gene, in accordance with
the terms of the Bollgard Gene License and Seed Services Agreement (the
"Bollgard Agreement") among D&PL, Monsanto and D&M Partners. This initial EPA
registration had been set to expire on January 1, 2001 but was updated to expire
January 1, 2002. In September 2001, the EPA renewed the registration for an
additional five years, at which time the EPA will, among other things,
reevaluate the effectiveness of the insect resistance management plan and decide
whether to convert the registration to a non-expiring (and/or unconditional)
registration.
Pursuant to the terms of the Bollgard Agreement, farmers must buy a limited use
sublicense for the technology from D&M Partners, a partnership of D&PL (90%) and
Monsanto (10%), in order to purchase seed containing the Bollgard gene
technology. Monsanto determines the licensing fee growers pay for use of
Bollgard technology. Growers may receive discounts and/or rebates of licensing
fees under certain crop destruct, crop replant and other programs. D&M Partners
contracts the billing and collection activities for Bollgard and Roundup Ready
licensing fees to Monsanto. The distributor/dealers who coordinate the farmer
licensing process receive a portion of the technology sublicensing fee,
presently approximately 15%. After the dealers and distributors are compensated,
D&M Partners pays Monsanto a royalty equal to 71% of the net sublicense fee
(technology sublicensing fees less certain distributor/dealer payments), and we
receive the remainder of net sublicense revenue for our services. The expiration
date of the Bollgard Agreement is determined by the last to expire of the patent
rights licensed under that agreement. On that basis (unless we terminate sooner,
as is permitted after October 11, 2008), the expiration date of the Bollgard
Agreement will be November 4, 2018.
Pursuant to the Bollgard Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto must also indemnify us against a) costs of
inventory and b) lost profits on inventory which becomes unsaleable because of
patent infringement claims. Monsanto must defend any claims of failure of
performance of a Bollgard gene. Monsanto and D&PL share the cost of any product
performance claims in proportion to each party's share of the net sublicense
fees. The indemnity from Monsanto only covers performance claims involving
failure of performance of the Bollgard gene and not claims arising from other
causes. Pharmacia remains liable for Monsanto's performance under these defense
and indemnity agreements.
In December 2000, D&PL and Monsanto executed the Bollgard II Gene License and
Seed Services Agreement (the "Bollgard II Agreement") for Monsanto's subsequent
insect resistance product. The Bollgard II Agreement contains essentially the
same terms as the Bollgard Agreement. On December 23, 2002, Monsanto announced
that it had received U.S. regulatory clearance for Bollgard II. We
commercialized limited quantities of our Bollgard II cotton varieties in the
U.S. during fiscal 2003 and have limited quantities available for sale this
year.
In May 2002, we signed a product development agreement with Syngenta Seed AG
("Syngenta") whereby we will perform development work, including introgression,
testing and evaluation, of Syngenta's insect resistance technology in our elite
cotton germplasm. We may commercialize varieties containing Syngenta's insect
resistance technology if we reach a commercialization agreement and Syngenta
obtains U.S. government regulatory approval.
In January 2003, we announced a collaboration agreement with Dow AgroSciences
LLC ("DAS") under which we will develop, test and evaluate elite cotton
varieties containing DAS insect resistance traits. We may commercialize
varieties containing DAS insect resistance technology if we reach a
commercialization agreement and DAS obtains U.S. government regulatory approval.
Herbicide Tolerance for Cotton
In February 1996, D&PL, Monsanto and D&M Partners executed the Roundup Ready
Gene License and Seed Services Agreement (the "Roundup Ready Agreement"), which
provides for the commercialization of Roundup Ready cottonseed. Pursuant to the
collaborative biotechnology licensing agreements executed in 1996 and amended in
July 1996, December 1999, January 2000 and March 2003, we have also developed
transgenic cotton varieties that are tolerant to Roundup, a glyphosate-based
herbicide sold by Monsanto. In 1996, such Roundup Ready plants were approved by
the Food and Drug Administration, the USDA, and the EPA. The Roundup Ready
Agreement grants a license to D&PL and certain of our affiliates the right in
the United States to sell cottonseed of our varieties that contain Monsanto's
Roundup Ready gene. The Roundup Ready gene makes cotton plants tolerant to
contact with Roundup herbicide applications made during a finite early season
growth period. Similar to the Bollgard Agreement, farmers must execute limited
use sublicenses in order to purchase seed containing the Roundup Ready gene.
