UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
------- Exchange Act of 1934 for the fiscal year ended August 31, 2005
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
------- Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number: 000-21788
DELTA AND PINE LAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware 62-1040440
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Cotton Row, Scott, Mississippi 38772
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (662) 742-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $0.10 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No ___
The aggregate market value of Common Stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
28, 2005, as reported on the New York Stock Exchange, was approximately
$930,500,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of October 31, 2005, Registrant had 36,083,334 outstanding shares of Common
Stock.
DOCUMENTS TO BE INCORPORATED BY REFERENCE
Registrant incorporates by reference portions of the Delta and Pine Land Company
Proxy Statement for the Annual Meeting of Stockholders to be held on January 16,
2006. (Items 10, 11, 12, 13 and 14 of Part III).
PART I
ITEM 1. BUSINESS
Domestic
Delta and Pine Land Company, a Delaware corporation, and subsidiaries ("D&PL")
is primarily engaged in the breeding, production, conditioning and marketing of
proprietary varieties of cotton planting seed in the United States and other
cotton producing nations. We also breed, produce, condition and market soybean
planting seed in the United States.
Since 1915, we have bred, produced and/or marketed upland picker varieties of
cotton planting seed for cotton varieties that are grown primarily east of Texas
and in Arizona. D&PL also breeds and markets varieties of stripper cottonseed,
which are grown primarily in the Texas high plains, and Acala and Pima
cottonseed, which are grown primarily in California. We have used our extensive
classical plant breeding programs to develop a gene pool necessary for producing
cotton varieties with improved agronomic traits important to farmers (such as
crop yield) and to textile manufacturers (such as enhanced fiber
characteristics).
In 1980, we added soybean seed to our product line. In 1996, we commenced
commercial sales in the United States of cotton planting seed containing
1
Bollgard(R) ("Bollgard") gene technology licensed from Monsanto which expresses
a protein toxic to certain lepidopteran pests. Since 1997, we have marketed in
the U.S. cotton planting seed that contains a gene licensed from Monsanto that
provides tolerance to glyphosate-based herbicides, commonly referred to as
Roundup Ready(R) ("Roundup Ready") Cotton. In 1997, we commenced commercial
sales in the 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. In 2003, we began selling cotton varieties
containing Bollgard II(R), Monsanto's insect resistance technology which
contains two genes conferring resistance to lepidopteran insects.
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 and hybrids, technological know-how in producing and
conditioning high-quality seed and our brand name recognition. Furthermore,
Monsanto's Bollgard, Bollgard II and Roundup Ready gene technologies (that we
either have licensed or have options to license) are effective in many countries
and could bring value to farmers.
We sell our products in foreign countries through (i) export sales to
distributors and (ii) direct in-country operations through either joint ventures
or wholly-owned subsidiaries. The method varies and evolves, depending on our
assessment of the potential size and profitability of the market, governmental
policies, currency and credit risks, sophistication of the target country's
agricultural economy, and costs (as compared to risks) of commencing physical
operations in a particular country. In 2005, the majority of international sales
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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".
came from direct in-country operations (primarily Argentina, Australia, Brazil,
China, South Africa and Turkey).
See Note 13 of the Notes to Consolidated Financial Statements in Part II, Item 8
for further details about business segments.
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
Cotton Seed Technology Company Ltd. ("Ji Dai") with parties in Hebei Province,
one of the major cotton producing regions in the People's Republic of China. Ji
Dai is 67% owned by D&PL China and 33% owned by Chinese parties. In June 1997,
Ji Dai commenced construction of a cottonseed conditioning and storage facility
in Shijiazhuang, Hebei, China, pursuant to the terms of the joint venture
agreement. The new facility was completed in December 1997 and seed processing
and sales of seed of D&PL cotton varieties containing Monsanto's Bollgard
technology commenced in 1998.
In October 1997, D&M International, LLC formed a joint venture with Ciagro
S.R.L. ("Ciagro"), a distributor of agricultural inputs in the Argentine cotton
region, for the production and sale of genetically improved cottonseed. CDM
Mandiyu S.R.L. ("CDM") is owned 60% by D&M International, LLC, and 40% by
Ciagro. In September 1998, CDM began construction of a cottonseed conditioning
and storage facility in Avia Terai, Chaco, Argentina. Construction was completed
in June 1999. CDM has been licensed to sell our cotton varieties containing
Monsanto's Bollgard and Roundup Ready gene technologies. Sales of Bollgard
varieties commenced in 1999 and sales of Roundup Ready varieties began in 2003.
In July 1998, D&PL China and the Anhui Provincial Seed Corporation formed a
joint venture company, Anhui An Dai Cotton Seed Technology Company, Ltd. ("An
Dai") which is located in Hefei City, Anhui, China. An Dai is 49% owned by D&PL
China and 51% owned by Chinese parties. Under the terms of the joint venture
agreement, An Dai produces, conditions and sells our varieties of acid-delinted
cottonseed, which contain Monsanto's Bollgard gene. Commercial sales of our
cotton varieties containing the Bollgard gene technology began in 2000. In
January 2002, An Dai began construction of a cottonseed conditioning and storage
facility in Hefei City, Anhui, China. Construction was completed in October 2003
and the facility is now operational.
In November 1998, D&M International, LLC and Maeda Administracao e Participacoes
Ltda, an affiliate of Agropem - Agro Pecuria Maeda S.A., formed a joint venture
in Minas Gerais, Brazil. The joint venture, MDM Sementes De Algodao, Ltda.
("MDM"), produces, conditions and sells our varieties of acid-delinted cotton
planting seed. In 2000, we began selling our conventional cotton varieties. On
March 17, 2005, the Brazilian government announced approval of the Bollgard
trait for sale in cotton. We have received approval to commercialize one
Bollgard cottonseed variety and expect to sell limited quantities for seed
production purposes in 2006. MDM will introduce transgenic cottonseed varieties
containing the Roundup Ready gene technology in the Brazilian market as soon as
all required government approvals are obtained. Monsanto is responsible for
obtaining and maintaining government approvals for Bollgard and Roundup Ready
traits. MDM is 51% owned by D&M International, LLC and 49% owned by Maeda
Agroindustrial 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. A joint venture agreement was negotiated and agreed to with the
parties in Henan province and the agreement was submitted to the Chinese
government authorities for approval. However, in April 2002, China announced
rules prohibiting new foreign investment in seed companies that intend to sell
genetically modified seed, which will restrict the ability of non-Chinese
companies, including us, from investing in such joint ventures. We plan to
continue to expand our business in China through our existing joint ventures, Ji
Dai and An Dai.
In May 2002, we established DeltaMax Cotton, LLC ("DeltaMax"), a limited
liability company jointly owned with Verdia, Inc. ("Verdia"), which was
purchased by DuPont on July 2, 2004. DeltaMax was formed to create, develop and
commercialize value-enhancing traits for the cottonseed market that will
complement and/or compete with traits available today. It is currently focusing
on glyphosate-tolerant, insect-resistance and nematode-resistance strategies for
use in cotton. Commercialization of new traits developed by this venture is not
expected until after 2010. DeltaMax will contract research and development
activities to Verdia, third parties and D&PL when appropriate, and license its
products to D&PL and potentially to others. D&PL and Verdia each own 50% of
DeltaMax.
Subsidiaries
D&PL South Africa, Inc. ("D&PL South Africa"), our wholly-owned subsidiary,
through a South African branch, commercializes cottonseed varieties containing
Monsanto's Bollgard and Roundup Ready technologies in South Africa. In addition,
D&PL South Africa maintains winter nursery facilities, produces cottonseed
varieties for export to other countries and processes foundation seed grown in
that country.
D&PL Semillas Ltda., our wholly-owned subsidiary, maintains a winter nursery and
foundation seed operation in Canas, Costa Rica and has a delinting plant there
to process foundation seed for export to the United States. Multiple winter
nursery locations are used to manage seed production risks. The use of Southern
Hemisphere winter nurseries and seed production programs such as these may
accelerate the introduction of new varieties because we can raise at least two
crops per year by taking advantage of the Southern Hemisphere growing season.
Deltapine Australia Pty. Ltd., our wholly-owned Australian subsidiary, breeds,
produces, conditions and markets cotton planting seed in Australia. Certain
varieties developed in Australia are well adapted to other major cotton
producing countries and Australian-developed varieties are exported to those
areas. We sell seed of both conventional and transgenic varieties, containing
Monsanto's Bollgard II and Roundup Ready technologies, in Australia.
Turk Deltapine, Inc. ("Turk Deltapine"), our wholly-owned subsidiary, through a
Turkish branch, produces, conditions and markets cotton planting seed in Turkey.
In addition, Turk Deltapine produces conventional cottonseed varieties for sale
in Turkey and Europe.
In September 2004, D&PL established, through Indian nominee shareholders,
Deltapine India Seed Private Ltd. ("Deltapine India"). This company will be
wholly-owned by D&PL (by itself or through wholly-owned affiliates), pending
formal transfer of ownership from the nominee shareholders. Deltapine India was
formed to breed, test, produce, market and sell agricultural seeds and services
in India.
Employees
As of October 31, 2005, we employed a total of 522 full-time employees
worldwide, excluding approximately 107 employees of joint ventures. Due to the
nature of our business, we utilize seasonal employees in our delinting plants
and our research and foundation seed programs. The maximum number of seasonal
employees approximates 175 and typically occurs in October and November of each
year. We consider our employee relations to be good.
Biotechnology
Insect Resistance for Cotton
Monsanto Company
Collaborative biotechnology licensing agreements, which were executed with
Monsanto in March 1992 and subsequently revised in April 1993, October 1993,
February 1996, December 1999, January 2000 and March 2003, provide for the
commercialization of Monsanto's Bollgard ("Bacillus thuringiensis" or "Bt") gene
technology in our varieties in the United States. The selected Bt gene is from a
bacterium found naturally in soil and produces proteins toxic to certain
lepidopteran larvae, the principal cotton pests in many cotton growing areas.
Monsanto created a transgenic cotton plant by inserting Bt genes into cotton
plant tissue. The resulting transgenic plant tissue is lethal to certain
lepidopteran larvae that consume it. The gene and related technology were
patented or licensed from others by Monsanto and were licensed to us for use
under the trade name Bollgard. In our primary markets, the cost of insecticides
is a major expenditure for many cotton growers. The insect resistant
capabilities of transgenic cotton containing the Bollgard gene may reduce the
amount of insecticide required to be applied by cotton growers using planting
seed containing the Bollgard gene. In October 1995, the United States
Environmental Protection Agency ("EPA") completed its initial registration of
the Bollgard gene technology. In 1996, we sold commercially for the first time
two Deltapine varieties, which contained the Bollgard gene, in accordance with
the terms of the Bollgard Gene License and Seed Services Agreement (the
"Bollgard Agreement") among D&PL, Monsanto and D&M Partners. This initial EPA
registration had been set to expire on January 1, 2001 but was updated to expire
January 1, 2002. In September 2001, the EPA renewed the registration for an
additional five years. At the end of the five year period 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. Monsanto is responsible for obtaining and
maintaining regulatory approvals, and is planning to seek re-registration of
Bollgard.
Pursuant to the terms of the Bollgard Agreement, farmers must buy a limited use
sublicense for the technology from D&M Partners, a partnership 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 13%. After the dealers and distributors are compensated,
D&M Partners pays Monsanto a royalty equal to 71% of the net sublicense fee
(technology sublicensing fees less certain distributor/dealer payments), and we
receive the remainder of net sublicense revenue for our services. The expiration
date of the Bollgard Agreement is determined by the last to expire of the patent
rights licensed under that agreement. On that basis (unless we terminate sooner,
as is permitted after October 11, 2008), the expiration date of the Bollgard
Agreement will be June 13, 2012, the date the last of the presently issued
patents will expire. This date may be extended in the event additional relevant
patents issue that have expiration dates later than June 13, 2012.
Pursuant to the Bollgard Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto must also indemnify us against (a) costs of
inventory and (b) lost profits on inventory which becomes unsaleable because of
patent infringement claims. Monsanto must defend any claims of failure of
performance of a Bollgard gene. Monsanto and D&PL share the cost of any product
performance claims in proportion to each party's share of the net sublicense
fees. The indemnity from Monsanto only covers performance claims involving
failure of performance of the Bollgard gene and not claims arising from other
causes. Pharmacia remains liable for Monsanto's performance under these defense
and indemnity agreements.
In December 2000, D&PL and Monsanto executed the Bollgard II Gene License and
Seed Services Agreement (the "Bollgard II Agreement") for Monsanto's subsequent
insect resistance product. The Bollgard II Agreement contains essentially the
same terms as the Bollgard Agreement. On December 23, 2002, Monsanto announced
that it had received U.S. regulatory clearance for Bollgard II, which expires
after the 2006 crop year. Monsanto is responsible for obtaining and maintaining
regulatory approvals and is planning to seek re-registration of Bollgard II. We
have commercialized limited quantities of our Bollgard II cotton varieties in
the U.S. beginning in fiscal 2003. The expiration date of the Bollgard II
Agreement is determined by the last to expire of the patent rights licensed
under that Agreement. On that basis (unless we terminate sooner, as is permitted
after October 11, 2008), the expiration date of the Bollgard II Agreement will
be November 4, 2018, the date the last of the presently issued patents will
expire. This date may be extended in the event additional relevant patents issue
that have expiration dates later than November 4, 2018.
Syngenta Crop Protection AG
In August 2004, we executed a License Acquisition Agreement with Syngenta Crop
Protection AG ("Syngenta") under which D&PL acquired worldwide licenses for the
commercialization of Syngenta's VIP3A and Cry1Ab insect resistance genes in
cotton (the "VipCot Gene Licenses"). D&PL agreed to pay $46.8 million for these
licenses, payable in installments, of which $9.2 million represents contingent
payments. These licenses provide for commercialization of insect resistant
cotton varieties containing Syngenta insect resistance genes in the United
States and in other countries, subject to government approval of the
technologies. Syngenta is responsible for obtaining such government approval in
the United States and, if instructed by D&PL, in other countries. Syngenta is
required to consult with D&PL and to assist and support commercialization of
D&PL's products containing Syngenta's insect resistance genes.
Pursuant to the VipCot Gene Licenses, farmers will be sublicensed by D&PL to use
seed containing Syngenta's insect resistance technologies. The VipCot
technologies will be marketed on a competitive basis with alternative insect
control costs and other available technologies. After dealers and distributors
are compensated for their services, and after deduction of certain marketing
expenses and other costs, D&PL will pay Syngenta a royalty equal to 30% of the
net revenue obtained from sublicensing of the VipCot gene technologies. D&PL
retains the balance of such net sublicense revenue. Provisions for payment of
royalties under the VipCot Gene Licenses generally continue until the expiration
of the last to expire of Syngenta's applicable patent rights on a
country-by-country basis or for a minimum of ten years after the first
commercial sale of a licensed product in the subject country, after which D&PL
will hold a permanent paid-up license to Syngenta's licensed patent rights for
use in cotton. D&PL has the rights to sublicense its affiliates (and, in
countries outside the United States, third parties) to commercialize Syngenta's
insect resistance technologies. In the event D&PL elects not to make the
contingent payments, and upon other termination events, D&PL will retain rights
to commercialize products containing VipCot events which have then received
government approval for sale in the United States.
The VipCot Gene Licenses make D&PL the primary licensee of Syngenta's insect
resistance technology. To retain this status, D&PL must meet milestones for
development of VipCot cotton varieties, produce seed for commercial sale in the
United States and meet and maintain certain sales objectives.
Pursuant to the VipCot Gene Licenses, Syngenta is responsible for obtaining
required intellectual property rights and for defense of claims of patent
infringement. The costs of defense and indemnification are borne either by
Syngenta alone or by Syngenta and D&PL proportionately based on the nature of
the claim. D&PL is responsible for managing the defense of grower claims
alleging failure of performance of a licensed gene. Syngenta and D&PL will bear
the cost of product performance claims in proportion to each party's share of
net sublicense fees. The product performance indemnity from Syngenta only covers
claims involving failure of performance of the Syngenta insect resistance genes
and not claims arising from other causes.
Dow AgroSciences
In January 2003, we announced a collaboration agreement with Dow AgroSciences
LLC ("DAS") under which we would develop, test and evaluate elite cotton
varieties containing DAS insect resistance traits. We continue to work with DAS
insect resistant traits. On October 4, 2004, DAS announced it had received full
EPA registration for its WideStrikeTM Insect Protection technology and would
introduce products from its subsidiary in 2005. We may commercialize varieties
containing DAS insect resistance technology if we reach a commercialization
agreement. To date, no such agreement has been reached.
Herbicide Tolerance for Cotton
Monsanto Company
In February 1996, D&PL, Monsanto and D&M Partners executed the Roundup Ready
Gene License and Seed Services Agreement (the "Roundup Ready Agreement"), which
provides for the commercialization of Roundup Ready cottonseed. Pursuant to the
collaborative biotechnology licensing agreements executed in 1996 and amended in
July 1996, December 1999, January 2000 and March 2003, we have also developed
transgenic cotton varieties that are tolerant to Roundup(R), a glyphosate-based
herbicide sold by Monsanto. In 1996, such Roundup Ready plants were approved by
the Food and Drug Administration, the USDA, and the EPA. The Roundup Ready
Agreement grants a license to D&PL and certain of our affiliates the right in
the United States to sell cottonseed of our varieties that contain Monsanto's
Roundup Ready gene. The Roundup Ready gene makes cotton plants tolerant to
contact with Roundup herbicide applications made during a finite early season
growth period. Similar to the Bollgard Agreement, farmers must execute limited
use sublicenses in order to purchase seed containing the Roundup Ready gene.
Monsanto determines the licensing fee growers pay for use of Roundup Ready
technology. Growers may receive discounts and/or rebates of licensing fees under
certain crop destruct, crop replant and other programs. The distributors/dealers
who coordinate the farmer licensing process receive a portion of the technology
sublicensing fee, presently approximately 13%. After the dealers and
distributors are compensated, D&M Partners pays Monsanto a royalty equal to 70%
of the net sublicense fee (technology sublicensing fees less certain
distributor/dealer payments), and we receive the remainder of net sublicense
revenue for our services. The expiration date of the Roundup Ready Agreement is
determined by the last to expire of the patent rights licensed under that
agreement. On that basis (unless we terminate sooner, as is permitted after
October 11, 2008), the expiration date of the Roundup Ready Agreement will be
April 18, 2017, the date the last of the presently issued patents will expire.
This date may be extended in the event additional relevant patents issue that
have expiration dates later than April 18, 2017.
Pursuant to the Roundup Ready Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto will also indemnify us against the cost of
inventory that becomes unsaleable because of patent infringement claims, but
Monsanto is not required to indemnify us against lost profits on such unsaleable
seed. In contrast with the Bollgard Agreement, where the cost of gene
performance claims will be shared in proportion to the division of net
sublicense revenue, Monsanto must defend and must bear the full cost of any
claims of failure of performance of the Roundup Ready Gene. Pharmacia remains
liable for Monsanto's performance under these defense and indemnity agreements.
In both agreements, generally, we are responsible for varietal/seed performance
issues, and Monsanto is responsible for failure of the genes.
On January 7, 2005, D&PL executed the Roundup Ready Flex Gene License and Seed
Services Agreement (the "Roundup Ready Flex Agreement") for Monsanto's advanced
herbicide tolerance product. The Roundup Ready Flex Agreement contains
essentially the same terms, including compensatory terms, as the existing
Roundup Ready Agreement between D&PL and Monsanto. The expiration date of the
Roundup Ready Flex Agreement is determined by the last to expire of the patent
rights under this Agreement which cover the licensed gene. On that basis (unless
we terminate sooner, as is permitted after October 11, 2008), assuming that all
of the patents identified by Monsanto in the addendum to the Roundup Ready Flex
Agreement cover the licensed gene, the expiration date of the Roundup Ready Flex
Agreement will be December 15, 2020, the date the last of the presently issued
patents will expire. This date may be extended in the event additional relevant
patents issue that have expiration dates later than December 15, 2020.
On March 15, 2005, Monsanto announced it had obtained U.S. regulatory clearance
for Roundup Ready Flex technology. We have developed and produced commercial
seed quantities of several Roundup Ready Flex varieties in 2005 and are
preparing to commercialize these cotton varieties in the U.S. beginning in 2006.
Cotton Technology Licenses for Countries Outside the United States
In February 1996, D&PL and Monsanto executed an Option Agreement (subsequently
amended in December 1999) which provides us with option rights for an exclusive
license for Monsanto's Bollgard and other genes active against lepidopteran
insects in each country outside the United States where Monsanto commercializes
such genes in cotton (except for Australia where we have an option for a
non-exclusive license to such genes and India where we have no option rights to
such genes), option rights to non-exclusive licenses to Roundup Ready genes in
cotton in all countries outside the United States, and option rights to
non-exclusive licenses for all countries (except India) for any gene that may be
commercialized by Monsanto that enhances the fiber characteristics of cotton.
The terms of such licenses must be offered and negotiated in good faith. All
such licenses that are non-exclusive must provide us most favored licensee
status. The Option Agreement remains in effect so long as the Bollgard Agreement
and Roundup Ready Agreement for the United States remain in effect. Pursuant to
the Option Agreement, Monsanto and D&PL (or D&PL's affiliates or joint venture
companies) have entered into exclusive Bollgard licenses for seven countries
(Argentina, Brazil, China, Colombia, Mexico, South Africa, and Thailand) outside
the United States and a non-exclusive license for lepidopteran active genes for
Australia, as well as non-exclusive Roundup Ready licenses for five countries
(Argentina, Australia, Brazil, Colombia and South Africa) outside the United
States.
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. We believe this transformation
method uses techniques and plant parts that are not covered by currently issued
plant transformation U.S. patents held by others. It is a method which should be
more efficient and effective than many other plant transformation techniques
currently available. This patent and the marketing rights apply to all plant
species on which this method of transformation is effective.
The technologies described above resulted from basic research and will require
further development in order to be used in commercial seed. We estimate that it
will be several years before either of these technologies could be available
commercially. In addition, we have rights to other transformation, enabling and
other technologies that are useful to our research and commercial efforts and,
in some cases, may be sublicensed to others.
Other
We have licensing, research and development, confidentiality and material
transfer agreements with providers of technology that we are evaluating for
potential commercial applications and/or introduction. We also contract with
third parties to perform research on our behalf for enabling and other
technologies that we believe have potential commercial applications in varietal
crops around the world.
