3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended February 28, 2002 or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period
from to
------------------------ ------------------------
Commission File Number: 000-21788
Exact name of registrant as specified in its charter:
DELTA AND PINE LAND COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification Number: 62-1040440
Address of Principal Executive Offices (including zip code)
One Cotton Row, Scott, Mississippi 38772
Registrant's telephone number, including area code:
(662) 742-4500
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES (x) NO ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.10 Par Value - 38,317,544 shares outstanding as of March 29,
2002.
25
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - February 28, 2001,
August 31, 2001, and February 28, 2002 3
Consolidated Statements of Operations - Three Months
Ended February 28, 2001 and February 28, 2002 4
Consolidated Statements of Operations - Six Months
Ended February 28, 2001 and February 28, 2002 5
Consolidated Statements of Cash Flows - Six Months
Ended February 28, 2001 and February 28, 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Business 19
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
February 28, August 31, February 28,
2001 2001 2002
----------------- ---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,404 $ 114,003 $ 57,613
Receivables, net 194,721 176,177 141,038
Inventories 66,005 36,745 67,991
Prepaid expenses 1,936 2,138 1,438
Deferred income taxes 7,420 8,674 8,456
----------------- ---------------- ----------------
Total current assets 296,486 337,737 276,536
PROPERTY, PLANT and EQUIPMENT, net 65,316 62,839 60,436
EXCESS OF COST OVER NET ASSETS OF
BUSINESS ACQUIRED, net 4,263 4,148 4,184
INTANGIBLES, net 4,397 4,383 4,225
OTHER ASSETS 2,475 2,414 2,316
----------------- ---------------- ----------------
----------------- ---------------- ----------------
$ 372,937 $ 411,521 $ 347,697
================= ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,612 $ 1,629 $ 96
Accounts payable 25,266 15,279 18,565
Accrued expenses 133,808 175,085 108,862
Income taxes payable 16,877 16,048 11,079
----------------- ---------------- ----------------
----------------- ---------------- ----------------
Total current liabilities 178,563 208,041 138,602
----------------- ---------------- ----------------
LONG-TERM DEBT, less current
maturities 2,916 2,836 1,624
----------------- ---------------- ----------------
DEFERRED INCOME TAXES 4,975 4,706 4,732
----------------- ---------------- ----------------
MINORITY INTEREST IN SUBSIDIARIES 8,521 7,530 7,058
----------------- ---------------- ----------------
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 $0.10 per
share; 1,066,667 shares authorized;
issued and outstanding 107 107 107
Common stock, par value $0.10 per
share; 100,000,000 shares authorized;
39,090,449; 39,111,233 and
39,252,099 issued:
38,522,483; 38,543,267 and
38,476,333 shares outstanding 3,909 3,911 3,925
Capital in excess of par value 47,871 48,406 50,776
Retained earnings 139,745 149,923 159,265
Accumulated other
comprehensive loss (3,794) (4,063) (4,660)
Treasury stock at cost,
567,966; 567,966 and
775,766 shares (9,876) (9,876) (13,732)
----------------- ---------------- ----------------
Total stockholders' equity 177,962 188,408 195,681
----------------- ---------------- ----------------
$ 372,937 $ 411,521 $ 347,697
================= ================ ================
The accompanying notes are an integral part of these balance sheets.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
February 28, February 28,
2001 2002
---------------- ----------------
NET SALES AND LICENSING FEES $ 150,154 $ 111,867
COST OF SALES 98,372 71,745
---------------- ----------------
GROSS PROFIT 51,782 40,122
---------------- ----------------
OPERATING EXPENSES:
Research and development 4,975 4,560
Selling 3,361 2,934
General and administrative 4,033 3,354
---------------- ----------------
12,369 10,848
---------------- ----------------
OPERATING INCOME 39,413 29,274
---------------- ----------------
INTEREST INCOME, net 545 477
OTHER EXPENSE, net (2,167) (3,129)
MINORITY INTEREST IN
(EARNINGS) / LOSS OF SUBSIDIARIES (517) 936
---------------- ----------------
INCOME BEFORE INCOME TAXES 37,274 27,558
INCOME TAX PROVISION 13,388 9,784
---------------- ----------------
NET INCOME 23,886 17,774
DIVIDENDS ON PREFERRED STOCK (43) (53)
---------------- ----------------
NET INCOME APPLICABLE TO COMMON SHARES $ 23,843 $ 17,721
================ ================
BASIC EARNINGS PER SHARE $ 0.62 $ 0.46
================ ================
NUMBER OF SHARES USED
IN BASIC EARNINGS
PER SHARE CALCULATIONS 38,425 38,454
================ ================
DILUTED EARNINGS PER SHARE $ 0.59 $ 0.44
================ ================
================ ================
NUMBER OF SHARES USED
IN DILUTED EARNINGS
PER SHARE CALCULATIONS 40,101 39,991
================ ================
================ ================
DIVIDENDS PER COMMON SHARE $ 0.04 $ 0.05
================ ================
The accompanying notes are an integral part of these statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
February 28, February 28,
2001 2002
---------------- ----------------
NET SALES AND LICENSING FEES $ 159,848 $ 120,120
COST OF SALES 105,770 77,194
---------------- ----------------
GROSS PROFIT 54,078 42,926
---------------- ----------------
OPERATING EXPENSES:
Research and development 9,132 8,642
Selling 6,489 5,468
General and administrative 7,973 6,626
---------------- ----------------
23,594 20,736
---------------- ----------------
OPERATING INCOME 30,484 22,190
---------------- ----------------
INTEREST INCOME, net 2,536 1,158
OTHER EXPENSE, net (2,305) (3,215)
MINORITY INTEREST IN
(EARNINGS)/ LOSS OF SUBSIDIARIES (1,019) 472
---------------- ----------------
INCOME BEFORE INCOME TAXES 29,696 20,605
INCOME TAX PROVISION 10,735 7,316
---------------- ----------------
NET INCOME 18,961 13,289
DIVIDENDS ON PREFERRED STOCK (75) (106)
---------------- ----------------
NET INCOME APPLICABLE TO COMMON SHARES $ 18,886 $ 13,183
================ ================
BASIC NET INCOME PER SHARE $ 0.49 $ 0.34
================ ================
NUMBER OF SHARES USED
IN BASIC EARNINGS
PER SHARE CALCULATIONS 38,405 38,420
================ ================
DILUTED NET INCOME PER SHARE $ 0.47 $ 0.33
================ ================
================ ================
NUMBER OF SHARES USED
IN DILUTED EARNINGS
PER SHARE CALCULATIONS 40,124 39,871
================ ================
================ ================
DIVIDENDS PER COMMON SHARE $ 0.07 $ 0.10
================ ================
The accompanying notes are an integral part of these statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
(in thousands)
(Unaudited)
February 28, February 28,
2001 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,961 $ 13,289
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 3,501 3,364
Loss on sale of property and equipment 23 23
Minority interest in net income / (loss) of subsidiaries 1,019 (472)
Change in deferred income taxes - 244
Changes in current assets and liabilities:
Receivables (13,416) 35,139
Inventories (31,109) (31,552)
Prepaid expenses 295 700
Accounts payable 1,825 3,286
Accrued expenses (30,894) (66,223)
Income taxes payable (8,174) (4,547)
Intangibles and other assets 29 (115)
---------------- ----------------
Net cash used in operating activities (57,940) (46,864)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,021) (3,435)
Sale of investments and property 15 22
---------------- ----------------
---------------- ----------------
Net cash used in investing activities (4,006) (3,413)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (539) (2,951)
Payments of long-term debt (889) (103)
Dividends paid (2,767) (3,947)
Proceeds from long-term debt 1,323 620
Proceeds from short-term debt 1,151 1,263
Payments to acquire treasury stock - (3,856)
Minority interest portion of investment in subsidiaries (232) -
Proceeds from exercise of stock options 2,667 1,962
---------------- ----------------
Net cash provided by and (used in) financing activities 714 (7,012)
---------------- ----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES 169 899
NET DECREASE IN CASH AND CASH EQUIVALENTS (61,063) (56,390)
CASH AND CASH EQUIVALENTS, as of August 31 87,467 114,003
---------------- ----------------
CASH AND CASH EQUIVALENTS, as of February 28 $ 26,404 $ 57,613
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the six months for:
Interest, net of capitalized interest $ 100 $ 100
Income taxes $ 18,000 $ 13,000
Noncash financing activities:
Tax benefit of stock option exercises $ 100 $ 400
The accompanying notes are an integral part of these statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
the fair presentation of the consolidated financial statements have been
included. Due to the seasonal nature of Delta and Pine Land Company and
subsidiaries' ("D&PL" or the "Company") business, the results of operations for
the three and six month periods ended February 28, 2001 and February 28, 2002 or
for any quarterly period, are not necessarily indicative of the results to be
expected for the full year. For further information reference should be made to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report to Stockholders on Form 10-K for the fiscal year ended
August 31, 2001.
