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, 2004
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
------- Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number: 000-21788
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
27, 2004, as reported on the New York Stock Exchange, was approximately
$902,745,000. 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, 2004, Registrant had 38,550,251 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 11,
2005. (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. 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 that provides tolerance to
glyphosate-based herbicides, commonly referred to as Roundup Ready(R) ("Roundup
Ready") Cotton. In 1997, we commenced commercial sales in the U.S. of soybean
planting seed that contains a gene that provides tolerance to glyphosate-based
herbicides ("Roundup Ready Soybeans"). In 1998, we commenced sales of cotton
planting seed of varieties containing both the Bollgard and Roundup Ready genes.
International
-------------
During the 1980's, as a component of our long-term growth strategy, we began to
market our products, primarily cottonseed, internationally. Over a period of
years, we have strengthened and expanded our international staff in order to
support our expanding international business. In foreign countries, cotton
acreage is often planted with farmer-saved seed which has not been delinted or
treated and is of low overall quality. We believe that we have an attractive
opportunity to penetrate foreign markets because of our widely adaptable,
superior cotton varieties, technological know-how in producing and conditioning
high-quality seed and our brand name recognition. Furthermore, Monsanto's
Bollgard and Roundup Ready gene technologies (that we either have licensed or
have options to license) are effective in many countries and could bring value
to farmers.
We sell our products in foreign countries through (i) export sales to
distributors and (ii) direct in-country operations through either joint ventures
or wholly-owned subsidiaries. The method varies and evolves, depending on our
assessment of the potential size and profitability of the market, governmental
policies, currency and credit risks, sophistication of the target country's
agricultural economy, and costs (as compared to risks) of commencing physical
operations in a particular country. In 2004, the majority of international sales
came from direct in-country operations (primarily Argentina, Australia, Brazil,
China, South Africa and Turkey).
See Note 12 of the Notes to Consolidated Financial Statements in Part II, Item 8
for further details about business segments.
---------------------
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".
Joint Ventures
--------------
In March 1995, D&PL and Monsanto formed D&M International, LLC to introduce
cotton planting seed in international markets combining our acid delinting
technology and elite germplasm (cottonseed varieties) with Monsanto's Bollgard
and Roundup Ready gene technologies. In May 2002, Pharmacia activated a cross
purchase provision in the operating agreement for D&M International, LLC, and we
elected to have D&M International, LLC redeem Pharmacia's 50% interest in D&M
International, LLC. As a result of the redemption of Pharmacia's interest, we
now own all of D&M International, LLC.
In November 1995, D&M International, LLC formed a subsidiary, D&PL China Pte
Ltd. ("D&PL China"). D&PL China is 80% owned by D&M International, LLC, and 20%
owned by a Singaporean entity. In November 1996, D&PL China formed Hebei Ji Dai
Cottonseed Technology Company Ltd. ("Ji Dai") with parties in Hebei Province,
one of the major cotton producing regions in the People's Republic of China. Ji
Dai is 67% owned by D&PL China and 33% owned by Chinese parties. In June 1997,
Ji Dai commenced construction of a cottonseed conditioning and storage facility
in Shijiazhuang, Hebei, China, pursuant to the terms of the joint venture
agreement. The new facility was completed in December 1997 and seed processing
and sales of seed of D&PL cotton varieties containing Monsanto's Bollgard
technology commenced in 1998.
In December 1997, D&M International, LLC formed a joint venture with Ciagro
S.R.L. ("Ciagro"), a distributor of agricultural inputs in the Argentine cotton
region, for the production and sale of genetically improved cottonseed. CDM
Mandiyu S.R.L. ("CDM") is owned 60% by D&M International, LLC, and 40% by
Ciagro. In September 1998, CDM began construction of a cottonseed conditioning
and storage facility in Avia Terai, Chaco, Argentina. Construction was completed
in June 1999. CDM has been licensed to sell our cotton varieties containing
Monsanto's Bollgard and Roundup Ready gene technologies. Sales of Bollgard
varieties commenced in 1999 and sales of Roundup Ready varieties began in 2003.
In July 1998, D&PL China and the Anhui Provincial Seed Corporation formed a
joint venture, Anhui An Dai Cotton Seed Technology Company, Ltd. ("An Dai")
which is located in Hefei City, Anhui, China. An Dai is 49% owned by D&PL China
and 51% owned by Chinese parties. Under the terms of the joint venture
agreement, An Dai produces, conditions and sells our varieties of acid-delinted
cottonseed, which contain Monsanto's Bollgard gene. Commercial sales of our
cotton varieties containing the Bollgard gene technology began in 2000. In
January 2002, An Dai began construction of a cottonseed conditioning and storage
facility in Hefei City, Anhui, China. Construction was completed in October 2003
and the facility is now operational.
In November 1998, D&M International, LLC and Maeda Administracao e Participacoes
Ltda, an affiliate of Agropem - Agro Pecuria Maeda S.A., formed a joint venture
in Minas Gerais, Brazil. The joint venture, MDM Sementes De Algodao, Ltda.
("MDM"), produces, conditions and sells our varieties of acid-delinted cotton
planting seed. In 2000, we began selling our conventional cotton varieties. MDM
will introduce transgenic cottonseed varieties containing both Bollgard and
Roundup Ready gene technologies in the Brazilian market as soon as government
approvals are obtained. Monsanto is responsible for obtaining these government
approvals and has announced approval may not occur until 2005 or thereafter. MDM
is 51% owned by D&M International, LLC and 49% owned by Maeda Administracao e
Participacoes S/A (formerly Maeda Administracao e Participacoes Ltda).
In October 2001, we announced that we had signed Letters of Intent with two
parties in China to form two new joint ventures there, one each in Hubei and
Henan provinces. These two new potential markets contain approximately 4.5
million acres of cotton planted in 2001 which is almost 2.5 times the size of
the combined Hebei and Anhui markets. A joint venture agreement was negotiated
and agreed to with the parties in Henan province and the agreement was submitted
to the Chinese government authorities for approval. However, in April 2002,
China announced rules prohibiting new foreign investment in seed companies that
intend to sell genetically modified seed, which will restrict the ability of
non-Chinese companies, including us, from investing in such joint ventures.
However, our joint venture in Hebei province, Ji Dai, signed a distribution
agreement with a party in the Henan province and distributed seed there
beginning in fiscal 2003. We expect to continue to expand our business in China
through our existing joint ventures, Ji Dai and An Dai.
In May 2002, we established DeltaMax Cotton, LLC ("DeltaMax"), a limited
liability company jointly owned with Verdia, Inc. ("Verdia"), which was
purchased by DuPont on July 2, 2004. DeltaMax was formed to create, develop and
commercialize value-enhancing traits for the cottonseed market that will
complement and/or compete with traits available today. It is currently focusing
on glyphosate-tolerant, insect-resistance and nematode-resistance strategies for
use in cotton. Commercialization of new traits developed by this venture is not
expected until after 2010. DeltaMax will contract research and development
activities to Verdia, third parties and D&PL when appropriate, and license its
products to D&PL and potentially to others. D&PL and Verdia each own 50% of
DeltaMax.
Subsidiaries
------------
D&PL South Africa, Inc. ("D&PL South Africa"), our wholly-owned subsidiary,
through a South African branch, commercializes cottonseed varieties containing
Monsanto's Bollgard and Roundup Ready technologies in South Africa. In addition,
D&PL South Africa maintains winter nursery facilities, produces cottonseed
varieties for export to other countries and processes foundation seed grown in
that country.
D&PL Semillas Ltda., our wholly-owned subsidiary, maintains a winter nursery and
foundation seed operation in Canas, Costa Rica and has a delinting plant there
to process foundation seed for export to the United States. Multiple winter
nursery locations are used to manage seed production risks. The use of Southern
Hemisphere winter nurseries and seed production programs such as these may
accelerate the introduction of new varieties because we can raise at least two
crops per year by taking advantage of the Southern Hemisphere growing season.
Deltapine Australia Pty. Ltd., our wholly-owned Australian subsidiary, breeds,
produces, conditions and markets cotton planting seed in Australia. Certain
varieties developed in Australia are well adapted to other major cotton
producing countries and Australian-developed varieties are exported to those
areas. We sell seed of both conventional and transgenic varieties, containing
Monsanto's Bollgard II(R) and Roundup Ready technologies, in Australia.
Turk DeltaPine, Inc. ("Turk DeltaPine"), our wholly-owned subsidiary, through a
Turkish branch, produces, conditions and markets cotton planting seed in Turkey.
In addition, Turk DeltaPine produces conventional cottonseed varieties for sale
in Turkey and Europe.
In September 2004, D&PL established, through Indian nominee shareholders,
Deltapine India Seed Private Ltd. ("Deltapine India"). This company will be
wholly-owned by D&PL (by itself or through wholly-owned affiliates), pending
formal transfer of ownership from the nominee shareholders. Deltapine India was
formed with the intent to breed, test, produce, market and sell agricultural
seeds and services in India.
Employees
---------
As of October 31, 2004, we employed a total of 528 full-time employees
worldwide, excluding approximately 102 employees of joint ventures. Due to the
nature of our business, we utilize seasonal employees in our delinting plants
and our research and foundation seed programs. The maximum number of seasonal
employees approximates 175 and typically occurs in October and November of each
year. We consider our employee relations to be good.
Biotechnology
-------------
Insect Resistance for Cotton
----------------------------
Collaborative biotechnology licensing agreements, which were executed with
Monsanto in March 1992 and subsequently revised in April 1993, October 1993,
February 1996, December 1999, January 2000 and March 2003, provide for the
commercialization of Monsanto's Bollgard ("Bacillus thuringiensis" or "Bt") gene
technology in our varieties in the United States. The selected Bt gene is from a
bacterium found naturally in soil and produces proteins toxic to certain
lepidopteran larvae, the principal cotton pests in many cotton growing areas.
Monsanto created a transgenic cotton plant by inserting Bt genes into cotton
plant tissue. The resulting transgenic plant tissue is lethal to certain
lepidopteran larvae that consume it. The gene and related technology were
patented or licensed from others by Monsanto and were licensed to us for use
under the trade name Bollgard. In our primary markets, the cost of insecticides
is a major expenditure for many cotton growers. The insect resistant
capabilities of transgenic cotton containing the Bollgard gene may reduce the
amount of insecticide required to be applied by cotton growers using planting
seed containing the Bollgard gene. In October 1995, the United States
Environmental Protection Agency ("EPA") completed its initial registration of
the Bollgard gene technology, thus clearing the way for commercial sales of seed
containing the Bollgard gene. In 1996, we sold commercially for the first time
two Deltapine varieties, which contained the Bollgard gene, in accordance with
the terms of the Bollgard Gene License and Seed Services Agreement (the
"Bollgard Agreement") among D&PL, Monsanto and D&M Partners. This initial EPA
registration had been set to expire on January 1, 2001 but was updated to expire
January 1, 2002. In September 2001, the EPA renewed the registration for an
additional five years, at which time the EPA will, among other things,
reevaluate the effectiveness of the insect resistance management plan and decide
whether to convert the registration to a non-expiring (and/or unconditional)
registration.
Pursuant to the terms of the Bollgard Agreement, farmers must buy a limited use
sublicense for the technology from D&M Partners, a partnership of D&PL (90%) and
Monsanto (10%), in order to purchase seed containing the Bollgard gene
technology. Monsanto determines the licensing fee growers pay for use of
Bollgard technology. Growers may receive discounts and/or rebates of licensing
fees under certain crop destruct, crop replant and other programs. D&M Partners
contracts the billing and collection activities for Bollgard and Roundup Ready
licensing fees to Monsanto. The distributor/dealers who coordinate the farmer
licensing process receive a portion of the technology sublicensing fee,
presently approximately 15%. After the dealers and distributors are compensated,
D&M Partners pays Monsanto a royalty equal to 71% of the net sublicense fee
(technology sublicensing fees less certain distributor/dealer payments), and we
receive the remainder of net sublicense revenue for our services. The expiration
date of the Bollgard Agreement is determined by the last to expire of the patent
rights licensed under that agreement. On that basis (unless we terminate sooner,
as is permitted after October 11, 2008), the expiration date of the Bollgard
Agreement will be June 13, 2011, the date the last of the presently issued
patents will expire. This date may be extended in the event additional relevant
patents issue that have expiration dates later than June 13, 2011.
Pursuant to the Bollgard Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto must also indemnify us against (a) costs of
inventory and (b) lost profits on inventory which becomes unsaleable because of
patent infringement claims. Monsanto must defend any claims of failure of
performance of a Bollgard gene. Monsanto and D&PL share the cost of any product
performance claims in proportion to each party's share of the net sublicense
fees. The indemnity from Monsanto only covers performance claims involving
failure of performance of the Bollgard gene and not claims arising from other
causes. Pharmacia remains liable for Monsanto's performance under these defense
and indemnity agreements.
In December 2000, D&PL and Monsanto executed the Bollgard II Gene License and
Seed Services Agreement (the "Bollgard II Agreement") for Monsanto's subsequent
insect resistance product. The Bollgard II Agreement contains essentially the
same terms as the Bollgard Agreement. On December 23, 2002, Monsanto announced
that it had received U.S. regulatory clearance for Bollgard II. We have
commercialized limited quantities of our Bollgard II cotton varieties in the
U.S. beginning in fiscal 2003. The expiration date of the Bollgard II Agreement
is determined by the last to expire of the patent rights licensed under that
Agreement. On that basis (unless we terminate sooner, as is permitted after
October 11, 2008), the expiration date of the Bollgard II Agreement will be
November 4, 2018, the date the last of the presently issued patents will expire.
This date may be extended in the event additional relevant patents issue that
have expiration dates later than November 4, 2018.
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 cotton of Syngenta's VIP3A and Cry1Ab insect resistance
genes (the "VipCotTM 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 sales objectives.
Pursuant to the VipCot Gene Licenses, Syngenta is responsible for obtaining
required intellectual property rights and for defense of claims of patent
infringement. The costs of defense and indemnification are borne either by
Syngenta alone or by Syngenta and D&PL proportionately based on the nature of
the claim. D&PL is responsible for managing the defense of grower claims
alleging failure of performance of a licensed gene. Syngenta and D&PL will bear
the cost of product performance claims in proportion to each party's share of
net sublicense fees. The product performance indemnity from Syngenta only covers
claims involving failure of performance of the Syngenta insect resistance genes
and not claims arising from other causes.
In 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.