Monsanto determines the licensing fee growers pay for use of Roundup Ready
technology. Growers may receive discounts and/or rebates of licensing fees under
certain crop destruct, crop replant and other programs. The distributors/dealers
who coordinate the farmer licensing process receive a portion of the technology
sublicensing fee. After the dealers and distributors are compensated, D&M
Partners pays Monsanto a royalty equal to 70% of the net sublicense fee
(technology sublicensing fees less certain distributor/dealer payments), and we
receive the remainder of net sublicense revenue for our services. The expiration
date of the Roundup Ready Agreement is determined by the last to expire of the
patent rights licensed under that agreement. On that basis (unless we terminate
sooner, as is permitted after October 11, 2008), the expiration date of the
Roundup Ready Agreement will be January 16, 2018.
Pursuant to the Roundup Ready Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto will also indemnify us against the cost of
inventory that becomes unsaleable because of patent infringement claims, but
Monsanto is not required to indemnify us against lost profits on such unsaleable
seed. In contrast with the Bollgard Agreement, where the cost of gene
performance claims will be shared in proportion to the division of net
sublicense revenue, Monsanto must defend and must bear the full cost of any
claims of failure of performance of the Roundup Ready Gene. Pharmacia remains
liable for Monsanto's performance under these defense and indemnity agreements.
In both agreements, generally, we are responsible for varietal/seed performance
issues, and Monsanto is responsible for failure of the genes.
Cotton Technology Licenses for Countries Outside the United States
In February 1996, D&PL and Monsanto executed an Option Agreement (subsequently
amended in December 1999) which provides us with option rights for an exclusive
license for Monsanto's Bollgard and other genes active against lepidopteran
insects in each country outside the United States where Monsanto commercializes
such genes in cotton (except for Australia where we have an option for a
non-exclusive license to such genes and India where we have no option rights to
such genes), option rights to non-exclusive licenses to Roundup Ready genes in
cotton in all countries outside the United States, and option rights to
non-exclusive licenses for all countries for any gene that may be commercialized
by Monsanto that enhances the fiber characteristics of cotton. The terms of such
licenses must be offered and negotiated in good faith. All such licenses that
are non-exclusive must provide us most favored licensee status. The Option
Agreement remains in effect so long as the Bollgard Agreement and Roundup Ready
Agreement for the United States remain in effect. Pursuant to the Option
Agreement, Monsanto and D&PL (or D&PL's affiliates or joint venture companies)
have entered into exclusive Bollgard licenses for seven countries outside the
United States and a non-exclusive license for lepidopteran active genes for
Australia, as well as non-exclusive Roundup Ready licenses for four countries
outside the United States.
Herbicide Tolerance for Soybeans
In February 1997, D&PL and Monsanto executed a Roundup Ready Soybean License
Agreement which provided for commercialization of Roundup Ready soybean seed.
Effective September 1, 2001, D&PL and Monsanto executed a new Roundup Ready
Soybean License and Seed Services Agreement (the "Roundup Ready Soybean
Agreement") for 2001 and future years. The Roundup Ready Soybean Agreement
grants a non-exclusive license to D&PL to produce and to sell in the United
States soybean seed containing Monsanto's Roundup Ready gene. The Roundup Ready
gene makes soybean plants tolerant to contact with Roundup herbicide
applications when used in accordance with product instructions. Similar to the
Bollgard Agreement and the Roundup Ready Agreement for cotton, farmers must
execute limited use sublicenses in order to purchase soybean seed containing the
Roundup Ready gene. The royalty charged to the seed partners, including D&PL, is
set annually by Monsanto. We receive a portion of the royalty for our services
under the Roundup Ready Soybean Agreement and may receive additional incentives
based on a separate licensee incentive agreement. We have the right to terminate
the Roundup Ready Soybean Agreement at our option upon 90 days notice to
Monsanto; Monsanto may terminate the agreement only for cause. Unless terminated
sooner, the Roundup Ready Soybean Agreement will expire December 31, 2012.
Since 1987, we have conducted research to develop soybean plants that are
tolerant to certain DuPont Sulfonylurea herbicides. Such plants enable farmers
to apply these herbicides for weed control without significantly affecting the
agronomics of the soybean plants. Since soybean seed containing the STS(R)
herbicide-tolerant trait is not genetically engineered, sale of this seed does
not require government approval, although the herbicide to which they express
tolerance must be EPA approved.