Certain prior year balances have been reclassified to conform with the current
year presentation.
Significant Accounting Policies
Intangible Assets and Deferred Charges
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 discussed further in Note 5.
Derivative Financial Instruments
The Company 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 the Company are
negotiated to approximate the terms of the forecasted transaction; therefore,
the Company 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 earnings in the period in which
the forecasted transaction affects earnings (i.e., is sold or disposed) which
generally occurs during the Company's second and third fiscal quarters.
Quantities hedged that do not exceed the forecasted transactions are accounted
for as cash flow hedges. 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, the Company accounts for these derivative instruments as
discontinued cash flow hedges. The Company does not enter into any derivative
instruments that extend beyond the close of the following fiscal year.
During the six months ended February 28, 2002, a foreign subsidiary entered into
foreign currency forward exchange contracts to mitigate its risk associated with
currency fluctuations in foreign currency denominated debt. The terms of the
foreign currency forward exchange contracts used were negotiated to approximate
the terms of the forecasted transaction (i.e., debt maturity and interest
payments dates and amounts). The foreign currency forward exchange contracts
expired during the second quarter of fiscal 2002 and there were no foreign
currency forward exchange contracts outstanding as of February 28, 2002.
2. COMPREHENSIVE INCOME
--------------------
Total comprehensive income for the three and six months ended February 28, 2001
and February 28, 2002, was (in thousands):
Three Months Ended Six Months Ended
------------------ ----------------
February 28, February 28, February 28, February 28,
2001 2002 2001 2002
------------ ----------- ------------ -------------
Net income $ 23,886 $ 17,774 $18,961 $ 13,289
Other comprehensive (loss) income:
Foreign currency translation gains/(losses) 150 200 (266) (291)
Net unrealized losses on hedging
instruments (255) (20) (382) (306)
Income tax benefit (expense)
related to other comprehensive income 40 (64) 235 212
------------ ----------- ------------ -------------
Other comprehensive (loss) income, net of tax (65) 116 (413) (385)
------------ ----------- ------------ -------------
Total comprehensive income $ 23,821 $ 17,890 $18,548 $ 12,904
============ =========== ============ =============
3. SEGMENT DISCLOSURES
-------------------
The Company is in a single line of business and operates in two business
segments, domestic and international. The Company'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. The Company
develops its proprietary seed products through research and development efforts
in the United States and certain foreign countries.
The Company'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 the Company's Board of Directors. The accounting
policies of the segments are substantially the same as those described in the
summary of significant accounting policies in the Company's Form 10-K filed for
the year ended August 31, 2001.
Information about the Company's segments for the three and six months ended
February 28, 2001 and February 28, 2002 is as follows (in thousands):
Three Months Ended Six Months Ended
------------------ ----------------
February 28, February 28, February 28, February 28,
2001 2002 2001 2002
-------------- ------------- --------------- -----------------
Net sales
Domestic $ 57,217 $ 40,746 $ 57,313 $ 40,869
International 15,793 12,259 23,414 18,952
Licensing Fees 77,144 58,862 79,121 60,299
-------------- -------------- --------------- -----------------
$ 150,154 $ 111,867 $ 159,848 $ 120,120
============== ============== =============== =================
Operating income
Domestic $ 31,330 $ 22,818 $ 21,392 $ 14,241
International 8,083 6,456 9,092 7,949
-------------- -------------- --------------- -----------------
$ 39,413 $ 29,274 $ 30,484 $ 22,190
============== ============== =============== =================
4. SIGNIFICANT CHANGES IN ASSETS FROM FISCAL YEAR ENDED AUGUST 31, 2001
--------------------------------------------------------------------
Inventories increased approximately $31,246,000 to $67,991,000 at February 28,
2002 from $36,745,000 at August 31, 2001. This increase reflects the seasonal
nature of the Company's domestic production cycle. The Company's domestic
segment purchases bulk seed in its first and second fiscal quarters and begins
production for the current year's selling season. The increase at February 28,
2002 from August 31, 2001 in inventories and accounts payable is primarily
related to those events and is consistent with the Company's historical
experience.
Accounts receivable decreased approximately $35,139,000 to $141,038,000 at
February 28, 2002 from $176,177,000 at August 31, 2001. This decrease is
primarily related to the collection of sublicense revenue for the 2001 season in
September 2001 and lower 2002 sales. The decrease in accrued expenses from
August 31, 2001 to February 28, 2002 is primarily attributable to the related
royalty payment for the Bollgard and Roundup Ready gene technologies for the
2001 season and lower 2002 sales on which D&PL must pay royalties to Monsanto.
5. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
----------------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. Therefore, D&PL must adopt this statement no later than September 1,
2002. Management has not determined the impact, if any, that this statement will
have on its consolidated financial position or results of operations.
SFAS No. 143, "Accounting for Asset Retirement Obligations," addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement is effective for fiscal years beginning after June 15, 2002.
Therefore, D&PL must adopt this statement no later than September 1, 2002.
Management has not determined the impact, if any, that this statement will have
on its consolidated financial position or results of operations.
SFAS No. 141, "Business Combinations," sets forth guidelines for applying the
purchase method of accounting in the determination of intangible assets,
including goodwill acquired in a business combination, and expands financial
disclosures concerning business combinations consummated after June 1, 2001. The
application of SFAS 141 did not affect the Company's previously reported amounts
for goodwill or other intangible assets.
SFAS No. 142, "Goodwill and Other Intangible Assets," addresses the financial
accounting and reporting for acquired goodwill and other intangible assets.
Effective September 1, 2001, the Company adopted SFAS 142 at which time all
goodwill amortization ceased (second quarter 2002 goodwill amortization would
have been approximately $43,000, and $74,000 year-to-date). During the second
quarter of fiscal 2002, recorded goodwill attributable to the domestic segment
was tested for impairment by comparing the fair value to its carrying value.
Based on management's initial impairment test, management determined that none
of the goodwill recorded was impaired. Impairment adjustments recognized after
adoption, if any, generally are required to be recognized as operating expenses.
Excess of cost over net assets of business acquired at February 28, 2001 and
February 28, 2002 was $4,263,000 and $4,184,000, respectively.
In connection with adopting SFAS 142, the Company reassessed the useful lives
and the classification of its identifiable intangible assets and determined that
they continue to be appropriate. The components of amortized intangible assets
follow (in thousands):
February 28, 2001 August 31, 2001 February 28, 2002
-------------------------------- --------------------------------- --------------------------------
Gross Carrying Gross Carrying Gross Carrying
Amount Accumulated Amount Accumulated Amount Accumulated
Amortization Amortization Amortization
---------------- --------------- ----------------- --------------- ---------------- ---------------
---------------- --------------- ----------------- --------------- ---------------- ---------------
Contract-based $ 5,447 $ (1,050) $ 5,501 $ (1,118) $ 5,523 $ (1,298)
Amortization expense for intangible assets during the six months ended February
28, 2002 was approximately $125,000. Intangible asset amortization expense is
estimated to be $130,000 for the remainder of 2002 and $215,000 in each of the
fiscal years from fiscal 2003 through fiscal 2007.
Pro forma results of operations for the three and six months ended February 28,
2001 had we applied the nonamortization provisions of SFAS 142 in those periods
would not have been materially different than actual results for those periods.
