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 November 30, 2003 or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from/to
Commission File Number: 000-21788
Exact name of registrant as specified in its charter:
DELTA AND PINE LAND COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification Number: 62-1040440
Address of Principal Executive Offices (including zip code):
One Cotton Row, Scott, Mississippi 38772
Registrant's telephone number, including area code:
(662) 742-4000
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES (x) NO ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES (x) NO ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.10 Par Value - 38,078,917 shares outstanding as of December 31,
2003.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - November 30, 2003,
August 31, 2003, and November 30, 2002 3
Consolidated Statements of Operations - Three Months
Ended November 30, 2003 and November 30, 2002 4
Consolidated Statements of Cash Flows - Three Months
Ended November 30, 2003 and November 30, 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Business 21
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
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)
November 30, August 31, November 30,
2003 2003 2002
------------------ ----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 119,515 $ 143,285 $ 95,611
Receivables, net 11,222 166,952 11,337
Inventories 61,463 32,231 61,695
Prepaid expenses 1,618 2,116 1,575
Deferred income taxes 10,677 10,677 11,214
------------------ ----------------- -----------------
Total current assets 204,495 355,261 181,432
PROPERTY, PLANT AND EQUIPMENT, net 63,220 64,441 62,693
EXCESS OF COST OVER NET ASSETS OF
BUSINESSES ACQUIRED, net 4,183 4,183 4,187
INTANGIBLES, net 5,451 5,470 3,913
INVESTMENT IN AFFILIATE 413 328 635
OTHER ASSETS 1,778 1,869 2,358
------------------ ----------------- -----------------
TOTAL ASSETS $ 279,540 $ 431,552 $ 255,218
================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Notes payable $ 248 $ 40 $ 1,805
Accounts payable 20,338 17,966 16,775
Accrued expenses 34,516 176,150 30,285
Income taxes payable 6,069 9,894 6,887
------------------ ----------------- -----------------
Total current liabilities 61,171 204,050 55,752
------------------ ----------------- -----------------
LONG-TERM DEBT 1,598 1,557 1,225
------------------ ----------------- -----------------
DEFERRED INCOME TAXES 5,240 5,220 3,125
------------------ ----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 12)
------------------ ----------------- -----------------
MINORITY INTEREST IN SUBSIDIARIES 5,183 3,618 2,971
------------------ ----------------- -----------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.10 per share; 2,000,000 shares authorized
Series A Junior Participating Preferred, par value $0.10 per share;
456,989 shares authorized; no shares issued or outstanding - - -
Series M Convertible Non-Voting Preferred, par value $0.l0 per share;
1,066,667 shares authorized, issued and outstanding 107 107 107
Common stock, par value $0.10 per share; 100,000,000 shares authorized;
39,569,060, 39,525,116 and 39,367,005 shares issued;
38,087,794, 38,107,850 and 38,178,439 shares outstanding 3,957 3,953 3,937
Capital in excess of par value 55,596 54,850 52,229
Retained earnings 178,717 189,610 162,988
Accumulated other comprehensive loss (4,565) (5,442) (5,761)
Treasury stock, at cost; 1,481,266, 1,417,266 and 1,188,566 shares (27,464) (25,971) (21,355)
------------------ ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 206,348 217,107 192,145
------------------ ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 279,540 $ 431,552 $ 255,218
================== ================= =================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
November 30, November 30,
2003 2002
----------------- ------------------
NET SALES AND LICENSING FEES $ 13,845 $ 5,599
COST OF SALES 8,036 4,288
----------------- ------------------
GROSS PROFIT 5,809 1,311
----------------- ------------------
OPERATING EXPENSES:
Research and development 4,136 3,557
Selling 2,742 2,419
General and administrative 4,381 3,567
----------------- ------------------
11,259 9,543
SPECIAL CHARGES - (500)
----------------- ------------------
OPERATING LOSS (5,450) (8,732)
INTEREST INCOME, net 373 388
OTHER EXPENSE (3,172) (2,127)
EQUITY IN NET LOSS OF AFFILIATE (415) (460)
MINORITY INTEREST IN EARNINGS OF
SUBSIDIARIES (1,989) (457)