Commercial Seed
The following table presents the number of commercial cottonseed and soybean
seed varieties we sold in the years ended August 31, 2005 and 2004:
2005 2004
-------------- ---------------
Cotton
Conventional 11 11
Bollgard 2 3
Roundup Ready 14 16
Bollgard/Roundup Ready 15 14
Bollgard II/Roundup Ready 2 1
Bollgard II/Roundup Ready Flex 2 -
Roundup Ready Flex 1 -
--------------- ---------------
47 45
=============== ===============
Soybeans
Conventional 1 1
Roundup Ready 18 19
STS 2 2
Roundup Ready/STS 2 -
--------------- ---------------
23 22
=============== ===============
In addition to the varieties indicated above, we have many experimental cotton
and soybean varieties in late stage development prior to commercialization. We
also have experimental cotton hybrids that are being developed for certain
cotton markets in the world.
Seed of all commercial plant species is either varietal or hybrid. Most of our
cotton and all of our soybean seed are varietals. Varietal plants can be
reproduced from seed produced by a parent plant, with the offspring exhibiting
only minor genetic variations. The Plant Variety Protection Act of 1970, as
amended in 1994, in essence prohibits, with limited exceptions, purchasers of
varieties protected under the amended Act from selling seed harvested from these
varieties without permission of the plant variety protection certificate owner.
Some foreign countries provide similar legal protection for breeders of crop
varieties.
Although cotton is generally varietal and, therefore, can be grown from seed of
parent plants saved by the growers, most farmers in our primary domestic market
purchase seed from commercial sources each season because cottonseed requires
delinting prior to seed treatment with crop protection products in order to be
sown by modern planting equipment. Delinting and conditioning may be done either
by a seed company on its proprietary seed or by independent delinters for
farmers. Modern cotton farmers in upland picker areas generally recognize the
greater assurance of genetic purity, quality and convenience that professionally
grown and conditioned seed offers compared to seed they might save.
Additionally, U.S. patent laws make unlawful any unauthorized planting of seed
containing patented technology, such as Bollgard, Bollgard II and Roundup Ready,
saved from prior crops. In addition, we have patented many of our cotton
varieties which makes unauthorized planting or use of such varieties unlawful.
We farm approximately 5,500 acres globally, primarily for research purposes and
for production of cotton and soybean foundation seed. Additionally, we have
annual agreements with various growers to produce seed for cotton and soybeans.
The growers plant parent seed purchased from us and follow quality assurance
procedures required for seed production. If the grower adheres to our
established quality assurance standards throughout the growing season and if the
seed meets our standards upon harvest, we may be obligated to purchase specified
minimum quantities of seed, usually in our first and second fiscal quarters, at
prices equal to the commodity market price of the seed plus a grower premium. We
then condition the seed for sale.
The majority of our sales are made from late in the second fiscal quarter
through the end of the third fiscal quarter. Varying climatic conditions can
change the quarter in which seed is delivered, thereby shifting sales and our
earnings between quarters. Thus, seed production, distribution and sales are
seasonal and interim results will not necessarily be indicative of our results
for a fiscal year.
Revenues from domestic seed sales are recognized when the seed is shipped.
Revenues from Bollgard, Bollgard II and Roundup Ready licensing fees are
recognized when the seed is shipped. Domestically, the licensing fees charged to
farmers for Bollgard, Bollgard II and Roundup Ready cottonseed are based on
pre-established planting rates for nine geographic regions and, for years prior
to 2004, considered the estimated number of seed contained in each bag which
varied by variety, location grown, and other factors. Effective in 2004, picker
and stripper cottonseed products were sold in bags containing approximately
250,000 seed as well as bulk boxes containing approximately 8,000,000 seeds.
Acala and Pima cottonseed products continue to be sold in 50-pound bags.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. International export sales are not subject to return
except in limited cases in Mexico and Colombia. All other international revenues
from the sale of planting seed, less estimated reserves for returns, are
recognized when the seed is shipped, except in Australia where certain
immaterial revenues are recognized when collected.
Domestically, we promote our cotton and soybean seed directly to farmers and
sell our seed through distributors and dealers. All of our domestic seed
products (including those containing Bollgard, Bollgard II 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, Bollgard II and Roundup Ready technology fees offered
by Monsanto. Under these programs, if a farmer plants his seed and the crop is
lost (usually due to inclement weather) by a certain date, a portion of the
price of the seed and technology fees are forgiven or rebated to the farmer if
certain conditions are met. The amount of the refund and the impact to D&PL
depends on a number of factors including whether the farmer can replant the crop
that was destroyed. We record monthly estimates to account for these programs.
The majority of program rebates occur during the second, third, and fourth
quarters. Essentially all material claims under these programs have occurred or
are accounted for by fiscal year end.
Availability of Information on Our Website
Additional information (including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) and 15(d) of the Exchange
Act) is available free of charge at our website at www.deltaandpine.com under
Media & News, as soon as reasonably practicable after we electronically file
such material with or furnish such material to the Securities and Exchange
Commission.
Outlook
From time to time, we may make forward-looking statements relating to such
matters as anticipated financial performance, existing products, technical
developments, new products, 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 Item and in "Risks
and Uncertainties" in Item 7.
ITEM 2. PROPERTIES
We maintain facilities primarily used for research, delinting, conditioning,
storage and distribution. Our world headquarters is located in Scott,
Mississippi. This location is used for corporate offices, quality assurance,
research and development, sales and marketing, seed production, and cottonseed
delinting, conditioning and storage.
Our other owned cottonseed delinting, conditioning and storage facilities in the
United States are in: Eloy, Arizona; Hollandale, Mississippi; and Aiken, Texas.
We have additional leased storage facilities in Lubbock, Texas and Greenville,
Mississippi and own an additional storage facility in Lubbock, Texas. We own a
soybean processing plant in Harrisburg, Arkansas. We also own cottonseed
delinting facilities in Narromine, New South Wales, Australia; Groblersdal,
South Africa; Canas, Costa Rica; Shijiazhuang, Hebei, China (through a Chinese
joint venture); Hefei City, Anhui, China (through a Chinese joint venture); and
Avia Terai, Chaco, Argentina (through an Argentine joint venture). We have an
additional leased storage facility in Adana, Turkey. We also own a facility in
Tunica, Mississippi that is not currently in use.
Our plant breeders conduct research at eight company-owned facilities in the
United States. We also own research facilities in Australia and Brazil and lease
additional research facilities in Brazil and Greece. In connection with our
foundation seed program, we lease land in the United States, Argentina,
Australia, Brazil, China, Costa Rica, South Africa, and Turkey.
All owned properties are free of encumbrances. We also may lease warehouse space
in other locations. We believe that all of our facilities, including our
conditioning, storage and research facilities, are well maintained and generally
adequate to meet our needs for the foreseeable future. (See "Liquidity and
Capital Resources" in Item 7).
PRINCIPAL COMPANY LOCATIONS, AFFILIATES AND SUBSIDIARIES:
World Headquarters
Scott, Mississippi, USA
Research Centers Operations Facilities
Scott, Mississippi, USA Scott, Mississippi, USA
Winterville, Mississippi, USA Hollandale, Mississippi, USA
Maricopa, Arizona, USA Eloy, Arizona, USA
Tifton, Georgia, USA Harrisburg, Arkansas, USA
Hartsville, South Carolina, USA Aiken, Texas, USA
Hale Center, Texas, USA Lubbock, Texas, USA
Haskell, Texas, USA Avia Terai, Chaco, Argentina
Lubbock, Texas, USA Narromine, New South Wales, Australia
Narrabri, New South Wales, Australia Canas, Costa Rica
Capinopolis, Minas Gerais, Brazil Hefei City, Anhui, People's Republic
Uberlandia, Minas Gerais, Brazil of China
Canas, Costa Rica Shijiazhuang, Hebei, People's
Larissa, Greece Republic of China
Groblersdal, South Africa
Adana, Turkey
Foreign Offices
Narrabri, New South Wales, Australia
Uberlandia, Minas Gerais, Brazil
Canas, Costa Rica
Thessaloniki, Greece
New Delhi, India
Mexicali, Mexico
Mexico City, Mexico
Wassenaar, The Netherlands
Beijing, People's Republic of China
Groblersdal, South Africa
Seville, Spain
Izmir, Turkey
ITEM 3. LEGAL PROCEEDINGS
The following sets forth all known pending litigation in which D&PL is named as
a defendant and a description of other legal matters.
Product Claims
D&PL and Monsanto were named as defendants in a lawsuit filed in the 106th
Judicial District Court of Gaines County, Texas, on April 27, 2000. In this case
the plaintiff alleges, among other things, that certain cottonseed acquired from
D&PL that contained the Roundup Ready gene did not perform as the farmer had
anticipated. D&PL and Monsanto are investigating the claims to determine the
cause or causes of the alleged problem. Pursuant to the terms of the February 2,
1996 Roundup Ready Gene License and Seed Service Agreement (the "Roundup Ready
Agreement"), D&PL has tendered the defense of this claim to Monsanto and
requested indemnity. Pursuant to the Roundup Ready Agreement, Monsanto is
contractually obligated to defend and indemnify D&PL against all claims arising
out of the failure of the Roundup Ready gene and Monsanto has agreed to do so.
D&PL will not have a right of indemnification from Monsanto, however, for any
claim involving defective varietal characteristics separate from or in addition
to the herbicide tolerance gene and such claims are contained in this
litigation.
D&PL was named in two lawsuits filed in the Circuit Court of Holmes County,
Mississippi. One was filed March 14, 2002, and the second was filed on August
19, 2002. Both cases include numerous plaintiffs who allege that certain
cottonseed sold by D&PL was improperly mixed and blended and failed to perform
as advertised. On December 14, 2004, an Order was entered in the March 14, 2002
case severing the individual claims of the 57 original plaintiffs into
fifty-seven separate actions. Fourteen of the fifty-seven cases will remain in
Holmes County, Mississippi. The venue to which the other cases will be
transferred has not yet been determined. On January 24, 2005, the Supreme Court
of the State of Mississippi granted D&PL's interlocutory appeal of the trial
court's denial of D&PL's motion to dismiss the claims of seven plaintiffs for
failure to comply with the Mississippi Seed Arbitration Act. The briefing and
scheduling order has been entered on the consolidated appeals and it is
anticipated that the resolution of this matter will take approximately six to
nine months. The issue involved on these consolidated interlocutory appeals, if
decided in D&PL's favor, should dispose of 43 of the 57 original plaintiffs in
the March 14, 2002 action and 15 of the original 17 plaintiffs in the August 19,
2002 action. Motions are now pending in the August 19, 2002 case identical to
those filed in the March 14, 2002 case. It is anticipated that the trial court
will withhold ruling on those motions until such time as the Mississippi Supreme
Court decides the interlocutory appeal of the March 14, 2002 case. Neither of
these lawsuits alleges that the Monsanto gene technology failed, and
accordingly, it does not appear that D&PL has a claim for indemnity or defense
under the terms of any of the gene licenses with Monsanto.
In December 2002, D&PL filed a suit in the Circuit Court of Holmes County,
Mississippi, against Nationwide Agribusiness and other insurance companies
seeking a declaration that the allegations of the Holmes County, Mississippi
lawsuit filed March 14, 2002, are covered by D&PL's comprehensive general
liability and umbrella liability policies. This case was removed by the
defendants to the United States District Court for the Southern District of
Mississippi. In this litigation, D&PL seeks a declaration that its insurers are
responsible for the cost of defending such actions, and full indemnification of
D&PL in the event a judgment is rendered against it based upon the seed mix
claim alleged by plaintiffs. D&PL alleges in this litigation that the
allegations of plaintiffs' complaint are covered by one or more of D&PL's
insurance policies issued by the defendant insurance companies. Both Nationwide
and D&PL have filed Motions for Summary Judgment which are now pending before
the court. Barring a ruling on those motions in advance of trial, the case is
scheduled to commence on November 14, 2005.
In the August 19, 2002 Holmes County lawsuit, D&PL has filed a third party
Complaint against Nationwide Agribusiness and other insurers alleging they are
responsible for the cost of defending the action and for full indemnification of
D&PL in the event a Judgment is entered against it. The third party defendants
removed this case to the United States District Court for the Southern District
of Mississippi, but on September 28, 2004, the case was remanded to Holmes
County, Mississippi where it remains pending. The decision in the December 2002
case filed by D&PL against Nationwide referenced in the immediately preceding
paragraph may be dispositive of D&PL's third party complaint in this action.
D&PL, Monsanto, and another seed producer were named in a lawsuit filed in the
United States District Court for the Eastern District of Texas, Marshall
Division, on October 6, 2005. In this case, multiple plaintiffs allege that
their growing crops were damaged by the application of Roundup(R) Glyphosate
within labeled tolerances and that Monsanto and the other named defendants have
been guilty of false advertising in the promotion of Roundup Ready cottonseed.
D&PL is in the process of investigating the claims to determine the cause or
causes of the alleged problem. Pursuant to the terms of the February 2, 1996
Roundup Ready Gene License and Seed Service Agreement (the "Roundup Ready
Agreement"), D&PL has tendered the defense of this claim to Monsanto and
requested indemnity. Pursuant to the Roundup Ready Agreement, Monsanto is
contractually obligated to defend and indemnify D&PL against all claims arising
out of the failure of the Roundup Ready gene.
All lawsuits related to product claims seek monetary damages. See Note 17 of the
Notes to Consolidated Financial Statements in Part II, Item 8 for further
details about product claims.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II cottonseed infringes Bayer's Australian patent that
claims an alleged invention entitled "Prevention of Bt Resistance Development."
The suit seeks an injunction, damages and other relief against Deltapine
Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners, a partnership of D&PL (90%) and Monsanto
(10%), pertaining to matters under the Bollgard and Roundup Ready Licenses for
the United States and matters under license agreements for Argentina and the
Republic of South Africa. In August 2003, D&PL and D&M Partners responded to
Monsanto's positions on each issue and notified Monsanto of additional disputes,
each concerning Monsanto's compliance with its obligations under the Bollgard
and Roundup Ready Licenses for the United States. In accordance with the dispute
resolution provisions of the subject agreements, the issues raised in Monsanto,
D&PL and D&M Partners' notices were submitted to a panel of senior executives
(the "Executive Panel"). Monsanto subsequently withdrew from the Executive Panel
the issue involving the license agreements for the Republic of South Africa and
submitted to the Executive Panel one additional issue of interpretation of the
Bollgard and Roundup Ready Licenses for the United States. Issues arising from
operations in Argentina and issues involving technology fees and interest have
been settled without material financial impact on the Company and are no longer
in dispute. On May 20, 2004, Monsanto submitted to arbitration before the
American Arbitration Association two unresolved issues: whether D&M Partners has
paid Monsanto all royalties due and whether D&PL has made unauthorized transfers
of materials containing Monsanto technology. In this arbitration proceeding,
Monsanto seeks an adjudication of its alleged right to terminate the Bollgard
and Roundup Ready Licenses, to dissolve D&M Partners, to obtain an accounting
and to receive monetary damages and a return or destruction of materials
containing Monsanto technologies. D&PL denies the claims asserted by Monsanto in
the arbitration filing and has filed appropriate responses to Monsanto's claims
and filed three counterclaims based on the issues submitted by D&PL to the
Executive Panel. The parties are currently conducting discovery. The Arbitration
Panel has set an August 2006 final hearing date. On November 8, 2004, Monsanto
submitted one new claim allegedly involving a dispute under the license
agreements to the Executive Panel. This issue has been resolved by the Executive
Panel. On March 31, 2005, D&PL submitted an issue involving an international
license under the 1996 Option Agreement between Monsanto and D&PL for resolution
by the Executive Panel. The Executive Panel has that claim under consideration.
D&PL is committed to participating in good faith resolution of issues in dispute
through arbitration or through the Executive Panel, as applicable.
In October 2002, Transportes Darkepe Ltda, a Brazilian trucking company, filed
suit in a local court in the State of Parana, Brazil, against an employee of
D&PL Brasil Ltda. ("D&PL Brasil"), a Brazilian subsidiary of D&PL, and Localiza
Rent a Car ("LRC"), alleging that the employee had caused a motor vehicle
accident resulting in property damage to a truck owned by the plaintiff. In
December 2002, D&PL Brasil was joined as a defendant on the basis that the
rental car driven by the employee had been rented in its name. The case remains
pending in pretrial proceedings. The damages sought, including interest, is
approximately $49,000. The employee and D&PL Brasil are being defended and are
indemnified in this litigation by the respective insurance carriers for LRC and
D&PL.
In January 2001, Sure Grow Seed Inc. ("Sure Grow"), an indirect subsidiary of
D&PL, gave notice to Ozbugday Tarim Isletmeleri ve Tohumculuk A.S. ("OTIT"), a
Turkish seed company, of termination (effective at the end of the 2001 crop
year) of OTIT's exclusive distributorship for cottonseed of Sure Grow varieties
in the Republic of Turkey. OTIT refused to acknowledge the validity of this
termination. In October 2002, Sure Grow and the Turkish Branch of Turk
Deltapine, Inc. ("Turk Deltapine'"), D&PL's local affiliate in Turkey, commenced
a civil action in a Turkish commercial court seeking an injunction against
continued sales of Sure Grow varieties by OTIT. OTIT filed a counterclaim
seeking an injunction against Turk Deltapine's marketing of seed of Sure Grow
varieties in alleged violation of OTIT's exclusive distribution rights and
monetary damages for lost profits in an amount to be determined. In May 2005,
the court in which the case is pending, reversing a prior advisory opinion, held
that the law of the State of Alabama, governs the termination of OTIT's
distributorship and the January 2001 notice of termination was timely and
effective. Consistent with this decision, the court rejected OTIT claims that
Turk Deltapine has been involved in unfair competition against OTIT. The
decision of the court has been appealed by OTIT. Both OTIT and Turk Deltapine
have continued to distribute cotton planting seed of Sure Grow varieties in
Turkey.
In June 2004, D&PL filed an application with the Turkish Ministry of Agriculture
to gain intellectual property protection of certain of D&PL's proprietary cotton
varieties under Turkey's new law protecting breeders' rights for new plant
varieties, which was enacted in January 2004. On November 3, 2004, the Ministry
of Agriculture denied protection under Turkish law for all but one of these
varieties. In December 2004, D&PL filed a petition with the Ministry of
Agriculture requesting reconsideration of its decision denying protection. The
Ministry of Agriculture is still considering D&PL's petition. D&PL also filed a
petition in January 2005 in the Administrative Court of Ankara requesting a
decision granting intellectual property protection of D&PL's varieties. This
petition is currently pending before the Administrative Court.
In December 1999, Mycogen Plant Science, Inc. ("Mycogen") filed a suit in the
Federal Court of Australia alleging that Monsanto Australia Ltd., Monsanto's
wholly-owned Australian subsidiary, and Deltapine Australia have been infringing
two of Mycogen's Australian patents by making, selling, and licensing cotton
planting seed expressing insect resistance. The suit seeks an injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. Trial of this matter commenced on March 7, 2005,
and concluded on April 6, 2005. D&PL is awaiting a decision from the Court.
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
$696,329 at October 31, 2005 exchange rates) and an injunction preventing D&PL
from distributing seed through any other licensee in that region. The Guatemalan
court, where this action is proceeding, has twice declined to approve the
injunction sought. D&PL continues to make seed available for sale in Central
America and Mexico.
D&PL vs. Monsanto Company and Pharmacia Corporation
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
effectively terminating Monsanto's efforts to gain government approval of the
merger of Monsanto with D&PL under the May 8, 1998, Merger Agreement. On
December 30, 1999, D&PL filed suit (the "December 30 Suit") in the First
Judicial District of Bolivar County, Mississippi, seeking, among other things,
the payment of the $81 million termination fee due pursuant to the merger
agreement, compensatory damages and punitive damages. On January 2, 2000, D&PL
and Monsanto reached an agreement whereby D&PL would withdraw the December 30
Suit without prejudice for the purpose of negotiating a settlement of D&PL's
claims, and Monsanto would immediately pay the $81 million. On January 3, 2000,
Monsanto paid to D&PL the termination fee of $81 million as required by the
merger agreement. On January 18, 2000, after unsuccessful negotiations, D&PL
filed a suit (the "January 18 Suit") reinstating essentially all of the
allegations contained in the December 30 Suit. The January 18 Suit by D&PL
against Monsanto seeks, among other things, in excess of $1 billion in
compensatory and $1 billion in punitive damages for breach of contract under the
merger agreement between the parties. D&PL alleges that Monsanto failed to use
its best efforts, commercially reasonable efforts, and/or reasonable best
efforts to obtain antitrust approval from the U.S. Department of Justice, as
required under the terms of the merger agreement. D&PL also seeks damages for
breach of the January 2, 2000, agreement pursuant to which the parties were to
negotiate for two weeks to resolve the dispute over failure of the merger to
close.
The parties litigated for several months in 2000 over the appropriate forum to
hear the case. On July 17, 2000, the Delaware Court of Chancery rejected
Monsanto's attempt to maintain the action in Delaware and returned the parties
to the Circuit Court for the First Judicial District of Bolivar County,
Mississippi.
On December 18, 2000, D&PL amended its complaint to include a claim for tortious
interference with prospective business relations on the grounds that Monsanto's
unreasonable delay prevented the consummation of the merger and kept D&PL from
being in a position to enter into transactions and relationships with others in
the industry. In light of the merger of Monsanto into Pharmacia & Upjohn, Inc.,
after the filing of the original complaint, D&PL named both Pharmacia Corp. (the
renamed existing defendant) and Monsanto Company as defendants in the amended
complaint.
In January, 2001, Monsanto filed a motion for summary judgment on the breach of
contract claims, alleging that D&PL suffered no cognizable damages as a result
of the failed merger. Monsanto also filed a motion to dismiss (or in the
alternative for summary judgment) with respect to the tortious interference
claim, arguing that it was entitled to 1) dismissal of the action on the grounds
that D&PL's amended complaint did not satisfy any of the elements of a tortious
interference claim and, thus, did not state a viable claim; and 2) summary
judgment because D&PL has not suffered any damages as a result of Monsanto's
actions. On November 15, 2001, the Circuit Court denied the defendants' motion
for summary judgment on the breach of contract claims, holding that the case
presents issues for trial by jury including the existence and extent of
benefit-of-the-bargain damages. The Court also denied defendants' motion to
dismiss or for summary judgment on D&PL's claim for tortious interference with
business relationships.
In June, 2003, the original trial judge to whom this case was assigned, retired
and the case was assigned to a new trial court judge.
On September 12, 2003, Monsanto amended its answer to include four counterclaims
against D&PL, alleging breach of contract, fraudulent inducement, and negligent
misrepresentation. The fraudulent inducement and negligent misrepresentation
claims allege that D&PL misrepresented the status of the Department of Justice's
investigation into D&PL's 1996 acquisition of the Sure Grow companies prior to
the signing of the merger agreement. The breach of contract claim alleges that
D&PL failed to notify Monsanto that D&PL had sustained a material adverse
change, where the alleged material adverse change relates to some of the matters
for which D&PL seeks consequential damages in this litigation. The breach of
contract claim also alleges that D&PL failed to use its contractually-required
efforts to inform Monsanto that Monsanto was not using contractually-required
efforts to complete the transaction. Monsanto is seeking unspecified damages for
its counterclaims, including the $81 million paid by Monsanto to D&PL as a
termination fee and related expenses. D&PL answered the counterclaims, denying
all liability, and intends to vigorously defend against these counterclaims. On
December 21, 2004, Monsanto filed a motion to amend its answer to withdraw two
of its four counterclaims, specifically the fraudulent inducement and negligent
misrepresentations counterclaims.