6. INVENTORIES
Inventories consisted of the following (in thousands):
February 28, August 31, February 28,
2001 2001 2002
---------------- ----------------- ----------------
Finished goods $ 54,316 $ 31,835 $ 45,633
Raw materials 21,287 12,515 28,908
Growing crops 1,245 2,218 652
Supplies and other 721 1,162 1,369
---------------- ----------------- ----------------
77,569 47,730 76,562
Less reserves (11,564) (10,985) (8,571)
---------------- ----------------- ----------------
$ 66,005 $ 36,745 $ 67,991
================ ================= ================
Substantially all finished goods and raw material inventory is valued at the
lower of average cost or market. Growing crops are recorded at cost. See Note 8
for description of hedging activities.
7. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment consisted of the following (in thousands):
February 28, August 31, February 28,
2001 2001 2002
---------------- ----------------- ------------------
Land and improvements $ 4,014 $ 4,284 $ 4,742
Buildings and improvements 37,813 38,777 37,719
Machinery and equipment 47,709 48,279 49,575
Germplasm 7,500 7,500 7,500
Breeder and foundation seed 2,000 2,000 2,000
Construction in progress 6,350 1,529 1,268
---------------- ----------------- ------------------
105,386 102,369 102,804
Less accumulated depreciation (40,070) (39,530) (42,368)
---------------- ----------------- ------------------
$ 65,316 $ 62,839 $ 60,436
================ ================= ==================
8. DERIVATIVE FINANCIAL INSTRUMENTS
--------------------------------
Net losses of $382,000 and $95,000 were recorded as other comprehensive income
during the six months ended February 28, 2001 and February 28, 2002,
respectively. During the six months ended February 28, 2002, losses of $119,000
that had previously been recorded as other comprehensive income were
reclassified from equity to current year earnings, compared to losses of
$151,000 for the six months ended February 28, 2001. At February 28, 2002, the
deferred loss of $95,000, reflected as a component of accumulated other
comprehensive loss, included realized losses of approximately $111,000. The
deferred loss will be charged to earnings within the fiscal year, however, the
actual amount that will be charged to earnings may vary as a result of changes
in market conditions. There were no foreign currency forward exchange contracts
outstanding as of February 28, 2002.
For the three and six months ended February 28, 2001 and February 28, 2002, the
Company recorded no gains or losses in earnings as a result of hedge
ineffectiveness or discontinuance of cash flow hedges.
9. CONTINGENCIES
--------------
Product Liability Litigation
The Company is named as a defendant in various lawsuits that allege, among other
things, that certain of the Company's products (including Monsanto's technology)
did not perform as the farmer had anticipated or expected. In all cases where
the seed contained either or both of Monsanto's Bollgard and/or Roundup Ready
gene technologies, and a failure of such technology was alleged, D&PL has
tendered the defense of those cases to Monsanto and requested indemnity. In
certain cases where the seed sold contained either or both of Monsanto's
Bollgard and Roundup Ready gene technologies, but did not allege a failure of
such technology, D&PL has given Monsanto notice of the claims pursuant to the
various gene licensing agreements, but has not 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 8, 1999) D&PL has a right to be contractually indemnified by
Monsanto against all claims arising out of the failure of Monsanto's gene
technology. Some of the product liability lawsuits contain varietal claims which
are aimed solely at the Company. D&PL does not have a right to indemnification,
however, from Monsanto for any claims involving varietal characteristics
separate from or in addition to the failure of the Monsanto technology. The
Company believes that the resolution of these matters will not have a material
impact on the consolidated financial statements. The Company intends to
vigorously defend itself in these matters. See Part II, Item I for a discussion
of each case.
Other Litigation
On May 15, 2000, several farmers and a seller of farm supplies filed suit in the
United States District Court for the Northern District of Alabama, against
Monsanto, the Company, and D&M International, LLC (a joint venture of Monsanto
and the Company) under federal antitrust laws and requested class certification.
Plaintiffs claim that defendants have: (1) unlawfully attempted to monopolize
the U.S. cotton seed and herbicide market in violation of ss. 2 of the Sherman
Act; (2) monopolized the U.S. cotton seed and herbicide market in violation of
ss. 2 of the Sherman Act; (3) conspired to unreasonably restrain trade in the
U.S. cotton seed and herbicide market in violation of ss. 1 of the Sherman Act;
and (4) engaged in unlawful tying of cotton seed and herbicide in violation of
ss. 3 of the Clayton Act. Plaintiffs demand unspecified antitrust damages,
including treble and compensatory damages, plus costs of litigation, including
attorneys' fees. In July 2000, the Company answered the complaint and in October
2000, moved for dismissal of the action on the ground that plaintiffs had failed
to allege any conduct or action by the Company that violates the federal
antitrust laws. Discovery has not commenced. On December 6, 2001, the United
States District Judge, acting on the recommendation of the Magistrate Judge,
granted Monsanto's and DPL's motions to dismiss the complaint without prejudice.
The plaintiffs were granted 30 days from the District Court's Order to file an
Amended Complaint. On January 7, 2002, plaintiffs filed an Amended Complaint
against Monsanto and the Company; however, plaintiffs did not assert in their
Amended Complaint any claims against D&M International, LLC.
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 Pty. Ltd., D&PL's
wholly-owned Australian subsidiary, 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.
In November 1999, Bios Agrosystems S.A. ("Bios"), a former distributor of
SureGrow brand cottonseed in Greece, brought suit in the U.S. District Court in
Delaware against D&PL International Technology, D&PL's subsidiary, to enjoin the
termination of its distributorship which was to become effective at the end of
November 1999. The suit demanded a declaratory judgment that the termination is
not effective and compensatory and punitive damages for wrongful termination.
Bios also filed a request for arbitration and a parallel suit seeking injunctive
relief in a Greek court. In January 2000, the U. S. District Court denied the
request for an injunction to prevent termination of Bios' distributorship and
subsequently enjoined Bios from proceeding with parallel litigation in the Greek
courts. Bios appealed to the United States Court of Appeals for the Third
Circuit. In March 2001, Bios gave notice that it was dismissing its appeal. On
March 14, 2002, the case was finally dismissed by the U. S. District Court for
failure to prosecute. Bios has not appealed this dismissal nor indicated that it
will now seek to arbitrate its claims. D&PL believes this claim has now been
resolved without material effect on D&PL's combined financial condition and
without interference with the distribution of SureGrow brand cottonseed in
Greece.
In 1989, a corporation owned by the son of the Company's former Guatemalan
distributor filed suit asserting that the Company 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 5,300,000 Guatemalan
quetzales (approximately $675,000 at current exchange rates) and an injunction
preventing the Company 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. Management believes that the
resolution of the matter will not have a material impact on the Company's
consolidated financial statements. The Company continues to offer seed for sale
in Guatemala.
10. EARNINGS PER SHARE
------------------
Dilutive common share equivalents consist of both the Company's series M
Convertible Non-Voting Preferred shares and the outstanding options to purchase
the Company's common stock that have been issued under the 1993 Stock Option
Plan and the 1995 Long-Term Incentive Plan. Approximately 805,000 and 1,222,000
outstanding stock options were not included in the computation of diluted
earnings per share for the three and six months ended February 28, 2001 and
2002, respectively, because the effect of their exercise was not dilutive based
on the average market price of the Company's common stock for each respective
reporting period. These options expire at various dates from 2006 to 2011.