Herbicide Tolerance for Cotton
------------------------------
In February 1996, D&PL, Monsanto and D&M Partners executed the Roundup Ready
Gene License and Seed Services Agreement (the "Roundup Ready Agreement"), which
provides for the commercialization of Roundup Ready cottonseed. Pursuant to the
collaborative biotechnology licensing agreements executed in 1996 and amended in
July 1996, December 1999, January 2000 and March 2003, we have also developed
transgenic cotton varieties that are tolerant to Roundup(R), a glyphosate-based
herbicide sold by Monsanto. In 1996, such Roundup Ready plants were approved by
the Food and Drug Administration, the USDA, and the EPA. The Roundup Ready
Agreement grants a license to D&PL and certain of our affiliates the right in
the United States to sell cottonseed of our varieties that contain Monsanto's
Roundup Ready gene. The Roundup Ready gene makes cotton plants tolerant to
contact with Roundup herbicide applications made during a finite early season
growth period. Similar to the Bollgard Agreement, farmers must execute limited
use sublicenses in order to purchase seed containing the Roundup Ready gene.
Monsanto determines the licensing fee growers pay for use of Roundup Ready
technology. Growers may receive discounts and/or rebates of licensing fees under
certain crop destruct, crop replant and other programs. The distributors/dealers
who coordinate the farmer licensing process receive a portion of the technology
sublicensing fee. After the dealers and distributors are compensated, D&M
Partners pays Monsanto a royalty equal to 70% of the net sublicense fee
(technology sublicensing fees less certain distributor/dealer payments), and we
receive the remainder of net sublicense revenue for our services. The expiration
date of the Roundup Ready Agreement is determined by the last to expire of the
patent rights licensed under that agreement. On that basis (unless we terminate
sooner, as is permitted after October 11, 2008), the expiration date of the
Roundup Ready Agreement will be April 18, 2017, the date the last of the
presently issued patents will expire. This date may be extended in the event
additional relevant patents issue that have expiration dates later than April
18, 2017.
Pursuant to the Roundup Ready Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto will also indemnify us against the cost of
inventory that becomes unsaleable because of patent infringement claims, but
Monsanto is not required to indemnify us against lost profits on such unsaleable
seed. In contrast with the Bollgard Agreement, where the cost of gene
performance claims will be shared in proportion to the division of net
sublicense revenue, Monsanto must defend and must bear the full cost of any
claims of failure of performance of the Roundup Ready Gene. Pharmacia remains
liable for Monsanto's performance under these defense and indemnity agreements.
In both agreements, generally, we are responsible for varietal/seed performance
issues, and Monsanto is responsible for failure of the genes.
Cotton Technology Licenses for Countries Outside the United States
------------------------------------------------------------------
In February 1996, D&PL and Monsanto executed an Option Agreement (subsequently
amended in December 1999) which provides us with option rights for an exclusive
license for Monsanto's Bollgard and other genes active against lepidopteran
insects in each country outside the United States where Monsanto commercializes
such genes in cotton (except for Australia where we have an option for a
non-exclusive license to such genes and India where we have no option rights to
such genes), option rights to non-exclusive licenses to Roundup Ready genes in
cotton in all countries outside the United States, and option rights to
non-exclusive licenses for all countries for any gene that may be commercialized
by Monsanto that enhances the fiber characteristics of cotton. The terms of such
licenses must be offered and negotiated in good faith. All such licenses that
are non-exclusive must provide us most favored licensee status. The Option
Agreement remains in effect so long as the Bollgard Agreement and Roundup Ready
Agreement for the United States remain in effect. Pursuant to the Option
Agreement, Monsanto and D&PL (or D&PL's affiliates or joint venture companies)
have entered into exclusive Bollgard licenses for seven countries (Argentina,
Brazil, China, Colombia, Mexico, South Africa, and Thailand) outside the United
States and a non-exclusive license for lepidopteran active genes for Australia,
as well as non-exclusive Roundup Ready licenses for four countries (Argentina,
Australia, Brazil, and South Africa) outside the United States.
Herbicide Tolerance for Soybeans
--------------------------------
In February 1997, D&PL and Monsanto executed a Roundup Ready Soybean License
Agreement which provided for commercialization of Roundup Ready soybean seed.
Effective September 1, 2001, D&PL and Monsanto executed a new Roundup Ready
Soybean License and Seed Services Agreement (the "Roundup Ready Soybean
Agreement") for 2001 and future years. The Roundup Ready Soybean Agreement
grants a non-exclusive license to D&PL to produce and to sell in the United
States soybean seed containing Monsanto's Roundup Ready gene. The Roundup Ready
gene makes soybean plants tolerant to contact with Roundup herbicide
applications when used in accordance with product instructions. Similar to the
Bollgard Agreement and the Roundup Ready Agreement for cotton, farmers must
execute limited use sublicenses in order to purchase soybean seed containing the
Roundup Ready gene. The royalty charged to the seed partners, including D&PL, is
set annually by Monsanto. We receive a portion of the royalty for our services
under the Roundup Ready Soybean Agreement and may receive additional incentives
based on a separate licensee incentive agreement. We have the right to terminate
the Roundup Ready Soybean Agreement at our option upon 90 days notice to
Monsanto; Monsanto may terminate the agreement only for cause. Unless terminated
sooner, the Roundup Ready Soybean Agreement will expire December 31, 2012.
Since 1987, we have conducted research to develop soybean plants that are
tolerant to certain DuPont Sulfonylurea herbicides. Such plants enable farmers
to apply these herbicides for weed control without significantly affecting the
agronomics of the soybean plants. Since soybean seed containing the STS(R)
herbicide-tolerant trait is not genetically engineered, sale of this seed does
not require government approval, although the herbicide to which they express
tolerance must be EPA approved.
Transformation, Enabling and Other Technologies
-----------------------------------------------
In March 1998, D&PL and the United States of America, as represented by the
Secretary of Agriculture (USDA) were granted United States Patent No. 5,723,765,
entitled "Control Of Plant Gene Expression". Subsequently, two other patents
(United States Patent Nos. 5,925,808 and 5,977,441) were granted under the same
title. These patents for the Technology Protection System resulted from a
concept developed by research scientists employed by both D&PL and the U.S.
Department of Agriculture's Agricultural Research Service ("USDA-ARS"). The
patents broadly cover all species of plants and seed, both transgenic and
conventional, for a system designed to allow control of progeny seed viability
without harming the crop. One application of the technology could be to control
unauthorized planting of seed of proprietary varieties (sometimes called "brown
bagging") by making such a practice non-economic since unauthorized saved seed
will not germinate, and, therefore, would be useless for planting. Another
application of the technology would be to prevent the unlikely possibility of
transfer of transgenes, through pollen, to closely related species of plants.
These patents have the prospect of opening significant worldwide seed markets to
the sale of transgenic technology in varietal crops in which crop seed currently
is saved and used in subsequent seasons as planting seed. D&PL and the USDA
executed a commercialization agreement on July 6, 2001, for this technology
giving us the exclusive right to market this technology. Once developed, we
intend licensing of this technology to be widely available to other seed
companies.
In July 1999, United States Patent No. 5,929,300, entitled "Pollen Based
Transformation System Using Solid Media," was issued to the United States of
America as represented by the Secretary of Agriculture (USDA). This patent
covers transformation of plants. The patent for the Pollen Transformation System
resulted from a research program conducted pursuant to a Cooperative Research
and Development Agreement between D&PL and the USDA-ARS in Lubbock, Texas. D&PL
and the USDA executed on December 18, 2000, a commercialization agreement,
providing us exclusive rights to market this technology to third parties,
subject to certain rights reserved to the USDA. This transformation method uses
techniques and plant parts that are not covered by currently issued plant
transformation U.S. patents held by others. It is a method which should be more
efficient and effective than many other plant transformation techniques
currently available. This patent and the marketing rights apply to all plant
species on which this method of transformation is effective.
The technologies described above resulted from basic research and will require
further development in order to be used in commercial seed. We estimate that it
will be several years before either of these technologies could be available
commercially. In addition, we have rights to other transformation, enabling and
other technologies that are useful to our research and commercial efforts and,
in some cases, may be sublicensed to others.
Other
-----
We have licensing, research and development, confidentiality and material
transfer agreements with providers of technology that we are evaluating for
potential commercial applications and/or introduction. We also contract with
third parties to perform research on our behalf for enabling and other
technologies that we believe have potential commercial applications in varietal
crops around the world.
Commercial Seed
---------------
The following table presents the number of commercial cottonseed and soybean
seed varieties we sold in the years ended August 31, 2004 and 2003:
2004 2003
--------------- ---------------
Cotton
Conventional 11 20
Bollgard 3 5
Roundup Ready 16 14
Bollgard/Roundup Ready 14 14
Bollgard II/Roundup Ready 1 2
--------------- ---------------
45 55
=============== ===============
Soybeans
Conventional 1 1
Roundup Ready 19 15
STS 2 2
--------------- --------------
22 18
=============== ==============
In addition to the above, in 2004, we had 87 experimental cotton varieties and 6
experimental soybean varieties in late stage development prior to
commercialization. In 2003, we had 76 experimental cotton varieties and 6
experimental soybean varieties in late stage development prior to
commercialization.
Seed of all commercial plant species is either varietal or hybrid. Our cotton
and soybean seed are varietals. Varietal plants can be reproduced from seed
produced by a parent plant, with the offspring exhibiting only minor genetic
variations. The Plant Variety Protection Act of 1970, as amended in 1994, in
essence prohibits, with limited exceptions, purchasers of varieties protected
under the amended Act from selling seed harvested from these varieties without
permission of the plant variety protection certificate owner. Some foreign
countries provide similar legal protection for breeders of crop varieties.
Although cotton is varietal and, therefore, can be grown from seed of parent
plants saved by the growers, most farmers in our primary domestic markets
purchase seed from commercial sources each season because cottonseed requires
delinting prior to seed treatment with chemicals and in order to be sown by
modern planting equipment. Delinting and conditioning may be done either by a
seed company on its proprietary seed or by independent delinters for farmers.
Modern cotton farmers in upland picker areas generally recognize the greater
assurance of genetic purity, quality and convenience that professionally grown
and conditioned seed offers compared to seed they might save. Additionally, U.S.
patent laws make unlawful any unauthorized planting of seed containing patented
technology, such as Bollgard and Roundup Ready, saved from prior crops.
We farm approximately 5,500 acres globally, primarily for research purposes and
for production of cotton and soybean foundation seed. Additionally, we have
annual agreements with various growers to produce seed for cotton and soybeans.
The growers plant parent seed purchased from us and follow quality assurance
procedures required for seed production. If the grower adheres to our
established quality assurance standards throughout the growing season and if the
seed meets our standards upon harvest, we may be obligated to purchase specified
minimum quantities of seed, usually in our first and second fiscal quarters, at
prices equal to the commodity market price of the seed plus a grower premium. We
then condition the seed for sale.
The majority of our sales are made from late in the second fiscal quarter
through the end of the third fiscal quarter. Varying climatic conditions can
change the quarter in which seed is delivered, thereby shifting sales and our
earnings between quarters. Thus, seed production, distribution and sales are
seasonal and interim results will not necessarily be indicative of our results
for a fiscal year.
Revenues from domestic seed sales are recognized when the seed is shipped.
Revenues from Bollgard and Roundup Ready licensing fees are recognized when the
seed is shipped. Domestically, the licensing fees charged to farmers for
Bollgard and Roundup Ready cottonseed are based on pre-established planting
rates for nine geographic regions and, for years prior to 2004, considered the
estimated number of seed contained in each bag which varied by variety, location
grown, and other factors. Effective in 2004, picker and stripper cottonseed
products were sold in bags containing approximately 250,000 seed as well as bulk
boxes containing approximately 8,000,000 seeds. Acala and Pima cottonseed
products continue to be sold in 50-pound bags. International export revenues are
recognized upon the later of when the seed is shipped or the date letters of
credit (or instruments with similar security provisions) are confirmed.
International export sales are not subject to return except in limited cases in
Mexico and Colombia. All other international revenues from the sale of planting
seed, less estimated reserves for returns, are recognized when the seed is
shipped, except in Australia where certain immaterial revenues are recognized
when collected.
Domestically, we promote our cotton and soybean seed directly to farmers and
sell our seed through distributors and dealers. All of our domestic seed
products (including those containing Bollgard and Roundup Ready technologies)
are subject to return and credit risk, the effects of which vary from year to
year. The annual level of returns and, ultimately, net sales are influenced by
various factors, principally commodity prices and weather conditions occurring
in the spring planting season during our third and fourth quarters. We provide
for estimated returns as sales occur. To the extent actual returns differ from
estimates, adjustments to our operating results are recorded when such
differences become known, typically in our fourth quarter. All significant
returns occur and are accounted for by fiscal year end. We also offer various
sales incentive programs for seed and participate in such programs related to
the Bollgard and Roundup Ready technology fees offered by Monsanto. Under these
programs, if a farmer plants his seed and the crop is lost (usually due to
inclement weather) by a certain date, a portion of the price of the seed and
technology fees are forgiven or rebated to the farmer if certain conditions are
met. The amount of the refund and the impact to D&PL depends on a number of
factors including whether the farmer can replant the crop that was destroyed. We
record monthly estimates to account for these programs. The majority of program
rebates occur during the second, third, and fourth quarters. Essentially all
material claims under these programs have occurred or are accounted for by
fiscal year end.
Availability of Information on Our Website
------------------------------------------
Additional information (including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) and 15(d) of the Exchange
Act) is available free of charge at our website at www.deltaandpine.com under
Investor Relations, as soon as reasonably practicable after we electronically
file such material with or furnish such material to the Securities and Exchange
Commission.
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
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 defendent and a description of other legal matters.
Product Claims
--------------
D&PL and Monsanto were named as defendants in a lawsuit filed in the 106th
Judicial District Court of Gaines County, Texas, on April 27, 2000. In this case
the plaintiff alleges, among other things, that certain cottonseed acquired from
D&PL that contained the Roundup Ready gene did not perform as the farmer had
anticipated. D&PL and Monsanto are investigating the claims to determine the
cause or causes of the alleged problem. Pursuant to the terms of the February 2,
1996 Roundup Ready Gene License and Seed Service Agreement (the "Roundup Ready
Agreement"), D&PL has tendered the defense of this claim to Monsanto and
requested indemnity. Pursuant to the Roundup Ready Agreement, Monsanto is
contractually obligated to defend and indemnify D&PL against all claims arising
out of the failure of the Roundup(R) glyphosate tolerance gene and Monsanto has
agreed to do so. D&PL will not have a right of indemnification from Monsanto,
however, for any claim involving defective varietal characteristics separate
from or in addition to the herbicide tolerance gene and such claims are
contained in this litigation.