On December 5, 2003, Monsanto filed a motion for partial summary judgment
relating to one method that D&PL had used to calculate its damages, and on
October 8, 2004, the Court granted Monsanto's motion. D&PL sought an
interlocutory appeal of this ruling to the Mississippi Supreme Court. On
February 14, 2005, the Mississippi Supreme Court granted D&PL's petition to hear
its appeal. The Mississippi Supreme Court also agreed to hear D&PL's appeal of a
discovery ruling relating to documents that Monsanto claimed to be immune from
disclosure under the attorney-client privilege and work product doctrine. The
original trial judge had ordered Monsanto to produce the documents and the new
trial judge has ordered D&PL to return a significant portion of them.
On January 3, 2005, Monsanto filed two additional motions for partial summary
judgment. Both motions seek summary judgment on certain aspects of D&PL's
damages. On February 17, 2005, D&PL filed a motion with the trial court to amend
its complaint to add a claim against Monsanto for fraudulently inducing D&PL to
extend the deadline to complete the merger with Monsanto. The Mississippi
Supreme Court has stayed the proceedings in the trial court pending the
resolution of the two interlocutory appeals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our stock trades on the New York Stock Exchange (the "NYSE") under the trading
symbol DLP. The range of closing prices for these shares for the last two fiscal
years, as reported by the NYSE, was as follows:
Common Stock Data 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
----------------- ---------- ---------- ----------- ----------
FYE August 31, 2005
Market Price Range - Low $25.22 $26.16 $24.76 $24.70
- High 27.48 30.49 28.82 27.48
FYE August 31, 2004
Market Price Range - Low $22.62 $24.28 $22.80 $20.90
- High 25.40 26.63 25.82 25.80
Dividends totaling $0.51 and $0.46 per share on common and preferred shares were
paid in 2005 and 2004, respectively. The Board of Directors anticipates that
quarterly dividends of $0.15 per share will continue to be paid in the future;
however, the Board of Directors reviews this policy quarterly. Aggregate
dividends paid on common shares in 2005 were $19.1 million and should
approximate $21.7 million in 2006. Aggregate dividends paid on preferred shares
in 2005 were $0.5 million and should approximate $0.6 million in 2006. In the
first quarter of 2006, the Board of Directors authorized a quarterly dividend of
$0.15 per share to be paid on December 14, 2005, to shareholders of record on
November 30, 2005.
On October 31, 2005, there were approximately 20,000 shareholders of our
36,083,334 outstanding common shares.
Equity Compensation Plan Information
The following table reflects the described information as of August 31, 2005:
Number of securities
to be issued upon Weighted average Number of securities
exercise of exercise price remaining available for
outstanding options, of outstanding options, future issuance under equity
Plan category warrants and rights warrants and rights compensation plan
---------------------------------- ------------------------ --------------------------- -----------------------------
Equity compensation plans
approved by security holders
Stock Options 3,704,182 $ 23.30 2,397,676
Restricted Stock & Restricted
Stock Units 167,748 - 1,932,252
Equity compensation plans not
approved by security holders - - -
Issuer Purchases of Equity Securities
On June 30, 2005, D&PL's Board of Directors authorized a new share repurchase
program to buy up to an additional $50 million of the Company's common stock.
The Company anticipates that repurchases will be implemented over time through a
variety of methods, which generally will include open market purchases. The
timing and amount of repurchases under the program will depend on market
conditions, legal restrictions and other factors. The adoption of the June 2005
repurchase program replaced the previous stock repurchase plan, which was
adopted in February 2000.
The following table presents the number of shares purchased monthly under the
Company's stock repurchase program for the three-month period ended August 31,
2005:
Approximate Dollar
Total Total Number of Shares Value of Shares that
Number of Average Purchased as Part of May Yet Be Purchased
Shares Price Paid Publicly Announced Plan Under the Plan
Period Purchased per Share
----------------------------------------- ------------ ------------ -------------------------- -----------------------
June
(June 1, 2005 to June 30, 2005) - - - $ 2,494,671
July
(July 1, 2005 to July 31, 2005) - - - $ 50,000,000
August
(August 1, 2005 to August 31, 2005) 110,000 $25.52 110,000 $ 47,192,594
------------ --------------------------
Total 110,000 $25.52 110,000 $ 47,192,594
============ ==========================
There were no shares purchased in the quarter other than those authorized
pursuant to the June 2005 stock repurchase plan.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS (In thousands, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
As of and for the Years Ended August 31,
------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ------------ ----------- ----------- ------------
Operating Results:
Net sales and licensing fees $366,085 $312,765 $283,799 $259,509 $307,092
Special charges and unusual
items(1) - - (962) - (6,301)
In-process research and development
and related transaction costs(2) - (38,532) - - -
Net income 42,557 5,316 27,805 30,339 32,307
Balance Sheet Summary:
Current assets $356,679 $375,475 $355,261 $308,468 $337,737
Current liabilities 263,013 226,225 204,050 174,124 208,041
Working capital 93,666 149,250 151,211 134,344 129,696
Total assets 439,184 457,023 431,552 383,142 411,521
Long-term debt 7,271 16,486 1,557 1,176 2,836
Stockholders' equity 164,023 209,726 217,107 202,207 188,408
Per Share Data:
Net income - Diluted $1.08 $0.13 $0.70 $0.76 $0.81
Book value 4.32 5.48 5.70 5.27 4.90
Cash dividends per common share 0.51 0.46 0.27 0.20 0.15
Weighted average number of shares
used in net income per share
calculation -
Diluted 39,370 39,670 39,594 39,781 40,111
------------------------------------------------------------------------------------------------------------------------------------
(1) In 2003, we reported (a) a $0.6 million special charge for the closings of
two U.S. locations and (b) a $0.4 million special charge for reductions in
the number of employees at an international wholly-owned subsidiary and an
international joint venture. In 2001, we reported (a) a $3.0 million
special charge for the closing of a delinting plant and a write down of
other long-lived assets to be disposed of and (b) a $3.3 million charge for
severance pay related to the plant closing and reductions in operations and
corporate staffs.
(2) In 2004, we recorded a $38.5 million charge for a write off of in-process
research and development and related transaction expenses related to our
August 24, 2004 acquisition of global licenses to develop and commercialize
Syngenta's insect resistance technology in cottonseed.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW/OUTLOOK
We reported record revenues for the second year in a row for the year ended
August 31, 2005. In addition, the operating results of our core business were
the highest in the Company's ninety year history. Our record results were due to
higher sales in both our domestic and international segments during 2005. In our
domestic segment, sales increased by 18% over 2004, despite a reduction in
soybean seed sales. Domestic licensing fees from cottonseed sales increased over
2004 due to trait fee price increases enacted by Monsanto and higher unit sales
of stacked gene products. Since we recognize greater revenue and profitability
from stacked gene products, our business has benefited greatly from farmers
increased purchases of these products over cottonseed products containing either
an insect-resistant trait or a herbicide tolerant trait alone. We also saw a
substantial increase in sales of our higher value products, such as DP 555 BG/RR
and DP 444 BG/RR. For the second consecutive year, these products were the two
most widely planted cottonseed varieties, making up almost one-third of all
cotton acres planted in the U.S. according to the USDA. According to a September
2005 USDA report, U.S. cotton plantings increased to 14.2 million acres in 2005
as compared to 13.7 million acres in 2004. Normally, such as increase in cotton
acres would enhance our earnings and generate additional unit sales. However, we
believe farmers decreased the amount of seeds planted per acre this year and
therefore our unit sales increased only slightly. Soybean seed sales and
profitability for 2005 were lower than 2004 which diminished our domestic
results. Soybean seed results were lower due to a shortage of inventories,
primarily in our most popular Group V varieties due to lack of seed production
caused by inclement weather that occurred during the 2004 harvest.
International operating income increased almost 60% and sales increased over 11%
in 2005 as compared to the prior year, primarily due to strong revenue growth
due to price increases and higher unit sales in Australia, Brazil and Turkey,
and through increased export sales to Greece, Spain and Mexico. Many of these
markets increased their area planted to cotton in 2005 and new product offerings
in some markets resulted in increased demand for our products. In China, sales
declined at both of our joint ventures due to a reduction in cotton acres as
well as strong competition from local varieties.
Strategic Transactions and Events
In August, 2004, we announced the acquisition of global licenses to develop and
commercialize innovative insect resistance technology in cotton from Syngenta
Crop Protection AG ("Syngenta"). In addition, we obtained licenses to a wide
range of other Syngenta enabling technologies that may be used to develop new
products in both cottonseed and soybean seed. In return for these licenses, we
will pay Syngenta $46.8 million in installments due primarily over the next
three years. A portion of this amount represents contingent payments. Once the
licensed traits are commercialized, we will receive 70% of the net licensing
revenues generated from these products. We have recently decided to focus our
development efforts on a dual insect stack combination of these Syngenta traits,
which we expect to be a combination of VIP3A and Cry1Ab genes. Depending on the
timing of regulatory approval, we plan to have a limited quantity of seed
containing these traits available for sale as early as 2008. We expect to
commercialize the dual insect traits with a glyphosate tolerance trait beginning
in 2009, subject to regulatory approval. We expect to incur incremental expenses
of approximately $3.0 million related to development of VipCot products in 2006.
See "Acquired In-Process Research and Development" located in this Item 7 for
further discussion.
In January 2003, we announced a collaboration agreement with Dow AgroSciences
LLC ("DAS") under which we will develop, test, and evaluate elite cotton
varieties containing DAS insect resistant traits. We are continuing to work with
these traits. In October 2004, DAS announced it had received full EPA
registration for its WideStrike Insect Protection technology. DAS commercialized
the first cottonseed products containing Widestrike in 2005. We may
commercialize varieties containing DAS insect resistance technology if we reach
a commercialization agreement. To date no such commercialization agreement has
been reached.
In May 2002, we established DeltaMax Cotton LLC ("DeltaMax"), a limited
liability company jointly owned with Verdia, Inc. ("Verdia"), a subsidiary of
Maxygen, Inc. In July, 2004, Verdia was acquired by DuPont, which we believe
brings potential for additional investment capital, strategic focus and critical
mass to our collaboration, which is aimed at developing value-added traits for
cotton. We are currently developing traits for insect-resistance, glyphosate
tolerance and nematode resistance for cotton. We are currently transforming
cotton plants for both the insect resistance and glyphosate tolerance traits. We
expect to invest up to $20 million over the next five to eight years to fund our
portion of DeltaMax.
Other Matters
We are continuing to rapidly develop new product offerings containing Monsanto's
second generation traits, Bollgard II and Roundup Ready Flex. On March 15, 2005,
Monsanto announced it had obtained U.S. regulatory clearance for Roundup Ready
Flex cotton. We had substantial seed production this year of new varieties
containing these traits and are planning to commercially launch these products
in 2006. We anticipate commercializing up to ten new products containing both
the Bollgard II and Roundup Ready Flex genes or the Roundup Ready Flex genes
alone in 2006. We expect to have sufficient seed of these varieties available
for sale to plant one to two million acres next season. The actual seed
quantities available of these new products will depend on a number of factors,
including final raw material purchases and quality assurance data. In addition,
we are continuing to develop products containing Syngenta's VipCot technology
and expanded field testing of VipCot products in 2005. We are focusing our
efforts on developing varieties containing dual insect genes from Syngenta and
plan a limited commercial launch of these varieties in 2008, depending on when
full regulatory approval is obtained. In addition, our joint venture with
Verdia, Inc. (a subsidiary of DuPont), DeltaMax Cotton LLC, continues
development of novel cotton traits in the areas of glyphosate tolerance and
insect resistance.
We are continuing to take steps to enhance value by returning excess cash to our
shareholders. On May 24, 2005, we completed the purchase of 2,374,940 shares of
our common stock pursuant to a modified "Dutch auction" tender offer that was
announced on April 20, 2005. The shares were purchased at $27.00 per share for
an aggregate purchase price of $64,123,380. During 2005, we purchased an
aggregate 3.2 million shares of our common stock for a total purchase price of
$85.5 million. This includes shares purchased in the open market as well as the
shares repurchased through the "Dutch auction" tender offer. In addition, on
June 30, 2005, our Board of Directors authorized a new share repurchase program
to buy up to an additional $50 million of our common stock. The timing and
amount of these repurchases will depend on market conditions, legal restrictions
and other factors. On October 20, 2005, the Board declared a first quarter, 2006
dividend of $0.15 per share, payable on December 14, 2005 to shareholders of
record on November 30, 2005. The Board will continue to consider alternatives
for uses of excess cash, including additional share repurchases and increased
dividends as well as other options.
We continue to seek opportunities to expand our International business into new
markets, including India and parts of Africa. Our subsidiary, D&PL India Seed
Private Ltd., has expanded research and testing of our hybrid products
throughout India in 2005. In addition, we recently have started a new cotton
research program in the Punjab region of Northern India. Results of our testing
programs from 2004 and 2005 have shown many of our products are competitive in
India in terms of both yield and fiber quality.
We continue to pursue our litigation against Monsanto Company and Pharmacia. On
February 14, 2005, the Mississippi Supreme Court granted our petitions seeking
interlocutory appeals of two rulings issued by the Circuit Court for the First
Judicial District of Bolivar County, Mississippi ("Circuit Court"). The appeals
were consolidated, and we expect that the Mississippi Supreme Court will rule on
these appeals during 2006. After their rulings are issued, we anticipate the
Circuit Court will set a trial date. The Mississippi Supreme Court has stayed
the proceedings in the Circuit Court pending resolution of the interlocutory
appeals. See Part I, Item 3 for further discussion.
Separately, we are in an arbitration with Monsanto over a series of disputes
relating to the parties' Bollgard and Roundup Ready licenses and related
agreements. The arbitration, which is being conducted according to the rules of
the American Arbitration Association, is in the discovery phase. The Arbitration
Panel has set an August 2006 final hearing date. See Part I, Item 3 for more
information.
Outlook
Future growth in sales and earnings will be dependent on (a) cotton acreage in
the U.S. and around the world, (b) the successful development and launch of
varieties containing second generation traits from Monsanto, Bollgard II and
Roundup Ready Flex, (c) our ability to continue to develop and commercialize
varieties that have increased yield potential and enhanced fiber qualities, (d)
our ability to continue to profitably expand our international operations, (e)
the successful development and launch of the Syngenta insect resistance
technology, and (f) our ability to successfully develop and launch technologies
that we will own or have more control over (such as those being developed by
DeltaMax Cotton, LLC). Due to our market position in the U.S., U.S. cotton
acreage has a significant effect on our sales and earnings.
As we have previously announced, we expect to provide 2006 earnings guidance
later this year. The commodity price of cotton has been lower in 2005 over price
levels for most of 2004. We anticipate 2005 cotton yields to be near record
levels again despite difficult weather conditions during the growing season
(hot, dry weather) and at harvest (three hurricanes) in much of the U.S. market.
We believe it is too early to estimate 2006 cotton plantings at this time. We
expect to have adequate supplies of seed of most of our popular cotton varieties
for 2006 plantings, despite the impact of inclement weather conditions during
harvest this year. Due to inclement weather during soybean harvesting in our
Mid-South and Illinois soybean seed production areas, supplies of some popular
soybean varieties may be limited. However, final cottonseed and soybean seed
supply amounts are not yet available as processing and quality assurance testing
have not yet occurred for most of the 2006 product offerings.
Internationally, we continue to expand our global reach and we seek to improve
the operating results of our existing ex-U.S. operations. In 2005, operating
income improved significantly due to increased sales in most of our
international locations. Due to the strong Brazilian Real and weaker cotton
prices in 2005, we expect acreage in 2006 in several of our international
locations to be reduced as compared to 2005 planting levels. In particular, we
are already seeing a reduction in cotton plantings in Brazil due to the strong
Brazilian Real and because farmers experienced lower overall cotton yields in
2005 due to poor weather conditions during the growing season. Despite early
indications of lower sales in Brazil for 2006, we believe this market holds
great potential for strong earnings in the future because of the recent approval
of Bollgard. Although the Bollgard gene was approved for planting, we only
recently received approval to commercialize one Bollgard cotton variety, DP 90B,
as the Brazilian regulations require each variety to be approved prior to
commercial sale. We have imported a small amount of DP 90B into Brazil, which we
intend to have planted to produce commercial seed quantities for sales in 2007
and beyond. In addition, we continue to test additional Bollgard varieties in
order to obtain government approval to sell. We also anticipate the Brazilian
government will approve Monsanto's Roundup Ready gene in cotton. Once the
Roundup Ready gene is approved, we will seek approval of Roundup Ready varieties
for sale in Brazil. We are currently working with Monsanto to develop strategies
for commercialization of the Bollgard and Roundup Ready traits in Brazil in
order to minimize farmer saved seed. In Australia, we believe increased
competition from local products will result in lower demand for our products in
2006 and thus lower sales and profitability. Cottonseed sales and farmer
plantings have only just begun in our Southern Hemisphere markets and will not
occur until the Spring and Summer of 2006 in countries in the Northern
Hemisphere. Thus, it is too early to accurately forecast International results
for 2006. We will continue to develop new businesses in markets such as India,
Pakistan and portions of Africa.
We continue to develop and test varieties containing new technologies from
multiple sources. We are developing products with Monsanto's second generation
traits, Bollgard II and Roundup Ready Flex. In addition, we continue to work
with Syngenta's VipCot traits so that these products may be commercialized as
quickly as regulatory approval is received. Both Monsanto and Syngenta traits
are being introgressed into our most elite cotton germplasm. We believe we are
uniquely positioned to rapidly introduce new technologies to both U.S. and
ex-U.S. cotton farmers due to the strength and breadth of our breeding programs
and germplasm base, our technical services capabilities, know-how, brand
recognition and market position.
Share Repurchase Program/Dividend Policy
In February 2000, the Board of Directors authorized a program for the repurchase
of up to $50 million of D&PL's common stock. The shares repurchased under this
program were used to provide for option exercises, the potential conversion of
D&PL's Series M Convertible Non-Voting Preferred shares and for other general
corporate purposes. At August 31, 2005, D&PL had repurchased 2,229,900 shares at
an aggregate purchase price of approximately $47,505,000 under this program. In
2005, D&PL purchased 676,700 shares at an aggregate purchase price of
$17,928,000 under this plan. This repurchase plan has been terminated and
replaced by the June 2005 plan discussed below.
On May 24, 2005, D&PL completed the purchase of 2,374,940 shares of its common
stock pursuant to a modified "Dutch auction" tender offer that was announced on
April 20, 2005, under a new plan separately approved by the Board of Directors.
The shares were purchased for $27.00 per share for an aggregate purchase price
of $64,123,380. The Company also incurred associated expenses of approximately
$675,000 in connection with the acquisition of these shares (primarily related
to legal and advisory services) that have been recorded as a component of
treasury stock.
On June 30, 2005, D&PL`s Board of Directors authorized a new share repurchase
program to buy up to an additional $50 million of the Company's common stock. We
expect to repurchase shares under this plan over time and through a variety of
methods, which generally will include open market purchases. The timing and
amount of repurchases under the program will depend on market conditions, legal
restrictions and other factors. The adoption of the June 2005 repurchase program
replaced the February 2000 plan. At August 31, 2005, D&PL had repurchased
110,000 shares at an aggregate purchase price of approximately $2,807,000 under
this plan.
Currently, the quarterly dividend is $0.15 per share. The Board of Directors
reviews the dividend policy quarterly. Assuming the dividend rate is maintained
through 2006, the aggregate payments will be $21.7 million to the holders of the
36.1 million common shares outstanding and $0.6 million to the holder of the 1.1
million preferred shares outstanding. In addition, the Board of Directors
continues to review uses of the Company's cash position and alternatives for
maximizing its value to shareholders. See "Risks and Uncertainties" located in
this Item 7.
RESULTS OF OPERATIONS
Net Sales and Licensing Fees
In 2005, our consolidated net sales and licensing fees increased 17.0% to $366.1
million from 2004 sales of $312.8 million. This increase was primarily driven by
the following: (a) an increase in the licensing fees charged per bag, an
increase in sales of stacked-gene picker products and lower payments on crop
loss and replant programs, (b) an increase in cottonseed prices and higher sales
of our higher-priced, elite varieties, (c) a slight increase in cottonseed units
sold, and (d) an increase in international revenues, primarily from in-country
sales in Australia and Brazil and from export sales to Mexico, Greece and Spain.
Sales in Australia increased due to the introduction of additional Bollgard II
varieties and an increase in the area planted to cotton. Sales in Brazil
increased due to stronger demand for our products and higher prices. Mexico's
sales increase was primarily attributable to an increase in demand for
stacked-gene products and higher cotton acreage, and the increase in Greece and
Spain was due to stronger sales to our distributors to increase their inventory
levels.
In 2004, our consolidated net sales and licensing fees increased 10.2% to $312.8
million from 2003 sales of $283.8 million. This increase was primarily driven by
the following: (a) an increase in licensing fee revenues due to lower payments
on crop loss and replant programs, an increase in the licensing fees charged per
bag, and an increase in sales of stacked-gene picker products, (b) an increase
in cottonseed prices and higher sales of our higher-priced, elite varieties, (c)
an increase in units of soybean seed sold, and, (d) an increase in international
revenues, primarily from in-country sales in Australia, Brazil and Turkey and
from export sales to Mexico and Colombia. Australia, Brazil and Turkey sales
increased due to stronger demand for our products and new product introductions.
Colombia sales increased due to the recent approval of transgenic varieties
containing Monsanto's Bollgard technology while Mexico's sales increase was
primarily attributable to higher cotton acreage.
Gross Profit
Our consolidated gross profit increased to $132.0 million in 2005 compared to
$109.0 million in 2004. Consolidated gross profit as a percentage of
consolidated net sales and licensing fees increased to 36.1 % in the current
year, from 34.9% in 2004. The revenue increase attributable to price increases
and the adoption of higher priced products and increased licensing fees was
partially offset by lower margins on soybean sales caused by higher costs of
soybean raw materials, as well as an increase in cottonseed production costs.
Our consolidated gross profit increased to $109.0 million in 2004 compared to
$100.7 million in 2003. Consolidated gross profit as a percentage of
consolidated net sales and licensing fees decreased slightly to 34.9% in 2004,
from 35.5% in 2003. The revenue increase attributable to the adoption of higher
priced products was more than offset by lower margins on soybean sales caused by
higher costs of soybean raw materials and an increase in both cottonseed
production costs and in the provision for damaged, obsolete and excess
cottonseed inventory.