The table below reconciles the basic and diluted per share computations:
For the Three Months Ended For the Six Months Ended
-------------------------- -----------------------
(in thousands, except per share amounts)
February 28, February 28, February 28, February 28,
2001 2002 2001 2002
------------- ------------- --------------- --------------
------------- ------------- --------------- --------------
Income:
Net income $ 23,886 $ 17,774 $ 18,961 $ 13,289
Less: Preferred stock dividends (43) (53) (75) (106)
------------- ------------- --------------- --------------
Basic EPS:
Net income 23,843 17,721 18,886 13,183
Effect of Dilutive Securities:
Convertible Preferred Stock Dividends 43 53 75 106
------------- ------------- --------------- --------------
Diluted EPS:
Net income available to common stockholders
plus assumed conversions $ 23,886 $ 17,774 $ 18,961 $ 13,289
============= ============= =============== ==============
============== ============= =============== ==============
Shares:
Basic EPS Shares 38,425 38,454 38,405 38,420
Effect of Dilutive Securities:
Options to purchase stock 609 470 652 384
Convertible preferred stock 1,067 1,067 1,067 1,067
-------------- ------------- --------------- --------------
Diluted EPS Shares 40,101 39,991 40,124 39,871
============== ============= =============== ==============
Per Share Amounts:
Basic $ 0.62 $ 0.46 $ 0.49 $ 0.34
============== ============= =============== ==============
Diluted $ 0.59 $ 0.44 $ 0.47 $ 0.33
============== ============= =============== ==============
PART I.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Overview
Due to the seasonal nature of its business, D&PL typically incurs losses in its
first and fourth fiscal quarters since the majority of the Company's domestic
sales are made in its second and third quarters. Sales in the first and fourth
quarters are generally limited to those made to export markets and those made by
the Company's non-U.S. joint ventures and subsidiaries located primarily in the
Southern hemisphere.
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. The licensing fees charged to farmers are based on pre-established
planting rates for eight geographic regions and considers the estimated number
of seed contained in each bag which may vary by variety, location grown, and
other factors. International export revenues are recognized upon the later of
seed shipment or confirmation of letters of credit. Generally, international
export sales are not subject to return. All other international revenues from
the sale of planting seed, less estimated reserves for returns, are recognized
upon shipment of seed.
Domestically, the Company promotes its cotton and soybean seed directly to
farmers and sells its seed through distributors and dealers. All of the
Company's domestic seed products (including those that contain the Bollgard and
Roundup Ready technologies) are subject to return or credit, 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 the Company's third
and fourth quarters. The Company provides for estimated returns as sales occur.
To the extent actual returns differ from estimates, adjustments to the Company's
operating results are recorded when such differences become known, typically in
the Company's fourth quarter. All significant returns occur or are accounted for
by fiscal year end.
Results
Net income of $17.8 million for this quarter was less than the record net income
of $23.9 million reported in the comparable prior year quarter, due primarily to
an expected shift in shipments from the second quarter into the third quarter.
Customers have been slow to order and purchase seed this year because they are
waiting on finalization of the pending farm legislation now before the U.S.
Congress. Such legislation will impact farm subsidy payments and potentially
impact planted acreage. The effect of this decrease in revenue was partially
offset by a reduction in operating expenses of approximately $1.6 million and
higher gross margins earned. Additionally, net income was unfavorably affected
by increased foreign exchange losses and legal fees associated with the Monsanto
litigation which are included in other expense.
D&PL previously provided earnings guidance for fiscal year ending August 31,
2002. That guidance assumed that planted acreage and market share would remain
consistent with 2001 and that the Company would continue to successfully
implement its international expansion plans. The USDA and the National Cotton
Council have both announced that they expect planted cotton acreage to decline
by approximately 1.0 million acres or 6% to 7%. This anticipated decrease is due
in part to commodity prices and farmer uncertainty surrounding the pending
federal farm legislation now before Congress. Once the legislation is finalized,
or as more data become available or developed, D&PL will provide revised
earnings guidance as it considers necessary. For additional risks and
uncertainties that may affect the operations, performance, development and
results of D&PL's business, see "Risks and Uncertainties" in Part II, Item 5.
Results of Operations
The following sets forth selected operating data of the Company (in thousands):
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
February 28, February 28, February 28, February 28,
2001 2002 2001 2002
------------- ------------- ------------- --------------
Operating results -
Net sales and licensing fees $150,154 $111,867 $159,848 $120,120
Gross profit 51,782 40,122 54,078 42,926
Operating expenses 12,369 10,848 23,594 20,736
Operating income 39,413 29,274 30,484 22,190
Income before income taxes 37,274 27,588 29,696 20,605
Net income applicable to common shares 23,843 17,721 18,886 13,183
The following sets forth selected balance sheet data of the Company as of the
following periods (in thousands):
February 28, August 31, February 28,
2001 2001 2002
------------- -------------- --------------
Balance sheet summary-
Current assets $ 296,486 $ 337,737 $ 276,536
Current liabilities 178,563 208,041 138,602
Working capital 117,923 129,696 137,934
Property, plant and equipment, net 65,316 62,839 60,436
Total assets 372,937 411,521 347,697
Outstanding borrowings 5,528 4,465 1,720
Stockholders' equity 177,962 188,408 195,681
Three months ended February 28, 2002, compared to three months ended February
28, 2001:
Net sales and licensing fees decreased approximately $38.3 million to $111.9
million from $150.2 million. This decrease reflects the decline in 2002 orders
and shipments compared to the strength of last year's record second quarter when
shipments were accelerated into the second quarter as customers purchased seed
earlier in the cycle. Revenues for the second quarter of 2002 decreased as a
result of an expected shift in shipments from the second quarter into the third
quarter because customers have been slow to purchase seed. Management believes
that farmers are waiting on finalization of the pending farm legislation now
before the U.S. Congress, which will impact farm subsidy payments and
potentially impact planted acreage.
Quarterly operating expenses decreased from $12.4 million to $10.8 million due,
in part, to savings resulting from the Company's August 2001 corporate
realignment and, in part, to lower contract research and advertising expenses.
Other expense increased approximately $0.9 million in the second fiscal quarter
of 2002 compared to same quarter of the prior year and is primarily attributable
to additional legal fees related to the Monsanto litigation and foreign exchange
losses in Argentina.
Six months ended February 28, 2002, compared to six months ended February 28,
2001:
Net sales and licensing fees decreased approximately $39.7 million to $120.1
million from $159.8 million. This decrease is primarily the result of an
expected shift in shipments from the second quarter into the third quarter as
noted above.
Operating expenses decreased from $23.6 million through the second quarter of
2001 to $20.7 million for the same period in 2002. This increase is primarily
attributable to, in part, savings resulting from the Company's August 2001
corporate realignment and, in part, to reduced contract research, advertising,
and insurance expenses.
The Company reported net interest income of $1.2 million in the six months ended
February 28, 2002 compared to $2.5 million for the same period of the prior year
due to lower interest rates earned on cash investments.
The Company reported net other expense of approximately $3.2 million for the six
months ended February 28, 2002 compared to net other expense of approximately
$2.3 million for the same period of the prior year and is primarily attributable
to additional legal fees related to the Monsanto litigation and foreign exchange
losses.
Liquidity and Capital Resources
The seasonal nature of the Company's business significantly impacts cash flow
and working capital requirements. The Company has maintained credit facilities,
and used early payments by customers and cash from operations to fund working
capital needs. For more than 18 years D&PL has borrowed on a short-term basis to
meet seasonal working capital needs. However, cash generated from operations in
2000 and 2001 along with a merger termination fee has been used to meet working
capital needs. The Company is currently evaluating potential uses of its cash
for purposes other than for working capital needs. One potential such use is the
acquisition or funding of alternative technologies that could be used to enhance
the Company's product portfolio and ultimately the Company's long-term earnings
potential. Another potential use is the repurchase in the open market of the
Company's shares pursuant to its previously announced share repurchase program.
For the six months ended February 28, 2002, the Company repurchased shares. Once
the evaluation of certain transactions that are currently being considered is
brought to conclusion (perhaps resulting in such acquisitions), the Company may
reconsider other potential uses of the remaining cash, up to and including
repurchasing shares more aggressively depending on market considerations and
other factors.
In the United States, D&PL purchases seed from contract growers in its 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 normally begin in the middle of the third fiscal quarter and are
typically completed by the first fiscal quarter of the following year. D&PL also
offers customers financial incentives to make early payments. To the extent D&PL
attracts early payments from customers, bank borrowings are reduced.
In the United States, the Company records revenue for licensing fees on Bollgard
and Roundup Ready seed sales upon shipment, usually in the Company's second and
third quarters. The Company has contracted the billing and collection activities
for Bollgard and Roundup Ready licensing fees to Monsanto. In September, the
licensing fees are due at which time D&PL receives payment from Monsanto. D&PL
then pays Monsanto its royalty for the Bollgard and Roundup Ready licensing
fees. As a result of the timing of these events, licensing fees receivable and
royalties payable peak at fiscal year end.