D&PL was named as a defendant in a lawsuit filed in the 110th Judicial District
Court of Floyd County, Texas, on November 21, 2002. In this multiple plaintiff
case, each plaintiff alleges that seed purchased from D&PL failed to perform as
represented and seeks compensatory damages for crop losses during the 2002
growing season. D&PL and the claimants in this case have now entered into an
agreement for binding arbitration of the claims pursuant to the arbitration
clause contained in the Monsanto Gene Licensing Agreement executed by the
growers. Although the claim involves a cotton variety that contains the Roundup
Ready gene, no claim against Monsanto was alleged, nor was there any allegation
that Monsanto technology caused or contributed to plaintiffs' alleged problems.
Thus, it does not presently appear that Monsanto is contractually obligated to
defend and/or indemnify D&PL in this case.
D&PL 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. In the second Holmes County lawsuit, D&PL has filed a third party
Complaint and seeks a declaration that its insurers are responsible for the cost
of defending the action and for full indemnification of D&PL in the event a
judgment is entered against it. The third-party defendant removed the case to
the United States District Court for the Southern District of Mississippi,
Jackson Division, where a motion to remand was granted on September 28, 2004.
Accordingly that case has now been returned to the docket of Holmes County,
Mississippi. Both cases are in the preliminary discovery stage. However,
dispositive motions are pending in the March 14, 2002 filed case, and will be
filed shortly in the August 19, 2002 case which has just been returned to state
court. Neither of these lawsuits alleges that the Monsanto gene technology
failed, and accordingly, it does not appear that D&PL has a claim for indemnity
or defense under the terms of any of the gene licenses with Monsanto.
The pending lawsuits filed against D&PL in Hockley County, Texas on April 14,
1999, the two lawsuits filed November 15, 1999, in the Court of Common Pleas of
Hampton County, South Carolina, and the three lawsuits filed July 29, 2002, in
the Court of Common Pleas of Hampton County, South Carolina have now been
resolved without material financial impact on the Company.
All lawsuits related to product claims seek monetary damages. See Note 17 of the
Notes to Consolidated Financial Statements in 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(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.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners, a partnership of D&PL (90%) and Monsanto
(10%), pertaining to matters under the Bollgard and Roundup Ready Licenses for
the United States and matters under license agreements for Argentina and the
Republic of South Africa. In August 2003, D&PL and D&M Partners responded to
Monsanto's positions on each issue and notified Monsanto of additional disputes,
each concerning Monsanto's compliance with its obligations under the Bollgard
and Roundup Ready Licenses for the United States. In accordance with the dispute
resolution provisions of the subject agreements, the issues raised in Monsanto,
D&PL and D&M Partners' notices were submitted to a panel of senior executives
(the "Executive Panel"). Monsanto subsequently withdrew from the Executive Panel
the issue involving the license agreements for the Republic of South Africa and
submitted to the Executive Panel one additional issue of interpretation of the
Bollgard and Roundup Ready Licenses for the United States. Issues arising from
operations in Argentina and issues involving technology fees and interest have
been settled without material financial impact on the Company and are no longer
in dispute. On May 20, 2004, Monsanto submitted to arbitration before the
American Arbitration Association two unresolved issues: whether D&M Partners has
paid Monsanto all royalties due and whether D&PL has made unauthorized transfers
of materials containing Monsanto technology. In this arbitration proceeding,
Monsanto seeks an adjudication of its alleged right to terminate the Bollgard
and Roundup Ready Licenses, to dissolve D&M Partners, to obtain an accounting
and to receive monetary damages and a return or destruction of materials
containing Monsanto technologies. D&PL denies the claims asserted by Monsanto in
the arbitration filing and has filed appropriate responses and counterclaims to
Monsanto's claims based on the issues submitted by D&PL to the Executive Panel.
On November 8, 2004, Monsanto submitted one new claim allegedly involving a
dispute under the license agreements to the Executive Panel. D&PL is committed
to participating in good faith resolution of the issues in dispute through
arbitration or through the Executive Panel, as applicable.
In 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, referenced under "Product Claims" immediately
above, are covered by D&PL's comprehensive general liability and umbrella
liability policies. This case was removed by the defendants to the United States
District Court for the Southern District of Mississippi. In this litigation,
D&PL seeks a declaration that its insurers are responsible for the cost of
defending such actions, and full indemnification of D&PL in the event a judgment
is rendered against it based upon the seed mix claim alleged by plaintiffs. D&PL
alleges in this litigation that the allegations of plaintiffs' complaint are
covered by one or more of D&PL's insurance policies issued by the defendant
insurance companies.
In November 2002, D&PL filed suit in the Circuit Court of Washington County,
Mississippi, against its fire insurance carrier, Reliance Insurance Company of
Illinois. That suit seeks recovery of seed inventory lost, damaged or destroyed
during a fire that occurred in November 1999 at D&PL's Hollandale, Mississippi
facility. A Stay Order has now been entered in this case pursuant to the powers
of the Receiver of Reliance Insurance Company of Illinois, which is now in
liquidation. Therefore, we are currently prevented from formally pursuing the
matter.
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, through
August 2004, is approximately $49,000. The employee and D&PL Brasil are being
defended and are indemnified in this litigation by the respective insurance
carriers for LRC and D&PL.
In January 2001, Sure Grow Seed Inc. ("Sure Grow"), an indirect subsidiary of
D&PL, gave notice to Ozbugday Tarim Isletmeleri ve Tohumculuk A.S. ("OTIT"), a
Turkish seed company, of termination (effective at the end of the 2001 crop
year) of OTIT's exclusive distributorship for cottonseed of Sure Grow varieties
in the Republic of Turkey. OTIT refused to acknowledge the validity of this
termination. In October 2002, Sure Grow and the Turkish Branch of Turk
Deltapine, Inc. ("Turk Deltapine'"), D&PL's local affiliate in Turkey, commenced
a civil action in a Turkish commercial court seeking an injunction against
continued sales of Sure Grow varieties by OTIT. OTIT filed a counterclaim
seeking an injunction against Turk Deltapine's marketing of seed of Sure Grow
varieties in alleged violation of OTIT's exclusive distribution rights and
monetary damages for lost profits in an amount to be determined. In June 2004, a
panel of legal experts appointed by the court in which the case is pending
rendered an advisory opinion that Turkish law should govern the termination of
OTIT's distributorship agreement and, that under Turkish law, the January 2001
notice of termination was not effective. The court has not entered a decision
after receipt of this advisory opinion. Both OTIT and Turk Deltapine have
continued to distribute cotton planting seed of Sure Grow varieties in Turkey.
In December 1999, Mycogen Plant Science, Inc. ("Mycogen") filed a suit in the
Federal Court of Australia alleging that Monsanto Australia Ltd., Monsanto's
wholly-owned Australian subsidiary, and Deltapine Australia have been infringing
two of Mycogen's Australian patents by making, selling, and licensing cotton
planting seed expressing insect resistance. The suit seeks an injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. The litigation is currently in discovery and
pretrial proceedings. Consistent with its commitments, Monsanto has agreed to
defend D&PL in this suit and to indemnify D&PL against damages, if any are
awarded. Monsanto is providing separate defense counsel for D&PL. D&PL is
assisting Monsanto to the extent reasonably necessary.
A corporation owned by the son of D&PL's former Guatemalan distributor sued in
1989 asserting that D&PL violated an agreement with it by granting to another
entity an exclusive license in certain areas of Central America and southern
Mexico. The suit seeks damages of 5,292,459 Guatemalan quetzales (approximately
$697,000 at October 31, 2004, exchange rates) and an injunction preventing D&PL
from distributing seed through any other licensee in that region. The Guatemalan
court, where this action is proceeding, has twice declined to approve the
injunction sought. D&PL continues to make seed available for sale in Central
America and Mexico.
D&PL vs. Monsanto Company and Pharmacia Corp.
---------------------------------------------
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
effectively terminating Monsanto's efforts to gain government approval of the
merger of Monsanto with D&PL under the May 8, 1998, Merger Agreement. On
December 30, 1999, D&PL filed suit (the "December 30 Suit") in the First
Judicial District of Bolivar County, Mississippi, seeking, among other things,
the payment of the $81 million termination fee due pursuant to the merger
agreement, compensatory damages and punitive damages. On January 2, 2000, D&PL
and Monsanto reached an agreement whereby D&PL would withdraw the December 30
Suit, without prejudice for the purpose of negotiating a settlement of D&PL's
claims, and Monsanto would immediately pay the $81 million. On January 3, 2000,
Monsanto paid to D&PL a 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 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 intends to seek an
interlocutory appeal of this issue to the Mississippi Supreme Court. D&PL has
also sought interlocutory review by the Mississippi Supreme Court of a discovery
ruling relating to documents that Monsanto claimed to be privileged that the
original trial judge ordered Monsanto to produce and that the new trial judge
ordered D&PL to return. The Court has temporarily suspended the dates for the
completion of discovery, originally established in a September 2003 Order, and
no trial date has been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE 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, 2004
Market Price Range - Low $22.62 $24.28 $22.80 $20.90
- High 25.40 26.63 25.82 25.80
FYE August 31, 2003
Market Price Range - Low $17.96 $19.18 $18.70 $21.78
- High 20.79 20.96 24.02 25.30
Dividends totaling $0.46 and $0.27 per share on common and preferred shares were
paid in 2004 and 2003, respectively. The Board of Directors anticipates that
quarterly dividends of $0.12 per share will continue to be paid in the future;
however, the Board of Directors reviews this policy quarterly. Aggregate
dividends paid on common shares in 2004 were $17.6 million and should
approximate $18.5 million in 2005. Aggregate dividends paid on preferred shares
in 2004 were $0.5 million and should approximate $0.5 million in 2005. In the
first quarter of fiscal 2005, the Board of Directors authorized a quarterly
dividend of $0.12 per share to be paid on December 14, 2004, to shareholders of
record on November 30, 2004.
On October 31, 2004, there were approximately 6,000 shareholders of our
38,550,251 outstanding common shares.
Equity Compensation Plan Information
------------------------------------
The following table reflects the described information as of August 31, 2004:
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 3,329,633 $ 20.63 1,140,331
Equity compensation plans not
approved by security holders - - -
Issuer Purchases of Equity Securities
-------------------------------------
In February 2000, the Board of Directors authorized a program for the repurchase
of up to $50 million of D&PL's common stock. The shares repurchased under this
program are to be used to provide for option exercises, conversion of D&PL's
Series M Convertible Non-Voting Preferred shares and for other general corporate
purposes.
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,
2004:
Approximate Dollar
Total Total Number of Shares Value of Shares that
Number of Average Purchased as Part of May Yet Be
Shares Price Paid Publicly Announced Purchased Under the
Period Purchased per Share Plan Plan
----------------------------------------- ------------ ------------ -------------------------- -----------------------
June
(June 1, 2004 to June 30, 2004) 75,000 $21.26 75,000 $21,124,813
July
(July 1, 2004 to July 31, 2004) 32,200 21.81 32,200 20,422,432
August
(August 1, 2004 to August 31, 2004) - - - 20,422,432
------------ --------------------------
Total 107,200 21.42 107,200 20,422,432
============ ==========================
There were no shares purchased in the quarter other than those authorized
pursuant to the February 2000 stock repurchase plan.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS (In thousands, except per share amounts)
As of and for the Year Ended August 31,
----------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ------------ ----------- ----------- ------------
Operating Results:
Net sales and licensing fees $314,871 $284,487 $260,041 $308,307 $303,816
Special charges and unusual
items(1) - (962) - (6,301) 71,233
In-process research and development
and related transaction costs(2) (38,532) - - - -
Net income 5,316 27,805 30,339 32,307 79,326
Balance Sheet Summary:
Current assets $375,475 $355,261 $308,468 $337,737 $313,701
Current liabilities 226,225 204,050 174,124 208,041 215,315
Working capital 149,250 151,211 134,344 129,696 98,386
Total assets 457,023 431,552 383,142 411,521 390,134
Long-term debt 16,486 1,557 1,176 2,836 2,482
Stockholders' equity 209,726 217,107 202,207 188,408 159,628
Per Share Data:
Net income - Diluted $0.13 $0.70 $0.76 $0.81 $1.98
Book value 5.48 5.70 5.27 4.90 4.15
Cash dividends per common share 0.46 0.27 0.20 0.15 0.12
Weighted average number of shares
used in net income per share
calculation -
Diluted 39,670 39,594 39,781 40,111 40,159
----------------------------------------------------------------------------------------------------------------------
(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. In 2000, we reported the $81 million merger termination
fee, net of related expenses, as an unusual income item.
(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 fiscal year ended August 31, 2004 due to
strong sales of our newer cottonseed products in the U.S. and a substantial
increase in soybean seed sales and international sales over 2003. Licensing fees
from cottonseed sales also increased over 2003 due to trait fee price increases
enacted by Monsanto and higher unit sales of stacked gene products coupled with
a decline in technology fee rebates in 2004 for crop destruct and replant
program claims. In 2004, much of the U.S. cotton belt experienced excellent
weather conditions during planting and much of the growing season. These
favorable weather conditions resulted in lower rebates than we experienced in
2003. Under the crop destruct program, if a farmer plants transgenic seed and
his crop is destroyed within sixty days of planting, Monsanto, after field
inspection, may forgive or waive the technology fee on the affected acreage. Our
U.S. cottonseed business also benefited from strong sales of our newer products,
including DP 555 BG/RR and DP 444 BG/RR, the two most popular varieties planted
in the U.S. in 2004. DP 555 BG/RR was the most popular variety planted in the
U.S. in 2003 and 2004, and our 2004 unit sales of this variety increased by
approximately 50% over last year. Likewise, DP 444 BG/RR sales were very strong
in 2004, the first year of wide-scale commercial sales. We believe DP 444 BG/RR
sales could have been higher had we not been limited by our seed supply of this
variety. Overall, we believe 2004 operating results were diminished due to a
reduction in U.S. cotton acreage from 2003 in our most profitable regions east
of Texas. In a March 31, 2004 report issued by the United States Department of
Agriculture ("USDA"), U.S. cotton acreage was forecast to be 14.4 million acres
in 2004, which represented an increase of approximately 1.0 million acres over
2003. However, strong soybean commodity prices during the 2004 planting season
resulted in a shift of acres away from cotton and into soybeans. In September,
2004, the USDA issued another report which reflected an estimate of U.S. cotton
plantings of 13.7 million acres. However, this report indicated acres were lower
in areas east of Texas which are more profitable to us and where we have greater
market share. The report also reflected an increase in cotton plantings over
2003 in Texas, which has less profit potential for us and where we have lower
market share. Our market share was stable to slightly higher in the cotton
growing regions east of Texas in 2004, but declined in Texas, due in part to a
lack of adequate supplies of products best suited for that market.