----------------- ------------------
LOSS BEFORE INCOME TAXES (10,653) (11,388)
INCOME TAX BENEFIT 3,675 3,957
----------------- ------------------
NET LOSS (6,978) (7,431)
DIVIDENDS ON PREFERRED STOCK (107) (53)
----------------- ------------------
NET LOSS APPLICABLE TO COMMON SHARES $ (7,085) $ (7,484)
================= ==================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.19) $ (0.20)
================= ==================
NUMBER OF SHARES USED IN BASIC AND
DILUTED NET LOSS
PER SHARE CALCULATIONS 38,099 38,176
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.10 $ 0.05
================= ==================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
(in thousands)
(Unaudited)
November 30, November 30,
2003 2002
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,978) $ (7,431)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,018 1,735
Loss on disposition of assets 11 -
Equity in net loss of affiliate 415 460
Foreign exchange (gain) loss (78) 54
Minority interest in earnings of
subsidiaries 1,989 457
Changes in assets and liabilities:
Receivables 155,755 134,478
Inventories (28,740) (21,532)
Prepaid expenses 611 686
Intangibles and other assets 41 84
Accounts payable 2,253 289
Accrued expenses (141,479) (113,334)
Income taxes (3,683) (5,232)
------------------ -----------------
Net cash used in operating activities (17,865) (9,286)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (699) (1,078)
Sale of investments and property 39 11
Investment in affiliate (500) (400)
------------------ -----------------
Net cash used in investing activities (1,160) (1,467)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (36) (334)
Dividends paid (3,915) (1,962)
Proceeds from long-term debt - 106
Proceeds from short-term debt 245 450
Minority interest in dividends paid by
subsidiary (424) -
Payments to acquire treasury stock (1,493) (1,519)
Proceeds from exercise of stock options 571 415
------------------ -----------------
Net cash used in financing activities (5,052) (2,844)
------------------ -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES 307 117
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,770) (13,480)
CASH AND CASH EQUIVALENTS, August 31 143,285 109,091
------------------ -----------------
CASH AND CASH EQUIVALENTS, November 30 $ 119,515 $ 95,611
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest, net of capitalized interest $ 5 $ 20
Income taxes $ 9 $ 950
Noncash financing activities:
Tax benefit of stock option exercises $ 200 $ 300
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
the fair presentation of the consolidated financial statements have been
included. The business of Delta and Pine Land Company and its subsidiaries
("D&PL") is seasonal in nature; thus, the results of operations for the three
month periods ended November 30, 2003 and November 30, 2002 or for any quarterly
period, are not necessarily indicative of the results to be expected for the
full year. D&PL's investment in 50%-owned affiliate DeltaMax Cotton, LLC is
accounted for using the equity method. For further information, reference should
be made to the consolidated financial statements and footnotes thereto included
in D&PL's Annual Report to Stockholders on Form 10-K for the fiscal year ended
August 31, 2003.
Reclassifications
In the consolidated income statement for the three month period ended November
30, 2003, certain expenses historically classified as Research and Development
in Operating Expenses have been reclassified as Cost of Sales. These expenses
for the prior year period have also been reclassified for consistency. The
expenses relate to certain activities performed by the Technical Services
department. As the sales of transgenic varieties have increased as a percentage
of our Net Sales and Licensing Fees over the past several years, certain
technical services department activities have become more related to preparing
seed for sale than to Research and Development activities. The activities for
which expenses have been reclassified relate primarily to the increase of seed
quantities to allow us to offer certain varieties commercially and to late-stage
trials performed to ensure that varieties that have been chosen to be offered
commercially meet agronomic and transgenic requirements contained in certain of
our third party licenses. The amount of expenses reclassified for the three
month periods ended November 30, 2003 and 2002 were $483,000 and $449,000,
respectively.