Operating Expenses
Operating expenses decreased to $60.3 million in 2005 from $87.4 million in
2004. The decrease in operating expenses in 2005 versus 2004 was approximately
$27.1 million. This decrease primarily relates to a $38.5 million charge for
acquired in-process research and development costs related to the acquisition of
technology licenses included in 2004, offset by higher research and development
costs associated with new research programs and new technology testing and
higher general and administrative costs, primarily related to higher
professional fees for legal matters and Sarbanes-Oxley compliance, and
additional compensation costs.
Operating expenses increased to $87.4 million in 2004 from $44.0 million in
2003. Operating expenses for 2004 include a $38.5 million charge for acquired
in-process research and development and transaction costs related to the
acquisition of technology licenses. Operating expenses for 2003 included special
charges of $1.0 million. Excluding the in-process research and development and
related transaction costs in 2004 and the special charges recorded in 2003, the
increase in operating expenses in 2004 versus 2003 was approximately $6.0
million. This increase primarily relates to higher research and development
costs associated with new technologies and an increase in general and
administrative expenses, primarily related to higher professional fees.
Research and Development Expenses
Research and development expenses increased 25% to $23.0 million in 2005 from
$18.4 million in 2004. The increase was primarily attributable to increased
costs of working with new breeding programs and new technologies (Bollgard II,
Roundup Ready Flex and VipCot), including the addition of new personnel,
increased testing program expenses and related compensation costs.
Research and development expenses increased 10.2% to $18.4 million in 2004 from
$16.7 million in 2003. The increase was primarily attributable to increased
costs of working with new technologies, including the addition of new personnel
and increased testing program expenses.
Selling Expenses
Selling expenses increased 15.4% to $13.5 million in 2005 from $11.7 million in
2004. This increase was primarily attributable to higher advertising,
promotional and compensation costs.
Selling expenses increased 6.4% to $11.7 million in 2004 from $11.0 million in
2003. This increase was primarily attributable to higher advertising costs.
General and Administrative Expenses
General and administrative expenses increased 26.6% to $23.8 million in 2005
from $18.8 million in 2004. The increase primarily related to an increase in
professional fees incurred, mainly due to legal matters and Sarbanes-Oxley
compliance and additional compensation costs.
General and administrative expenses increased 22.1% to $18.8 million in 2004
from $15.4 million in 2003. The increase primarily related to an increase in
professional fees.
In-Process Research and Development and Related Transaction Costs
In 2004, we recorded a $38.5 million charge associated with the write-off of
acquired in-process research and development and related transaction expenses
related to our August 24, 2004 acquisition of global licenses to develop and
commercialize Syngenta insect resistance technology in cottonseed. See "Acquired
In-Process Research and Development" located in this Item 7 for further
information.
Interest Income
Net interest income increased to $2.2 million in 2005, compared to net interest
income of $1.5 million in 2004. In 2005, interest income was $3.3 million and
interest expense was $1.1 million. Higher interest rates earned on our cash
balances resulted in higher interest income during 2005. Interest expense
increased due to a note payable to Syngenta related to the 2004 acquired
in-process research & development transaction.
Net interest income increased to $1.5 million in 2004, compared to net interest
income of $1.1 million in 2003. In 2004, interest income was $1.9 million and
interest expense was $0.4 million. Higher interest rates earned on our cash
balances resulted in higher interest income during 2004.
Other Income/Expense
Other expense decreased to $4.3 million in 2005, compared to $10.5 million in
2004. This decrease is primarily attributable to decreased legal expenses
related to our suit against Pharmacia and Monsanto. In 2005, we incurred $4.3
million, or $0.07 per diluted share, related to Monsanto/Pharmacia litigation
expenses, compared to $10.9 million, or $0.18 per diluted share, in 2004. In
2005, these expenses decreased due to the Mississippi Supreme Court staying the
proceedings pending the resolution of two matters. See Part I, Item 3 for more
information.
Other expense decreased to $10.5 million in 2004, compared to $12.2 million in
2003. This decrease is primarily attributable to decreased legal expenses
related to our suit against Pharmacia and Monsanto. In 2004, we incurred $10.9
million, or $0.18 per diluted share, related to Monsanto/Pharmacia litigation
expenses, compared to $13.0 million, or $0.21 per diluted share, in 2003.
Net Income and Earnings Per Share
Net income applicable to common shares was $42.0 million, $4.8 million, and
$27.5 million in 2005, 2004 and 2003, respectively. Net income per share
(diluted) was $1.08, $0.13 and $0.70 in 2005, 2004 and 2003, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently utilize off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS (AMOUNTS IN THOUSANDS)
We have certain obligations and commitments to make future payments under
contracts. Current estimates of our future payments under these obligations are
shown in the following table.
Payments Due in Fiscal Years Ending August 31,
----------------------------------------------------------------------------------------------
Total 2006 2007 2008 2009 2010 2011
and
beyond
------------- ------------- --------- ---------- -------- ------- --------
Long-Term Obligations (1) $ 20,550 $ 11,050 $ 7,050 $ 2,450 $ - $ - $ -
Operating Lease Obligations 1,657 994 467 83 79 34 -
Purchase Obligations (2) 4,330 4,330 - - - - -
------------- ------------- --------- ---------- -------- ------- --------
Total $ 26,537 $ 16,374 $ 7,517 $ 2,533 $ 79 $ 34 $ -
============= ============= ========= ========== ======== ======= ========
(1) Long-Term Obligations are comprised of payments related to the Syngenta
transaction (see "Acquired In-Process Research and Development" located in this
Item 7 for information concerning non-contingent payments related to the
Syngenta transaction) and payments required under research and license contracts
with other third parties.
(2) The amount reported as "Purchase Obligations" for 2006 relates to payments
to be made to cotton growers and producers for a portion of seed that we will
purchase in the first and second quarters of 2006. At August 31, 2005, we had
open purchase contracts with many cotton and soybean growers, producers and
conditioners that may require us to purchase minimum amounts of cotton and
soybean seed if that seed meets our quality assurance standards. The amount that
we will pay for the seed that we accept is based on market prices that
fluctuate. The amount of seed that we will accept and the unit prices that we
will pay cannot be known until that seed is delivered to us (which should occur
in the first and second quarters of 2006) and is tested for quality.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Overview
Management's discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing in Item 8 of this Annual Report on Form
10-K for the fiscal year ended August 31, 2005. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
We have identified below the accounting policies that involve those estimates
and assumptions that we believe are critical to an understanding of our
financial statements. Our management has discussed the development and selection
of each critical accounting estimate with the Audit Committee of our Board of
Directors, and the Audit Committee has reviewed the related disclosures below.
Since application of these accounting policies involves the exercise of judgment
and use of estimates, actual results could differ from those estimates.
Revenue Recognition
Revenues from domestic seed sales are recognized when the seed is shipped.
Revenues from Bollgard, Bollgard II and Roundup Ready licensing fees are
recognized when the seed is shipped. Domestically, the licensing fees charged to
farmers for Bollgard, Bollgard II and Roundup Ready cottonseed are based on
pre-established planting rates for each of nine geographic regions and, for
years prior to 2004, considered the estimated number of seed contained in each
bag which varied by variety, location grown, and other factors. Beginning in
2004, picker and stripper cottonseed products were sold in bags containing
approximately 250,000 seed or bulk boxes containing approximately 8,000,000
seed. Acala and Pima cottonseed products continue to be sold in 50-pound bags.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. International export sales are not subject to return
except in limited cases in Mexico and Colombia. All other international revenues
from the sale of planting seed, less estimated reserves for returns, are
recognized when the seed is shipped, except in Australia where certain
immaterial revenues are recognized when collected.
All of our domestic seed products (including those containing Bollgard, Bollgard
II 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, Bollgard II and Roundup Ready technology fees offered by Monsanto.
Under these programs, if a farmer plants his seed and the crop is lost (usually
due to inclement weather) by a certain date, a portion of the price of the seed
and technology fees are forgiven or rebated to the farmer if certain conditions
are met. The amount of the refund and the impact to D&PL depends on a number of
factors including whether the farmer can replant the crop that was destroyed. We
record monthly estimates to account for these programs. The majority of program
rebates occur during the second, third, and fourth quarters. Essentially all
material claims under these programs have occurred or are accounted for by
fiscal year end.
Provision for Damaged, Obsolete and Excess Inventory
Each year, we record a provision to adjust our reserves related to inventory
based on our estimate of seed that will not pass our quality assurance ("QA")
standards at year end, or is deemed excess based on our desired seed stock level
for a particular variety ("dump seed"). Seed can fail QA standards based on
physical defects (i.e., cut seed, moisture content, discoloration, etc.),
germination rates, or transgenic purities. The amount recorded as inventory
provision in a given year is calculated based on the total quantity of inventory
that has not passed QA standards at any fiscal year end, any seed that is
expected to deteriorate before it can be sold and seed deemed to be excess. In
establishing the provision, we consider the scrap value of the seed to be
disposed. An initial estimate of the needed provision is made at the beginning
of each year and recorded over the course of the year. Adjustments for changes
in our estimates are made monthly, if necessary.
See Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8
for further details about inventory reserves.
Deferred Income Taxes
Deferred income taxes are estimated based upon temporary differences between the
income and loss that we report in our financial statements and our taxable
income and loss as determined under applicable tax laws. We estimate the value
of deferred income taxes based on existing tax rates and laws, and our
expectations of future earnings. For deferred income taxes, we applied a
composite statutory income tax rate of approximately 38%.
We are required to evaluate the likelihood of our ability to generate sufficient
future taxable income that will enable us to realize the value of our deferred
tax assets. If, in our judgment, we determine that we will not realize deferred
tax assets, then valuation allowances are recorded. As of August 31, 2005, we
had recorded net deferred tax assets of approximately $17.1 million primarily
related to capitalizing the licenses acquired from Syngenta in 2004 for income
tax reporting purposes. We estimate that our deferred tax assets will be
realized; therefore, we have not recorded any valuation allowances as of August
31, 2005.
We use management judgment and estimates when estimating deferred taxes. If our
judgments and estimates prove to be inadequate, or if certain tax rates and laws
should change, our financial results could be materially adversely impacted in
future periods.
See Note 8 of the Notes to Consolidated Financial Statements in Part II, Item 8
for further details about income taxes.
Contingent Liabilities
A liability is contingent if the amount is not presently known, but may become
known in the future as a result of the occurrence of some uncertain future
event. 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.
ACQUIRED IN-PROCESS RESEARCH & DEVELOPMENT
In August 2004, we entered into an agreement with Syngenta to purchase global
licenses to develop and commercialize Syngenta's insect resistance genes (known
as VIP3A and Cry1Ab) in cottonseed. In addition, we purchased licenses to other
Syngenta enabling technologies that may be useful in developing valuable new
products for use in cottonseed and soybean seed. In return for the licenses,
D&PL is to pay Syngenta $46.8 million. The purchase price will be paid in
installments over seven years. Fixed payments of $37.6 million will be made in
installments through the first quarter of 2008. In 2008, D&PL will make certain
decisions which will determine whether the additional $9.2 million in contingent
payments will be made.
For the year ended August 31, 2004, we recorded a charge of approximately
$38,532,000 related to the write off of the acquired in-process research and
development (IPR&D) and related transaction costs. Approximately $36,225,000 of
the purchase price represents the fair value of the non-contingent payments
related to the acquired IPR&D projects that had not yet reached technological
feasibility and had no alternative future use. Accordingly, this amount was
immediately expensed in the 2004 Consolidated Statement of Income on the
acquisition date. The remaining $2,307,000 of the charge incurred represents the
related transaction costs, primarily professional fees. The assigned value of
each of the technologies acquired was as follows: VIP3A - $19,113,000; Cry1Ab -
$16,812,000; Other - $300,000.
The VIP3A and Cry1Ab projects ("VipCot") represent new technologies that are
expected to compete with insect resistance technologies currently on the market,
including technologies that are currently contained in varieties sold by us. The
VIP3A and Cry1Ab genes produce proteins that are toxic to certain lepidopteran
larvae, the principal cotton pests in many cotton growing areas. The acquired
VIP3A gene provides for a novel mode of action (for attacking larvae that
consume the protein). VipCot will require further development by us, including
the introgression into our elite germplasm. We estimate that we will incur the
following costs to complete the projects: 2006 - $3,000,000; 2007 - $4,000,000;
2008 - $4,000,000; 2009 - $2,500,000. These projects will also require
regulatory approval from the Food and Drug Administration (FDA), the U.S.
Department of Agriculture (USDA), and the U.S. Environmental Protection Agency
(EPA) before commercialization can begin. Syngenta is responsible for U.S.
regulatory approval. Syngenta has advised us that they expect U.S. regulatory
approval to be obtained for the selected VIP3A/Cry1Ab combination of events in
2008, prior to the planting season. If the regulatory approval process proceeds
as expected, we may begin limited introduction of the VIP3A/Cry1Ab combination
of events in 2008. Once commercialization begins, we will owe Syngenta a royalty
equal to 30% of the net license fees received, after deduction of certain
expenses, from these technologies. We will retain the remaining 70% of the net
license fees.
There is no assurance that these technologies will result in commercially viable
products or that such technologies are developed in the time frame or for the
amounts estimated to complete. Also, there is no assurance that regulatory
approval will be obtained for the products.
LIQUIDITY AND CAPITAL RESOURCES
In the United States, we purchase seed from contract growers in our first and
second fiscal quarters. Seed conditioning, treating and packaging commence late
in the first fiscal quarter and continue through the third fiscal quarter.
Seasonal cash needs normally begin to increase in the first fiscal quarter and
cash needs peak in the third fiscal quarter. Cash is generated and loan
repayments, if applicable, normally begin in the middle of the third fiscal
quarter and are typically completed by the first fiscal quarter of the following
year. In some cases, we offer customers financial incentives to make early
payments. To the extent we attract early payments from customers, bank
borrowings, if any, are reduced.
In the U.S., we record revenue and accounts receivable for technology licensing
fees on transgenic seed sales upon shipment, usually in our second and third
fiscal quarters. Receivables from seed sales generally become due in May and
June. The licensing fees are due in September, at which time we receive payment.
We then pay Monsanto its royalty for the Bollgard, Bollgard II and Roundup Ready
licensing fees, which is recorded as a component of cost of sales. As a result
of the timing of these events, licensing fees receivable and royalties payable
peak at our fiscal year end, August 31.
The seasonal nature of our business significantly impacts cash flow and working
capital requirements. Historically, we have maintained credit facilities, and
used early payments by customers and cash from operations to fund working
capital needs. In the past, we have borrowed on a short-term basis to meet
seasonal working capital needs. However, since 2002, we have used cash generated
from operations and other available cash to meet working capital needs. We
continue to evaluate potential uses of our cash for purposes other than for
working capital needs. On May 24, 2005, we completed the purchase of 2,374,940
shares of our common stock pursuant to a modified "Dutch auction" tender offer
that was announced on April 20, 2005. The shares were purchased for $27.00 per
share for an aggregate purchase price of $64,123,380. Other potential uses of
our cash in the future may be the acquisition of, or funding of, alternative
technologies (such as, or in addition to, DeltaMax and Syngenta) that could be
used to enhance our product portfolio and ultimately our long-term earnings
potential and/or an investment in new markets outside the U.S. such as India.
Another potential use would be the repurchase of our shares pursuant to our
recently announced $50 million share repurchase program. We are currently
considering other potential uses of our cash, including increasing the dividend
rate or repurchasing additional shares depending on market considerations and
other factors. As a part of this analysis, we continue to evaluate the Company's
liquidity needs and its capital structure.
On April 15, 2005, we entered into an unsecured $75 million credit agreement
(the "Credit Agreement") with Bank of America, N.A. (the "Bank"). The Credit
Agreement provides for unsecured revolving loans up to a maximum aggregate
amount outstanding of $75 million, plus Letters of Credit which were outstanding
prior to the execution of the Credit Agreement in the amount of approximately $2
million. Of the total commitment, $50 million represents a seasonal commitment
available from October to July of each year. The Credit Agreement expires on
July 31, 2006, at which time all outstanding amounts under the Credit Agreement
would be due and payable, subject to the Company's right to request a one-year
extension and the Bank's acceptance of that request. On October 10, 2005, the
Company requested an extension of the Credit Agreement and negotiations
regarding this extension are underway.
In general, borrowings under the Credit Agreement will bear interest at a rate
calculated according to a Eurodollar rate, plus 0.55%. The Eurodollar rate is
generally the 30-day, 60-day or 90-day LIBOR rate. We will also be required to
pay unused fees of 0.125% annually calculated on the daily-unused portion of the
Credit Agreement. The primary financial covenant requires the Company's funded
indebtedness under the Credit Agreement to not exceed 50% of certain current and
long-term assets, defined in the Credit Agreement and determined as of the last
day of each fiscal quarter.
As of August 31, 2005, there were no loans outstanding under the Credit
Agreement, other than the existing Letters of Credit as discussed above.
Capital expenditures were $6.7 million, $6.0 million and $8.3 million in the
years ended August 31, 2005, 2004 and 2003, respectively. We anticipate that
capital expenditures will approximate $8.0 to $10.0 million in 2006.
Annual dividends of $0.51, $0.46 and $0.27 per share were paid in 2005, 2004 and
2003, respectively. Aggregate dividends paid on common and preferred shares in
2005, 2004 and 2003 were $19.6 million, $18.1 million and $10.6 million,
respectively. On November 2, 2005, we announced that our Board of Directors had
declared a $0.15 per share dividend for the first quarter of 2006. The first
quarter dividend will be paid on December 14, 2005 to shareholders of record on
November 30, 2005. The Board anticipates that quarterly dividends of $0.15 per
share will continue to be paid in the future; however, the Board of Directors
reviews this policy quarterly. Based on a quarterly dividend of $0.15 per share
in 2006, aggregate preferred and common stock dividends should approximate $22.3
million in 2006.
The Company purchases its common stock in the open market from time to time
depending on market conditions and other factors. The shares repurchased may be
used to provide for option exercises, conversion of our Series M Convertible
Non-Voting Preferred shares and for other general corporate purposes. From
September 1, 2004 to August 31, 2005, the Company purchased approximately 3.2
million shares of its common stock at an aggregate purchase price of $85.5
million. This includes shares purchased in the open market as well as the shares
repurchased through the "Dutch auction" tender offer discussed above.
Cash provided from operations, cash on hand, early payments from customers and
borrowings under the credit facility, if necessary, should be sufficient to meet
the Company's 2006 working capital needs.
RISKS AND UNCERTAINTIES
Various statements included herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on current expectations and are indicated
by words or phrases such as "anticipate," "estimate," "expect," "project,"
"believe," "is or remains optimistic," "currently envisions" and similar words
or phrases and involve known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Forward-looking statements include
statements relating to such matters as anticipated financial performance
(including when earnings estimates are discussed), existing products, technical
developments, new products, new technologies, research and development
activities, and similar matters. These forward-looking statements are based
largely on our expectations and are subject to a number of risks and
uncertainties, many of which are beyond our control. Actual results could differ
materially from these forward-looking statements as a result of, among others,
changes in the competitive marketplace, including the introduction of new
products or pricing changes by our competitors, changes in the economy and other
similar events. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, we cannot assure
you that the forward-looking information contained herein will in fact
transpire. The risks and uncertainties that may affect the operations,
performance, development and results of our business include those noted
elsewhere herein and the following:
Demand for our seed will be affected by government programs and policies
and by weather in all countries where we sell products and operate. Demand
for seed is also influenced by commodity prices, the cost of other crop
inputs, and the demand for a crop's end-uses such as textiles, animal feed,
cottonseed oil, food and raw materials for industrial use. Weather impacts
crop yields, commodity prices and the planting decisions that farmers make
regarding both original planting commitments and, when necessary,
replanting levels. These factors all also influence the cost and
availability of seed for subsequent seasons.
The planting seed market is highly competitive, and our products face
competition from a number of seed companies, diversified crop protection
product companies, agricultural biotechnology companies, governmental
agencies and academic and scientific institutions. In addition, several of
our distributors/customers have also entered the cotton planting seed
business. A number of crop protection product and biotechnology companies
have seed production and/or distribution capabilities to ensure market
access for new seed products and new technologies that may compete with the
Bollgard, Bollgard II and Roundup Ready gene technologies of Monsanto, our
principal licensor of such technology. Our seed products and technologies
contained therein may encounter substantial competition from technological
advances by others or products from new market entrants. Many of our
competitors are, or are affiliated with, large diversified companies that
have substantially greater resources than we have.
We currently are engaged in a dispute resolution and arbitration process
with Monsanto, the principal licensor of our cotton technology and
competitor of ours in the cotton planting seed business. In the
arbitration, Monsanto is seeking a determination by the arbitrators of its
right to terminate certain agreements between our companies, including the
Bollgard and Roundup Ready licenses. In addition, we are currently engaged
in litigation with Monsanto (the January 18 Suit) concerning the failed
merger of the companies. The result of this litigation (and the process of
litigating) may materially affect the results of our business. (See Part I,
Item 3.)
There is no assurance that new technologies such as the DeltaMax and the
Syngenta technologies will result in commercially viable products or that
such technologies will be developed in the time frame or for the amounts
estimated to complete development. Also, there is no assurance that
regulatory approval will be obtained for the products.
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign governments
and shipping disruptions. Particular policies which may affect our domestic
and international operations include the use of and the acceptance of
products that were produced from plants that have been genetically
modified, the testing, quarantine and other restrictions relating to the
import and export of plants and seed products and the availability (or lack
thereof) of proprietary protection for plant products. The absence or lack
of enforcement of intellectual property laws may lead to counterfeit and
farmer-saved seed which negatively impacts our sales. In addition, United
States government policies, particularly those affecting foreign trade and
investment, may impact our international operations.
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 2005, approximately 95% of our cottonseed that was sold
in the United States contained either or both of Monsanto's Bollgard,
Bollgard II and Roundup Ready gene technologies, and 96% of our soybean
seed sales contained the Roundup Ready gene technology. Although many
farmers have rapidly adopted these technologies, the concern of some
customers and governmental entities over finished products that contain
GMOs could impact demand for crops (and ultimately seed) raised from seed
containing such traits. In addition, regulatory approvals for Monsanto's
Bollgard and Bollgard II technologies expire in 2006. Monsanto is
responsible for obtaining and maintaining regulatory approvals and is
planning to seek re-registration of both Bollgard and Bollgard II, but
there is no assurance that their efforts will be successful.
Due to the varying levels of agricultural and social development of the
international markets in which we operate and because of factors within the
particular international markets we target, international profitability and
growth may be less stable and predictable than domestic profitability and
growth. Furthermore, recent action taken by the U.S. government, including
that taken by the U.S. military in the aftermath of the tragic events of
September 11, 2001, the war in Iraq, and conflicts between major cotton
producing nations, may serve to further complicate our ability to execute
our long range ex-U.S. business plans because those plans include future
expansion into Uzbekistan, Pakistan and India. World health concerns about
infectious diseases also affect the conduct of our international business.