Our 2004 financial results were affected by a charge to earnings related to the
acquisition of technology licenses that occurred during our fourth quarter. Our
pre-tax earnings were reduced by $38.5 million due to this write off of acquired
in-process research and development ("IPR&D") and related expenses. This charge
reduced our diluted earnings per share by $0.61 for fiscal year 2004. The
acquisition of these licenses is a key component of our strategic plan to
commercialize technologies from multiple providers and at higher fee sharing
percentages to us than we have currently.
Our financial results also benefited from strong soybean seed sales and a
substantial improvement in our international business over 2003. Soybean seed
sales for 2004 increased almost 25% over 2003 due to improved product offerings
as well as an increase in soybean plantings in 2004. Results of operations for
the International segment almost tripled over 2003 due to an approximately 30%
increase in sales. In particular, sales in Australia, Brazil, Colombia, Mexico,
South Africa and Turkey increased significantly over 2003. Cotton fiber
commodity prices were generally higher during planting in 2004 than in 2003.
This resulted in increased cotton plantings in many of our international
markets. In addition, improved product offerings, price increases, and further
penetration of transgenic products led to the improvement in international
results.
Production costs related to our cottonseed sales were higher this year due to
higher raw materials costs and freight related to sourcing seed production from
the western United States and, in some cases, Australia. In addition, cost of
sales increased due to an increase in the provisions for obsolete inventory.
Normally, a higher percentage of products are produced in the Mid-South, but
inclement weather destroyed most of the 2003 Mid-South cottonseed production
prompting us to shift some production to other areas for this year. The
increased cottonseed costs partially offset the effect of our increase in
cottonseed selling prices.
Strategic Transactions and Events
On August 24, 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. Once the licensed traits are commercialized, we will receive 70% of
the net licensing revenues generated from these products. The first product to
be commercialized under the agreements is expected to be VipCot, a novel insect
control trait. Depending on the timing of regulatory approval, we expect to have
a limited quantity of seed available for sale as early as 2006. This agreement
not only provides us with greater share of licensing revenue than we have today,
but also more control of development and commercialization decisions with
respect to the products. Syngenta will be responsible for obtaining regulatory
approval of these products in the U.S. and, if instructed by D&PL, in other
countries. We will bear the cost of developing new varieties containing the
Syngenta traits and expect to incur expenses of approximately $3.5 million
related to this in 2005. 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. On October 4, 2004, DAS announced it had received full EPA
registration for its WideStrike 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 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 then 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 pursue our litigation against Monsanto Company and
Pharmacia. On October 13, 2004, we announced that the Circuit Court of the First
Judicial District of Bolivar County, Mississippi (the "Court") had issued two
new orders. In the first order, which related to our damage claims, the Court
granted Monsanto's motion for partial summary judgment relating to our claim for
expectation or "benefit of the bargain" damages. This ruling reversed a ruling
by the previous trial judge in the case, who had ruled that the use of a benefit
of the bargain damages measurement was a matter for the jury to decide. We
intend to seek an interlocutory review of this ruling by the Mississippi Supreme
Court. Our experts have calculated damages using several methods, two of which
result in damage estimates of several hundred million dollars to over a billion
dollars. Benefit of the bargin damages was one of those methods. The second
order related to Monsanto's counterclaims in the case. The Court granted our
motion to compel the production of documents and testimony of witnesses relating
to Monsanto's counterclaims. Monsanto had invoked privilege as a basis for not
producing documents and for not permitting its witnesses to answer questions
during depositions. D&PL has also sought interlocutory review by the Mississippi
Supreme Court of a September 10, 2004, discovery ruling relating to documents
that Monsanto claimed to be privileged that the original trial judge ordered
Monsanto to produce and that the new trial judge ordered D&PL to return. At this
point, we do not expect the trial to occur in 2005. See Part I, Item 3 for more
information.
On May 20, 2004, Monsanto submitted to arbitration before the American
Arbitration Association two matters which had been in a formal dispute
resolution process before a panel of senior executives since July, 2003. In the
arbitration filing, Monsanto is seeking an adjudication of its alleged right to
terminate the Bollgard and Roundup Ready Licenses between our companies,
monetary damages, as well as other items. We have responded to this arbitration
filing and denied Monsanto's claims. In addition, we have asserted counterclaims
based on issues that we had submitted to the panel of senior executives. We are
committed to participating in good faith resolution of these items through the
arbitration process. 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) our ability to continue to profitably expand
our international operations, (c) the successful development and launch of the
Syngenta insect resistance technology and (d) 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 2005 earnings guidance
later this year. The commodity prices of cotton, soybeans, and corn have been
depressed recently due to high production from the 2004 crop and other factors.
The current prices of soybeans and corn are at levels that may result in an
increase in cotton plantings in the U.S. in 2005 over 2004. However, other
factors must be considered and we believe it is too early to estimate 2005
cotton plantings at this time. We expect to have adequate supplies of seed of
most of our popular cotton varieties for 2005 plantings due to favorable weather
conditions in the Mid-South seed production areas 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 2005 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 2004, operating
results improved significantly due to increased sales in most of our
international locations. Depending on the prices of cotton fiber at the time of
plantings, we expect acreage in many of our international locations to remain
constant with 2004. In addition, we have already seen an increase in cotton
acreage in Australia due to an increase in rains where drought conditions have
existed for several years. We also expect to see further penetration of
transgenic products containing Monsanto's Bollgard, Bollgard II and Roundup
Ready technologies in 2005. In Australia, regulatory authorities have approved
Monsanto's Bollgard II and increased the area on which it may be planted versus
Monsanto's original Bollgard product. In addition, we expect further penetration
of transgenics in Colombia where they have only recently been approved for large
scale planting. We are already seeing improvements in our businesses in
Australia (due to introduction of Bollgard II and increased acreage) and Brazil
(due to further penetration of our products). However, it is too early to
accurately forecast International results for 2005 as plantings have not yet
occurred in most markets. We will continue to develop new businesses in markets
such as India and portions of Africa. We recently have formed a subsidiary,
Deltapine India Seed Private Ltd., to further our business activities in
India.
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
Our Board of Directors approved a common stock repurchase plan of up to $50
million in 2000. As of October 31, 2004, D&PL had repurchased 1,553,200 shares
at an aggregate purchase price of $29.6 million under the current purchase
program. We expect to continue purchasing shares under this plan in the open
market subject to market price and other considerations. Currently, the
quarterly dividend is $0.12 per share. The Board of Directors reviews the
dividend policy quarterly. Assuming the dividend rate is maintained through
2005, the aggregate payments will be $18.5 million to the holders of the 38.5
million common shares outstanding and $0.5 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.
Net Sales and Licensing Fees
In 2004, our consolidated net sales and licensing fees increased 10.7% to $314.9
million from 2003 sales of $284.5 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.
In 2003, our consolidated net sales and licensing fees increased 9.4% to $284.5
million from 2002 sales of $260.0 million. This increase was primarily the
result of (a) an increase in sales of stacked gene products, for which higher
technology licensing fees are charged, (b) an increase in the selling price of
our seed and the introduction of higher-priced cottonseed varieties, primarily
DP 555 BG/RR, and (c) an increase in soybean seed sales, which increased
approximately 26% in 2003 from 2002. In 2003, domestic transgenic cottonseed
sales comprised approximately 96% of total domestic unit sales of cottonseed,
compared to approximately 93% in 2002. Offsetting these increases were lower
international sales and higher sales rebates associated with distributor
payments, crop destruct and crop replant programs. The decrease in international
sales was mainly attributable to a decrease in sales at our joint venture in
Brazil (due to the devaluation of the Brazilian Real), a decrease in export
sales to Greece (due to high inventory levels at our distributor), and lower
sales in Australia (due to the severe drought conditions), offset by an increase
in sales at our joint ventures in China.
Gross Profit
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 was consistent with the prior year at
35%. The revenue increase attributable to the adoption of higher priced products
was 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.
Our consolidated gross profit increased to $100.7 million in 2003 compared to
$90.8 million in 2002. Consolidated gross profit as a percentage of consolidated
net sales and licensing fees was flat with 2002 at 35%. Price increases and the
introduction of higher priced varieties were partially offset by an increase in
cottonseed cost caused by higher raw materials costs and freight related to
sourcing seed production from the western United States and Australia.
Operating Expenses
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 for legal
matters and Sarbanes-Oxley compliance.
Operating expenses increased to $44.0 million in 2003 from $40.3 million in
2002. Operating expenses for 2003 included special charges of $1.0 million.
Excluding the special charges recorded in 2003, this increase is primarily due
to increased compensation, pension and payroll related costs, higher insurance
premiums and professional fees.
Research and Development Expenses
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
positions and increased testing program expenses.
Research and development expenses were virtually unchanged from the prior year
at $16.7 million in 2003 compared to $16.4 million in 2002. The increase was
primarily attributable to increased international research and development
activities.
In the Consolidated Statements of Income, certain expenses historically
classified as Research and Development in Operating Expenses have been
reclassified as Cost of Sales. The 2004 expenses as well as the prior years'
have been reclassified for consistency. The expenses relate to certain
activities performed by the Technical Services department. As the sales of
transgenic varieties have increased as a percentage of our Net Sales and
Licensing Fees over the past several years, certain technical services
department activities have become more related to preparing seed for sale than
to Research and Development activities. The activities for which expenses have
been reclassified relate primarily to the increase of seed quantities to allow
us to offer certain varieties commercially and to late-stage trials performed to
ensure that varieties that have been chosen to be offered commercially meet
agronomic and transgenic requirements of our third-party technology licenses.
The amount of expenses reclassified for 2004, 2003 and 2002 was $1.8 million,
$1.6 million and $1.7 million, respectively.
Selling Expenses
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.
Selling expenses increased 3.8% to $11.0 million in 2003 from $10.6 million in
2002. This increase was primarily attributable to an increase in advertising
expenditures related to the introduction of new varieties.
General and Administrative Expenses
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 incurred, mainly due to legal matters and Sarbanes-Oxley
compliance.
General and administrative expenses increased 15.8% to $15.4 million in 2003
from $13.3 million in 2002. The increase mainly related to increases in
compensation and pension costs, as well as an increase in legal fees related to
licensing activities.
Special Charges
There were no special charges recorded in 2004 or 2002.
In 2003, we recorded a $0.6 million charge associated with additional expenses
for the closing of our Chandler, Arizona plant and the closing of our facility
in Centre, Alabama and a $0.4 million charge associated with reductions in the
number of employees at our wholly-owned subsidiary in Australia and at our joint
venture in Hebei Province, People's Republic of China.
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 $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 earnings during 2004.
Net interest income decreased to $1.1 million in 2003, compared to net interest
income of $1.2 million in 2002. In 2003, interest income was $1.5 million and
interest expense was $0.4 million. Lower interest rates earned on our cash
balances resulted in lower interest earnings during 2003. International interest
expense decreased primarily due to a decrease in interest rates incurred on debt
at our joint venture in Argentina.
Other Income/Expense
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.
Other expense increased to $12.2 million in 2003, compared to $7.2 million in
2002. This increase is primarily attributable to increased legal expenses
related to our suit against Pharmacia and Monsanto partially offset by foreign
exchange income in 2003. In 2003, we incurred $13.0 million, or $0.21 per
diluted share, related to Monsanto/Pharmacia litigation expenses, compared to
$4.7 million, or $0.08 per diluted share, in 2002.
Net Income and Earnings Per Share
Net income applicable to common shares was $4.8 million, $27.5 million, and
$30.1 million in 2004, 2003 and 2002, respectively. Net income per share
(diluted) was $0.13, $0.70 and $0.76 in 2004, 2003 and 2002, 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 Year Ending August 31,
------------------------------------------------------------------------------------------
Total 2005 2006 2007 2008 2009 2010
and
beyond
------------ ----------- ---------- ---------- --------- --------- ---------
Long-Term Obligations (1) $ 23,500 $ 5,800 $ 10,150 $ 5,950 $ 1,600 $ - $ -
Operating Lease Obligations 552 187 125 80 82 78 -
Purchase Obligations (2) 609 609 - - - - -
------------ ----------- ---------- ---------- --------- --------- ---------
Total $ 24,661 $ 6,596 $ 10,275 $ 6,030 $ 1,682 $ 78 $ -
============ =========== ========== ========== ========= ========= =========
(1) See "Acquired In-Process Research and Development" located in this Item 7
for information concerning non-contingent payments related to the Syngenta
transaction.
(2) The amount reported as "Purchase Obligations" for 2005 relates to
guaranteed 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
the 2005 fiscal year for sales in that fiscal year. At August 31, 2004, 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 will occur in the first and second quarters of our 2005 fiscal year)
and is tested for quality.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Overview
Management's discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing in Item 8 of our Annual Report on Form
10-K for the fiscal year ended August 31, 2004. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
We have identified below the accounting policies that involve those estimates
and assumptions that we believe are critical to an understanding of our
financial statements. Our management has discussed the development and selection
of each critical accounting estimate with the Audit Committee of our Board of
Directors, and the Audit Committee has reviewed the related disclosures below.
Since application of these accounting policies involves the exercise of judgment
and use of estimates, actual results could differ from those estimates.
Revenue Recognition
Revenues from domestic seed sales are recognized when the seed is shipped.
Revenues from Bollgard and Roundup Ready licensing fees are recognized when the
seed is shipped. Domestically, the licensing fees charged to farmers for
Bollgard and Roundup Ready cottonseed are based on pre-established planting
rates for each of nine geographic regions and, for years prior to 2004,
considered the estimated number of seed contained in each bag which varied by
variety, location grown, and other factors. Effective this year, picker and
stripper cottonseed products were sold in bags containing approximately 250,000
seed or bulk boxes containing approximately 8,000,000 seed. Acala and Pima
cottonseed products continue to be sold in 50-pound bags.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. International export sales are not subject to return
except in limited cases in Mexico and Colombia. All other international revenues
from the sale of planting seed, less estimated reserves for returns, are
recognized when the seed is shipped, except in Australia where certain
immaterial revenues are recognized when collected.
All of our domestic seed products (including those containing Bollgard and
Roundup Ready technologies) are subject to return and credit risk, the effects
of which vary from year to year. The annual level of returns and, ultimately,
net sales are influenced by various factors, principally commodity prices and
weather conditions occurring in the spring planting season during our third and
fourth quarters. We provide for estimated returns as sales occur. To the extent
actual returns differ from estimates, adjustments to our operating results are
recorded when such differences become known, typically in our fourth quarter.
All significant returns occur or are accounted for by fiscal year end.
Therefore, the application of this estimate could affect our quarterly
information.