2. COMPREHENSIVE LOSS
Total comprehensive loss for the three months ended November 30, 2003 and
November 30, 2002, was (in thousands):
Three Months Ended
November 30, November 30,
2003 2002
------------------- -------------------
Net loss $ (6,978) $ (7,431)
Other comprehensive income:
Foreign currency translation gains 629 60
Net realized and unrealized gains
on hedging instruments 248 118
Income tax expense related to
other comprehensive income (303) (62)
------------------- -------------------
Other comprehensive income, net of tax 574 116
------------------- -------------------
Total comprehensive loss $ (6,404) $ (7,315)
=================== ===================
3. SEGMENT DISCLOSURES
D&PL is in a single line of business and operates in two business segments,
domestic and international. D&PL's reportable segments offer similar products;
however, the business units are managed separately due to the geographic
dispersion of their operations. D&PL breeds, produces, conditions, and markets
proprietary varieties of cotton and soybean planting seed in the United States.
The international segment offers cottonseed in several foreign countries through
both export sales and in-country operations. D&PL develops its proprietary seed
products through research and development efforts in the United States and
certain foreign countries.
D&PL's chief operating decision maker utilizes revenue information in assessing
performance and making overall operating decisions and resource allocations.
Profit and loss information is reported by segment to the chief operating
decision maker and D&PL's Board of Directors. The accounting policies of the
segments are substantially the same as those described in the summary of
significant accounting policies in D&PL's Form 10-K filed for the year ended
August 31, 2003.
Information about D&PL's segments for the three month periods ended November 30,
2003 and November 30, 2002, is as follows (in thousands):
Three Months Ended
------------------
November 30, November 30,
2003 2002
------------------- -------------------
Net sales and licensing fees
Domestic $ 839 $ 426
International 13,006 5,173
------------------- -------------------
$ 13,845 $ 5,599
=================== ===================
Operating (loss) income
Domestic $ (8,596) $ (8,875)
International 3,146 143
------------------- -------------------
$ (5,450) $ (8,732)
=================== ===================
4. SIGNIFICANT CHANGES IN ASSETS AND LIABILITIES FROM AUGUST 31, 2003
Accounts receivable decreased approximately $155,730,000 to $11,222,000 at
November 30, 2003 from $166,952,000 at August 31, 2003. This decrease is
primarily related to the collection of the 2003 technology sublicense fees in
September 2003. The corresponding decrease in accrued expenses is primarily
related to the royalty payments made by the Company for the Bollgard and Roundup
Ready licensing fees on fiscal year 2003 sales in September 2003.
5. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Financial Accounting Standards Board Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"
requires the primary beneficiary of a variable interest entity ("VIE") to
consolidate the VIE under certain circumstances. FIN 46 is effective for all new
VIEs created or acquired after January 31, 2003. As amended by FASB Staff
Position FIN 46-6, "Effective Date of FASB Interpretation No. 46, Consolidation
of Variable Interest Entities," FIN 46 is effective for variable interests in a
VIE created before February 1, 2003 at the end of the first interim or annual
period ending after December 15, 2003 (the second quarter of fiscal 2004,
February 28, 2004, for D&PL). Management has not determined the impact, if any,
that this statement will have on our financial position or results of
operations.
Statement of Financial Accounting Standards ("SFAS") No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
requires additional annual disclosures about pension plan assets, benefit
obligations, cash flows, benefit costs and related information. SFAS No. 132
(Revised 2003) also requires companies to disclose various elements of pension
and postretirement benefit costs in interim-period financial statements for
quarters beginning after December 15, 2003. D&PL will be required to present
this interim disclosure in its May 31, 2004 quarterly financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity," provides guidance on how to classify and
measure certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. D&PL adopted this
statement for financial instruments entered into after May 31, 2003 and
otherwise adopted this statement September 1, 2003. The adoption of this
statement did not have a material impact on D&PL's consolidated financial
position or results of operations.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure -- an Amendment of FASB Statement No. 123," was issued in December
2002. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation under which compensation cost for stock options is recognized. In
addition, this statement amends the disclosure requirements of FASB Statement
No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. This required disclosure is
included in Note 6.
6. STOCK-BASED COMPENSATION PLANS
As permitted by both SFAS No. 123, "Accounting for Stock -Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure -- an Amendment of FASB Statement No. 123," D&PL applies Accounting
Principles Board Opinion 25 in accounting for its employee stock option plans.
Therefore, no compensation expense for stock options is deducted in determining
net income, as all options granted had an exercise price equal to the fair
market value of the underlying common stock on the grant date. For further
information about D&PL's employee stock option plans, reference should be made
to the consolidated financial statements and footnotes thereto included in
D&PL's Annual Report to Stockholders on Form 10-K for the fiscal year ended
August 31, 2003.