Our customers in many markets, including the U.S., benefit from government
subsidy programs. The Farm Security and Rural Investment Act of 2002
expires on January 1, 2007 (although the bill includes the 2007 cotton
planting season), and future U.S. farm subsidy programs are uncertain.
Various other countries, including Brazil, have challenged, and may
continue to challenge, the appropriateness of U.S. farm subsidies through
the World Trade Organization ("WTO") or other forums. In particular, the
WTO has ruled in Brazil's favor in its challenge that certain U.S.
subsidies violate the provisions of the WTO. It is not clear if, when, or
to what extent, U.S. subsidies will be modified as a result of this ruling.
However, in the event changes to subsidies are made, they may negatively
impact U.S. farmers. U.S. farm programs, government subsidies and WTO
rulings impacting such programs may materially affect the results of our
business.
Overall profitability will depend on the factors noted above, as well as
worldwide commodity prices, our ability to successfully open new
international markets, our ability to penetrate the Texas High Plains
market, the technology partners' ability to obtain timely government
approval (and maintain such approval) for existing and for additional
biotechnology products on which they and D&PL are working, the terms of
such government approvals, our technology partners' ability to successfully
defend challenges to proprietary technologies licensed to us and our
ability to produce sufficient commercial quantities of high quality
planting seed of these products. Any delay in or inability to successfully
complete these projects may affect future profitability. In addition,
earnings forecasts do not consider the impact of potential transactions,
their related accounting and other factors, that may be under consideration
by the Company, but have not yet been completed or their effect determined
at the date of a particular filing.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 154, "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3". Among
other changes, SFAS No. 154 requires that a voluntary change in accounting
principle be applied retrospectively with all prior period financial statements
presented based on the new accounting principle, unless it is impracticable to
do so. SFAS No. 154 provides that (1) a change in method of depreciating or
amortizing a long-lived nonfinancial asset be accounted for as a change in
estimate (prospectively) that was effected by a change in accounting principle,
and (2) correction of errors in previously issued financial statements should be
termed a "restatement." SFAS No. 154 is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005. The
Company does not expect the adoption of this statement to have a material impact
on D&PL's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions". This statement's amendments are based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. Further, SFAS No. 153 eliminates the narrow exception for
nonmonetary exchanges of similar productive assets and replaces it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Provisions of this statement are effective for fiscal
periods beginning after June 15, 2005. The Company does not expect the adoption
of this statement to have a material impact on D&PL's consolidated financial
statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," which clarifies the types of costs that should be
expensed rather than capitalized as inventory. This statement also clarifies the
circumstances under which fixed overhead costs associated with operating
facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June
15, 2005, and may impact certain inventory costs D&PL incurs after September 1,
2005. The Company has not determined the impact, if any, that this statement
will have on D&PL's consolidated financial position or results of operations.
SFAS No. 123(R), "Share-Based Payment," issued in December 2004, is a revision
of FASB No. 123, "Accounting for Stock-Based Compensation" and supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123(R) requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award. This
statement is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. This statement will apply to
all awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. SFAS No. 123(R) will be effective for
D&PL in the first quarter of fiscal year 2006. The Company has not yet made any
decisions about how it will adopt SFAS 123(R). However, the pro forma net income
effect of using the fair value method for the years ended August 31, 2005, 2004
and 2003 is presented in Note 1 of the Notes to Consolidated Financial
Statements in Part II, Item 8. The pro forma compensation costs presented in
Note 1 of the Notes to Consolidated Financial Statemens in Part II, Item 8 and
in our prior filings have been calculated using a Black-Scholes option pricing
model and may not be indicative of amounts that should be expected in future
years. D&PL has not made any decisions about which option-pricing model is most
appropriate for future awards. The Company has not determined the impact, if
any, that this statement will have on D&PL's consolidated financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure relative to fluctuations in the price of soybean raw material
inventory, foreign currency fluctuations and interest rate changes. From time to
time we enter into various agreements that are considered derivatives to reduce
our soybean commodity price risk. During the year ended August 31, 2005,
derivative instruments have not been used to manage foreign currency or interest
rate risks. We do not enter into speculative hedges or purchase or hold any
derivative financial instruments for trading purposes.
A discussion of our accounting policies related to derivative financial
instruments is included in Note 1 of the Notes to Consolidated Financial
Statements in Part II, Item 8. Further information on our exposure to market
risk is included in Note 15 of the Notes to Consolidated Financial Statements in
Part II, Item 8.
The fair value of derivative commodity instruments outstanding as of August 31,
2005, was $10,000. A 10% adverse change in the underlying commodity prices upon
which these contracts are based would not have a material effect on our
consolidated financial position.
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 primarily
in Argentina, Australia, Brazil, China, South Africa and Turkey. At August 31,
2005, the result of a uniform 10% strengthening in the value of the dollar
relative to the currencies in which our transactions are denominated would not
cause a material impact on earnings.
For the year ended August 31, 2005, 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.
PART II
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Financial Statements Page(s)
The following consolidated financial statements of Delta and Pine Land Company
and subsidiaries are submitted in response to Part II, Item 8:
Reports of Independent Registered Public Accounting Firm...................32
Management's Report........................................................34
Consolidated Statements of Income - for each of the three years in the
period ended August 31, 2005............................................35
Consolidated Balance Sheets - August 31, 2005 and 2004.....................36
Consolidated Statements of Cash Flows - for each of the three years in the
period ended August 31, 2005............................................37
Consolidated Statements of Stockholders' Equity and Comprehensive Income
- for each of the three years in the period ended August 31, 2005.......38
Notes to Consolidated Financial Statements.................................39
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Delta and Pine Land Company:
We have audited the accompanying consolidated balance sheets of Delta and Pine
Land Company and subsidiaries (the Company) as of August 31, 2005 and 2004, and
the related consolidated statements of income, changes in stockholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended August 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Delta and Pine Land
Company and subsidiaries as of August 31, 2005 and 2004, and the results of
their operations and their cash flows for each of the years in the three-year
period ended August 31, 2005, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Delta and Pine
Land Company and subsidiaries internal control over financial reporting as of
August 31, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated November 14, 2005 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
KPMG LLP
Jackson, Mississippi
November 14, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Delta and Pine Land Company:
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting (see
Part II, Item 9A(c) of the August 31, 2005 Annual Report on From 10-K of Delta
and Pine Land Company), that Delta and Pine Land Company and subsidiaries (the
Company) maintained effective internal control over financial reporting as of
August 31, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Delta and Pine Land Company and
subsidiaries maintained effective internal control over financial reporting as
of August 31, 2005, is fairly stated, in all material respects, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our opinion, Delta and Pine Land Company and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
August 31, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Delta and Pine Land Company and subsidiaries as of August 31, 2005 and 2004, and
the related consolidated statements of income, changes in stockholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ending August 31, 2005, and our report dated November 14, 2005 expressed
an unqualified opinion on those consolidated financial statements.
KPMG LLP
Jackson, Mississippi
November 14, 2005
MANAGEMENT'S REPORT:
D&PL is responsible for preparing the consolidated financial statements and
related information appearing in this Annual Report on Form 10-K. Management
believes that the financial statements present fairly D&PL's financial position,
its results of operations and its cash flows in conformity with accounting
principles generally accepted in the United States. In preparing its financial
statements, D&PL is required to include amounts based on estimates and judgments
that it believes are reasonable under the circumstances.
D&PL maintains accounting and other systems designed to provide reasonable
assurance that financial records are reliable for purposes of preparing
financial statements and that assets are properly accounted for and safeguarded.
Compliance with these systems and controls is reviewed by executive management
and the accounting staff. Limitations exist in any internal control system,
recognizing that the system's cost should not exceed the benefits derived.
The Board of Directors pursues its responsibility for D&PL's financial
statements primarily through the efforts of its Audit Committee, which is
composed solely of "independent" directors who are not Company officers or
employees. The Audit Committee meets as often as it determines is necessary, but
at least four times per year. In addition, the Audit Committee meets with the
independent auditor at least quarterly. The Audit Committee also meets
periodically with management and the head of the internal audit function in
separate executive sessions. The independent auditors have direct access to the
Audit Committee, with and without the presence of management representatives.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED AUGUST 31,
(In thousands, except per share amounts)
2005 2004 2003
------------------ ----------------- -----------------
NET SALES AND LICENSING FEES $ 366,085 $ 312,765 $ 283,799
COST OF SALES (234,064) (203,757) (183,132)
------------------ ----------------- -----------------
GROSS PROFIT 132,021 109,008 100,667
------------------ ----------------- -----------------
OPERATING EXPENSES:
Research and development 23,015 18,436 16,669
Selling 13,531 11,693 10,971
General and administrative 23,760 18,787 15,358
Special charges - - 962
In-process research and development and related transaction costs - 38,532 -
------------------ ----------------- -----------------
Total operating expenses 60,306 87,448 43,960
------------------ ----------------- -----------------
OPERATING INCOME 71,715 21,560 56,707
INTEREST INCOME, NET 2,194 1,522 1,100
OTHER EXPENSE (4,310) (10,518) (12,178)
EQUITY IN NET LOSS OF AFFILIATE (2,787) (3,551) (1,977)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (1,609) (2,303) (1,104)
------------------ ----------------- -----------------
INCOME BEFORE INCOME TAXES 65,203 6,710 42,548
PROVISION FOR INCOME TAXES (22,646) (1,394) (14,743)
------------------ ----------------- -----------------
NET INCOME 42,557 5,316 27,805
DIVIDENDS ON PREFERRED STOCK (544) (491) (288)
------------------ ----------------- -----------------
NET INCOME APPLICABLE TO COMMON SHARES $ 42,013 $ 4,825 $ 27,517
================== ================= =================
BASIC EARNINGS PER SHARE $ 1.11 $ 0.13 $ 0.72
================== ================= =================
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN PER SHARE CALCULATIONS - BASIC 37,958 38,250 38,113
================== ================= =================
DILUTED EARNINGS PER SHARE $ 1.08 $ 0.13 $ 0.70
================== ================= =================
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN PER SHARE CALCULATIONS - DILUTED 39,370 39,670 39,594
================== ================= =================
The accompanying notes are an integral part of these consolidated statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31,
(In thousands, except share and per share amounts)
2005 2004
----------------- ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 93,075 $ 149,587
Receivables, net 228,800 184,759
Inventories 26,625 30,151
Prepaid expenses 1,874 1,923
Deferred income taxes 6,305 9,055
----------------- ------------------
Total current assets 356,679 375,475
PROPERTY, PLANT AND EQUIPMENT, NET 60,158 61,988
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED 4,183 4,183
INTANGIBLES, net of accumulated amortization of $2,458 and $1,969 5,960 5,471
OTHER ASSETS 1,446 1,594
DEFERRED INCOME TAXES 10,758 8,312
----------------- ------------------
TOTAL ASSETS $ 439,184 $ 457,023
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Current maturities of long-term debt $ 10,078 $ 5,639
Accounts payable 18,218 23,784
Accrued expenses 221,824 187,890
Income taxes payable 12,893 8,912
----------------- ------------------
Total current liabilities 263,013 226,225
----------------- ------------------
LONG-TERM DEBT 7,271 16,486
----------------- ------------------
DEFERRED INCOME TAXES - -
----------------- ------------------
MINORITY INTEREST IN SUBSIDIARIES 4,877 4,586
----------------- ------------------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 17)
----------------- ------------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.10 per share; 2,000,000 shares authorized
Series A Junior Participating Preferred, par value $0.10 per share;
456,989 shares authorized; no shares issued or outstanding; - -
Series M Convertible Non-Voting Preferred, par value $0.l0 per share;
1,066,667 shares authorized, issued and outstanding 107 107
Common stock, par value $0.10 per share; 100,000,000 shares authorized;
40,928,929 and 40,162,820 shares issued;
36,099,823 and 38,495,354 shares outstanding 4,093 4,016
Capital in excess of par value 81,640 64,250
Retained earnings 199,742 176,808
Accumulated other comprehensive loss (4,305) (3,736)
Treasury stock, at cost; 4,829,106 and 1,667,466 shares (117,254) (31,719)
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 164,023 209,726
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 439,184 $ 457,023
================= ==================
The accompanying notes are an integral part of these consolidated statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
(in thousands)
2005 2004 2003
------------------ ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,557 $ 5,316 $ 27,805
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 8,661 8,364 7,759
Loss (gain) on sale of assets 115 189 (34)
Noncash component of in-process research and development - 22,125 -
Equity in net loss of affiliate 2,787 3,551 1,977
Foreign exchange (gain) loss (101) 124 (748)
Accretion of debt discount 777 - -
Minority interest in earnings of subsidiaries 1,609 2,303 1,104
Compensation expense of restricted stock 508 - -
Change in deferred income taxes 2,043 (12,294) 3,315
Changes in assets and liabilities:
Receivables (43,370) (17,693) (20,804)
Inventories 4,183 1,921 7,849
Prepaid expenses 43 178 144
Intangibles and other assets (540) (95) (133)
Accounts payable (6,068) 5,571 2,241
Accrued expenses 31,796 12,438 30,114
Income taxes 4,027 3,788 (1,557)
------------------ ----------------- -----------------
Net cash provided by operating activities 49,027 35,786 59,032
------------------ ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,669) (6,049) (8,298)
Sale of investments and property 451 161 79
Investment in affiliate (2,980) (2,630) (1,610)
------------------ ----------------- -----------------
Net cash used in investing activities (9,198) (8,518) (9,829)
------------------ ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (5,800) (277) (2,109)
Payments of long-term debt - (1,607) -
Dividends paid (19,623) (18,118) (10,576)
Proceeds from long-term debt - - -
Proceeds from short-term debt 247 245 467
Minority interest in dividends paid by subsidiaries (1,318) (1,336) -
Payments to acquire treasury stock (85,535) (5,748) (6,135)
Proceeds from exercise of stock options 14,103 6,004 2,484
------------------ ----------------- -----------------
Net cash used in financing activities (97,926) (20,837) (15,869)
------------------ ----------------- -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES 1,585 (129) 860
------------------ ----------------- -----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (56,512) 6,302 34,194
CASH AND CASH EQUIVALENTS, beginning of year 149,587 143,285 109,091
------------------ ----------------- -----------------
CASH AND CASH EQUIVALENTS, end of year $ 93,075 $ 149,587 $ 143,285
================== ================= =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest $ - $ 10 $ 61
Income taxes $ 13,804 $ 8,904 $ 13,399
Noncash operating activities:
Deferred taxes resulting from change in minimum pension liability $ 1,276 $ 339 $ 678
Noncash financing activities:
Tax benefit of stock option exercises $ 2,856 $ 3,459 $ 825
The accompanying notes are an integral part of these consolidated statements.
DELTA AND PINE LAND COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED AUGUST 31, 2003, 2004 AND 2005
(In thousands, except per share data)
Accumulated
Capital in Other Total
Preferred Common Excess of Retained Comprehensive Treasury Stockholders'
Stock Stock Par Value Earnings Income/(Loss) Stock Equity
------------ ------------- ------------ ----------- --------------- ------------- ------------
Balance at August 31, 2002 $ 107 $ 3,931 $ 51,563 $ 172,381 $ (5,939) $ (19,836) $ 202,207
------------
Net income - - - 27,805 - - 27,805
Minimum pension liability
adjustment, net of
tax of $0.7 million - - - - (1,122) - (1,122)
Foreign currency translation
adjustment - - - - 1,661 - 1,661
Unrealized gain on hedging
instruments - - - - (42) - (42)
------------
Total comprehensive income 28,302
------------
Exercise of stock options and tax
benefit of stock option
exercises - 22 3,287 - - - 3,309
Cash dividends, $0.27 per share - - - (10,576) - - (10,576)
Purchase of common stock - - - - - (6,135) (6,135)
------------ ------------- ------------ ------------ -------------- ------------ ------------
Balance at August 31, 2003 107 3,953 54,850 189,610 (5,442) (25,971) 217,107
------------
Net income - - - 5,316 - - 5,316
Minimum pension liability
adjustment, net of
tax of $0.3 million - - - - 558 - 558
Foreign currency translation
adjustment - - - - 1,544 - 1,544
Unrealized loss on hedging
instruments - - - - (396) - (396)
------------
Total comprehensive income 7,022
------------
Exercise of stock options and tax
benefit of stock option
exercises - 63 9,400 - - - 9,463
Cash dividends, $0.46 per share - - - (18,118) - - (18,118)
Purchase of common stock - - - - - (5,748) (5,748)
------------ ------------- ------------ ------------ -------------- ------------ ------------
Balance at August 31, 2004 107 4,016 64,250 176,808 (3,736) (31,719) 209,726
------------
Net income - - - 42,557 - - 42,557
Minimum pension liability
adjustment, net of
tax of $1.3 million - - - - (2,096) - (2,096)
Foreign currency translation
adjustment - - - - 1,169 - 1,169
Unrealized gain on hedging
instruments - - - - 358 - 358
------------
Total comprehensive income 41,988
------------
Exercise of stock options and tax
benefit of stock option
exercises - 77 16,882 - - - 16,959
Amortization of deferred compensation 508 508
Cash dividends, $0.51 per share - - - (19,623) - - (19,623)
Purchase of common stock - - - - - (85,535) (85,535)
------------ ------------- ------------ ------------ ------------- ------------- ------------
Balance at August 31, 2005 $ 107 $ 4,093 $ 81,610 $ 199,742 $ (4,305) $ (117,254) $ 164,023
============ ============= ============ ============ ============= ============== ============
The accompanying notes are an integral part of these consolidated statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Delta and Pine Land Company and subsidiaries (the "Company" or "D&PL") breed,
produce, condition and market cotton and soybean planting seed. D&PL farms
approximately 5,500 acres largely for research purposes and the production of
cotton and soybean foundation seed.
D&PL has annual agreements with various growers to produce seed for cotton and
soybeans. The growers plant seed purchased from D&PL and follow quality
assurance procedures required for seed production. If the grower adheres to
established Company quality assurance standards throughout the growing season
and if the seed meets Company quality standards upon harvest, D&PL may be
obligated to purchase specified minimum quantities of seed at prices equal to
the commodity market price of the seed, plus a grower premium. D&PL then
conditions the seed for sale as planting seed.
Basis of Presentation
The accompanying financial statements include the accounts of Delta and Pine
Land Company and its subsidiaries. Significant inter-company accounts and
transactions have been eliminated in consolidation. D&PL's investment in
50%-owned affiliate DeltaMax Cotton, LLC is accounted for using the equity
method.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 2005
presentation.
Special Charges/Unusual Items
During 2003, D&PL recorded a $1.0 million charge associated with additional
expenses for the closing of its Chandler, Arizona plant, the closing of its
facility in Centre, Alabama, and reductions in the number of employees at its
wholly-owned subsidiary in Australia and at its joint venture in Hebei Province,
People's Republic of China. These charges are included in "SPECIAL CHARGES" in
the accompanying Consolidated Statements of Income.
At August 31, 2003 essentially all amounts related to the closing of the two
U.S. facilities and headcount reductions noted above had been utilized.
Cash Equivalents
Cash equivalents include overnight repurchase agreements and other short-term
investments having an original maturity of less than three months.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided for financial reporting purposes using the straight-line method
over the estimated useful lives of the assets. Accelerated methods are used for
income tax purposes. The estimated useful lives of the various classes of
property, in years, are as follows:
Land improvements 5-20
Buildings and improvements 10-35
Machinery and equipment 3-15
Germplasm 10-15
Breeder and foundation seed 40
The germplasm, breeder and foundation seed were purchased as part of
acquisitions and include amounts for specifically identified varieties and for
breeding stocks. The amounts associated with specific varieties are amortized
over the expected commercial life of those varieties. Breeding stocks are
amortized over 40 years, since they can be revitalized from time to time and
remain viable indefinitely after such revitalization.
Intangible Assets
Identifiable intangible assets consist of trademarks, patents and other
intangible assets and are being amortized using the straight-line method over 5
to 40 years.
D&PL incurred in-process research and development ("IPR&D") and related
transaction costs of $38,532,000 in 2004, including amounts assigned to acquired
in-process technology of $36,225,000. The value assigned to acquired in-process
technology was determined by identifying those acquired specific in-process
research and development projects that would be continued and for which (a)
technology feasibility had not been established at the acquisition date, (b)
there was no alternative future use, and (c) the fair value was estimable with
reasonable reliability.
Foreign Currency Translation
Financial statements of foreign operations where the local currency is the
functional currency are translated using exchange rates in effect at period end
for assets and liabilities and average exchange rates during the period for
results of operations. Translation adjustments are reported as a separate
component of stockholders' equity. Gains and losses from foreign currency
transactions are included in earnings.
Fair Value of Financial Instruments
The fair value of D&PL's financial instruments at August 31, 2005 and 2004,
which include cash, receivables, derivatives, accounts payable, and payments to
be made to Syngenta, approximates their carrying value.
Income Taxes
D&PL uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates and laws.
Revenue Recognition
Revenues from domestic seed sales are recognized when seed is shipped. Revenues
from Bollgard(R), Bollgard II(R) and Roundup Ready(R) licensing fees are
recognized when the seed is shipped. Domestically, the licensing fees charged to
farmers for Bollgard, Bollgard II and Roundup Ready cottonseed are based on
pre-established planting rates for each of nine geographic regions and consider
the number of seed contained in each container (bag or bulk box). International
export revenues are recognized upon the later of when seed is shipped or the
date letters of credit (or other instruments) are confirmed. Generally,
international export sales are not subject to return. Generally, all other
international revenues from the sale of planting seed, less estimated reserves
for returns, are recognized when the seed is shipped.
All of D&PL's domestic seed products (including those containing Bollgard,
Bollgard II and Roundup Ready technologies) are subject to return and credit
risk, the effects of which vary from year to year. D&PL provides for estimated
returns as sales occur. All significant returns occur or are accounted for by
fiscal year end. The Company records monthly estimates to account for various
sales incentive programs for seed and Monsanto's Bollgard, Bollgard II and
Roundup Ready technologies. The majority of program rebates occur during the
second, third and fourth quarters. Essentially all material claims under these
programs have occurred or are accounted for by fiscal year end.
Research and Development
All research and development costs incurred to breed and produce experimental
seed are expensed. Costs incurred to produce sufficient quantities of planting
seed needed for commercialization are carried as inventory until such seed is
sold. Cotton lint and other by-products of seed production are also carried as
inventory until sold.
Accounting for Stock-Based Compensation
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 No. 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. See Note
18 for a description of the plans and our disclosure of the assumptions
underlying the pro forma calculations below.
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.