Domestically, we promote our cotton and soybean seed directly to farmers and
sell our seed through distributors and dealers. We also offer various sales
incentive programs for seed and participate in such programs related to the
Bollgard and Roundup Ready technology fees offered by Monsanto. Under these
programs, if a farmer plants his seed and the crop is lost (usually due to
inclement weather) by a certain date, a portion of the price of the seed and
technology fees are forgiven or rebated to the farmer if certain conditions are
met. The amount of the refund and the impact to D&PL depends on a number of
factors including whether the farmer can replant the crop that was destroyed. We
record monthly estimates to account for these programs. The majority of program
rebates occur during the second, third, and fourth quarters. Essentially all
material claims under these programs have occurred or are accounted for by
fiscal year end.
Provision for Damaged, Obsolete and Excess Inventory
Each year, we record a provision to adjust our reserves related to inventory
based on our estimate of seed that will not pass our quality assurance ("QA")
standards at year end, or is deemed excess based on our desired seed stock level
for a particular variety ("dump seed"). Seed can fail QA standards based on
physical defects (i.e., cut seed, moisture content, discoloration, etc.),
germination rates, or transgenic purities. The amount recorded as inventory
provision in a given year is calculated based on the total quantity of inventory
that has not passed QA standards at any fiscal year end, any seed that is
expected to deteriorate before it can be sold and seed deemed to be excess. In
establishing the provision, we consider the scrap value of the seed to be
disposed. An initial estimate of the needed provision is made at the beginning
of each year and recorded over the course of the year. Adjustments for changes
in our estimates are made monthly, if necessary.
See Note 2 of the Notes to Consolidated Financial Statements in Item 8 for
further details about inventory reserves.
Deferred Income Taxes
Deferred income taxes are estimated based upon temporary differences between the
income and losses that we report in our financial statements and our taxable
income and losses as determined under applicable tax laws. We estimate the value
of deferred income taxes based on existing tax rates and laws, and our
expectations of future earnings. For deferred income taxes, we applied a
composite statutory income tax rate of 38%.
We are required to evaluate the likelihood of our ability to generate sufficient
future taxable income that will enable us to realize the value of our deferred
tax assets. If, in our judgment, we determine that we will not realize deferred
tax assets, then valuation allowances are recorded. As of August 31, 2004, we
had recorded net deferred tax assets of approximately $17.4 million primarily
related to capitalizing the licenses from Syngenta for income tax reporting
purposes. We estimate that our deferred tax assets will be realized; therefore,
we have not recorded any valuation allowances as of August 31, 2004.
We use management judgment and estimates when estimating deferred taxes. If our
judgments and estimates prove to be inadequate, or if certain tax rates and laws
should change, our financial results could be materially adversely impacted in
future periods.
Contingent Liabilities
A liability is contingent if the amount is not presently known, but may become
known in the future as a result of the occurrence of some uncertain future
event. D&PL estimates its contingent liabilities based on management's estimates
about the probability of outcomes and its ability to estimate the range of
exposure. Accounting standards require that a liability be recorded if
management determines that it is probable that a loss has occurred and the loss
can be reasonably estimated. In addition, it must be probable that the loss will
be confirmed by some future event. As part of the estimation process, management
is required to make assumptions about matters that are by their nature highly
uncertain. The assessment of contingent liabilities, including legal
contingencies and income tax liabilities, involves the use of critical
estimates, assumptions and judgments. Management's estimates are based on their
belief that future events will validate the current assumptions regarding the
ultimate outcome of these exposures. However, there can be no assurance that
future events, such as court decisions or I.R.S. positions, will not differ from
management's assessments. Whenever practicable, management consults with third
party experts (attorneys, accountants, claims administrators, etc.) to assist
with the gathering and evaluation of information related to contingent
liabilities.
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,
primarily over the next three years. 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 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: 2005 - $3,500,000; 2006 - $4,000,000;
2007 - $4,000,000; 2008 - $2,000,000. 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 event in 2007, prior to the
planting season, and for the selected Cry1Ab event in 2008, prior to the
planting season. If the regulatory approval process proceeds as expected, we may
begin limited introduction of the VIP3A event in 2006 and the Cry1Ab event 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 licensing fees on
Bollgard and Roundup Ready seed sales upon shipment, usually in our second and
third fiscal quarters. Receivables from seed sales generally become due in May
and June. The licensing fees are due in September, at which time we receive
payment. We then pay Monsanto its royalty for the Bollgard and Roundup Ready
licensing fees, which is recorded as a component of cost of sales. As a result
of the timing of these events, licensing fees receivable and royalties payable
peak at our fiscal year end, August 31.
The seasonal nature of our business significantly impacts cash flow and working
capital requirements. Historically, we have maintained credit facilities, and
used early payments by customers and cash from operations to fund working
capital needs. In the past, we have borrowed on a short-term basis to meet
seasonal working capital needs. However, in fiscal years 2004, 2003 and 2002, we
used cash generated from operations and other available cash to meet working
capital needs. We continue to evaluate potential uses of our cash for purposes
other than for working capital needs. Potential uses of our cash may be the
acquisition of, or funding of, alternative technologies (such as, or in addition
to, DeltaMax and Syngenta) that could be used to enhance our product portfolio
and ultimately our long-term earnings potential and/or an investment in new
markets outside the U.S. Another potential use is the repurchase in the open
market of our shares pursuant to our previously announced share repurchase
program. We are currently considering other potential uses of the remaining
cash, including increasing the dividend rate or repurchasing shares more
aggressively depending on market considerations and other factors. As a part of
this analysis, we are evaluating the Company's liquidity needs and its capital
structure.
In April 1998, we entered into a syndicated credit facility with three lenders,
which provided for aggregate borrowings of $110 million. This agreement expired
on April 1, 2001. We have had discussions with several potential lenders about a
replacement facility.
Capital expenditures were $6.0 million, $8.3 million, and $8.4 million in fiscal
2004, 2003 and 2002, respectively. We anticipate that capital expenditures will
approximate $8.0 to $10.0 million in 2005.
Annual dividends of $0.46, $0.27 and $0.20 per share were paid in 2004, 2003 and
2002, respectively. Aggregate dividends paid on common and preferred shares in
2004, 2003 and 2002 were $18.1 million, $10.6 million and $7.9 million,
respectively. On July 14, 2004, we announced that our Board of Directors had
declared a $0.12 per share dividend for the fourth quarter. The fourth quarter
dividend, payable to shareholders of record on August 31, 2004, was paid on
September 14, 2004. In the first quarter of fiscal 2005, the Board of Directors
authorized a quarterly dividend of $0.12 per share to be paid on December 14,
2004, to shareholders of record on November 30, 2004. The Board anticipates that
quarterly dividends of $0.12 per share will continue to be paid in the future;
however, the Board of Directors reviews this policy quarterly. Aggregate
preferred and common stock dividends should approximate $19.0 million in 2005.
In February 2000, the Board of Directors authorized a program for the repurchase
of up to $50 million of our common stock. The shares repurchased under this
program are to be used to provide for option exercises, conversion of our Series
M Convertible Non-Voting Preferred shares and for other general corporate
purposes. At August 31, 2004, we had repurchased 1,553,200 shares at an
aggregate purchase price of approximately $29.6 million under this program.
During the year ended August 31, 2004, we purchased 250,200 shares at an
aggregate purchase price of $5.8 million under this plan. During the quarter
ended August 31, 2004, we purchased 107,200 shares at an aggregate price of $2.3
million.
Cash provided from operations, cash on hand, early payments from customers and
borrowings under a loan agreement, if necessary, should be sufficient to meet
the Company's 2005 working capital needs.
RISKS AND UNCERTAINTIES
From time to time, we may publish forward-looking statements relating to such
matters as anticipated financial performance (including when earnings estimates
are discussed), existing products, technical developments, new products, new
technologies, research and development activities, and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, we note that a variety of factors could cause our actual results and
experience to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of our business include those noted elsewhere in this filing and the
following:
Demand for our seed will be affected by government programs and policies
and by weather. Demand for seed is also influenced by commodity prices, the
cost of other crop inputs, and the demand for a crop's end-uses such as
textiles, animal feed, cottonseed oil, food and raw materials for
industrial use. These factors, along with weather, influence the cost and
availability of seed for subsequent seasons. Weather impacts crop yields,
commodity prices and the planting decisions that farmers make regarding
both original planting commitments and, when necessary, replanting levels.
The planting seed market is highly competitive, and our products face
competition from a number of seed companies, diversified chemical
companies, agricultural biotechnology companies, governmental agencies and
academic and scientific institutions. A number of chemical and
biotechnology companies have seed production and/or distribution
capabilities to ensure market access for new seed products and new
technologies that may compete with the Bollgard and Roundup Ready gene
technologies of Monsanto, our principal licensor of such technology. Our
seed products and technologies contained therein may encounter substantial
competition from technological advances by others or products from new
market entrants. Many of our competitors are, or are affiliated with, large
diversified companies that have substantially greater resources than we
have.
We currently are engaged in a dispute resolution and arbitration process
with Monsanto, the principal licensor of our cotton technology. In the
arbitration, Monsanto is seeking a determination by the arbitrators of its
right to terminate certain agreements between our companies, including the
Bollgard and Roundup Ready licenses. In addition, we are currently engaged
in litigation with Monsanto (the January 18 suit) concerning the failed
merger of the companies. The result of this litigation(and the process of
litigating) may materially affect the results of our business.(See Part 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 are developed in the time frame or for the amounts
estimated to complete. Also, there is no assurance that regulatory approval
will be obtained for the products.
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign governments
and shipping disruptions. Particular policies which may affect our domestic
and international operations include the use of and the acceptance of
products that were produced from plants that have been genetically
modified, the testing, quarantine and other restrictions relating to the
import and export of plants and seed products and the availability (or lack
thereof) of proprietary protection for plant products. In addition, United
States government policies, particularly those affecting foreign trade and
investment, may impact our international operations.
The publicity related to genetically modified organisms ("GMOs") or
products made from plants that contain GMOs may have an effect on our sales
in the future. In 2004, approximately 94% of our cottonseed that was sold
in the United States contained either or both of Monsanto's Bollgard and
Roundup Ready gene technologies, and 95% of our soybean seed sales
contained the Roundup Ready gene technology. Although many farmers have
rapidly adopted these technologies, the concern of some customers and
governmental entities over finished products that contain GMOs could impact
demand for crops (and ultimately seed) raised from seed containing such
traits.
Due to the varying levels of agricultural and social development of the
international markets in which we operate and because of factors within the
particular international markets we target, international profitability and
growth may be less stable and predictable than domestic profitability and
growth. Furthermore, recent action taken by the U.S. government, including
that taken by the U.S. military in the aftermath of the tragic events of
September 11, 2001, the war in Iraq, and conflicts between major cotton
producing nations, may serve to further complicate our ability to execute
our long range ex-U.S. business plans because those plans include future
expansion into Uzbekistan, Pakistan and India. World health concerns about
infectious diseases also affect the conduct of our international business.
Overall profitability will depend on the factors noted above as well as
weather conditions, government policies in all countries where we sell
products and operate, worldwide commodity prices, our ability to
successfully open new international markets, our ability to develop the
Texas High Plains market, the technology partners' ability to obtain timely
government approval (and maintain such approval) for existing and for
additional biotechnology products on which they and D&PL are working, our
technology partners' ability to successfully defend challenges to
proprietary technologies licensed to us and our ability to produce
sufficient commercial quantities of high quality planting seed of these
products. Any delay in or inability to successfully complete these projects
may affect future profitability. In addition, earnings forecasts do not
consider the impact of potential transactions, their related accounting and
other factors, that may be under consideration by the Company, but have not
yet been completed or their effect determined at the date of a particular
filing.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
None
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 commodity price risk. During the year ended August 31, 2004, 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 Item 8. Further information on our exposure to market risk is
included in Note 14 of the Notes to Consolidated Financial Statements in Item 8.
The fair value of derivative commodity instruments outstanding as of August 31,
2004, was $94,000. A 10% adverse change in the underlying commodity prices upon
which these contracts are based would result in a $40,000 loss in future
earnings (not counting the gain on the underlying commodities).
Our earnings are also affected by fluctuations in the value of the U.S. dollar
compared to foreign currencies as a result of transactions in foreign markets.
We conduct non-U.S. operations through subsidiaries and joint ventures primarily
in Argentina, Australia, Brazil, China, South Africa and Turkey. At August 31,
2004, the result of a uniform 10% strengthening in the value of the dollar
relative to the currencies in which our transactions are denominated would not
cause a material impact on earnings.
For the year ended August 31, 2004, a 10% adverse change in the interest rate
that we earned on our excess cash that we invested would not have resulted in a
material change to our net interest income or cash flow.