In April 1998, the Company entered into a syndicated credit facility with three
lenders which provided for aggregate borrowings of $110 million. This agreement
provided a base commitment of $55 million and a seasonal commitment of $55
million. The base commitment was a long-term loan that could be borrowed upon at
any time and was due April 1, 2001. The seasonal commitment was a working
capital loan that could be drawn upon from September 1 through June 30 of each
fiscal year. Each commitment offered variable and fixed interest rate options
and required the Company to pay facility or commitment fees and to comply with
certain financial covenants. This agreement expired on April 1, 2001. D&PL and
the lenders are currently negotiating a replacement facility that will provide
for aggregate borrowings of $100 million plus a $25 million overline and will
contain terms and conditions similar to the 1998 facility.
The financial covenants under the loan agreements required the Company to: (a)
maintain a ratio of total liabilities to tangible net worth at August 31, of
less than or equal to 2.25 to 1 (4.0 to 1.0 at the other quarter ends) (b)
maintain a fixed charge coverage ratio at the end of each quarter greater than
or equal to 2.0 to 1.0 and (c) maintain at all times tangible net worth of not
less than the sum of (i) $40 million plus (ii) 50% of net income (but not
losses) determined on the last day of each fiscal year. At February 28, 2002,
the Company was in compliance with the covenants of the now expired credit
facility.
Capital expenditures for the six months ended February 28, 2002 were $3.4
million ($4.0 million for the six months ended February 28, 2001). The Company
anticipates that capital expenditures will approximate $10.0 million in 2002.
Capital expenditures will be funded by cash from operations, borrowings as
necessary, or investments from joint venture partners.
The Board of Directors reviews the Company's dividend policy quarterly. In the
second quarter of 2002, the Board authorized a quarterly dividend to $0.05 per
share paid on March 14, 2002, to shareholders of record on February 28, 2002.
In the second quarter of 2000, the Board of Directors approved a Stock
Repurchase Plan pursuant to which the Company may repurchase its outstanding
common stock. The shares repurchased will be available for use under the
Company's stock option plans, an expected conversion of outstanding convertible
Preferred Stock and for other corporate purposes. During the quarter ended
February 28, 2002, no shares were purchased by D&PL, however, during the first
quarter of 2002, 207,800 shares were repurchased by D&PL. Subsequent to the
second quarter end, the Company purchased 169,900 shares for $3.0 million
bringing the total shares purchased in fiscal 2002 to 377,700 shares at an
aggregate amount of $6.9 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure relative to fluctuations in the price of soybean raw
material inventory, foreign currency fluctuations and interest rate changes. For
more information about market risk and how the Company manages specific risk
exposures, see Notes 1 and 12 to the Company's consolidated financial statements
contained in the Company's Annual Report on Form 10-K for the year ended August
31, 2001. Also see Note 8 of the Notes to consolidated financial statements in
Item 1 for further details about the Company's exposure to market risk.
The fair value of derivative commodity instruments outstanding as of February
28, 2002 was $20,000. A 10% adverse change in the underlying commodity prices
upon which these contracts are based would not result in a material impact on
earnings.
The Company's 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. The Company conducts non-U.S. operations primarily through
subsidiaries and joint ventures in Argentina, Australia, Brazil, China, and
South Africa and others. At February 28, 2002, the result of a uniform 10%
strengthening in the value of the dollar relative to the currencies in which the
Company's transactions are denominated would not cause a material impact on
earnings.
The Company utilizes fixed and variable-rate debt to maintain liquidity and fund
its business operations, with the terms and amounts based on business
requirements, market conditions and other factors. At February 28, 2002, a 100
basis point change to interest rates (with all other variables held constant) on
the portion of the Company's debt with variable interest rates would not result
in a material change to the Company's interest expense or cash flow.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Product Claims
The Company was named as a defendant, along with a local seed distributor in a
lawsuit filed in the Superior Court of the County of Colquit, Georgia on October
5, 2001. This lawsuit was removed to the United States District Court for the
Middle District of Georgia. The lawsuit alleges that certain cottonseed
varieties sold by D&PL suffered from a disease or malady known as bronze wilt.
Although this lawsuit involves a cotton variety which contains the Roundup
Ready(R) gene, no claim against Monsanto was alleged, nor is there an allegation
that Monsanto technology caused or contributed to Plaintiff's claims. Thus, it
does not presently appear that Monsanto is contractually obligated to defend or
indemnify the Company in this case. The Company is presently investigating this
claim to determine the causes of the alleged problems.
The Company was named in three lawsuits filed in the State of Mississippi. One
lawsuit was filed in the Circuit Court of Lowndes County, Mississippi on July
11, 2001. That suit alleges that certain cottonseed sold by D&PL did not
germinate properly or at the rate stated on the label causing the farmer to
incur losses during the 1998 growing season. The second suit was filed in the
Circuit Court of Webster County on August 10, 2001. That suit alleges that the
seed purchased by plaintiff failed to perform as represented and seeks damages
for crop losses incurred during the 1999 growing season. The third lawsuit was
filed in the Circuit Court of Holmes County on March 14, 2002. That suit brought
on behalf of fifty-one individual Plaintiffs alleges that certain cotton seed
sold by D&PL was improperly mixed or blended and failed to perform as
advertised. The Company is presently investigating all of these claims to
determine the cause or causes of the alleged problems. None of the Mississippi
lawsuits allege that the Monsanto gene technology failed, and accordingly, it
does not appear that D&PL has a claim for indemnity or defense under the Roundup
Ready(R) Gene Licensing and Seed Services Agreement (the "Roundup Ready
Agreement").
On June 7, 2001, the Company was named in a lawsuit filed in the Circuit Court
of the County of Crockett, Tennessee. This case was subsequently removed to the
United Sates District Court for the Western District of Tennessee, Eastern
Division. This lawsuit alleges that a specific cotton variety did not perform as
promised and that the plaintiff farmers suffered lower than expected yields as a
result of the allegedly defective variety. Although this lawsuit involves a
cotton variety which contains the Roundup Ready(R) gene, no claim against
Monsanto was alleged, nor is there an allegation that the Monsanto technology
caused or contributed to plaintiffs' problems, thus, it does not appear that
Monsanto is contractually obligated to defend or indemnify the Company in this
case. The Company is presently investigating this claim to determine the cause
or causes of the alleged problem.
On February 5, 2001, D&PL and Monsanto and a local seed distributor were named
in a lawsuit filed in the Sixth Judicial Court, Parish of East Carroll,
Louisiana. This lawsuit alleges that certain cottonseed varieties sold by D&PL
which contained Monsanto's licensed gene technology suffered from a disease or
malady known as bronze wilt. The Company and Monsanto are presently
investigating this claim to determine the cause or causes of the alleged
problem. The lawsuit does not allege that the Monsanto gene technology failed
and, accordingly, it does not appear that D&PL has a claim for indemnity or
defense under the Roundup Ready Agreement as the claim alleges defective
varietal characteristics only.
The Company 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(R) gene did not perform as
the farmer had anticipated. The Company and Monsanto are investigating the
claims to determine the cause or causes of the alleged problem. Pursuant to the
terms of 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 the
Company 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.
The Company and Monsanto are named as defendants, along with local seed or
technology distributors in twenty-three lawsuits filed in Alabama. Four were
filed in Autauga County, three on March 23, 2000 and one on March 27, 2000;
three were filed in Barbour County, two on October 19, 2000, and one on November
7, 2000; three were filed in Chilton County on March 22, 2000; one was filed in
Dallas County on March 22, 2000; one was filed in Elmore County on March 22,
2000; two were filed in Lowndes County, one on March 14 and one on March 22,
2000; and one was filed in Wilcox County on March 22, 2000; six were filed in
Limestone County, one on April 25, 2001, one on May 17, 2001, and four on
September 14, 2001; and two were filed in Lauderdale County, one on April 6,
2001 and one on April 20, 2001. In each case the plaintiff alleges, among other
things, that certain cottonseed acquired from D&PL, which contained either the
Roundup Ready(R) gene, the Bollgard(R) gene or both of such genes, did not
perform as the farmers had anticipated or as allegedly represented to them.