Transformation, Enabling and Other Technologies
In March 1998, D&PL and the United States of America, as represented by the
Secretary of Agriculture (USDA) were granted United States Patent No. 5,723,765,
entitled "Control Of Plant Gene Expression". Subsequently, two other patents
(United States Patent Nos. 5,925,808 and 5,977,441) were granted under the same
title. These patents for the Technology Protection System resulted from a
concept developed by research scientists employed by both D&PL and the U.S.
Department of Agriculture's Agricultural Research Service ("USDA-ARS"). The
patents broadly cover all species of plants and seed, both transgenic and
conventional, for a system designed to allow control of progeny seed viability
without harming the crop. One application of the technology could be to control
unauthorized planting of seed of proprietary varieties (sometimes called "brown
bagging") by making such a practice non-economic since unauthorized saved seed
will not germinate, and, therefore, would be useless for planting. Another
application of the technology would be to prevent the unlikely possibility of
transfer of transgenes, through pollen, to closely related species of plants.
These patents have the prospect of opening significant worldwide seed markets to
the sale of transgenic technology in varietal crops in which crop seed currently
is saved and used in subsequent seasons as planting seed. D&PL and the USDA
executed a commercialization agreement on July 6, 2001, for this technology
giving us the exclusive right to market this technology. Once developed, we
intend licensing of this technology to be widely available to other seed
companies.
In July 1999, United States Patent No. 5,929,300, entitled "Pollen Based
Transformation System Using Solid Media," was issued to the United States of
America as represented by the Secretary of Agriculture (USDA). This patent
covers transformation of plants. The patent for the Pollen Transformation System
resulted from a research program conducted pursuant to a Cooperative Research
and Development Agreement between D&PL and the USDA-ARS in Lubbock, Texas. D&PL
and the USDA executed on December 18, 2000, a commercialization agreement,
providing us exclusive rights to market this technology to third parties,
subject to certain rights reserved to the USDA. This transformation method uses
techniques and plant parts that are not covered by currently issued plant
transformation U.S. patents held by others. It is a method which should be more
efficient and effective than many other plant transformation techniques
currently available. This patent and the marketing rights apply to all plant
species on which this method of transformation is effective.
The technologies described above resulted from basic research and will require
further development in order to be used in commercial seed. We estimate that it
will be several years before either of these technologies could be available
commercially. In addition, we have rights to other transformation, enabling and
other technologies that are useful to our research and commercial efforts and,
in some cases, may be sublicensed to others.
Other
We have licensing, research and development, confidentiality and material
transfer agreements with providers of technology that we are evaluating for
potential commercial applications and/or introduction. We also contract with
third parties to perform research on our behalf for enabling and other
technologies that we believe have potential commercial applications in varietal
crops around the world.
Commercial Seed
The following table presents the number of commercial cottonseed and soybean
seed varieties we sold in the nine months ended May 31, 2004 and the year ended
August 31, 2003:
2004 2003
--------------- ---------------
Cotton
Conventional 12 20
Bollgard 3 5
Roundup Ready 16 14
Bollgard/Roundup Ready 14 14
Bollgard II/Roundup Ready 1 2
--------------- ---------------
46 55
=============== ===============
Soybeans
Conventional 1 1
Roundup Ready 19 15
STS 2 2
--------------- ---------------
22 18
=============== ===============
In addition to the above, in the nine months ended May 31, 2004, we had 87
experimental cotton varieties and 6 experimental soybean varieties in late stage
development prior to commercialization. In 2003, we had 76 experimental cotton
varieties and 6 experimental soybean varieties in late stage development prior
to commercialization.
Seed of all commercial plant species is either varietal or hybrid. Our cotton
and soybean seed are varietals. Varietal plants can be reproduced from seed
produced by a parent plant, with the offspring exhibiting only minor genetic
variations. The Plant Variety Protection Act of 1970, as amended in 1994, in
essence prohibits, with limited exceptions, purchasers of varieties protected
under the amended Act from selling seed harvested from these varieties without
permission of the plant variety protection certificate owner. Some foreign
countries provide similar legal protection for breeders of crop varieties.
Although cotton is varietal and, therefore, can be grown from seed of parent
plants saved by the growers, most farmers in our primary domestic markets
purchase seed from commercial sources each season because cottonseed requires
delinting prior to seed treatment with chemicals and in order to be sown by
modern planting equipment. Delinting and conditioning may be done either by a
seed company on its proprietary seed or by independent delinters for farmers.