2005 2004 2003
------------------ ----------------- -----------------
Net income (in thousands):
As reported $ 42,557 $ 5,316 $ 27,805
Add: Total stock-based compensation expense
included in reported net income, net of
related tax effects 327 - -
Less: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effects (5,442) (2,979) (3,600)
------------------ ----------------- -----------------
Pro forma $ 37,442 $ 2,337 $ 24,205
================== ================= =================
Basic earnings per share:
As reported $ 1.11 $ 0.13 $ 0.72
================== ================= =================
Pro forma $ 0.97 $ 0.05 $ 0.63
================== ================= =================
Diluted earnings per share:
As reported $ 1.08 $ 0.13 $ 0.70
================== ================= =================
Pro forma $ 0.95 $ 0.06 $ 0.62
================== ================= =================
Derivative Financial Instruments
D&PL uses various derivative financial instruments to mitigate its risk to
variability in cash flows related to soybean purchases and to effectively fix
the cost of a significant portion of its soybean raw material inventory. The
terms of the hedging derivatives used by D&PL are negotiated to approximate the
terms of the forecasted transaction; therefore, D&PL expects the instruments
used in hedging transactions to be highly effective in offsetting changes in
cash flows of the hedged items. Realized and unrealized hedging gains and losses
are recorded as a component of other comprehensive income and are reclassified
into cost of sales in the period in which the forecasted transaction affects
earnings (i.e., is sold or disposed of) which generally occurs during D&PL's
second and third fiscal quarters. Quantities hedged that do not exceed the
forecasted transactions are accounted for as cash flow hedges in the manner
discussed above. However, to the extent that the quantities hedged exceed the
forecasted transactions due to intra-season changes to the sales forecast where
it is probable that the originally forecasted transaction will no longer occur,
D&PL accounts for gains and losses on these derivative instruments as
discontinued cash flow hedges, whereby they are immediately recorded as a
component of net income. D&PL does not enter into any derivative instruments
that extend beyond the close of the following fiscal year. D&PL does not enter
into speculative hedges or purchase or hold any derivative financial instruments
for trading purposes.
Impairment of Long-Lived Assets
D&PL assesses recoverability and impairment of identifiable intangible assets
and other long-lived assets whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Recorded goodwill is tested
annually during the fourth quarter of each fiscal year for impairment by
comparing its implied fair value to its carrying value. Based on management's
impairment tests during the fourth quarters of 2005 and 2004, management
determined that none of the goodwill was impaired. For other long-lived assets,
D&PL determines if the unamortized balance can be recovered through projected
future operating cash flows. If the sum of the expected future cash flows is
less than the carrying amount of the asset, an impairment loss is recognized.
Otherwise, an impairment loss is not recognized, and D&PL continues to amortize
its other long-lived assets based on the remaining estimated useful life.
Use of Estimates
The preparation of D&PL's consolidated financial statements requires the use of
estimates and assumptions that affect the reported amounts of assets and
liabilities, the reported amounts of revenues and expenses and the disclosure of
contingent liabilities. Management makes its best estimate of the ultimate
outcome for these items based on historical trends and other information
available when the financial statements are prepared. Changes in estimates are
recognized in accordance with the accounting rules for the estimate, which is
typically in the period when new information becomes available to management.
Areas where the nature of the estimate makes it reasonably possible that actual
results could materially differ from amounts estimated include: damaged,
obsolete and excess inventory, income tax liabilities, allowances for sales
returns and marketing programs, allowance for doubtful accounts, employee
benefit plans and contingent liabilities.
Recently Issued Financial Accounting Standards
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 154, "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3". Among
other changes, SFAS No. 154 requires that a voluntary change in accounting
principle be applied retrospectively with all prior period financial statements
presented based on the new accounting principle, unless it is impracticable to
do so. SFAS No. 154 provides that (1) a change in method of depreciating or
amortizing a long-lived nonfinancial asset be accounted for as a change in
estimate (prospectively) that was effected by a change in accounting principle,
and (2) correction of errors in previously issued financial statements should be
termed a "restatement." SFAS No. 154 is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005. The
Company does not expect the adoption of this statement to have a material impact
on D&PL's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions". This statement's amendments are based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. Further, SFAS No. 153 eliminates the narrow exception for
nonmonetary exchanges of similar productive assets and replaces it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Provisions of this statement are effective for fiscal
periods beginning after June 15, 2005. The Company does not expect the adoption
of this statement to have a material impact on D&PL's consolidated financial
statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," which clarifies the types of costs that should be
expensed rather than capitalized as inventory. This statement also clarifies the
circumstances under which fixed overhead costs associated with operating
facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June
15, 2005, and may impact certain inventory costs D&PL incurs after September 1,
2005. The Company has not determined the impact, if any, that this statement
will have on D&PL's consolidated financial position or results of operations.
SFAS No. 123(R), "Share-Based Payment," issued in December 2004, is a revision
of FASB No. 123, "Accounting for Stock-Based Compensation" and supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123(R) requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award. This
statement is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. This statement will apply to
all awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. SFAS No. 123(R) will be effective for
D&PL in the first quarter of fiscal year 2006. The Company has not yet made any
decisions about how it will adopt SFAS 123(R). However, the pro forma net income
effect of using the fair value method for the years ended August 31, 2005, 2004
and 2003 is presented in Note 1 above. The pro forma compensation costs
presented in Note 1 above and in our prior filings have been calculated using a
Black-Scholes option pricing model and may not be indicative of amounts that
should be expected in future years. D&PL has not made any decisions about which
option-pricing model is most appropriate for future awards. The Company has not
determined the impact, if any, that this statement will have on D&PL's
consolidated financial position or results of operations.
2. INVENTORIES
Inventories at August 31, consisted of the following (in thousands):
2005 2004
------------------- -------------------
Finished goods $ 19,713 $ 24,867
Raw materials 13,156 14,333
Growing crops 818 1,432
Supplies 1,101 1,040
------------------- -------------------
34,788 41,672
Less reserves (8,163) (11,521)
------------------- -------------------
$ 26,625 $ 30,151
=================== ===================
Finished goods and raw material inventory is valued at the lower of average cost
or market. Growing crops are recorded at cost. Elements of cost in inventories
include raw materials, direct production costs, manufacturing overhead and
immaterial general and administrative expenses. Inventory reserves relate to
estimated damaged, obsolete and excess inventory. The provision recorded for
damaged, obsolete and excess inventory for the years ended August 31, 2005, 2004
and 2003 was $12,997,000, $12,299,000, and $7,478,000, respectively. See Note 15
for a description of hedging activities.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at August 31, consisted of the following (in
thousands):
2005 2004
------------------- -------------------
Land and improvements $ 6,263 $ 5,981
Buildings and improvements 43,018 42,228
Machinery and equipment 63,142 59,125
Germplasm 7,500 7,500
Breeder and foundation seed 2,000 2,000
Construction in progress 2,564 2,538
------------------- -------------------
124,487 119,372
Less accumulated depreciation (64,329) (57,384)
------------------- -------------------
$ 60,158 $ 61,988
=================== ===================
Depreciation expense was approximately $8,250,000, $7,980,000 and $7,490,000 in
2005, 2004, and 2003, respectively.
4. INTANGIBLES
The components of identifiable intangible assets at August 31, consisted of the
following (in thousands):
2005 2004
------------------------------------ ------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------- ----------------- ----------------- -----------------
Trademarks $ 3,182 $ (958) $ 3,182 $ (879)
Commercialization agreements 400 (121) 400 (93)
Licenses 1,100 (192) 1,100 (83)
Patents 1,640 (116) 772 (97)
Other 2,096 (1,071) 1,986 (817)
----------------- ----------------- ----------------- -----------------
$ 8,418 $ (2,458) $ 7,440 $ (1,969)
================= ================= ================= =================
Amortization expense for identifiable intangible assets during the years ended
August 31, 2005, 2004, and 2003 was approximately $410,000, $380,000, and
$270,000, respectively. Identifiable intangible asset amortization expense is
estimated to be $500,000 in each of the fiscal years from 2006 through 2007 and
$400,000 in each of the fiscal years from 2008 through 2010.
During the fourth quarters of fiscal 2005 and 2004, "EXCESS OF COST OVER NET
ASSETS OF BUSINESS ACQUIRED" ("goodwill") 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 was impaired.
5. INVESTMENT IN AFFILIATE
D&PL owns a 50% interest in DeltaMax Cotton, LLC, a limited liability company
jointly owned with Verdia, Inc. Verdia was acquired by DuPont on July 2, 2004.
Established in May 2002, the DeltaMax joint venture was formed to create,
develop and commercialize herbicide tolerant and insect resistant traits for the
cottonseed market. D&PL has licensed from DeltaMax the developed traits for
commercialization in both the U.S. and other cotton-producing countries in the
world. For the years ended August 31, 2005, 2004 and 2003, D&PL's equity in the
net loss of DeltaMax was $2,787,000, $3,551,000, and $1,977,000, respectively.
6. LONG-TERM DEBT
The amounts reported in the Consolidated Balance Sheets as "Current Maturities
of Long-Term Debt" and "Long-Term Debt" at August 31, 2005 primarily relate to
payments to be made to Syngenta Crop Protection AG ("Syngenta") related to the
acquisition of certain licenses. See Note 16 for more information on the
transaction.
7. ACCRUED EXPENSES
Accrued expenses at August 31, consisted of the following (in thousands):
2005 2004
---------------- -----------------
Bollgard, Bollgard II and Roundup
Ready royalties and related
expenses due to Monsanto $ 179,412 $ 149,984
Sales allowances 15,106 12,281
Dividends 5,419 4,619
Other accrued expenses 21,887 21,006
---------------- -----------------
$ 221,824 $ 187,890
================ =================
8. INCOME TAXES
The provisions for income taxes for the years ended August 31, consisted of the
following (in thousands):
2005 2004 2003
----------------- ----------------- ----------------
Current-
Federal $ 18,606 $ 12,078 $ 10,891
State 1,997 1,226 1,216
Deferred-
Federal 1,813 (10,232) 2,347
State 230 (1,678) 289
----------------- ----------------- ----------------
$ 22,646 $ 1,394 $ 14,743
================= ================= ================
The differences between the statutory federal income tax rate and the effective
tax rate are as follows:
2005 2004 2003
----------------- ------------------ ------------------
Statutory rate 35.0% 35.0% 35.0%
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit 2.2 (4.4) 2.3
Research and development tax credits (1.1) (9.3) (1.2)
Foreign activities (1.0) (3.1) (1.6)
Other (0.4) 2.6 0.2
----------------- ------------------ ------------------
Effective tax rate 34.7% 20.8% 34.7%
================= ================== ==================
The effective tax rate was reduced in 2004 primarily due to the impact of the
IPR&D charge (see Note 16). State taxes resulted in a net benefit in 2004 due to
state income tax credits and the recognition of certain state net operating
losses that had not previously been benefited.
Deferred income taxes at August 31, consisted of the following (in thousands):
2005 2004
------------------- -------------------
Deferred tax assets:
Inventory $ 2,954 $ 4,048
Litigation costs 453 1,129
Pension 1,984 955
Capitalized licenses (Syngenta) 13,839 14,541
Other 1,932 3,327
------------------- -------------------
$ 21,162 $ 24,000
=================== ===================
Deferred tax liabilities:
Property and intangibles $ (4,046) $ (3,615)
Other (53) (3,018)
------------------- -------------------
(4,099) (6,633)
------------------- -------------------
Net deferred income taxes $ 17,063 $ 17,367
=================== ===================
The Company has not provided for income taxes on the undistributed earnings of
certain foreign subsidiaries where the earnings are expected to be permanently
reinvested outside the United States. However, if taxes were provided on these
earnings, such taxes are not expected to be material to the Company's
consolidated financial statements.
The American Jobs Creation Act of 2004 provides a one-time opportunity for U.S.
corporations to elect to deduct 85% of certain cash dividends from controlled
foreign corporations, provided certain qualifications are met as to the amounts
of the dividends and the use of the repatriated funds. The Company has not yet
completed its evaluation of these provisions, but will do so by the end of
calendar year 2005.
9. LEASES
D&PL leases a portion of the real estate and machinery and equipment used in its
operations under operating lease arrangements. Substantially all rent expense is
recorded as cost of sales. D&PL does not have any capital leases. Future minimum
rental payments after 2005 under operating leases with initial or remaining
non-cancelable terms in excess of one year are as follows:
2006 $ 511,000
2007 $ 467,000
2008 $ 83,000
2009 $ 79,000
2010 $ 34,000
Rent and lease expense approximated $3,059,000, $2,558,000, and $2,767,000 in
2005, 2004 and 2003, respectively.
10. Credit Facility
On April 15, 2005, Delta and Pine Land Company and certain of its subsidiaries
entered into an unsecured $75 million credit agreement (the "Credit Agreement")
with Bank of America, N.A. (the "Bank"). The Credit Agreement provides for
unsecured revolving loans up to a maximum aggregate amount outstanding of $75
million, plus Letters of Credit which were outstanding prior to the execution of
the Credit Agreement in the amount of approximately $2 million. Of the total
commitment, $50 million represents a seasonal commitment available from October
to July of each year. The Credit Agreement expires on July 31, 2006, at which
time all outstanding amounts under the Credit Agreement would be due and
payable, subject to the Company's right to request a one-year extension and the
Bank's acceptance of that request. On October 10, 2005, the Company requested an
extension of the Credit Agreement and negotiations regarding this extension are
underway.
In general, borrowings under the Credit Agreement will bear interest at a rate
calculated according to a Eurodollar rate, plus 0.55%. The Eurodollar rate is
generally the 30-day, 60-day or 90-day LIBOR rate. The Company will also be
required to pay an annual fee of 0.125% of the daily-unused portion of the
Credit Agreement. The primary financial covenant requires the Company's funded
indebtedness under the Credit Agreement to not exceed 50% of certain current and
long-term assets, defined in the Credit Agreement and determined as of the last
day of each fiscal quarter.
As of August 31, 2005, there were no loans outstanding under the Credit
Agreement, other than the existing Letters of Credit discussed above.
11. EMPLOYEE BENEFIT PLANS
Defined Benefit Plan
Substantially all full-time employees are covered by a noncontributory defined
benefit plan (the "Plan"). Benefits are paid to employees, or their
beneficiaries, upon retirement, death or disability based on their final average
compensation over the highest consecutive five years. D&PL's funding policy is
to make contributions to the Plan that are at least equal to the minimum amounts
required to be funded in accordance with the provisions of ERISA. D&PL expects
to contribute $2 million to the Plan in 2006.
Effective January 1992, D&PL adopted a Supplemental Executive Retirement Plan
(the "SERP"), which will pay supplemental pension benefits to certain employees
whose benefits from the Plan were decreased as a result of certain changes made
to the Plan. The benefits from the SERP will be paid in addition to any benefits
the participants may receive under the Plan and will be paid from Company
assets, not Plan assets. D&PL does not expect to contribute to the SERP in 2006.
The measurement of Plan and SERP assets and obligations was performed as of June
30. The following table provides a reconciliation of the changes in the Plan's
and SERP's benefit obligations and fair value of assets over the two-year period
ended August 31, 2005, and a statement of the funded status as of August 31,
2005 and 2004.
Plan SERP
-------------------------------------- ---------------------------------------
2005 2004 2005 2004
----------------- ----------------- ------------------ ------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at beginning of year $ 17,866,000 $ 16,848,000 $ 607,000 $ 616,000
Service cost 853,000 832,000 - 9,000
Interest cost 1,094,000 989,000 36,000 35,000
Actuarial loss (gain) 3,142,000 (121,000) 39,000 (4,000)
Benefits paid (691,000) (682,000) (49,000) (49,000)
----------------- ----------------- ------------------ ------------------
Benefit obligation at end of year $ 22,264,000 $ 17,866,000 $ 633,000 $ 607,000
================= ================= ================== ==================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 13,215,000 $ 10,188,000 $ 339,000 $ 362,000
Actual return on plan assets 356,000 1,101,000 10,000 27,000
Company contributions 1,500,000 2,700,000 - -
Benefits paid (691,000) (682,000) (49,000) (49,000)
Expenses (87,000) (92,000) (1,000) (1,000)
----------------- ----------------- ------------------ ------------------
Fair value of plan assets at end of year $ 14,293,000 $ 13,215,000 $ 299,000 $ 339,000
================= ================= ================== ==================
Funded status $ (7,971,000) (4,651,000) (334,000) (268,000)
Unrecognized prior service cost 15,000 36,000 - -
Unrecognized net loss 9,354,000 5,781,000 56,000 -
----------------- ----------------- ------------------ ------------------
Prepaid (accrued) pension cost $ 1,398,000 $ 1,166,000 $ (278,000) $ (268,000)
================= ================= ================== ==================
Plan SERP
-------------------------------------- ---------------------------------------
2005 2004 2005 2004
----------------- ----------------- ------------------ ------------------
AMOUNTS REFLECTED IN THE BALANCE SHEET AT
AUGUST 31:
Prepaid (accrued) benefit cost $ 1,398,000 $ 1,166,000 $ (278,000) $ (268,000)
Minimum pension liability (7,104,000) (3,809,000) (56,000) -
Accumulated other comprehensive loss 7,089,000 3,773,000 56,000 -
Intangible asset 15,000 36,000 - -
----------------- ----------------- ------------------ ------------------
$ 1,398,000 $ 1,166,000 $ (278,000) $ (268,000)
================= ================= ================== ==================
The accumulated benefit obligation for the Plan was $19,999,000 and $15,858,000
as of August 31, 2005 and 2004, respectively. The accumulated benefit obligation
for the SERP was $633,000 and $607,000 as of August 31, 2005 and 2004,
respectively.
Periodic Pension Expense:
Plan SERP
----------------------------------------- -----------------------------------------
2005 2004 2003 2005 2004 2003
------------ ------------ ------------- ------------ ------------- ------------
Service cost $ 853,000 $ 832,000 $ 638,000 $ - $ 9,000 $ 8,000
Interest cost on projected
benefit obligation 1,094,000 989,000 915,000 36,000 35,000 38,000
Expected return on assets (1,088,000) (921,000) (687,000) (26,000) (28,000) (32,000)
Recognized loss (gain) 406,000 472,000 263,000 (2,000) 50,000 186,000
Amortization of prior
service cost 3,000 3,000 3,000 - - -
------------ ------------ ------------- ------------ ------------- ------------
Net periodic pension
expense $ 1,268,000 $ 1,375,000 $ 1,132,000 $ 8,000 $ 66,000 $ 200,000
============ ============ ============= ============ ============= ============
Company contributions $ 1,500,000 $ 2,700,000 $ 1,500,000 $ - $ - $ -
============ ============ ============= ============ ============= ============
Plan SERP
-------------------------------------- ---------------------------------------
2005 2004 2005 2004
----------------- ------------------ ------------------ ------------------
Weighted-average assumptions used to determine
benefit obligations at August 31:
Discount rate 5.25% 6.25% 5.25% 6.25%
Rate of compensation increases 3.50% 4.00% 3.50% 4.00%
Weighted-average assumptions used to determine
net periodic benefit cost for years ended
August 31:
Discount rate 6.25% 6.00% 6.25% 6.00%
Expected long-term return on plan assets 8.50% 8.50% 8.50% 8.50%
Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
The expected long-term rate of return assumptions for each asset class are
selected based on historical relationships between the assets classes and the
economic and capital market environments updated for current conditions.
D&PL's Plan and SERP asset allocations as of the measurement dates of June 30,
2005 and 2004 are as follows:
Plan SERP
-------------------------------------- ---------------------------------------
2005 2004 2005 2004
----------------- ----------------- ------------------ ------------------
Asset Category
Common stocks 70% 70% 73% 72%
Preferred stocks 15% 18% 26% 27%
Temporary investments 15% 12% 1% 1%
----------------- ----------------- ------------------ ------------------
Total 100% 100% 100% 100%
================= ================= ================== ==================
The Plan and SERP plan assets are managed by an independent portfolio manager as
balanced accounts with assets invested in fixed income securities (including
preferred stocks, corporate bonds and debentures) and equities (including common
stocks). The target range for asset allocation is 20% to 40% for fixed income
securities and 60% to 80% for equities.
A primary risk control is the limiting of any one equity position to no more
than 8% of the value of the equity portion of the portfolio. No derivatives are
used in portfolio construction. No Plan or SERP assets were invested in D&PL
common stock at June 30, 2005 or 2004.
At August 31, 2005, total future Plan and SERP benefits are estimated as
follows:
Plan SERP
----------------- -----------------
2006 $ 769,000 $ 63,000
2007 782,000 63,000
2008 827,000 63,000
2009 892,000 63,000
2010 972,000 63,000
Years 2011-2015 5,388,000 314,000
Defined Contribution Plan
D&PL sponsors a defined contribution plan under Section 401(k) of the Internal
Revenue Code which covers substantially all full-time employees of D&PL. D&PL,
at its option, may elect to make matching contributions to the Plan. No matching
contributions were made in 2005, 2004 or 2003.
12. MAJOR CUSTOMERS
In fiscal 2005, 2004 and 2003, seed sales to each of three customers and the
related licensing fees ultimately billed to farmers for sales made by these
customers for transgenic products comprised more than 10% of total sales and
licensing fees. The table below presents the approximate amount of annual sales
and licensing fees to each of the customers. These amounts were reported in
D&PL's domestic segment.
Customer 2005 2004 2003
--------------- ------------------ ------------------- -------------------
A $41,245,000 $38,820,000 $32,275,000
B 77,865,000 66,156,000 57,580,000
C 69,306,000 55,388,000 55,438,000
13. BUSINESS SEGMENT INFORMATION
D&PL is in a single line of business and operates in two business segments,
domestic and international. D&PL's reportable segments offer similar products;
however, the business units are managed separately due to the geographic
dispersion of their operations. D&PL breeds, produces, conditions, and markets
proprietary varieties of cotton and soybean planting seed in the United States.
The international segment offers cottonseed in several foreign countries through
both export sales and in-country operations. D&PL develops its proprietary seed
products through research and development efforts in the United States and
certain foreign countries.
D&PL's chief operating decision maker utilizes revenue information in assessing
performance and making overall operating decisions and resource allocations.
Profit and loss information is reported by segment to the chief operating
decision maker and D&PL's Board of Directors. The accounting policies of the
segments are substantially the same as those described in the summary of
significant accounting policies.