These lawsuits also include varietal claims aimed solely at the Company. Eleven
of these lawsuits were earlier filed as seed arbitration claims with the Alabama
Department of Agriculture, all of which were dismissed by that entity for lack
of jurisdiction. The Company and Monsanto have investigated the claims, and are
continuing to investigate the claims, to determine the cause or causes of the
alleged problem. Pursuant to the terms of the Roundup Ready(R) Agreement between
D&PL and Monsanto and the Bollgard(R) Gene License and Seed Services Agreement
("the Bollgard Agreement") between D&PL and Monsanto, D&PL has a right to be
contractually indemnified against all claims arising out of the failure of
Monsanto's gene technology. D&PL will not have a right to indemnification,
however, from Monsanto for any claim involving varietal characteristics separate
from or in addition to the failure of the Monsanto technology and such claims
are contained in each of these lawsuits.
The Company and Monsanto and various retail seed suppliers were named in three
pending lawsuits in the State of South Carolina. One lawsuit was filed November
15, 1999, in the Beaufort Division of the United States District Court, District
of South Carolina; both of the other cases were filed on November 15, 1999, in
the Court of Common Pleas of Hampton County, South Carolina. The two state court
lawsuits were removed to the United States District Court for the District of
South Carolina but were subsequently remanded back to the state court in which
they were filed. In each of these cases the plaintiff alleges, among other
things, that certain seed acquired from D&PL which contained the Roundup
Ready(R) gene and/or the Bollgard(R) gene did not perform as the farmer had
anticipated. These lawsuits also include varietal claims aimed solely at the
Company. Of these cases, one filed in Hampton County and the other filed in the
United States District Court seek class action treatment for all purchasers of
certain D&PL varieties which contain the Monsanto technology. The Company and
Monsanto are continuing to investigate the claims to determine the cause or
causes of the alleged problem. Pursuant to the terms of the Roundup Ready
Agreement and the Bollgard(R) Agreement between D&PL and Monsanto, D&PL has a
right to be contractually indemnified against all claims arising out of the
failure of Monsanto's gene technology. D&PL will not have a right to
indemnification, however, from Monsanto for any claim involving varietal
characteristics separate from or in addition to the failure of the Monsanto
technology and such claims are contained in each of these lawsuits.
The Company and Monsanto are named as defendants in three pending lawsuits filed
in the State of Texas. One lawsuit was filed in Lamb County, Texas on April 5,
1999; one lawsuit was filed in Lamb County, Texas on April 14, 1999; and one
lawsuit was filed in Hockley County, Texas, on April 21, 1999. These lawsuits
were removed to the United States District Court, Lubbock Division, but
subsequently were remanded back to the state court where they were filed. In
each case the plaintiff alleges, among other things, that certain cottonseed
acquired from the Company did not perform as the farmers had anticipated or as
allegedly represented to them. This litigation is identical to seed arbitration
claims previously filed in the State of Texas, which were concluded in the
Company's favor. The Company and Monsanto have investigated the claims to
determine the cause or causes of the alleged problems and they appear to be
caused entirely by environmental factors.
Other Litigation
On May 15, 2000, several farmers and a seller of farm supplies filed suit in the
United States District Court for the Northern District of Alabama, against
Monsanto, the Company, and D&M International, LLC (a joint venture of Monsanto
and the Company) under federal antitrust laws and requested class certification.
Plaintiffs claim that defendants have: (1) unlawfully attempted to monopolize
the U.S. cotton seed and herbicide market in violation of ss. 2 of the Sherman
Act; (2) monopolized the U.S. cotton seed and herbicide market in violation of
ss. 2 of the Sherman Act; (3) conspired to unreasonably restrain trade in the
U.S. cotton seed and herbicide market in violation of ss. 1 of the Sherman Act;
and (4) engaged in unlawful tying of cotton seed and herbicide in violation of
ss. 3 of the Clayton Act. Plaintiffs demand unspecified antitrust damages,
including treble and compensatory damages, plus costs of litigation, including
attorneys' fees. In July 2000, the Company answered the complaint and in October
2000, moved for dismissal of the action on the ground that plaintiffs had failed
to allege any conduct or action by the Company that violates the federal
antitrust laws. Discovery has not commenced. On December 6, 2001, the United
States District Judge, acting on the recommendation of the Magistrate Judge,
granted Monsanto's and DPL's motions to dismiss the complaint without prejudice.
The plaintiffs were granted 30 days from the District Court's Order to file an
Amended Complaint. On January 7, 2002, plaintiffs filed an Amended Complaint
against Monsanto and the Company; however, plaintiffs did not assert in their
Amended Complaint any claims against D&M International, LLC.
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 Pty. Ltd., D&PL's
wholly-owned Australian subsidiary, 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.
In November 1999, Bios Agrosystems S.A. ("Bios"), a former distributor of
SureGrow brand cottonseed in Greece, brought suit in the U.S. District Court in
Delaware against D&PL International Technology, D&PL's subsidiary, to enjoin the
termination of its distributorship which was to become effective at the end of
November 1999. The suit demanded a declaratory judgment that the termination is
not effective and compensatory and punitive damages for wrongful termination.
Bios also filed a request for arbitration and a parallel suit seeking injunctive
relief in a Greek court. In January 2000, the U.S. District Court denied the
request for an injunction to prevent termination of Bios' distributorship and
subsequently enjoined Bios from proceeding with parallel litigation in the Greek
courts. Bios appealed to the United States Court of Appeals for the Third
Circuit. In March 2001, Bios gave notice that it was dismissing its appeal. On
March 14, 2002, the case was finally dismissed by the U.S. District Court for
failure to prosecute. Bios has not appealed this dismissal nor indicated that it
will now seek to arbitrate its claims.
In 1989, a corporation owned by the son of the Company's former Guatemalan
distributor filed suit asserting that the Company 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 5,300,000 Guatemalan
quetzales (approximately $675,000 at current exchange rates) and an injunction
preventing the Company 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. The Company continues to offer seed
for sale in Guatemala.
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 the Company under the May 8, 1998, Merger Agreement. On
December 30, 1999, the Company 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, the
Company and Monsanto reached an agreement whereby the Company would withdraw the
December 30 Suit, and Monsanto would immediately pay the $81 million. On January
3, 2000, Monsanto paid to the Company a termination fee of $81 million as
required by the merger agreement. On January 18, 2000, the Company filed a suit
(the "January 18 Suit") reinstating essentially all of the allegations contained
in the December 30 Suit. The January 18 Suit by the Company against Monsanto
seeks in excess of $1 billion in compensatory and $1 billion in punitive damages
for breach of contract under the merger agreement between the parties. The
Company alleges that Monsanto failed to make its best efforts, commercially
reasonable efforts, and/or reasonable best efforts to obtain antitrust approval
from the U.S. Department of Justice, as required under the terms of the merger
agreement. The Company also seeks damages for breach of the January 2, 2000
agreement pursuant to which the parties were to negotiate for two weeks to
resolve the dispute over failure of the merger to close.
The parties litigated for several months over the appropriate forum to hear the
case. A Delaware Court of Chancery ruling rejected Monsanto's attempt to
maintain the action in Delaware and returned the parties to the Circuit Court
for the First Judicial District of Bolivar County, Mississippi. Monsanto filed a
motion for summary judgment on the breach of contract claims alleging that the
Company suffered no cognizable damages as a result of the failed merger. On
December 18, 2000, the Company 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
the Company 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, the
Company named both Pharmacia Corp. (the newly formed corporation and existing
defendant) and Monsanto Company (a newly spun-off majority-owned subsidiary) as
defendants in the amended complaint. The Company filed two motions to compel
additional discovery from Monsanto. Monsanto filed a motion for summary judgment
and a motion to dismiss the added claim of tortious interference contained in
the amended complaint. Monsanto alleged that it was entitled to 1) dismissal of
the action on the grounds that the Company'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 the Company has not suffered any
injury as a result of Monsanto's actions. On November 15, 2001, the Circuit
Court denied Monsanto's motion for summary judgment on the breach of contract
claims, holding that the case presents issues for trial by jury. The Court also
denied Monsanto's motion to dismiss or for summary judgment on D&PL's claim for
tortious interference with business relationships. The Court also granted
substantially all of the discovery sought by D&PL in its motion to compel. The
parties are in discovery.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Business
Domestic
Delta & Pine Land Company ("D&PL"), a Delaware corporation, and subsidiaries are
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. D&PL also breeds, produces, conditions and distributes
soybean planting seed in the United States.