Modern cotton farmers in upland picker areas generally recognize the greater
assurance of genetic purity, quality and convenience that professionally grown
and conditioned seed offers compared to seed they might save. Additionally, U.S.
patent laws make unlawful any unauthorized planting of seed containing patented
technology, such as Bollgard and Roundup Ready, saved from prior crops.
We farm approximately 3,000 acres in the U.S., primarily for research purposes
and for production of cotton and soybean foundation seed. Additionally, we have
annual agreements with various growers to produce seed for cotton and soybeans.
The growers plant parent seed purchased from us and follow quality assurance
procedures required for seed production. If the grower adheres to our
established quality assurance standards throughout the growing season and if the
seed meets our standards upon harvest, we may be obligated to purchase specified
minimum quantities of seed, usually in our first and second fiscal quarters, at
prices equal to the commodity market price of the seed plus a grower premium. We
then condition the seed for sale.
The majority of our sales are made from late in the second fiscal quarter
through the end of the third fiscal quarter. Varying climatic conditions can
change the quarter in which seed is delivered, thereby shifting sales and our
earnings between quarters. Thus, seed production, distribution and sales are
seasonal and interim results will not necessarily be indicative of our results
for a fiscal year.
Revenues from domestic seed sales are recognized when the seed is shipped.
Revenues from Bollgard and Roundup Ready licensing fees are recognized when the
seed is shipped. Domestically, the licensing fees charged to farmers for
Bollgard and Roundup Ready cottonseed are based on pre-established planting
rates for nine geographic regions and consider the estimated number of seed
contained in each bag for years prior to 2004 which may vary by variety,
location grown, and other factors. Effective this year, picker and stripper
cottonseed products will be sold in bags containing approximately 250,000 seed.
Acala and Pima cottonseed products will continue to be sold in 50-pound bags.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. International export sales are not subject to return
except in limited cases in Mexico and Colombia. All other international revenues
from the sale of planting seed, less estimated reserves for returns, are
recognized when the seed is shipped, except in Australia and South Africa where
certain immaterial revenues are recognized when collected.
Domestically, we promote our cotton and soybean seed directly to farmers and
sell our seed through distributors and dealers. All of our domestic seed
products (including those containing Bollgard and Roundup Ready technologies)
are subject to return and credit risk, the effects of which vary from year to
year. The annual level of returns and, ultimately, net sales are influenced by
various factors, principally commodity prices and weather conditions occurring
in the spring planting season during our third and fourth quarters. We provide
for estimated returns as sales occur. To the extent actual returns differ from
estimates, adjustments to our operating results are recorded when such
differences become known, typically in our fourth quarter. All significant
returns occur and are accounted for by fiscal year end. We also offer various
sales incentive programs for seed and participate in such programs related to
the Bollgard and Roundup Ready technology fees offered by Monsanto. Under these
programs, if a farmer plants his seed and the crop is lost (usually due to
inclement weather) by a certain date, a portion of the price of the seed and
technology fees are forgiven or rebated to the farmer if certain conditions are
met. The amount of the refund and the impact to D&PL depends on a number of
factors including whether the farmer can replant the crop that was destroyed. We
record monthly estimates to account for these programs. The majority of program
rebates occur during the second and third quarters. Essentially all material
claims under these programs have occurred or are accounted for by fiscal year
end.
Availability of Information on Our Website
Additional information (including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) and 15(d) of the Exchange
Act) is available at our website at www.deltaandpine.com under Investor
Relations, as soon as reasonably practicable after we electronically file such
material with or furnish such material to the Securities and Exchange
Commission.
RISKS AND UNCERTAINTIES
From time to time, we may publish forward-looking statements relating to such
matters as anticipated financial performance (including when earnings estimates
are referenced), existing products, technical developments, new products, new
technologies, research and development activities, and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, we note that a variety of factors could cause our actual results and
experience to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of our business include those noted elsewhere in this filing and the
following:
Demand for our seed will be affected by government programs and policies
and by weather. Demand for seed is also influenced by commodity prices, the
cost of other crop inputs, and the demand for a crop's end-uses such as
textiles, animal feed, cottonseed oil, food and raw materials for
industrial use. These factors, along with weather, influence the cost and
availability of seed for subsequent seasons. Weather impacts crop yields,
commodity prices and the planting decisions that farmers make regarding
both original planting commitments and, when necessary, replanting levels.