Information about D&PL's segments for the years ended August 31, is as follows
(in thousands):
2005 2004 2003
--------------- --------------- ---------------
Net sales and licensing fees
Domestic $ 325,621 $ 276,410 $ 255,133
International 40,464 36,355 28,666
--------------- --------------- ---------------
$ 366,085 $ 312,765 $ 283,799
=============== =============== ===============
Net sales and licensing fees
Cottonseed $ 342,918 $ 282,233 $ 257,158
Soybean seed 21,051 26,951 21,670
Other 2,116 3,581 4,971
--------------- --------------- ---------------
$ 366,085 $ 312,765 $ 283,799
=============== =============== ===============
Operating income
Domestic $ 64,786 $ 17,199 $ 55,170
International 6,929 4,361 1,537
--------------- --------------- ---------------
$ 71,715 $ 21,560 $ 56,707
=============== =============== ===============
Capital expenditures
Domestic $ 4,200 $ 4,240 $ 5,613
International 2,469 1,809 2,685
--------------- --------------- ---------------
$ 6,669 $ 6,049 $ 8,298
=============== =============== ===============
Depreciation and amortization
Domestic $ 6,836 $ 6,762 $ 6,559
International 1,825 1,602 1,200
--------------- --------------- ---------------
$ 8,661 $ 8,364 $ 7,759
=============== =============== ===============
Information about the financial position of D&PL's segments as of August 31, is
as follows (in thousands):
2005 2004
--------------- ---------------
Long-term assets
Domestic $ 65,898 $ 65,210
International 16,607 16,338
--------------- ---------------
$ 82,505 $ 81,548
=============== ===============
Total assets
Domestic $ 408,784 $ 428,444
International 30,400 28,579
--------------- ---------------
$ 439,184 $ 457,023
=============== ===============
14. RELATED PARTY TRANSACTIONS
The chairman of the Board of Directors of D&PL is also a director for Stephens
Group, Inc. In October 2003, he retired as an officer of Stephens Group, Inc.
and as a director and officer for Stephens, Inc., a full service investment
bank; however, he remains a consultant and an employee of these companies.
Stephens Group, Inc. and Stephens, Inc. are stockholders of D&PL. During 2004,
D&PL paid consulting fees to Stephens, Inc. of approximately $313,000 for the
evaluation of certain technology transactions.
During 2005, 2004 and 2003, a partner of a law firm that represents D&PL was
also a stockholder and D&PL's corporate secretary. D&PL paid legal fees to this
firm of approximately $962,000, $929,000, and $633,000 in 2005, 2004 and 2003,
respectively.
During 2005, 2004 and 2003, DeltaMax paid Temasek Life Science Laboratory
("TLL") approximately $1,465,000, $1,118,000 and $811,000, respectively, for
research activities TLL conducted for DeltaMax. TLL is a related party of
Temasek Capital and Temasek Holdings. Dr. Chua, a member of the Board of
Directors of D&PL, was the Chief Scientific Advisor of Temasek Capital from
April 2001 to March 2003 and was appointed to be Corporate Advisor to Temasek
Holdings in April 2003 through March 2006, and has advised TLL since April 2004.
Dr. Chua has been a paid consultant to Pioneer Hi-Bred International, Inc., a
DuPont subsidiary, for several years and continues in this capacity. In July
2004, DuPont acquired Verdia, Inc., which owns 50% of DeltaMax (see Note 5).
15. DERIVATIVE FINANCIAL INSTRUMENTS
Accumulated other comprehensive loss includes the following related to the
Company's soybean hedging program for the years ended August 31, 2005 and 2004
(in thousands):
2005 2004
-------------- --------------
Deferred net (loss) gain, beginning of year $ (134) $ 262
Net (losses) gains on hedging instruments
arising during the year (116) 60
Reclassification adjustment of losses(gains)
on hedging instruments to earnings 474 (456)
-------------- --------------
Net change in accumulated other comprehensive
loss 358 (396)
-------------- --------------
Deferred net gain (loss), end of year $ 224 $ (134)
============== ==============
The deferred net gain of $224,000 included in accumulated other comprehensive
loss at August 31, 2005, consists of net realized gains of $234,000 and net
unrealized losses of $10,000, 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 years ended August 31, 2005 and August 31, 2004, D&PL recorded no gains
or losses in earnings as a result of hedge ineffectiveness or discontinuance of
cash flow hedges.
16. IN-PROCESS RESEARCH AND DEVELOPMENT
In August 2004, D&PL entered into an acquisition agreement with Syngenta to
purchase global licenses to develop and commercialize Syngenta's insect
resistance technology in cottonseed. In addition, D&PL purchased licenses to a
wide range of other Syngenta enabling technologies that may be useful in
developing new products for use in cottonseed and soybean seed. In return for
the licenses, D&PL is to pay Syngenta approximately $46.8 million in
installments due primarily through the first quarter of 2008. Under the
acquisition agreement, D&PL paid Syngenta $14.1 million at closing in 2004 and
paid Syngenta $5.8 million during 2005. D&PL is further required to make future
payments of $10.15 million in 2006, $5.95 million in 2007, and $1.6 million in
2008. Of the $46.8 million purchase price, contingent payments of $1.6 million
in 2008, $3.1 million in 2009, $3.0 million in 2010, and $1.5 million in 2011
may also have to be made under the agreements.
At the purchase date, an amount equal to the present value of the payments
required to be made was capitalized as an intangible asset of $36,225,000, and
then immediately expensed in the 2004 Consolidated Statement of Income, as the
technologies to which D&PL purchased licenses were in-process research and
development (IPR&D) projects that had not yet reached technological feasibility
and had no alternative future use. Payments to be made after the first quarter
of 2008 are contingent on certain events occurring, and thus were not included
in the amount capitalized and then written off as IPR&D. Related transaction
costs of approximately $2,307,000 primarily related to professional fees are
also included in the caption "In-process research and development and related
transaction costs" in the Consolidated Statement of Income.
The present value of the amounts to be paid through the first quarter of 2008
was computed based on discount rates that approximated borrowing rates that D&PL
would incur on borrowings with similar maturities as the payments required to be
made. Accordingly, the discount rate used for the payments to be made one, two
and three and one-half years after the purchase date was 3.28%, 3.84% and 4.25%,
respectively. The amount due to Syngenta within the next twelve months is
reported in the Consolidated Balance Sheet as "Current Maturities of Long-Term
Debt" under Current Liabilities. The balance of the remaining payments due
through the first quarter of 2008 is reported as "Long-Term Debt."
17. COMMITMENTS AND CONTINGENCIES
Product Liability Claims
D&PL is named as a defendant in various lawsuits that allege, among other
1
things, that certain of D&PL's products (including those containing Monsanto's
technology) did not perform as the farmer had anticipated or expected. In some
of these cases, Monsanto and/or the dealer or distributor who sold the seed are
also named as defendants. In all cases where the seed sold contained either or
both of Monsanto's Bollgard and/or Roundup Ready gene technologies, and where
the farmer alleged a failure of one or more of those technologies, D&PL has
tendered the defense of the case to Monsanto and requested indemnity. Pursuant
to the terms of the February 2, 1996 Bollgard Gene License and Seed Services
Agreement (the "Bollgard Agreement") and the February 2, 1996 Roundup Ready Gene
License and Seed Services Agreement (the "Roundup Ready Agreement") (both as
amended December 1999, January 2000 and March 2003 and the Roundup Ready
Agreement as additionally amended July 1996), D&PL has a right to be
contractually indemnified by Monsanto against all claims arising out of the
failure of Monsanto's gene technology. Pharmacia remains liable for Monsanto's
performance under these indemnity agreements. Some of the product liability
lawsuits contain varietal claims which are aimed solely at D&PL. D&PL does not
have a right to indemnification from Monsanto for any claims involving varietal
characteristics separate from or in addition to the failure of the Monsanto
technology. D&PL believes that the resolution of these matters will not have a
material impact on the consolidated financial statements. D&PL intends to
vigorously defend itself in these matters.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II(R) cottonseed infringes Bayer's Australian patent
that claims an alleged invention entitled "Prevention of Bt Resistance
Development." The suit seeks an injunction, damages and other relief against
Deltapine Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings. Due to the status of this
matter, management is unable to determine the impact of this matter on the
consolidated financial statements.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners, a partnership of D&PL (90%) and Monsanto
(10%), pertaining to matters under the Bollgard and Roundup Ready Licenses for
the United States and matters under license agreements for Argentina and the
Republic of South Africa. In August 2003, D&PL and D&M Partners responded to
Monsanto's positions on each issue and notified Monsanto of additional disputes,
each concerning Monsanto's compliance with its obligations under the Bollgard
and Roundup Ready Licenses for the United States. In accordance with the dispute
resolution provisions of the subject agreements, the issues raised in Monsanto,
D&PL and D&M Partners' notices were submitted to a panel of senior executives
(the "Executive Panel"). Monsanto subsequently withdrew from the Executive Panel
the issue involving the license agreements for the Republic of South Africa and
submitted to the Executive Panel one additional issue of interpretation of the
Bollgard and Roundup Ready Licenses for the United States. Issues arising from
operations in Argentina and issues involving technology fees and interest have
been settled and are no longer in dispute. On May 20, 2004, Monsanto submitted
to arbitration before the American Arbitration Association two unresolved
issues: whether D&M Partners has paid Monsanto all royalties due and whether
D&PL has made unauthorized transfers of materials containing Monsanto
technology. In this arbitration proceeding, Monsanto seeks an adjudication of
its alleged right to terminate the Bollgard and Roundup Ready Licenses, to
dissolve D&M Partners, to obtain an accounting and to receive monetary damages
and a return or destruction of materials containing Monsanto technologies. D&PL
denies the claims asserted by Monsanto in the arbitration filing and has filed
appropriate responses to Monsanto's claims and filed three counterclaims based
on the issues submitted by D&PL to the Executive Panel. The parties are
------------------------
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".
currently conducting discovery. The Arbitration Panel has set an August 2006
final hearing date. On November 8, 2004, Monsanto submitted one new claim
allegedly involving a dispute under the license agreements to the Executive
Panel. This issue has been resolved by the Executive Panel. On March 31, 2005,
D&PL submitted an issue involving an international license under the 1996 Option
Agreement between Monsanto and D&PL for resolution by the Executive Panel. The
Executive Panel has that claim under consideration. D&PL is committed to
participating in good faith resolution of the issues in dispute through
arbitration, or through the Executive Panel, as applicable. Due to the status of
this matter, management is unable to determine the impact of this matter on the
consolidated financial statements.
In December 1999, Mycogen Plant Science, Inc. ("Mycogen") filed a suit in the
Federal Court of Australia alleging that Monsanto Australia Ltd., Monsanto's
wholly-owned Australian subsidiary, and Deltapine Australia have been infringing
two of Mycogen's Australian patents by making, selling, and licensing cotton
planting seed expressing insect resistance. The suit seeks injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. Trial of this matter commenced on March 7, 2005,
and concluded on April 6, 2005. D&PL is awaiting a decision from the Court.
Consistent with its commitments, Monsanto has agreed to defend D&PL in this suit
and to indemnify D&PL against damages, if any are awarded. Monsanto is providing
separate defense counsel for D&PL. D&PL is assisting Monsanto to the extent
reasonably necessary. Due to the status of this matter, management is unable to
determine the impact of this matter on the consolidated financial statements.
A corporation owned by the son of D&PL's former Guatemalan distributor sued D&PL
in 1989 asserting that D&PL violated an agreement with it by granting to another
entity an exclusive license in certain areas of Central America and southern
Mexico. The suit seeks damages of 5,292,459 Guatemalan quetzales (approximately
$696,329 at October 31, 2005 exchange rates) and an injunction preventing D&PL
from distributing seed through any other licensee in that region. The Guatemalan
court, where this action is proceeding, has twice declined to approve the
injunction sought. D&PL continues to make available seed for sale in Central
America and Mexico. D&PL believes that the resolution of this matter will not
have a material impact on the consolidated financial statements.
D&PL vs. Monsanto Company and Pharmacia Corporation
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
effectively terminating Monsanto's efforts to gain government approval of the
merger of Monsanto with D&PL under the May 8, 1998 Merger Agreement. On December
30, 1999, D&PL filed suit in the First Judicial District of Bolivar County,
Mississippi, seeking, among other things, the payment of the $81 million
termination fee due pursuant to the Merger Agreement, compensatory damages and
punitive damages. On January 2, 2000, D&PL and Monsanto reached an agreement
whereby D&PL would withdraw the suit, without prejudice, for the purpose of
negotiating a settlement of D&PL's claims, and Monsanto would immediately pay
the $81 million. On January 3, 2000, Monsanto paid to D&PL the termination fee
of $81 million as required by the Merger Agreement. On January 18, 2000, after
unsuccessful negotiations, D&PL re-filed its suit. D&PL seeks in excess of $1
billion in compensatory and $1 billion in punitive damages for breach of the
Merger Agreement between the parties.
On September 12, 2003, Monsanto amended its answer to include four counterclaims
against D&PL. Monsanto is seeking unspecified damages for its counterclaims,
including the $81 million paid by Monsanto to D&PL as a termination fee and
related expenses. D&PL answered the counterclaims, denying all liability, and
D&PL intends to vigorously defend itself against these counterclaims. On
December 21, 2004, Monsanto filed a motion to amend its answer to withdraw two
of its four counterclaims. On February 17, 2005, D&PL filed a motion with the
trial court to amend its complaint to add a claim against Monsanto for
fraudulently inducing D&PL to extend the deadline to complete the merger with
Monsanto. The Mississippi Supreme Court has stayed the proceedings in this case
pending the resolution of two interlocutory appeals filed by D&PL. Due to the
status of this matter, management is unable to determine the impact of this
matter on the consolidated financial statements.
18. STOCKHOLDERS' EQUITY
Preferred Stock
The Board of Directors of D&PL is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue up to an
aggregate of 2,000,000 shares of Preferred Stock, in one or more series, and to
determine or alter the designations, preferences, rights and any qualifications,
limitations or restrictions on the shares of each such series thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series.
In August 1996, the Board of Directors adopted a Stockholder Rights Plan
("Rights Plan") and declared a dividend of one preferred stock purchase right
("right") for each outstanding share of D&PL's Common Stock. Similar rights have
been, and generally will be, issued in respect of Common Stock subsequently
issued. Each right becomes exercisable, upon the occurrence of certain events,
for one one-hundredth of a share of Series A Junior Participating Preferred
Stock, $0.10 par value, at a purchase price of $175 per one one-hundredth of a
Preferred Share, subject to adjustment. In the event that D&PL is acquired in a
merger or other business combination transaction not approved by the Board of
Directors, each holder of a right shall have the right to receive that number of
shares of common stock of the surviving company which would have a market value
of two times the exercise price of the right. Under the Rights Plan, 456,989
shares of Series A Junior Participating Preferred Stock have been reserved. The
rights currently are not exercisable and will be exercisable only if a person or
group acquires beneficial ownership of 15% or more of D&PL's outstanding shares
of Common Stock. The rights, which expire on August 30, 2006, are redeemable in
whole, but not in part, at D&PL's option at any time for a price of $0.01 per
right.
D&PL issued 1,066,667 shares (after effect of stock splits) of Series M
Convertible Non-Voting Preferred Stock, as consideration for the purchase in
1996 of Hartz Cotton, Inc. from Monsanto. The holders of Series M Preferred
Stock are entitled to receive dividends at the same rate per share as is paid
from time to time on each share of the Common Stock of D&PL, and no more, when
and as declared by the Board of Directors. In the event of any liquidation,
dissolution or winding up of D&PL, either voluntary or involuntary, the holders
of Series M Preferred Stock shall be entitled to receive, prior to and in
preference to any distribution to holders of Common Stock or any other class of
security of D&PL, $13.936 per share of Series M Preferred Stock. The Series M
Preferred Stock became convertible on February 2, 2003, the seventh anniversary
of the date on which the Series M Preferred Stock was issued.
Long Term Incentive Plans
The 1993 Stock Option Plan authorized the issuance of options to purchase up to
2,560,000 shares (after effect of all stock splits) of Common Stock at an option
price not less than the market price on the date of grant.
The 1995 Long-Term Incentive Plan, as amended and restated in March 2000, (the
"LTIP") allows for the awarding of stock options to officers, key employees and
directors. The amended and restated 1995 plan eliminates the ability of the
Board of Directors to award stock appreciation rights, restricted shares of
common stock and performance unit credits. Under the LTIP, options to purchase
5,120,000 shares (after effect of stock splits) of Common Stock of D&PL were
available for grant. Shares subject to options and awards which expire
unexercised are available for new option grants and awards under the LTIP. New
members of the Board of Directors receive automatic grants of options to
purchase 62,222 shares upon being named to the Board and each director is given
an additional annual grant of options to purchase 2,666 shares for each of the
second through sixth year each director serves as such (which grants began in
1998). At the March 30, 2000 Annual Meeting, the Board of Directors agreed to
grant options to each Director for 80,000 shares of D&PL Common Stock. Such
options are exercisable ratably over five years commencing after one year from
the date of grant.
The 2005 Omnibus Stock Plan ("2005 Stock Plan"), approved by the shareholders in
January 2005, provides the grant of (a) incentive stock options as defined in
the Internal Revenue Code of 1986, as amended, (b) non-qualified stock options,
(c) restricted stock, and (d) restricted stock units to D&PL's employees,
independent contractors and members of the Board of Directors for the purpose of
encouraging share ownership of D&PL. Up to 4,500,000 shares shall be available
for grants of awards under the Plan. The maximum number of shares which may be
issued for awards of restricted stock and restricted stock units is 2,100,000
shares and the maximum for options is 2,400,000. The Compensation Committee of
the Board of Directors administers the Plan and has sole discretion regarding
the exercisability of the option grants. Any lapsed awards shall again be
available under this plan.
During 2005, approximately 1.1 million stock options were granted under the LTIP
and the 2005 Stock Plan, most of which were granted at exercise prices above the
fair market value of D&PL Common Stock at the time of grant. These options were
all vested as of August 31, 2005.
Additional information regarding stock options granted and outstanding is
summarized below:
Number of
Shares Price Range
------------- ----------- ----------
Outstanding at August 31, 2002 4,037,819 $ 4.67 $ 47.31
Granted 258,554 18.28 23.99
Exercised (213,545) 4.67 24.25
Lapsed or canceled (98,846) 17.85 41.69
------------- ----------- ----------
Outstanding at August 31, 2003 3,983,982 4.67 47.31
Granted 35,332 22.61 25.50
Exercised (637,704) 4.67 22.36
Lapsed or canceled (51,977) 4.67 22.67
------------- ----------- ----------
Outstanding at August 31, 2004 3,329,633 10.69 47.31
Granted 1,170,548 26.02 30.06
Exercised (766,109) 10.69 26.82
Lapsed or canceled (29,890) 17.78 26.82
------------- ----------- ----------
Outstanding at August 31, 2005 3,704,182 $ 10.69 $ 47.31
============= =========== ==========
The weighted average fair values of options granted in 2005, 2004 and 2003 were
$4.64, $6.14, and $6.41 per share, respectively. The fair value for these
options was estimated at the date of grant, using a Black-Scholes Option Pricing
Model with the following assumptions:
2005 2004 2003
-------------- --------------- ---------------
Expected dividend yield 1.48% 1.00% 1.00%
Expected option lives 4 years 8 years 8 years
Expected volatility 19.81% 16.01% 24.99%
Risk-free interest rates 3.96% 3.82% 3.07%
The following table summarizes certain information about outstanding and
exercisable stock options at August 31, 2005:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Exercise Price Contractual Life Exercise Exercise
Range Number in Years Price Number Price
--------------------- ------------- ------------------- ------------- -------------- -------------
$10.69 to 19.99 1,646,274 5.2 $ 18.95 1,309,339 $ 19.06
$20.00 to 29.99 1,771,791 4.9 25.95 1,631,552 26.00
$30.00 to 39.99 284,117 5.5 31.74 284,117 31.74
$40.00 to 47.31 2,000 2.7 47.31 2,000 47.31
------------- --------------
3,704,182 5.1 23.30 3,227,008 23.70
============= ==============
On May 18, 2005, the Company issued approximately 145,000 shares of Restricted
Stock to its employees under the provisions of the 2005 Stock Plan. Pursuant to
the 2005 Stock Plan, Restricted Stock is a Stock Award under which the shares
are subject to forfeiture should the participant not be employed by the Company
on the date or dates specified in the Stock Award or should the performance
goals, if any, specified in the Stock Award not be met. The Stock Award for this
particular issuance did not contain any performance goals. Ownership of these
instruments vest to the holders over a three-year period, as follows: 40% on May
19, 2006; 30% on May 18, 2007; and 30% on May 18, 2008.
The Company also issued 24,000 Restricted Stock Units (RSU's) to its
non-employee directors under the provisions of the 2005 Stock Plan. Pursuant to
the 2005 Stock Plan, RSU means a Stock Award subject to a period or periods of
time after which the participant will receive shares if the conditions contained
in such award have been met. This particular issuance of RSU's contained no
conditions other than the passage of time. The RSU's issued vest on the same
schedule as the Restricted Stock discussed above.
Deferred compensation expense of approximately $4.4 million related to the
Restricted Stock and RSU's will be recognized over the three-year vesting period
based on the percentage of the units vesting in each respective year. The
deferred compensation expense was calculated based on the market price of the
Company's common stock on the date of grant, which was $26.31. For the year
ended August 31, 2005, the Company recognized approximately $508,000 of
compensation expense related to these instruments.
Treasury Stock
In February 2000, the Board of Directors authorized a program for the repurchase
of up to $50 million of D&PL's common stock. The shares repurchased under this
program were used to provide for option exercises, the potential conversion of
D&PL's Series M Convertible Non-Voting Preferred shares and for other general
corporate purposes. At August 31, 2005, D&PL had repurchased 2,229,900 shares at
an aggregate purchase price of approximately $47,505,000 under this program.
This repurchase plan was terminated and replaced by the June 2005 plan discussed
below.
On May 24, 2005, D&PL completed the purchase of 2,374,940 shares of its common
stock pursuant to a modified "Dutch auction" tender offer that was announced on
April 20, 2005, under a new plan separately approved by the Board of Directors.
The shares were purchased for $27.00 per share for an aggregate purchase price
of $64,123,380. The Company also incurred associated expenses of approximately
$675,000 in connection with the acquisition of these shares (primarily related
to legal and advisory services) that have been recorded as a component of
treasury stock.
On June 30, 2005, D&PL's Board of Directors authorized a new share repurchase
program to buy up to an additional $50 million of the Company's common stock.
This program replaces the plan established in February 2000. At August 31, 2005,
D&PL had repurchased 110,000 shares at an aggregate purchase price of
approximately $2,807,000 under this plan.
Earnings Per Share
Dilutive common share equivalents consist of D&PL's Series M Convertible
Non-Voting Preferred shares, the outstanding options to purchase D&PL's common
stock that have been issued under the 1993 Stock Option Plan, the 1995 Long-Term
Incentive Plan and the 2005 Omnibus Stock Plan and the outstanding Restricted
Stock and Restricted Stock Units which have been issued under the 2005 Omnibus
Stock Plan. Approximately 599,000, 551,000 and 1,117,000 outstanding common
stock options were not included in the computation of diluted earnings per share
for the years ended August 31, 2005, 2004 and 2003, respectively, because the
effect of their exercise was not dilutive based on the average market price of
D&PL's common stock for each respective reporting period. For the year ended
August 31, 2005, the Restricted Stock and Restricted Stock Units were not
included in the computation of diluted earnings per share as they were
anti-dilutive in the period presented. The number of dilutive common share
equivalents issued in the current year to include or exclude in the computation
of diluted earnings per share is calculated based on the length of time they
have been outstanding. The excluded options expire at various dates from 2007 to
2015.