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:
Report of Independent Registered Public Accounting Firm.............................................29
Management's Report.................................................................................30
Consolidated Statements of Income - for each of the three years in the
period ended August 31, 2004....................................................................31
Consolidated Balance Sheets - August 31, 2004 and 2003..............................................32
Consolidated Statements of Cash Flows - for each of the three years in the
period ended August 31, 2004.....................................................................33
Consolidated Statements of Stockholders' Equity and Comprehensive Income
- for each of the three years in the period ended August 31, 2004................................34
Notes to Consolidated Financial Statements..........................................................35
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, 2004 and 2003, and
the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended August 31, 2004. 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, 2004 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended August 31, 2004, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Memphis, Tennessee
October 25, 2004
MANAGEMENT'S REPORT:
--------------------
D&PL is responsible for preparing the financial statements and related
information appearing in this report. 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)
2004 2003 2002
------------------ ----------------- -----------------
NET SALES AND LICENSING FEES $ 314,871 $ 284,487 $ 260,041
COST OF SALES (205,863) (183,820) (169,209)
------------------ ----------------- -----------------
GROSS PROFIT 109,008 100,667 90,832
------------------ ----------------- -----------------
OPERATING EXPENSES:
Research and development 18,436 16,669 16,405
Selling 11,693 10,971 10,591
General and administrative 18,787 15,358 13,286
Special charges - 962 -
In-process research and development and related transaction costs 38,532 - -
------------------ ----------------- -----------------
Total operating expenses 87,448 43,960 40,282
------------------ ----------------- -----------------
OPERATING INCOME 21,560 56,707 50,550
INTEREST INCOME, NET 1,522 1,100 1,247
OTHER EXPENSE (10,518) (12,178) (7,188)
EQUITY IN NET LOSS OF AFFILIATE (3,551) (1,977) (305)
MINORITY INTEREST IN (EARNINGS) / LOSS OF SUBSIDIARIES (2,303) (1,104) 2,729
------------------ ----------------- -----------------
INCOME BEFORE INCOME TAXES 6,710 42,548 47,033
PROVISION FOR INCOME TAXES (1,394) (14,743) (16,694)
------------------ ----------------- -----------------
NET INCOME 5,316 27,805 30,339
DIVIDENDS ON PREFERRED STOCK (491) (288) (213)
------------------ ----------------- -----------------
NET INCOME APPLICABLE TO COMMON SHARES $ 4,825 $ 27,517 $ 30,126
================== ================= =================
BASIC EARNINGS PER SHARE $ 0.13 $ 0.72 $ 0.79
================== ================= =================
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN PER SHARE CALCULATIONS - BASIC 38,250 38,113 38,362
================== ================= =================
DILUTED EARNINGS PER SHARE $ 0.13 $ 0.70 $ 0.76
================== ================= =================
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN PER SHARE CALCULATIONS - DILUTED 39,670 39,594 39,781
================== ================= =================
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)
2004 2003
----------------- ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 149,587 $ 143,285
Receivables, net 184,759 166,952
Inventories 30,151 32,231
Prepaid expenses 1,923 2,116
Deferred income taxes 9,055 10,677
----------------- ------------------
Total current assets 375,475 355,261
PROPERTY, PLANT AND EQUIPMENT, NET 61,988 64,441
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED 4,183 4,183
INTANGIBLES, net of accumulated amortization of $1,969 and $1,597 5,471 5,470
INVESTMENT IN AFFILIATE - 328
OTHER ASSETS 1,594 1,869
DEFERRED INCOME TAXES 8,312 -
----------------- ------------------
TOTAL ASSETS $ 457,023 $ 431,552
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Notes payable $ 5,639 $ 40
Accounts payable 23,784 17,966
Accrued expenses 187,890 176,150
Income taxes payable 8,912 9,894
----------------- ------------------
Total current liabilities 226,225 204,050
----------------- ------------------
LONG-TERM DEBT 16,486 1,557
----------------- ------------------
DEFERRED INCOME TAXES - 5,220
----------------- ------------------
MINORITY INTEREST IN SUBSIDIARIES 4,586 3,618
----------------- ------------------
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;
40,162,820 and 39,525,116 shares issued;
38,495,354 and 38,107,850 shares outstanding 4,016 3,953
Capital in excess of par value 64,250 54,850
Retained earnings 176,808 189,610
Accumulated other comprehensive loss (3,736) (5,442)
Treasury stock, at cost; 1,667,466 and 1,417,266 shares (31,719) (25,971)
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 209,726 217,107
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 457,023 $ 431,552
================= ==================
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)
2004 2003 2002
------------------ ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,316 $ 27,805 $ 30,339
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 8,364 7,759 6,815
Loss (gain) on sale of assets 189 (34) 910
Noncash component of in-process research and development 22,125 - -
Equity in net loss of affiliate 3,551 1,977 305
Foreign exchange loss (gain) 124 (748) 2,476
Minority interest in earnings (loss) of subsidiaries 2,303 1,104 (2,729)
Change in deferred income taxes (12,294) 3,315 (3,061)
Changes in assets and liabilities:
Receivables (17,693) (20,804) 31,198
Inventories 1,921 7,849 (4,048)
Prepaid expenses 178 144 (21)
Intangibles and other assets (95) (133) (115)
Accounts payable 5,571 2,241 1,616
Accrued expenses 12,438 30,114 (34,443)
Income taxes 3,788 (1,557) (2,956)
------------------ ----------------- -----------------
Net cash provided by operating activities 35,786 59,032 26,286
------------------ ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,049) (8,298) (8,384)
Sale of investments and property 161 79 411
Investment in affiliate (2,630) (1,610) (1,000)
Purchase of minority interest in subsidiary - - (4,838)
------------------ ----------------- -----------------
Net cash used in investing activities (8,518) (9,829) (13,811)
------------------ ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (277) (2,109) (3,173)
Payments of long-term debt (1,607) - (73)
Dividends paid (18,118) (10,576) (7,881)
Proceeds from long-term debt - - 978
Proceeds from short-term debt 245 467 3,044
Minority interest in dividends paid by subsidiaries (1,336) - (446)
Payments to acquire treasury stock (5,748) (6,135) (9,960)
Proceeds from exercise of stock options 6,004 2,484 2,527
------------------ ----------------- -----------------
Net cash used in financing activities (20,837) (15,869) (14,984)
------------------ ----------------- -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES (129) 860 (2,403)
------------------ ----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,302 34,194 (4,912)
CASH AND CASH EQUIVALENTS, beginning of year 143,285 109,091 114,003
------------------ ----------------- -----------------
CASH AND CASH EQUIVALENTS, end of year $ 149,587 $ 143,285 $ 109,091
================== ================= =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of capitalized interest $ 10 $ 61 $ 880
Income taxes $ 8,904 $ 13,399 $ 21,077
Noncash operating activities:
Deferred taxes resulting from change in minimum pension liability $ 339 $ 678 $ 1,080
Noncash financing activities:
Tax benefit of stock option exercises $ 3,459 $ 825 $ 650
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, 2002, 2003 AND 2004
(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, 2001 $ 107 $ 3,911 $ 48,406 $ 149,923 $ (4,063) $ (9,876) $ 188,408
------------
Net income - - - 30,339 - - 30,339
Minimum pension liability adjustment, net of
tax of $1.08 million - - - - (1,787) - (1,787)
Foreign currency translation adjustment - - - - (183) - (183)
Unrealized gain on hedging instruments - - - - 94 - 94
------------
Total comprehensive income 28,463
------------
Exercise of stock options and tax benefit
of stock option exercises - 20 3,157 - - - 3,177
Cash dividends, $0.20 per share - - - (7,881) - - (7,881)
Purchase of common stock - - - - - (9,960) (9,960)
------------ ------------- ------------ ----------- --------------- ------------ ------------
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 loss 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
============ ============= ============ =========== =============== ============ ============
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
In the 2004 consolidated income statement, certain expenses historically
classified as Research and Development in Operating Expenses have been
reclassified as Cost of Sales. These expenses for the prior years have also been
reclassified for consistency. The expenses relate to certain activities
performed by the Technical Services department. As the sales of transgenic
varieties have increased as a percentage of our Net Sales and Licensing Fees
over the past several years, certain technical services department activities
have become more related to preparing seed for sale than to Research and
Development activities. The activities for which expenses have been reclassified
relate primarily to the increase of seed quantities to allow us to offer certain
varieties commercially and to late-stage trials performed to ensure that
varieties that have been chosen to be offered commercially meet agronomic and
transgenic requirements of our third-party technology licenses. The amount of
expenses reclassified for 2004, 2003 and 2002 was $1,803,000, $1,626,000 and
$1,717,000, respectively.
Also in 2004, certain shipping expenses historically classified as a reduction
to Net Sales and Licensing Fees have been reclassified as Cost of Sales. These
expenses primarily relate to costs incurred to ship finished goods to customers.
The amount of expenses reclassified for 2004, 2003 and 2002 was $3,104,000,
$3,211,000 and $2,234,000, respectively.
In addition, certain other prior year amounts have been reclassified to conform
with the 2004 presentation.
Special Charges/Unusual Items
2003
----
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. Excess of cost over net assets of businesses acquired was amortized
using the straight-line method over 40 years, until September 1, 2001, when
amortization was discontinued as required by Statement of Financial Accounting
Standards ("SFAS") No. 141.
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, which includes cash, accounts
receivables, derivatives and accounts payable, at August 31, 2004 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 and Roundup Ready licensing fees are recognized when the seed is
shipped. Domestically, the licensing fees charged to farmers for Bollgard and
Roundup Ready cottonseed are based on pre-established planting rates for 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 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. We
record monthly estimates to account for various sales incentive programs for
seed and Monsanto's Bollgard 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 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 plan 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.
2004 2003 2002
------------------ ----------------- -----------------
Net income(in thousands):
As reported $ 5,316 $ 27,805 $ 30,339
Less: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effects (2,979) (3,600) (4,714)
------------------ ----------------- -----------------
Pro forma $ 2,337 $ 24,205 $ 25,625
================== ================= =================
Basic earnings per share:
As reported $ 0.13 $ 0.72 $ 0.79
================== ================= =================
Pro forma $ 0.05 $ 0.63 $ 0.66
================== ================= =================
Diluted earnings per share:
As reported $ 0.13 $ 0.70 $ 0.76
================== ================= =================
Pro forma $ 0.06 $ 0.62 $ 0.64
================== ================= =================
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) 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 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 attributable
to the domestic segment 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 test during the fourth quarter of 2004
and 2003, management determined that none of the goodwill recorded 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 and contingent liabilities.
Recently Issued Financial Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - An Interpretation of ARB No. 51". In December 2003,
the FASB published a revision to Interpretation No. 46 (46R) to clarify some of
the provisions of the original Interpretation. The Company does not have any
variable interest entities and, therefore, the adoption of this statement did
not have a material impact on D&PL's consolidated financial position or results
of operations.
Statement of Financial Accounting Standards ("SFAS") No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
requires additional annual disclosures about pension plan assets, benefit
obligations, cash flows, benefit costs and related information. SFAS No. 132
(Revised 2003) also requires companies to disclose various elements of pension
and postretirement benefit costs in interim-period financial statements for
quarters beginning after December 15, 2003. The required additional annual
disclosures are included in Note 10.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity," provides guidance on how to classify and
measure certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. D&PL adopted this
statement for financial instruments entered into after May 31, 2003 and
otherwise adopted this statement September 1, 2003. The adoption of this
statement did not have a material impact on D&PL's consolidated financial
position or results of operations.
2. INVENTORIES
Inventories at August 31, consisted of the following (in thousands):
2004 2003
------------------- -------------------
Finished goods $ 24,867 $ 21,476
Raw materials 14,333 17,062
Growing crops 1,432 1,199
Supplies 1,040 733
------------------- -------------------
41,672 40,470
Less reserves (11,521) (8,239)
------------------- -------------------
$ 30,151 $ 32,231
=================== ===================
Finished goods and raw material inventory is valued at the lower of average cost
or market. Growing crops are recorded at cost. Elements of cost in inventories
include raw materials, direct production costs, manufacturing overhead and
immaterial general and administrative expenses. Inventory reserves relate to
estimated excess and obsolete inventory. The provision recorded for excess and
obsolete inventory for the years ended August 31, 2004, 2003 and 2002 were
$12,299,000, $7,478,000 and $10,345,000, respectively. See Note 14 for a
description of hedging activities.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at August 31, consisted of the following (in
thousands):
2004 2003
------------------- -------------------
Land and improvements $ 5,981 $ 5,124
Buildings and improvements 42,228 41,272
Machinery and equipment 59,125 56,202
Germplasm 7,500 7,500
Breeder and foundation seed 2,000 2,000
Construction in progress 2,538 5,464
------------------- -------------------
119,372 117,562
Less accumulated depreciation (57,384) (53,121)
------------------- -------------------
$ 61,988 $ 64,441
=================== ===================
Depreciation expense was approximately $7,980,000, $7,490,000 and $6,540,000 in
2004, 2003, and 2002, respectively.
4. INTANGIBLES
The components of identifiable intangible assets at August 31, consisted of the
following (in thousands):
2004 2003
------------------------------------ ------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------- ----------------- ----------------- -----------------
Trademarks $ 3,182 $ (879) $ 3,182 $ (800)
Commercialization
agreements 400 (93) 400 (65)
Licenses 1,100 (83) 1,100 -
Patents 772 (97) 426 (84)
Other 1,986 (817) 1,959 (648)
----------------- ----------------- ----------------- -----------------
$ 7,440 $ (1,969) $ 7,067 $ (1,597)
================= ================= ================= =================
Amortization expense for identifiable intangible assets during the years ended
August 31, 2004, 2003, and 2002 was approximately $380,000, $270,000, and
$280,000, respectively. Identifiable intangible asset amortization expense is
estimated to be $400,000 in each of the fiscal years from 2005 through 2008 and
$300,000 in 2009.
During the fourth quarters of fiscal 2004 and 2003, "EXCESS OF COST OVER NET
ASSETS OF BUSINESS ACQUIRED" ("goodwill") attributable to the domestic segment
was tested for impairment by comparing its implied fair value to its carrying
value. Based on management's impairment test, management determined that none of
the goodwill recorded was impaired.
5. INVESTMENT IN AFFILIATE
D&PL owns a 50% interest in DeltaMax, a limited liability company jointly owned
with Verdia, Inc. Verdia was acquired by DuPont on July 2, 2004. Established in
May 2002, the DeltaMax joint venture was formed to create, develop and
commercialize herbicide tolerant and insect resistant traits for the cottonseed
market. D&PL has licensed from DeltaMax the developed traits for
commercialization in both the U.S. and other cotton-producing countries in the
world. For the years ended August 31, 2004, 2003 and 2002, D&PL's equity in the
net loss of DeltaMax was $3,551,000, $1,977,000, and $305,000, respectively.
6. NOTES PAYABLE AND LONG-TERM DEBT
The amounts reported in the Consolidated Balance Sheets as "Notes Payable" and
"Long-Term Debt" at August 31, 2004 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):
2004 2003
------------------ ------------------
Bollgard and Roundup Ready
royalties and related expenses
due to Monsanto $ 149,984 $ 135,627
Sales allowances 12,281 11,756
Dividends 4,619 3,917
Other accrued expenses 21,006 24,850
------------------ ------------------
$ 187,890 $ 176,150
================== ==================
8. INCOME TAXES
The provisions for income taxes for the years ended August 31, consisted of the
following (in thousands):
2004 2003 2002
------------------ ------------------ -----------------
Current-
Federal $ 12,078 $ 10,891 $ 18,380
State 1,226 1,216 2,047
Deferred-
Federal (10,232) 2,347 (3,282)
State (1,678) 289 (451)
------------------ ------------------ -----------------
$ 1,394 $ 14,743 $ 16,694
================== ================== =================
The differences between the statutory federal income tax rate and the effective
rate are as follows:
2004 2003 2002
----------------- ------------------ ------------------
Statutory rate 35.0% 35.0% 35.0%
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit (4.4) 2.3 2.2
Research and development tax credits (9.3) (1.1) (1.1)
Foreign activities and non-deductible costs (0.9) (1.3) (1.4)
Other 0.4 (0.2) 0.8
----------------- ------------------ ------------------
Effective rate 20.8% 34.7% 35.5%
================= ================== ==================
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):
2004 2003
------------------- -------------------
Deferred tax assets:
Inventory $ 4,048 $ 5,635
Litigation costs 1,129 1,387
Pension 955 1,080
Capitalized licenses (Syngenta) 14,541 -
Other 3,327 2,575
------------------- -------------------
$ 24,000 $ 10,677
=================== ===================
Deferred tax liabilities:
Property and intangibles (3,615) (3,923)
Other (3,018) (1,297)
------------------- -------------------
(6,633) (5,220)
------------------- -------------------
Net deferred income taxes $ 17,367 $ 5,457
=================== ===================
The Company has provided for income taxes on the undistributed earnings of
foreign subsidiaries as if they had been distributed in cases where the earnings
are not planned to be permanently reinvested outside the United States.