The planting seed market is highly competitive, and our products face
competition from a number of seed companies, diversified chemical
companies, agricultural biotechnology companies, governmental agencies and
academic and scientific institutions. A number of chemical and
biotechnology companies have seed production and/or distribution
capabilities to ensure market access for new seed products and new
technologies that may compete with the Bollgard and Roundup Ready gene
technologies of Monsanto, our principal licensor of such technology. We
currently are engaged in a dispute resolution and arbitration process with
Monsanto. In the arbitration, Monsanto is seeking a determination by the
arbitrators of its right to terminate certain agreements between our
companies including the Bollgard and Roundup Ready licenses. (See Part II,
Item 1.) Our seed products and technologies contained therein may encounter
substantial competition from technological advances by others or products
from new market entrants. Many of our competitors are, or are affiliated
with, large diversified companies that have substantially greater resources
than we.
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign governments
and shipping disruptions. Particular policies which may affect our domestic
and international operations include the use of and the acceptance of
products that were produced from plants that have been genetically
modified, the testing, quarantine and other restrictions relating to the
import and export of plants and seed products and the availability (or lack
thereof) of proprietary protection for plant products. In addition, United
States government policies, particularly those affecting foreign trade and
investment, may impact our international operations.
The publicity related to genetically modified organisms ("GMOs") or
products made from plants that contain GMOs may have an effect on our sales
in the future. In 2003, approximately 96% of our cottonseed that was sold
in the United States contained either or both of Monsanto's Bollgard and
Roundup Ready gene technologies, and 94% of our soybean seed sales
contained the Roundup Ready gene technology. Although many farmers have
rapidly adopted these technologies, the concern of some customers and
governmental entities over finished products that contain GMOs could impact
demand for crops (and ultimately seed) raised from seed containing such
traits.
Due to the varying levels of agricultural and social development of the
international markets in which we operate and because of factors within the
particular international markets we target, international profitability and
growth may be less stable and predictable than domestic profitability and
growth. Furthermore, recent action taken by the U.S. government, including
that taken by the U.S. military in the aftermath of the tragic events of
September 11, 2001, the war in Iraq, and conflicts between major cotton
producing nations, may serve to further complicate our ability to execute
our long range ex-U.S. business plans because those plans include future
expansion into Uzbekistan, Pakistan and India. World health concerns about
infectious diseases also affect the conduct of our international business.
Overall profitability will depend on the factors noted above as well as
weather conditions, government policies in all countries where we sell
products and operate, worldwide commodity prices, our ability to
successfully open new international markets, our ability to develop the
High Plains market, the technology partners' ability to obtain timely
government approval (and maintain such approval) for existing and for
additional biotechnology products on which they and D&PL are working, our
technology partners' ability to successfully defend challenges to
proprietary technologies licensed to us and our ability to produce
sufficient commercial quantities of high quality planting seed of these
products. Any delay in or inability to successfully complete these projects
may affect future profitability. In addition, earnings forecasts do not
consider the impact of potential transactions, their related accounting and
other factors, that may be under consideration by the Company, but have not
yet been completed or their effect determined at the date of a particular
filing.
The risks and uncertainties that may affect the operations, performance,
development and results of our business include those noted elsewhere in this
Item and in "Risks and Uncertainties" in Item 7 of D&PL's Form 10-K filed for
the year ended August 31, 2003.
Item 6. Exhibits and Reports on Form 8-K
Exhibits.
31.01 Section 302 Certification of Chief Executive Officer
31.02 Section 302 Certification of Chief Financial Officer
32.01 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350 by Principal Executive Officer
32.02 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350 by Principal Financial and Accounting Officer
Reports on Form 8-K.
On May 20, 2004, D&PL filed a report on Form 8-K dated May 20, 2004 under Items
5 and 7 announcing a press release dated May 20, 2004.
On June 4, 2004, D&PL filed a report on Form 8-K dated June 4, 2004 under Items
5 and 7 announcing a press release dated June 4, 2004.
On July 9, 2004, D&PL filed a report on Form 8-K dated July 9, 2004 under Items
7 and 12 announcing a press release dated July 9, 2004, reporting results of
operations and financial condition for the quarter and nine-months ended May 31,
2004.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTA AND PINE LAND COMPANY
Date: July 15, 2004 /s/ W. Thomas Jagodinski
--------------------------------
W. Thomas Jagodinski
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: July 15, 2004 /s/ R. D. Greene
--------------------------------
R. D. Greene
Vice President - Finance, Treasurer and
Assistant Secretary
(Principal Financial and Accounting Officer)