Since 1915, D&PL has 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. The Company has used its 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, D&PL added soybean seed to its product line. In 1996, D&PL commenced
commercial sales in the United States of cotton planting seed containing
Bollgard(R) gene technology licensed from Monsanto Company ("Monsanto") which
expresses a protein toxic to certain lepidopteran cotton pests. in 1997, D&PL
commenced sales in the U.S. cotton planting seed that contains a gene that
provides tolerance to glyphosate-based herbicides ("Roundup Ready(R) Cotton").
In 1997, D&PL 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, D&PL commenced sales of cottonseed of
varieties containing both the Bollgard and Roundup Ready genes.
International
During the 1980's, as a component of its long-term growth strategy, the Company
began to market its products, primarily cottonseed, internationally. Over a
period of years, the Company has strengthened and expanded its international
staff in order to support its expanding international business, primarily
through joint ventures. 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. Management believes that D&PL has an attractive opportunity to
penetrate foreign markets because of its widely adaptable, superior cotton
varieties, technological know-how in producing and conditioning high-quality
seed and its brand name recognition. Furthermore, in many countries the Bollgard
gene technology and Roundup Ready gene technology licensed from Monsanto is
effective and could bring value to farmers.
D&PL sells its products in foreign countries through (i) export sales, (ii)
direct in-country operations through either joint ventures or wholly owned
subsidiaries and to a lesser degree (iii) distributors or licensees. The method
varies and evolves, depending upon the Company's 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. Prior to 1999, a majority of the Company's international sales resulted
from exports from the U.S. of the Company's products rather than direct
in-country operations. In 2001 and year to date 2002, the majority of
international sales came from in-country operations.
See Note 3 of the Notes to Consolidated Financial Statements in Part I, Item 1
for further details about business segments.
Joint Ventures
D&M International, LLC, is a venture formed in March, 1995 through which D&PL
(the managing member) and Monsanto plan to introduce, in combination, 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 November 1995, D&M International, LLC formed a subsidiary, D&PL China Pte
Ltd. ("D&PL China") and in November 1996, D&PL China formed with parties in
Hebei Province, one of the major cotton producing regions in the People's
Republic of China, Hebei Ji Dai Cottonseed Technology Company Ltd. ("Ji Dai"), a
joint venture controlled by D&PL China. D&PL China is 80% owned by D&M
International, LLC and 20% owned by various Singaporean entities. Ji Dai is 67%
owned by D&PL China and 33% by Chinese parties. In June 1997, Ji Dai commenced
construction of a cottonseed conditioning and storage facility in Shijiazhuang,
Hebei, China, pursuant to the terms of the joint venture agreement. The new
facility was completed in December 1997 and seed processing and sales of seed of
a D&PL cotton variety containing Monsanto's Bollgard technology commenced in
1998.
In December 1997, D&M International, LLC, formed a joint venture with Ciagro
S.R.L. ("Ciagro"), a distributor of agricultural inputs in the Argentine cotton
region, for the production and sale of genetically improved cottonseed. CDM
Mandiyu S.R.L., is owned 60% by D&M International, LLC, and 40% by Ciagro. CDM
Mandiyu S.R.L. has been licensed to sell D&PL cotton varieties containing
Monsanto's Bollgard gene technology. Sales of such varieties commenced in 1999.
Future plans include the production and sale of Roundup Ready cottonseed
varieties, which received government approval in 2001.
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.
Under the terms of the joint venture agreement, the newly formed entity will
produce, condition and sell acid delinted D&PL varieties of cottonseed which
contain Monsanto's Bollgard gene. Commercial sales of D&PL cotton varieties
containing the Bollgard gene technology began in 2000.
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 new company, MDM Maeda Deltapine Monsanto Algodao
Ltda. ("MDM"), produces, conditions and sells acid-delinted D&PL varieties of
cotton planting seed. In 2000, the Company began selling D&PL conventional
cotton varieties and first year sales accounted for more than 20% of cotton
acreage planted in Brazil. 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. MDM is 51% owned by D&M
International LLC and 49% by Brazilian entities.
In October 2001, the Company announced that it had recently 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 1.2
million acres which is almost 1.5 times the size of the combined Hebei and Anhui
markets.
Subsidiaries
The Company's operations in Groblersdal, South Africa and Catamarca, Argentina
process foundation seed grown in these countries. The use of Southern Hemisphere
winter nurseries and seed production programs such as these can accelerate the
introduction of new varieties because D&PL can raise at least two crops per year
by taking advantage of the Southern Hemisphere growing season. The Company
maintains a winter nursery in Canas, Costa Rica and has completed construction
of 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.
Deltapine Australia Pty. Ltd., a wholly owned Australian subsidiary of D&PL,
conducts breeding, production, conditioning and marketing of cotton planting
seed in Australia. Certain varieties developed in Australia are well adapted to
other Southern Hemisphere cotton producing countries and Australian developed
varieties are exported to these areas. The Company sells seed of both
conventional and transgenic varieties in Australia. The Company, through its
Australian operations, is identifying smaller potential export markets for the
Company's products throughout Southeast Asia. The adaptability of the Company's
germplasm must be evaluated in the target markets before such sales can be made.
Employees
As of March 29, 2002, the Company employed a total of 533 full time employees
worldwide excluding an estimated 149 employees of joint ventures. Due to the
nature of the business, the Company utilizes seasonal employees in its delinting
plants and its research and foundation seed programs. The maximum number of
seasonal employees approximates 300 and typically occurs in October and November
of each year. The Company considers its employee relations to be good.
Biotechnology
Insect Resistance for Cotton
Collaborative biotechnology licensing agreements, which were executed with
Monsanto in 1992 and subsequently revised in 1993 and amended and restated in
1996 and further amended in December 1999, provide for the commercialization of
Monsanto's Bollgard ("Bacillus thuringiensis" or "Bt") gene technology in D&PL's
varieties in the United States. The selected Bt is 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. This
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 D&PL for use under the trade name Bollgard. In
D&PL's primary markets, the cost of insecticides is the largest single
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, D&PL 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") between the Company and Monsanto. 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. 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 distributor/dealer
payments) and D&PL retains 29% for its services. The expiration date of the
Bollgard Agreement is determined by the last to expire of the patent rights
licensed under that agreement. Unless sooner terminated by the Company, as is
permitted after October 11, 2008, the expiration date of the Bollgard Agreement
based on the last to expire of the patents currently licensed thereunder will be
September 28, 2016.
Pursuant to the Bollgard Agreement, Monsanto must defend and indemnify D&PL
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto must also indemnify D&PL 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 royalty. Indemnity
from Monsanto only covers performance claims involving failure of performance of
the Bollgard gene and not claims arising from other causes.
Herbicide Tolerance for Cotton
In February 1996, the Company and Monsanto 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
December 1999, D&PL has also developed transgenic cotton varieties that are
tolerant to Roundup, a glyphosate-based herbicide sold by Monsanto. In 1996,
such Roundup Ready plants were approved by the Food and Drug Administration, the
USDA, and the EPA. The Roundup Ready Agreement grants a license to D&PL and
certain of its affiliates the right in the United States to sell cottonseed of
D&PL's varieties that contain Monsanto's Roundup Ready gene. The Roundup Ready
gene makes cotton plants tolerant to contact with Roundup herbicide. Similar to
the Bollgard Agreement, farmers must execute limited use sublicenses in order to
purchase seed containing the Roundup Ready Gene. The distributors/dealers who
coordinate the farmer licensing process receive a portion of the technology
sublicensing fee. D&PL's portion of the Roundup Ready technology fee varies
depending on the technology fee per acre established by Monsanto. In 2000 and
2001, D&M Partners paid Monsanto approximately 70% of the Roundup Ready
technology fees and D&PL retained the remaining 30%. The expiration date of the
Roundup Ready Agreement is determined by the last to expire of the patent rights
licensed under that agreement. Unless sooner terminated by the Company, as is
permitted after October 11, 2008, the expiration date of the Roundup Ready
Agreement based on the last to expire of the patents currently licensed
thereunder will be May 27, 2014.