9. LEASES
D&PL leases a portion of the real estate and machinery and equipment used in its
operations. Substantially all rent expense is recorded as cost of sales. D&PL
does not have any capital leases. Future minimum rental payments after 2004
under operating leases with initial or remaining noncancellable terms in excess
of one year are as follows:
2005 $ 187,000
2006 $ 125,000
2007 $ 80,000
2008 $ 82,000
2009 $ 78,000
Rent and lease expense approximated $2,558,000, $2,767,000, and $2,704,000 in
2004, 2003 and 2002, respectively.
10. 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 $1 million to the Plan in 2005.
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 2005.
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, 2004, and a statement of the funded status as of August 31,
2004 and 2003.
Plan SERP
-------------------------------------- ---------------------------------------
2004 2003 2004 2003
----------------- ----------------- ------------------ ------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at beginning of year $ 16,848,000 $ 13,393,000 $ 616,000 $ 570,000
Service cost 832,000 638,000 9,000 8,000
Interest cost 989,000 915,000 35,000 38,000
Actuarial (gain) loss (121,000) 2,624,000 (4,000) 49,000
Benefits paid (682,000) (722,000) (49,000) (49,000)
----------------- ----------------- ------------------ ------------------
Benefit obligation at end of year $ 17,866,000 $ 16,848,000 $ 607,000 $ 616,000
================= ================= ================== ==================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 10,188,000 $ 7,761,000 $ 362,000 $ 380,000
Actual return on plan assets 1,101,000 721,000 27,000 32,000
Company contributions 2,700,000 2,500,000 - -
Benefits paid (682,000) (722,000) (49,000) (49,000)
Expenses (92,000) (72,000) (1,000) (1,000)
----------------- ----------------- ------------------ ------------------
Fair value of plan assets at end of year $ 13,215,000 $ 10,188,000 $ 339,000 $ 362,000
================= ================= ================== ==================
Funded status $ (4,651,000) $ (6,660,000) $ (268,000) $ (254,000)
Unrecognized prior service cost 36,000 40,000 - -
Unrecognized net loss 5,781,000 6,461,000 - 49,000
----------------- ----------------- ------------------ ------------------
Prepaid (accrued) pension cost $ 1,166,000 $ (159,000) $ (268,000) $ (205,000)
================= ================= ================== ==================
Plan SERP
-------------------------------------- ---------------------------------------
2004 2003 2004 2003
----------------- ----------------- ------------------ ------------------
AMOUNTS REFLECTED IN THE BALANCE SHEET AT
AUGUST 31:
Prepaid (accrued) benefit cost $ 1,166,000 $ (159,000) $ (268,000) $ (205,000)
Minimum pension liability (3,809,000) (4,657,000) - (49,000)
Accumulated other comprehensive loss 3,773,000 4,617,000 - 49,000
Intangible asset 36,000 40,000 - -
----------------- ----------------- ------------------ ------------------
Net amount reflected $ 1,166,000 $ (159,000) $ (268,000) $ (205,000)
================= ================= ================== ==================
The accumulated benefit obligation for the Plan was $15,858,000 and $15,004,000
in 2004 and 2003, respectively. The accumulated benefit obligation for the SERP
was $607,000 and $616,000 in 2004 and 2003, respectively.
Periodic Pension Expense:
Plan SERP
----------------------------------------- -----------------------------------------
2004 2003 2002 2004 2003 2002
------------ ------------ ------------- ------------ ------------- ------------
Service cost $ 832,000 $ 638,000 $ 646,000 $ 9,000 $ 8,000 $ 7,000
Interest cost on projected benefit
obligation 989,000 915,000 841,000 35,000 38,000 37,000
Expected return on assets (921,000) (687,000) (889,000) (28,000) (32,000) (47,000)
Recognized loss 472,000 263,000 - 50,000 186,000 10,000
Amortization of transitional
obligation - - 65,000 - - -
Amortization of prior service cost 3,000 3,000 4,000 - - -
------------ ------------ ------------- ------------ ------------- ------------
Net periodic pension
expense $1,375,000 $1,132,000 $ 667,000 $ 66,000 $ 200,000 $ 7,000
============ ============ ============= ============ ============= ============
Company contributions $2,700,000 $1,500,000 $ 1,600,000 $ - $ - $ -
============ ============ ============= ============ ============= ============
Plan SERP
-------------------------------------- ---------------------------------------
2004 2003 2004 2003
----------------- ----------------- ------------------ ------------------
Weighted-average assumptions used to determine
benefit obligations at August 31:
Discount rate 6.25% 6.00% 6.25% 6.00%
Rate of compensation increases 4.00% 4.00% 4.00% 4.00%
Weighted-average assumptions used to determine
net periodic benefit cost for years ended
August 31:
Discount rate 6.00% 7.00% 6.00% 7.00%
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,
2004 and 2003 are as follows:
Plan SERP
-------------------------------------- ---------------------------------------
2004 2003 2004 2003
----------------- ----------------- ------------------ ------------------
Asset Category
Common stock 70% 63% 72% 58%
Preferred stock 18% 23% 27% 41%
Corporate bonds and debentures - 2% - -
Temporary investments 12% 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 stock, corporate bonds and debentures) and equities (including common
stock). 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, 2004 or 2003.
At August 31, 2004, total future Plan and SERP benefits are estimated as
follows:
Plan SERP
----------------- -----------------
2005 $ 676,000 $ 63,000
2006 736,000 63,000
2007 750,000 63,000
2008 790,000 63,000
2009 850,000 63,000
Years 2010-2014 4,962,000 314,000
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 2004, 2003 or 2002.
11. MAJOR CUSTOMERS
In fiscal 2004, 2003 and 2002 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 2004 2003 2002
--------------- ------------------ ------------------- -------------------
A $38,820,000 $32,275,000 $29,368,000
B 66,156,000 57,580,000 47,176,000
C 55,388,000 55,438,000 57,057,000
12. 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):
2004 2003 2002
--------------- --------------- ---------------
Net sales and licensing fees
Domestic $ 276,410 $ 255,133 $ 227,636
International 38,461 29,354 32,405
--------------- --------------- ---------------
$ 314,871 $ 284,487 $ 260,041
=============== =============== ===============
Net sales and licensing fees
Cottonseed $ 284,339 $ 257,846 $ 239,801
Soybean seed 26,951 21,670 17,136
Other 3,581 4,971 3,104
--------------- --------------- ---------------
$ 314,871 $ 284,487 $ 260,041
=============== =============== ===============
Operating income
Domestic $ 17,199 $ 55,170 $ 44,906
International 4,361 1,537 5,644
--------------- --------------- ---------------
$ 21,560 $ 56,707 $ 50,550
=============== =============== ===============
Capital expenditures
Domestic $ 4,240 $ 5,613 $ 5,922
International 1,809 2,685 2,462
--------------- --------------- ---------------
$ 6,049 $ 8,298 $ 8,384
=============== =============== ===============
Depreciation and amortization
Domestic $ 6,762 $ 6,559 $ 6,095
International 1,602 1,200 720
--------------- --------------- ---------------
$ 8,364 $ 7,759 $ 6,815
=============== =============== ===============
Information about the financial position of D&PL's segments as of August 31, is
as follows (in thousands):
2004 2003
--------------- ---------------
Long-term assets
Domestic $ 65,210 $ 59,640
International 16,338 16,651
--------------- ---------------
$ 81,548 $ 76,291
=============== ===============
Total assets
Domestic $ 428,444 $ 403,976
International 28,579 27,576
--------------- ---------------
$ 457,023 $ 431,552
=============== ===============
13. 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 2002, D&PL paid consulting
fees to Stephens, Inc. of approximately $306,000 relating to the DeltaMax
formation.
During 2004, 2003 and 2002, a partner of two law firms (he changed firms in
October 2001) that represented D&PL was also a stockholder and D&PL's corporate
secretary. D&PL paid legal fees to these firms of approximately $929,000,
$633,000, and $628,000 in 2004, 2003 and 2002, respectively.
During 2002, the Institute of Molecular Agrobiology ("IMA"), which is owned by
the National University of Singapore and the National Science and Technology
Board of Singapore, conducted contract research upon D&PL's instruction related
to the development of certain technologies for varietal crops such as cotton and
soybeans. D&PL paid approximately $249,000 in 2002 for such research projects.
Dr. Chua, a member of the Board of Directors of D&PL, was the Chairman of the
Management Board of Directors of IMA until September 2000 and Deputy Chairman
from that time until September 2001 and was also Chairman of the Board of an
affiliate of IMA, IMAGEN, until August 2001. IMAGEN, together with Singapore
Bio-Innovations Pte. Ltd., STIC Investments Pte. Ltd., and OCBC Wearnes and
Walden Investments Pte. Ltd., own 20% of the stock of D&PL China Pte. Ltd.
During 2004 and 2003, DeltaMax paid Temasek Life Science Laboratory ("TLL")
approximately $1,118,000 and $811,000, respectively, for research activities
Temasek 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 2005, 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).
14. DERIVATIVE FINANCIAL INSTRUMENTS
Other comprehensive loss includes the following related to the Company's soybean
hedging program for the years ended August 31, 2004 and 2003 (in thousands):
2004 2003
------------------- -------------------
Deferred net gain, beginning of year $ 262 $ 304
Net gains on hedging instruments arising during the year 60 463
Reclassification adjustment of gains on hedging instruments to
earnings (456) (505)
------------------- -------------------
Net change in accumulated other comprehensive loss (396) (42)
------------------- -------------------
Deferred net (loss) gain on derivative instruments included in other
comprehensive loss at end of year $ (134) $ 262
=================== ===================
The net loss of $134,000 included in accumulated other comprehensive loss at
August 31, 2004, consists of net unrealized losses of $175,000 and net
unrealized gains of $41,000, 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, 2004 and August 31, 2003, D&PL recorded no gains
or losses in earnings as a result of hedge ineffectiveness or discontinuance of
cash flow hedges.
15. ACQUISITION OF D&M INTERNATIONAL, LLC
1
On May 28, 2002, D&M International, LLC redeemed Pharmacia's 50% interest in
D&M International, LLC for cash of approximately $4.8 million. D&PL and
1
Monsanto formed D&M International, LLC in 1995 to introduce cotton planting
seed in international markets combining D&PL's acid delinting technology and
elite germplasm and Monsanto's Bollgard and Roundup Ready gene technologies. In
April 2002, Pharmacia activated a cross purchase provision in the operating
agreement for D&M International, LLC and D&PL notified Pharmacia that it elected
to have D&M International, LLC redeem Pharmacia's 50% interest in the company.
As a result of the redemption of Pharmacia's interest, D&PL now owns all of D&M
International, LLC.
The acquisition of the 50% interest in D&M International, LLC has been accounted
for as a purchase business combination, and the results of its operations have
been included in D&PL's consolidated statement of operations from the date of
acquisition. The allocation of the purchase price resulted in no goodwill. Pro
forma results of operations for the year ended August 31, 2002 had the
acquisition occurred at the beginning of the period would not have been
materially different than reported results for the period.
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 over the next three years. Under the acquisition
agreement, D&PL paid Syngenta $14.1 million at closing during fiscal year 2004
and is required to pay Syngenta $5.8 million in fiscal year 2005, $10.15 million
in fiscal year 2006, $5.95 million in fiscal year 2007, and $1.6 million in
fiscal year 2008. Contingent payments of $1.6 million in fiscal year 2008, $3.1
million in fiscal year 2009, $3.0 million in fiscal year 2010, and $1.5 million
in fiscal year 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, and then immediately
expensed in the Consolidated Statement of Income, as the technologies to which
we purchased licenses were in-process research and development (IPR&D) projects
that had not yet reached technological feasibility and had no alternative future
use. The amount capitalized and then written off as IPR&D was $36,225,000. This
amount is reported in the Consolidated Statement of Income under "In-process
research and development and related transaction costs." Payments to be made
after three and one-half years 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.
-----------------------------
1. On March 31, 2000, Monsanto Company consummated a merger with Pharmacia &
Upjohn Inc. and changed its name to Pharmacia Corporation. On February 9, 2000,
Monsanto Company formed a new subsidiary corporation, Monsanto Ag Company,
which, on March 31, 2000, changed its name to Monsanto Company. On August 31,
2002, Pharmacia distributed to its shareholders its remaining interest in the
new Monsanto Company. Pursuant to the closing of a merger on April 16, 2003,
Pharmacia Corporation merged with and into a wholly-owned subsidiary of Pfizer
Inc. Pharmacia survived the merger as a wholly-owned subsidiary of Pfizer Inc.
In this document, with respect to events occurring on or before March 31, 2000,
the term "Monsanto" refers to the entity then designated Monsanto Company and
renamed Pharmacia Corporation on that date. With respect to events occurring
between March 31, 2000 and April 16, 2003, this entity is referred to as
"Pharmacia". With respect to events occurring after April 16, 2003, the entity
referred to as "Pharmacia" is that entity which on that date became a
wholly-owned subsidiary of Pfizer Inc. With respect to events occurring after
March 31, 2000, the entity formed as Monsanto Ag Company and renamed Monsanto
Company (NYSE: MON) on March 31, 2000, is referred to as "Monsanto".
The present value of the amounts to be paid over the first three and one-half
years was computed based on discount rates that approximated borrowing rates
that we would incur on borrowings with similar maturities as the payments
required to be made. Accordingly, the discount rate used for the payments to be
made one, two and three and one-half years after the purchase date was 3.28%,
3.84% and 4.25%, respectively. The amount due to Syngenta within the next twelve
months is reported in the Consolidated Balance Sheet as "Notes Payable" under
Current Liabilities. The balance of the remaining payments due over the next
three and one-half years 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
things, that certain of D&PL's products (including those containing Monsanto's
technology) did not perform as the farmer had anticipated or expected. In some
of these cases, Monsanto and/or the dealer or distributor who sold the seed are
also named as defendants. In all cases where the seed sold contained either or
both of Monsanto's Bollgard(R) and/or Roundup Ready(R) gene technologies, and
where the farmer alleged a failure of one or more of those technologies, D&PL
has tendered the defense of the case to Monsanto and requested indemnity.