The table below reconciles the basic and diluted per share computations:
For the Years Ended August 31,
-------------------------------
2005 2004 2003
---------------- --------------- -------------
Income (in thousands):
Net income $ 42,557 $ 5,316 $ 27,805
Less: Preferred stock dividends (544) (491) (288)
---------------- --------------- -------------
Net income for basic EPS 42,013 4,825 27,517
Effect of Dilutive Securities:
Convertible Preferred Stock Dividends 544 491 288
---------------- --------------- -------------
Net income available to common
stockholders plus assumed conversions - for
diluted EPS $ 42,557 $ 5,316 $ 27,805
================ =============== =============
Shares (in thousands):
Basic EPS shares 37,958 38,250 38,113
Effect of Dilutive Securities:
Options to purchase common stock 345 353 414
Convertible preferred stock 1,067 1,067 1,067
---------------- --------------- -------------
Diluted EPS shares 39,370 39,670 39,594
================ =============== =============
Per Share Amounts:
Basic $ 1.11 $ 0.13 $ 0.72
================ =============== =============
Diluted $ 1.08 $ 0.13 $ 0.70
================ =============== =============
Shares Outstanding
Additional information regarding shares outstanding is summarized below:
Common Shares Number of
Shares
--------------
Outstanding at August 31, 2002 38,204,405
Exercises of stock options 213,545
Purchases of common stock (310,100)
--------------
Outstanding at August 31, 2003 38,107,850
Exercises of stock options 637,704
Purchases of common stock (250,200)
--------------
Outstanding at August 31, 2004 38,495,354
Exercises of stock options 766,109
Purchases of common stock (3,161,640)
--------------
Outstanding at August 31, 2005 36,099,823
==============
19. UNAUDITED QUARTERLY FINANCIAL DATA
All of D&PL's domestic seed products (including those containing Bollgard,
Bollgard II and Roundup Ready technologies) are subject to return and credit
risks, the effects of which vary from year to year. The annual level of returns
and, ultimately, net sales and net income, are influenced by various factors,
principally commodity prices and weather conditions occurring in the spring
planting season (during D&PL's third and fourth fiscal quarters). D&PL provides
for estimated returns as sales occur. To the extent actual returns differ from
estimates, adjustments to D&PL's operating results are recorded when such
differences become known, typically in D&PL's fourth quarter. All significant
returns occur or are accounted for by fiscal year end. D&PL also offers various
sales incentive programs for seed and participate in such programs related to
the Bollgard, Bollgard II and Roundup Ready technology fees offered by Monsanto.
Generally, under these programs, if a farmer plants his seed and the crop is
lost (usually due to inclement weather) by a certain date, a portion of the
price of the seed and technology fees are forgiven or rebated to the farmer. The
amount of the refund and the impact to D&PL depends on a number of factors
including whether the farmer can replant the crop that was destroyed. D&PL
records monthly estimates to account for these programs. The majority of program
rebates occur during the second, third and fourth quarters. Essentially all
material claims under these programs have occurred or are accounted for by
fiscal year end. Generally, international sales are not subject to return. A
substantial portion of Company sales is concentrated in the second and third
fiscal quarters. As a result, D&PL generally expects to incur losses in the
first and fourth quarters. Management believes that such seasonality is common
throughout the seed industry.
Summarized unaudited quarterly financial data is as follows: (In thousands,
except per share data)
----------------------------------------------------------------------------------------------------------
Fiscal 2005: Three months ended
November 30 February 28 May 31 August 31
----------------------------------------------------------------------------------------------------------
Net sales and licensing fees $ 17,454 $ 119,859 $ 203,320 $ 25,452
Gross profit 9,033 44,684 73,573 4,731
Net (loss) income applicable to
common shares (4,445) 19,032 36,156 (8,730)
Net (loss) income per share-basic (2) (0.12) 0.49 0.94 (0.24)
Weighted average number of shares used
in quarterly per share calculations-basic 38,544 38,763 38,416 36,133
Net (loss) income per share-diluted (2) (0.12) 0.48 0.91 (0.24)
Weighted average number of shares used
in quarterly per share calculations-diluted 38,544 40,276 39,839 36,133
----------------------------------------------------------------------------------------------------------
Fiscal 2004: Three months ended
November 30 February 29 May 31 August 31
----------------------------------------------------------------------------------------------------------
Net sales and licensing fees $ 13,837 $ 88,643 $ 185,649 $ 24,636
Gross profit 5,809 32,164 64,555 6,480
Net (loss) income applicable to
common shares (1) (7,085) 9,315 31,301 (28,706)
Net (loss) income per share-basic (1) (2) (0.19) 0.24 0.82 (0.75)
Weighted average number of shares used
in quarterly per share calculations-basic 38,099 38,138 38,311 38,451
Net (loss) income per share-diluted (1)(2) (0.19) 0.24 0.79 (0.75)
Weighted average number of shares used
in quarterly per share calculations-diluted 38,099 39,768 39,799 38,451
----------------------------------------------------------------------------------------------------------
Fiscal 2003: Three months ended
November 30 February 28 May 31 August 31
----------------------------------------------------------------------------------------------------------
Net sales and licensing fees $ 5,599 $ 107,519 $ 168,221 $ 2,460
Gross profit 1,311 41,842 57,841 (327)
Net (loss) income applicable to
common shares (3) (7,484) 16,068 28,401 (9,468)
Net (loss) income per share-basic (2) (3) (0.20) 0.42 0.75 (0.25)
Weighted average number of shares used
in quarterly per share calculations-basic 38,176 38,124 38,049 38,103
Net (loss) income per share-diluted (2)(3) (0.20) 0.41 0.72 (0.25)
Weighted average number of shares used
in quarterly per share calculations-diluted 38,176 39,556 39,598 38,103
----------------------------------------------------------------------------------------------------------
(1) The 2004 fourth quarter includes the effect of recording a $38.5
million charge for a write off of in-process research and development
and related transaction expenses related to our August 24, 2004
acquisition of global licenses to develop and commercialize Syngenta's
insect resistance technology in cottonseed.
(2) The sum of the quarterly net (loss) income per share amounts may
not equal the annual amount reported since per share amounts are
computed independently for each quarter, whereas annual earnings per
share are based on the annual weighted average shares deemed
outstanding during the year.
(3) The 2003 first and third quarters each include the effect of
recording a $0.5 million charge in each quarter for the closing of two
U.S. locations and reductions in the number of employees at an
international wholly-owned subsidiary and at an international joint
venture.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
We have established disclosure controls and procedures, as such term is defined
in Rule 13a - 15(e) under the Securities Exchange Act of 1934. Our disclosure
controls and procedures are designed to ensure that material information
relating to us, including our consolidated subsidiaries, is made known to our
principal executive officer and principal financial officer by others within our
organization. Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our disclosure
controls and procedures as of August 31, 2005. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of August 31, 2005, to
ensure that the information required to be disclosed by us in the reports that
we file or submit under the Securities and Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Controls.
There have not been any changes in D&PL's internal control over financial
reporting or in other factors that have materially affected, or are reasonably
likely to materially affect, D&PL's internal control over financial reporting.
(c) Management's Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a - 15(f)
under the Securities and Exchange Act of 1934. Under the supervision of and with
the participation of our management, including our principal executive officer
and principal financial officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting as of August 31, 2005, based on
the criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this evaluation, our management concluded that our internal control
over financial reporting was effective as of August 31, 2005. Our management's
assessment of the effectiveness of our internal control over financial reporting
as of August 31, 2005, has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their report which is included herein.
ITEM 9B. OTHER INFORMATION
The Board of Directors of D&PL has established January 16, 2006 as the next
Annual Meeting of Shareholders. Shareholders of record as of November 18, 2005
will be entitled to vote at that meeting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is set forth in D&PL's Proxy Statement for
the Annual Meeting of Stockholders to be held on January 16, 2006 to be filed
with the Commission pursuant to Regulation 14(a) no later than November 29, 2005
and is incorporated herein by reference.
D&PL has adopted a written code of ethics, the "Delta and Pine Land Company Code
of Business Conduct and Ethics" which is applicable to all directors, officers
and employees of D&PL, including D&PL's principal executive officer, principal
financial officer, principal accounting officer or controller and other
executive officers identified pursuant to this Item 10 who perform similar
functions (collectively, the "Selected Officers"). In accordance with the rules
and regulations of the Securities and Exchange Commission, a copy of the code
has been posted on the Company's website. The Company intends to disclose any
changes in or waivers from its code of ethics applicable to any Selected Officer
on its website at http://www.deltaandpine.com or by filing a Form 8-K.
Stockholders may obtain a copy of D&PL's Nominating/Corporate Governance
Committee Charter, Compensation Committee Charter, Audit Committee Charter,
Corporate Governance Guidelines, and Code of Business Conduct and Ethics without
charge, by contacting: R. D. Greene, Vice President - Finance and Treasurer,
Delta and Pine Land Company, One Cotton Row, Scott, Mississippi 38772, via email
at ricky.d.greene@deltaandpine.com, or by accessing our website at
www.deltaandpine.com under About D&PL - Corporate Governance.
The Annual Certification of the Company's Chief Executive Officer required to be
furnished to the New York Stock Exchange pursuant to Section 302A.12(a) of the
NYSE Listed Company Manual was previously filed at the New York Stock Exchange
on November 22, 2004.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to these items are set forth in D&PL's Proxy Statement
for the Annual Meeting of Stockholders to be held on January 16, 2006 to be
filed with the Commission pursuant to Regulation 14(a) no later than November
29, 2005 and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements - the following consolidated financial statements
of Delta and Pine Land Company and subsidiaries are submitted in
response to Part II, Item 8:
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Income - for each of the three years
in the period ended August 31, 2005
Consolidated Balance Sheets - August 31, 2005 and 2004
Consolidated Statements of Cash Flows - for each of the three
years in the period ended August 31, 2005
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income - for each of the three years in the period
ended August 31, 2005
Notes to Consolidated Financial Statements
2. Financial Statement Schedule - the following financial
statement schedule of Delta and Pine Land Company and
subsidiaries is submitted in response to Part IV, Item 15:
Report of Independent Registered Public Accounting Firm...............62
Schedule II - Consolidated Valuation and Qualifying Accounts..........63
All other schedules have been omitted as not required, not
applicable or because all the data is included in the financial
statements.
3. Exhibits
The exhibits to the Annual Report of Delta and Pine Land Company
filed herewith are listed on Page 64.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on November 14, 2005.
DELTA AND PINE LAND COMPANY
(Registrant)
/s/ Jon E. M. Jacoby November 14, 2005
---------------------------
By: Jon E. M. Jacoby, Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ W. Thomas Jagodinski President, Chief Executive November 14, 2005
-------------------------- Officer, and Director
W. Thomas Jagodinski (Principal Executive Officer)
/s/ R. D. Greene Vice President - Finance, November 14, 2005
-------------------------- Treasurer and Assistant Secretary
R. D. Greene (Principal Financial and
Accounting Officer)
/s/ F. Murray Robinson Vice Chairman and Director November 14, 2005
--------------------------
F. Murray Robinson
/s/ Stanley P. Roth Vice Chairman and Director November 14, 2005
--------------------------
Stanley P. Roth
/s/ Nam-Hai Chua Director November 14, 2005
--------------------------
Nam-Hai Chua
/s/ Joseph M. Murphy Director November 14, 2005
--------------------------
Joseph M. Murphy
/s/ Rudi E. Scheidt Director November 14, 2005
--------------------------
Rudi E. Scheidt
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Delta and Pine Land Company:
Under date of November 14, 2005, we reported on the consolidated balance sheets
of Delta and Pine Land Company and subsidiaries (the Company) as of August 31,
2005 and 2004, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended August 31, 2005, contained in the Annual
Report on Form 10-K for the year 2005. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule listed in Part IV, Item 15(a)2. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Jackson, Mississippi
November 14, 2005
SCHEDULE II
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
----------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged Balance
Beginning to Costs Charged to at End
of and Other of
Description Period Expenses Accounts Deductions Period
------------------------------------------------------------------------------------------------------------------------
Fiscal year ended August 31, 2003
Allowance for doubtful accounts $ 1,100 $ 476 $ 472(a) $ (39)(b) $ 2,009
Fiscal year ended August 31, 2004
Allowance for doubtful accounts $ 2,009 $ 263 $ -(a) $ (748)(c) $ 1,524
Fiscal year ended August 31, 2005
Allowance for doubtful accounts $ 1,524 $ 839 $ 119(a) $ (698)(d) $ 1,784
(a) Amount charged to cumulative translation adjustment for fluctuations in
non-U.S. dollar denominated reserves.
(b) Write off of uncollectible accounts, net of recoveries.
(c) Amount includes $724 related to a write-off against the allowance for
doubtful accounts of amounts previously deemed uncollectible and provided for in
prior years. In addition, certain payables of a similar amount related to this
item were also reduced in the prior years.
(d) Amount represents write-off against the allowance for doubtful accounts
deemed uncollectible and provided for in prior years.
INDEX
EXHIBITS TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED AUGUST 31, 2005
DELTA AND PINE LAND COMPANY
Exhibits (1) Description
2.01 Agreement and Plan of Merger dated as of May 8, 1998, by and between
Monsanto Company and Delta and Pine Land Company. (2)
2.02 Termination Option Agreement dated as of May 8, 1998, by and between
Monsanto, Company and Delta and Pine Land Company. (2)
3.01 Restated Certificate of Incorporation of the Registrant dated June 11,
1993.
3.02 Amended and Restated By-Laws of the Registrant dated April 26, 1993.
4.01 Certificate of Designation, Convertible Preferred Stock of Delta and
Pine Land Company. (3)
4.02 Specimen Certificate representing the Common Stock, par value $.10 per
share.
4.03 Reserved.
4.04 Rights Agreement, dated as of August 13, 1996, between Delta and Pine
Land Company and Harris Trust and Savings Bank, including the form of
Right Certificate and related form of Election to Purchase as Exhibit
A and the Summary of Rights to Purchase Preferred Shares as Exhibit B.
(4)
4.05 Amendment No. 1 to the Rights Agreement dated May 8, 1998, by and
between Delta and Pine Land Company and the Harris Trust and Savings
Bank. (2)
4.06 Amendment No. 2 to the Rights Agreement dated May 8, 1998 by and
between Delta and Pine Land Company and the Harris Trust and Savings
Bank. (14)
4.07 Certificate of Designations of the rights and privileges of the shares
of junior participating preferred stock created on August 13, 1996, to
be filed pursuant to Section 151 of the Delaware General Corporation
Law. (4)
4.08 Delta and Pine Land Company 2005 Omnibus Stock Plan. (6) (19)
10.01 Incentive Bonus Program. (1) (6)
10.02 Delta and Pine Land Company Retirement Plan as amended and restated as
of January 1, 1997 and further amended by Amendment No. 1 dated
October 23, 2002, Amendment Nos. 2 and 3 dated December 20, 2002. (15)
10.03 Supplemental Executive Retirement plan dated May 22, 1992, and
effective January 1, 1992. (1) (6)
10.04 1993 Stock Option Plan of Registrant, as adopted on June 11, 1993. (1)
(6)
10.05 Asset Purchase Agreement between Delta and Pine Land Company and
Cargill, Inc. dated May 2, 1994. (8)
10.06 Delta and Pine Land Company Savings Plan - Wells Fargo Bank Texas,
N.A. Defined Contribution Master Plan and Trust Agreement, Adoption
Agreement dated December 23, 2002, EGTRRA Amendment to the Wells Fargo
Bank Texas, N.A. Defined Contribution Master Plan and Trust Agreement
dated November 1, 2001, Post-EGTRRA Amendment to the Wells Fargo Bank
Texas, N.A. Defined Contribution Master Plan and Trust Agreement dated
September 11, 2003. (15)
10.07 Hartz Cotton Acquisition Agreement dated February 2, 1996 among
Monsanto Company ("Monsanto"), Hartz Cotton, Inc. ("Hartz Cotton"),
Delta and Pine Land Company (the "Company") and Paymaster Technology
Corp. ("PTC"). (3)
10.08 Trademark License Agreement dated February 2, 1996 between Monsanto
and D&PL. (3)
10.09 Registration Rights Agreement between D&PL and Monsanto dated February
2, 1996. (3)
10.10 Reserved.
10.11 Reserved.
10.12 Reserved.
10.13 Reserved.
10.14 Partnership Agreement dated February 2, 1996 between D&PL and
Monsanto. (3)
10.15 Marketing Services Agreement dated February 2, 1996 between D&PL,
Monsanto and D&M Partners. (3)
10.16 Bollgard Gene License and Seed Services Agreement dated February 2,
1996 between Monsanto, D&M Partners, and D&PL. (3)
10.17 Roundup Ready Gene License and Seed Services Agreement dated February
2, 1996 between Monsanto, D&M Partners and D&PL. (3)
10.18 Option Agreement dated February 2, 1996 between Monsanto and D&PL. (3)
(6)
10.19 Agreement between the D&PL Companies and the Sure Grow Companies, Sure
Grow Shareholders and Sure Grow Principals dated May 20, 1996. (9)
10.20 Amended and Restated Delta and Pine Land Company 1995 Long-Term
Incentive Plan, as adopted on February 6, 1996. (6) (15)
10.21 Amendment to Agreements dated as of December 8, 1999, by and between
Monsanto Company, Registrant, D&M Partners, a partnership of Monsanto
and D&PL, and Paymaster Technology Corp. (12)
10.22 D&M International Operating Agreement on March 10, 1995, between Delta
and Pine Land Company, through its wholly-owned subsidiary D&PL
International Technology Corp. and Monsanto Company. (13)
10.23 Bollgard II Gene License and Seed Services Agreement dated December
11, 2000. (11)
10.24 Roundup Ready Soybean License and Seed Services Agreement and the
Amended and Restated Licensee Incentive Agreement. (11)
10.25 Bollgard Gene License Agreement by and between Monsanto Company, Delta
and Pine Land Company, D&PL International Technology Corp., and D&M
International, L.L.C. and Amendment. (10)
10.26 Redemption Agreement dated as of May 28, 2002 among D&M International,
L.L.C., D&PL International Technology Corp., Pharmacia Corporation,
solely for the purposes of Section 1.2c and Articles II and III
thereof, and Monsanto Company, and, solely for the purposes of Section
3.2 thereof, Delta and Pine Land Company. (10)
10.27 Amendment to Bollgard Gene License and Seed Services Agreement of
February 2, 1996 dated March 26, 2003. (15)
10.28 Amendment to Roundup Ready Gene License and Seed Services Agreement of
February 2, 1996 dated March 26, 2003. (15)
10.29 Restated License Acquisition Agreement dated August 24, 2004 among
Syngenta Crop Protection AG and Delta and Pine Land Company. (16) (*)
10.30 Restated VIP3A Gene License Agreement dated August 24, 2004 among
Syngenta Crop Protection AG and Delta and Pine Land Company. (16) (*)
10.31 Restated Cry1Ab Gene License Agreement dated August 24, 2004 among
Syngenta Crop Protection AG and Delta and Pine Land Company. (16) (*)
10.32 Credit agreement among Delta and Pine Land Company, as Borrower,
Certain of its Subsidiaries, as Guarantors, and Bank of America, N.A.,
as Lender, dated as of April 15, 2005 and related forms of Revolving
Note dated April 15, 2005 and Autoborrow Service Agreement dated April
15, 2005. (21)
10.33 Roundup Ready Flex Gene License and Seed Services Agreement dated
December 22, 2004. (20)
10.34 Form of Restricted Stock Unit Award - Member of the Board of
Directors. (6) (22)
10.35 Form of Restricted Stock Award - Member of the Board of Directors. (6)
(22)
10.36 Form of Restricted Stock Award - Employee. (6) (22)
10.37 Form of Non-Qualified Stock Option Award. (6) (22)
10.38 Employment Agreement between Delta and Pine Land Company and W. Thomas
Jagodinski effective September 1, 1997. (6) (18)
14.00 Delta and Pine Land Company Code of Business Conduct and Ethics as
amended October 28, 2004. (17)
16.00 Letter from Arthur Andersen LLP to the Securities and Exchange
Commission dated May 14, 2002 regarding change in certifying
accountant. (5)
21.01 Subsidiaries of the Registrant. (23)
23.01 Consent of Independent Registered Public Accounting Firm. (23)
31.01 Section 302 Certification of Principal Executive Officer. (23)
31.02 Section 302 Certification of Principal Financial Officer. (23)
32.01 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350 by Principal Executive Officer. (23)
32.02 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350 by Principal Financial and Accounting Officer. (23)
-------------------------
(1) All incorporated by reference from Registration Statement on Form S-1,
File No. 33-61568, filed June 29, 1993 except as otherwise noted
herein.
(2) Incorporated by reference from Form 8-K filed May 14, 1998
(3) Incorporated by reference from Form 8-K, File No. 000-14136, filed
February 19, 1996
(4) Incorporated by reference from Form 8-A, File No. 000-21293, filed
September 3, 1996
(5) Incorporated by reference from Form 8-K filed May 17, 2002
(6) Represents management contract or compensatory plan
(7) Incorporated by reference from Form 10-Q, File No. 000-21788, filed
July 14, 1995
(8) Incorporated by reference from Form 8-K filed May 16, 1994
(9) Incorporated by reference from Form 8-K, File No. 000-21788, filed
June 4, 1996
(10) Incorporated by reference from Form 10-K filed November 25, 2002
(11) Incorporated by reference from Form 10-K filed November 29, 2001
(12) Incorporated by reference from Form 8-K filed May 18, 2000
(13) Incorporated by reference from Form 8-K filed September 14, 2000
(14) Incorporated by reference from Form 10-K filed November 24, 1998
(15) Incorporated by reference from Form 10-K filed November 26, 2003
(16) Incorporated by reference from Form 10-K filed November 15, 2004
(17) Incorporated by reference from Form 8-K filed November 1, 2004
(18) Incorporated by reference from Form 10-Q filed January 15, 1998
(19) Incorporated by reference from Form S-8 filed March 28, 2005
(20) Incorporated by reference from Form 10-Q filed April 11, 2005
(21) Incorporated by reference from Form 8-K filed April 20, 2005
(22) Incorporated by reference from Form 8-K filed May 24, 2005
(23) Filed herewith
(*) The Company has applied for and received SEC approval for confidential
treatment for portions of this agreement. Accordingly, portions thereof
have been omitted and filed separately.