Pursuant to the Roundup Ready Agreement, Monsanto must defend and indemnify D&PL
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto will also indemnify D&PL against the cost of
inventory that becomes unsaleable because of patent infringement claims, but
Monsanto is not required to indemnify D&PL against lost profits on such
unsaleable seed. In contrast with the Bollgard Gene License where the cost of
gene performance claims will be shared in proportion to the division of
sublicense revenue, Monsanto must defend and must bear the full cost of any
claims of failure of performance of the Roundup Ready Gene. In both agreements,
generally, D&PL is responsible for varietal/seed performance issues, and
Monsanto is responsible for failure of the genes.
Herbicide Tolerance for Soybeans
In February 1997, the Company and Monsanto executed the Roundup Ready Soybean
License Agreement (the "Roundup Ready Soybean Agreement") which provides for the
commercialization of Roundup Ready soybean seed. D&PL and Monsanto renegotiated
the terms of sale of Roundup Ready Soybeans for 2001 and future years and
executed a new agreement in September 2001.
Since 1987, D&PL has conducted research to develop soybean plants that are
tolerant to certain DuPont ALS(R) 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 ALS
herbicide-tolerant trait was 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
On July 27, 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. D&PL and the USDA executed on December 18, 2000
a commercialization agreement, providing D&PL exclusive rights to market this
technology, subject to certain rights reserved to the USDA.
In March 1998, D&PL was granted United States Patent No. 5,723,765, entitled
CONTROL OF PLANT GENE EXPRESSION. This patent is owned jointly by D&PL and the
United States of America, as represented by the Secretary of Agriculture. The
patent broadly covers 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. The patent
has 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. D&PL intends
licensing of this technology to be widely available to other seed companies.
The patents were developed from a research program conducted pursuant to a
Cooperative Research and Development Agreement between D&PL and the U.S.
Department of Agriculture's Agricultural Research Service ("USDA-ARS") in
Lubbock, Texas. The technologies resulted from basic research and will require
further development, currently underway, in order to be used in commercial seed.
The Company estimates that it will be several years before these technologies
could be available commercially.
The Company also has exclusive rights to market to third parties a method of
plant transformation that was developed by the USDA-ARS under a research
contract (funded by D&PL). This patent and the marketing rights apply to all
plant species on which the method of transformation is effective. 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.
Other
The Company has licensing, research and development, confidentiality and
material transfer agreements with providers of technology that the Company is
evaluating for potential commercial applications and/or introduction. The
Company also contracts with third parties to perform research on the Company's
behalf for enabling and other technologies that the Company believes have
potential commercial applications in varietal crops around the world.
Commercial Seed
In 2002, the Company had available for sale 89 varieties as cotton planting seed
for either commercial or experimental purposes. Of those varieties, 18 contained
the Bollgard gene technology, 24 contained the Roundup Ready gene technology, 22
contained both gene technologies, and 25 were conventional varieties.
Seed of all commercial plant species is either varietal or hybrid. D&PL's 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 D&PL's 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 saved from prior crops.
The Company farms approximately 2,500 acres in the U.S., primarily for research
purposes and for production of cotton and soybean foundation seed. The Company
has annual agreements with various growers to produce seed for cotton and
soybeans. The growers plant parent seed purchased from the Company 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 standards upon harvest, the Company may be
obligated to purchase specified minimum quantities of seed, usually in its first
and second fiscal quarters, at prices equal to the commodity market price of the
seed plus a grower premium. The Company then conditions the seed for sale.
The majority of the Company's sales are made from early in the second fiscal
quarter through the beginning of the fourth fiscal quarter. Varying climatic
conditions can change the quarter in which seed is delivered, thereby shifting
sales and the Company's earnings between quarters. Thus, seed production,
distribution and sales are seasonal and interim results will not necessarily be
indicative of the Company's results for a fiscal year.
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. The licensing fees charged to farmers are based on pre-established
planting rates for eight geographic regions and considers the estimated number
of seed contained in each bag which may vary by variety, location grown, and
other factors.
International export revenues are recognized upon the later of when seed is
shipped or the date letters of credit are confirmed. Generally, international
export sales are not subject to return. All other international revenues from
the sale of planting seed, less estimated reserves for returns, are recognized
when the seed is shipped.
Domestically, the Company promotes its cotton and soybean seed directly to
farmers and sells its seed through distributors and dealers. All of the
Company's domestic seed products (including Bollgard and Roundup Ready
technologies) are subject to return or credit, 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 the Company's third and fourth quarters. The
Company provides for estimated returns as sales occur. To the extent actual
returns differ from estimates, adjustments to the Company's operating results
are recorded when such differences become known, typically in the Company's
fourth quarter. All significant returns occur or are accounted for by fiscal
year end.
Euro Currency Conversion
On January 1, 1999, the euro became the common legal currency of 11 of the 15
member countries of the European Union.. To date, D&PL has not been affected by
the euro currency conversion, nor does it expect to be adversely affected by
these changes due to the nature of the Company's activities there. For the
foreseeable future, the Company does not expect a material amount of its
transactions to be denominated in the euro.
Risks and Uncertainties
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, existing products,
technical developments, new products, new technologies, research and development
activities, and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include those noted elsewhere in this Item and filing and the following:
Demand for D&PL's seed will be affected by government programs and policies
and, most importantly, by weather. Demand for seed is also influenced by
commodity prices and the demand for a crop's end-uses such as textiles,
animal feed, 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 D&PL 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. The Company's seed products and technologies contained
therein may encounter substantial competition from technological advances
by others or products from new market entrants. Many of the Company's
competitors are, or are affiliated with, large diversified companies that
have substantially greater resources than the Company.
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign governments.
Particular policies which may affect the domestic and international
operations of D&PL include the use of and the acceptance of products that
were produced from plants that were 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 the Company's international operations.
The publicity related to genetically modified organisms ("GMOs") or
products made from plants that contain GMOs may have an effect on the
Company's sales in the future. In 2001, approximately 90% of the Company's
cottonseed that was sold contained either the Bollgard, Roundup Ready, or
both gene technologies and 86% of the Company's soybean seed sales
contained the Roundup Ready gene technology. Although many farmers have
rapidly adopted these technologies, the alleged concern 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 the Company operates and because of factors
within the particular international markets targeted by the Company,
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, may serve to further
complicate the Company's ability to execute its long range ex-U.S. business
plans because those plans include future expansion into Uzbekistan (2003)
and Pakistan (2004).
Overall profitability will depend on the factors noted above as well as
weather conditions, government policies in all countries where the Company
sells products and operates, worldwide commodity prices, the Company's
ability to successfully open new international markets, the Company's
ability to successfully continue the development of the High Plains market,
the technology partners' ability to obtain timely government approval (and
maintain such approval) for existing and for additional biotechnology
products on which they and the Company are working and the Company's
ability to produce sufficient commercial quantities of high quality
planting seed of these products. Any delay in or inability to successfully
complete these projects may affect future profitability.
The risks and uncertainties that may affect the operations, performance,
development and results of the Company's business include those noted elsewhere
in this Item and in "Risks and Uncertainties" in Item 7 of the Company's Form
10K filed for the year ending August 31, 2001.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended February 28,
2002.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTA AND PINE LAND COMPANY
Date: April 15, 2002 /s/ F. Murray Roginson
--------------------------------
F. Murray Robinson, President, Vice Chairman and
Chief Executive Officer
Date: April 15, 2002 /s/ W. Thomas Jagodinski
--------------------------------
W. Thomas Jagodinski,
Senior Vice President - Finance and Treasurer