Pursuant to the terms of the February 2, 1996 Bollgard Gene License and Seed
Services Agreement (the "Bollgard Agreement") and the February 2, 1996 Roundup
Ready Gene License and Seed Services Agreement (the "Roundup Ready Agreement")
(both as amended December 1999, January 2000 and March 2003 and the Roundup
Ready Agreement as additionally amended July 1996), D&PL has a right to be
contractually indemnified by Monsanto against all claims arising out of the
failure of Monsanto's gene technology. Pharmacia remains liable for Monsanto's
performance under these indemnity agreements. Some of the product liability
lawsuits contain varietal claims which are aimed solely at D&PL. D&PL does not
have a right to indemnification from Monsanto for any claims involving varietal
characteristics separate from or in addition to the failure of the Monsanto
technology. D&PL believes that the resolution of these matters will not have a
material impact on the consolidated financial statements. D&PL intends to
vigorously defend itself in these matters.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II(R) cottonseed infringes Bayer's Australian patent
that claims an alleged invention entitled "Prevention of Bt Resistance
Development." The suit seeks an injunction, damages and other relief against
Deltapine Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings. Due to the status of this
matter, management is unable to determine the impact of this matter on the
consolidated financial statements.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners, a partnership of D&PL (90%) and Monsanto
(10%), pertaining to matters under the Bollgard and Roundup Ready Licenses for
the United States and matters under license agreements for Argentina and the
Republic of South Africa. In August 2003, D&PL and D&M Partners responded to
Monsanto's positions on each issue and notified Monsanto of additional disputes,
each concerning Monsanto's compliance with its obligations under the Bollgard
and Roundup Ready Licenses for the United States. In accordance with the dispute
resolution provisions of the subject agreements, the issues raised in Monsanto,
D&PL and D&M Partners' notices were submitted to a panel of senior executives
(the "Executive Panel"). Monsanto subsequently withdrew from the Executive Panel
the issue involving the license agreements for the Republic of South Africa and
submitted to the Executive Panel one additional issue of interpretation of the
Bollgard and Roundup Ready Licenses for the United States. Issues arising from
operations in Argentina and issues involving technology fees and interest have
been settled and are no longer in dispute. On May 20, 2004, Monsanto submitted
to arbitration before the American Arbitration Association two unresolved
issues: whether D&M Partners has paid Monsanto all royalties due and whether
D&PL has made unauthorized transfers of materials containing Monsanto
technology. In this arbitration proceeding, Monsanto seeks an adjudication of
its alleged right to terminate the Bollgard and Roundup Ready Licenses, to
dissolve D&M Partners, to obtain an accounting and to receive monetary damages
and a return or destruction of materials containing Monsanto technologies. D&PL
denies the claims asserted by Monsanto in the arbitration filing and has filed
appropriate responses and counterclaims to Monsanto's claims based on the issues
submitted by D&PL to the Executive Panel. On November 8, 2004, Monsanto
submitted one new claim allegedly involving a dispute under the license
agreements to the Executive Panel. 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 July 2002, Syngenta Biotechnology, Inc. ("SBI") brought suit in the U.S.
District Court in Delaware alleging that D&PL's making, using, selling and
offering to sell cotton planting seed containing Monsanto's insect-resistant Bt
genes, being sold under the trade name Bollgard, and Monsanto's herbicide
tolerance genes, being sold under the trade name Roundup Ready, infringed U.S.
Patent 6,051,757 entitled "Regeneration of Plants Containing Genetically
Engineered T-DNA". This suit was dismissed with prejudice by a Stipulation of
Dismissal filed February 20, 2004, with no material impact to D&PL.
In May 2002, Pharmacia Corporation filed a suit in state court in Missouri
against D&PL International Technology Corp. ("DITC"), D&PL's subsidiary, seeking
a declaratory judgment that it was entitled to invoke the cross purchase
provision in the Operating Agreement for D&M International, LLC, a limited
liability company jointly owned by Pharmacia and DITC. In March 2004, the
parties agreed to settle the matter without material financial impact to the
Company. An order of dismissal was entered on April 27, 2004.
In December 1999, Mycogen Plant Science, Inc. ("Mycogen") filed a suit in the
Federal Court of Australia alleging that Monsanto Australia Ltd., Monsanto's
wholly-owned Australian subsidiary, and Deltapine Australia have been infringing
two of Mycogen's Australian patents by making, selling, and licensing cotton
planting seed expressing insect resistance. The suit seeks injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. The litigation is currently in discovery and
pretrial proceedings. Consistent with its commitments, Monsanto has agreed to
defend D&PL in this suit and to indemnify D&PL against damages, if any are
awarded. Monsanto is providing separate defense counsel for D&PL. D&PL is
assisting Monsanto to the extent reasonably necessary. 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 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
$697,000 at October 31, 2004 exchange rates) and an injunction preventing D&PL
from distributing seed through any other licensee in that region. The Guatemalan
court, where this action is proceeding, has twice declined to approve the
injunction sought. D&PL continues to make available seed for sale in Central
America and Mexico.
D&PL vs. Monsanto Company and Pharmacia Corp.
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
effectively terminating Monsanto's efforts to gain government approval of the
merger of Monsanto with D&PL under the May 8, 1998, Merger Agreement. On
December 30, 1999, D&PL filed suit in the First Judicial District of Bolivar
County, Mississippi, seeking, among other things, the payment of the $81 million
termination fee due pursuant to the merger agreement, compensatory damages and
punitive damages. On January 2, 2000, D&PL and Monsanto reached an agreement
whereby D&PL would withdraw the suit, without prejudice, for the purpose of
negotiating a settlement of D&PL's claims, and Monsanto would immediately pay
the $81 million. On January 3, 2000, Monsanto paid to D&PL a termination fee of
$81 million as required by the merger agreement. On January 18, 2000, after
unsuccessful negotiations, D&PL re-filed its suit. D&PL seeks in excess of $1
billion in compensatory and $1 billion in punitive damages for breach of the
merger agreement between the parties.
On September 12, 2003, Monsanto amended its answer to include four counterclaims
against D&PL. Monsanto is seeking unspecified damages for its counterclaims,
including the $81 million paid by Monsanto to D&PL as a termination fee and
related expenses. D&PL answered the counterclaims, denying all liability, and
D&PL intends to vigorously defend against these counterclaims. 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.
Stock Option Plans
The 1993 Stock Option Plan authorized 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. 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.
Additional information regarding options granted and outstanding is summarized
below:
Stock Options Number of
Shares Price Range
-------------- --------------------------
Outstanding at August 31, 2001 4,055,960 $ 4.67 $ 49.31
Granted 682,496 17.85 20.47
Exercised (200,338) 4.67 19.62
Lapsed or canceled (500,299) 16.91 49.31
--------------
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
==============
The weighted average fair values of options granted in fiscal 2004, 2003 and
2002 were $6.14, $6.41, and $6.49 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:
2004 2003 2002
-------------- --------------- ---------------
Expected dividend yield 1% 1% 3%
Expected option lives 8 years 8 years 5 years
Expected volatility 16.01% 24.99% 33.52%
Risk-free interest rates 3.82% 3.07% 5.54%
The following table summarizes certain information about outstanding and
exercisable stock options at August 31, 2004:
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 15.71 241,388 1.3 $ 12.55 241,388 $ 12.55
$ 16.91 to 28.04 3,004,585 5.3 20.85 2,128,000 21.44
$ 32.80 to 37.80 81,660 4.2 35.90 81,660 35.90
$ 41.69 to 47.31 2,000 3.7 47.31 2,000 47.31
------------- --------------
3,329,633 2,453,048
============= ==============
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 are to be used to provide for option exercises, conversion of D&PL's
Series M Convertible Non-Voting Preferred shares and for other general corporate
purposes. At August 31, 2004, D&PL had repurchased 1,553,200 shares at an
aggregate purchase price of approximately $29,600,000 under this program. D&PL
purchased 250,200 shares at an aggregate purchase price of $5,748,000 under this
plan in the year ended August 31, 2004.
Earnings Per Share
Dilutive common share equivalents consist of both D&PL's Series M Convertible
Non-Voting Preferred Shares and outstanding stock options under D&PL's 1993
Stock Option Plan and the 1995 Long-Term Incentive Plan. Approximately 551,000,
1,117,000, and 2,259,000 outstanding stock options were not included in the
computation of diluted earnings per share for the years ended August 31, 2004,
2003 and 2002, 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. The table below reconciles the basic and diluted
per share computations:
For the Twelve Months Ended August 31,
---------------------------------------
2004 2003 2002
----------------- ---------------- ---------------
Income(in thousands):
Net income $ 5,316 $ 27,805 $ 30,339
Less: Preferred stock dividends (491) (288) (213)
----------------- --------------- ---------------
Net income for basic EPS 4,825 27,517 30,126
Effect of Dilutive Securities:
Convertible Preferred Stock Dividends 491 288 213
----------------- --------------- ---------------
Net income available to common stockholders
plus assumed conversions - for diluted EPS $ 5,316 $ 27,805 $ 30,339
================= =============== ===============
Shares(in thousands):
Basic EPS shares 38,250 38,113 38,362
Effect of Dilutive Securities:
Options to purchase common stock 353 414 352
Convertible preferred stock 1,067 1,067 1,067
----------------- --------------- ---------------
Diluted EPS shares 39,670 39,594 39,781
================= =============== ===============
Per Share Amounts:
Basic $ 0.13 $ 0.72 $ 0.79
================= =============== ===============
Diluted $ 0.13 $ 0.70 $ 0.76
================= =============== ===============
Shares Outstanding
Additional information regarding shares outstanding is summarized below:
Common Shares Number of
Shares
--------------
Outstanding at August 31, 2001 38,543,267
Exercises of stock options 200,338
Purchases of common stock (539,200)
--------------
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
==============
19. UNAUDITED QUARTERLY FINANCIAL DATA
All of D&PL's domestic seed products (including those containing Bollgard 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. We also offer various sales incentive
programs for seed and participate in such programs related to the Bollgard and
Roundup Ready technology fees offered by Monsanto. 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. 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. 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 2004: Three months ended
November 30 February 29 May 31 August 31
--------------------------------------------------------------------------------------------------------------------
Net sales and licensing fees $ 13,845 $ 88,276 $ 185,119 $ 27,631
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 $ 107,537 $ 168,936 $ 2,415
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
--------------------------------------------------------------------------------------------------------------------
Fiscal 2002: Three months ended
November 30 February 28 May 31 August 31
--------------------------------------------------------------------------------------------------------------------
Net sales and licensing fees $ 8,253 $ 111,867 $ 135,386 $ 4,535
Gross profit 2,438 39,736 48,470 188
Net (loss) income applicable to common shares (4,538) 17,721 25,012 (8,069)
Net (loss) income per share-basic (2) (0.12) 0.46 0.65 (0.21)
Weighted average number of shares used
in quarterly per share calculations -basic 38,385 38,454 38,343 38,267
Net (loss) income per share- diluted (2) (0.12) 0.44 0.63 (0.21)
Weighted average number of shares used
in quarterly per share calculations- diluted 38,385 39,991 39,769 38,267
(1) The 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 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.
D&PL's chief executive officer and chief financial officer have evaluated the
effectiveness of the design and operation of D&PL's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of August 31, 2004.
Based on that evaluation, the chief executive officer and chief financial
officer have concluded that D&PL's disclosure controls and procedures are
effective to ensure that material information relating to D&PL and D&PL's
consolidated subsidiaries is made known to such officers by others within these
entities, particularly during the period this report was prepared, in order to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
There have not been any changes in D&PL's internal control over financial
reporting or in other factors that have materially affected, or are reasonably
likely to materially affect, D&PL's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
The Board of Directors of D&PL has established January 11, 2005 as the next
Annual Meeting of Shareholders. Shareholders of record as of November 16, 2004
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 11, 2005 to be filed
with the Commission pursuant to Regulation 14(a) no later than December 29, 2004
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 Investor Relations.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information with respect to these item are set forth in D&PL's Proxy Statement
for the Annual Meeting of Stockholders to be held on January 11, 2005 to be
filed with the Commission pursuant to Regulation 14(a) no later than December
29, 2004 and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income - for each of the three
years in the period ended August 31, 2004
Consolidated Balance Sheets - August 31, 2004 and 2003
Consolidated Statements of Cash Flows - for each of the three
years in the period ended August 31, 2004
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income - for each of the three years in the
period ended August 31, 2004
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 ......57
Schedule II - Consolidated Valuation and Qualifying Accounts..58
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 59.
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 15, 2004.
DELTA AND PINE LAND COMPANY
(Registrant)
/s/ Jon E. M. Jacoby November 15, 2004
---------------------------
By: Jon E. M. Jacoby, Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ W. Thomas Jagodinski President, Chief Executive Officer, November 15, 2004
------------------------- and Director
W. Thomas Jagodinski (Principal Executive Officer)
/s/ R. D. Greene Vice President - Finance, November 15, 2004
------------------------- Treasurer and Assistant Secretary
R. D. Greene (Principal Financial and
Accounting Officer)
/s/ F. Murray Robinson Vice Chairman and Director November 15, 2004
-------------------------
F. Murray Robinson
/s/ Stanley P. Roth Vice Chairman and Director November 15, 2004
-------------------------
Stanley P. Roth
/s/ Nam-Hai Chua Director November 15, 2004
-------------------------
Nam-Hai Chua
/s/ Joseph M. Murphy Director November 15, 2004
-------------------------
Joseph M. Murphy
/s/ Rudi E. Scheidt Director November 15, 2004
-------------------------
Rudi E. Scheidt
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Delta and Pine Land Company:
Under date of October 25, 2004, we reported on the consolidated balance sheets
of Delta and Pine Land Company and subsidiaries (the Company) as of August 31,
2004 and 2003, and the related consolidated statements of income, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended August 31, 2004, which are included in this Form 10-K.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules listed in Part IV, Item 15(a)2. These financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
Memphis, Tennessee
October 25, 2004
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
-------- -------- ---------------------------- -------- --------
Description Balance at Charged Balance
----------- Beginning to Costs Charged to at End
of and Other of
Period Expenses Accounts Deductions Period
------------------------------------------------------------------------------------------------------------------------
Fiscal year ended August 31, 2002
Allowance for doubtful accounts $ 1,187 $ 228 $ (303)(a) $ (12)(b) $ 1,100
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
(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.
INDEX
EXHIBITS TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED AUGUST 31, 2004
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)
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 hereof, and Monsanto
Company, and, solely for the purposes of Section 3.2 hereof, 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)(*)
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. (16)
23.01 Consent of Independent Registered Public Accounting Firm. (16)
31.01 Section 302 Certification of Principal Executive Officer. (16)
31.02 Section 302 Certification of Principal Financial Officer. (16)
32.01 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section
1350 by Principal Executive Officer. (16)
32.02 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section
1350 by Principal Financial and Accounting Officer. (16)
-------------------------
(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) Filed herewith
(17) Incorporated by reference from Form 8-K filed November 1, 2004
(*) The Company has applied for confidential treatment for portions of
this agreement. Accordingly, portions thereof have been omitted and filed
separately.