The following table illustrates the effect on net loss and net loss per share if
D&PL had recorded compensation expense in accordance with the fair value
provisions of SFAS No. 123.
Three Months Ended
------------------
November 30, 2003 November 30, 2002
------------------- -------------------
Net loss:
As reported $ (6,978) $ (7,431)
Less: Total stock-based
compensation expense
determined under the fair
value based method for all
awards, net of related tax
effects (812) (883)
------------------- -------------------
Pro forma $ (7,790) $ (8,314)
=================== ===================
Basic net loss per share:
As reported $ (0.19) $ (0.20)
=================== ===================
Pro forma $ (0.21) $ (0.22)
=================== ===================
Diluted net loss per share:
As reported $ (0.19) $ (0.20)
=================== ===================
Pro forma $ (0.21) $ (0.22)
=================== ===================
7. INVENTORIES
Inventories consisted of the following as of (in thousands):
November 30, August 31, November 30,
2003 2003 2002
------------------ ----------------- -----------------
Finished goods $ 30,032 $ 21,476 $ 35,049
Raw materials 36,470 17,062 34,175
Growing crops 929 1,199 529
Supplies 1,234 733 1,035
------------------ ----------------- -----------------
68,665 40,470 70,788
Less reserves (7,202) (8,239) (9,093)
------------------ ----------------- -----------------
$ 61,463 $ 32,231 $ 61,695
================== ================= =================
Finished goods and raw material inventory is valued at the lower of average cost
or market. Growing crops are recorded at cost. Inventory reserves relate to
estimated excess and obsolete inventory. The provision recorded for excess and
obsolete inventory for the three month periods ended November 30, 2003 and 2002
were $372,000 and $1,190,000 respectively. See Note 11 for description of
hedging activities.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of (in thousands):
November 30, August 31, November 30,
2003 2003 2002
--------------- -------------- --------------
Land and improvements $ 5,175 $ 5,124 $ 5,045
Buildings and improvements 41,907 41,272 37,563
Machinery and equipment 58,555 56,202 53,243
Germplasm 7,500 7,500 7,500
Breeder and foundation seed 2,014 2,000 2,000
Construction in progress 3,562 5,464 4,494
--------------- -------------- --------------
118,713 117,562 109,845
Less accumulated depreciation (55,493) (53,121) (47,152)
--------------- -------------- --------------
$ 63,220 $ 64,441 $ 62,693
=============== ============== ==============
9. INTANGIBLES AND EXCESS OF COST OVER NET ASSETS OF BUSINESS ACQUIRED
The components of identifiable intangible assets follow as of (in thousands):
November 30, 2003 August 31, 2003 November 30, 2002
----------- --------------- -------------- ---------------- ------------- ---------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
Trademarks $ 3,182 $ (820) $ 3,182 $ (800) $ 3,182 $ (741)
Commercialization
agreements 400 (72) 400 (65) 400 (44)
Licenses 1,100 - 1,100 - - -
Patents 476 (87) 426 (84) 295 (76)
Other 1,967 (695) 1,959 (648) 1,395 (498)
----------- --------------- -------------- ---------------- ------------- --------------
$ 7,125 $ (1,674) $ 7,067 $ (1,597) $ 5,272 $ (1,359)
=========== =============== ============== ================ ============= ==============
Amortization expense for identifiable intangible assets during the three month
period ended November 30, 2003 was approximately $80,000. Identifiable
intangible asset amortization expense is estimated to be $220,000 for the
remainder of 2004 and $300,000 in each of the fiscal years from 2005 through
2009.
During the fourth quarter of 2003, "EXCESS OF COST OVER NET ASSETS OF BUSINESS
ACQUIRED" ("goodwill") attributable to the domestic segment was tested for
impairment by comparing its implied fair value to its carrying value. Based on
management's impairment test, management determined that none of the goodwill
recorded was impaired.
10. INVESTMENT IN AFFILIATE
D&PL owns a 50% interest in DeltaMax Cotton, LLC ("DeltaMax"), a limited
liability company jointly owned with Verdia, Inc. (formerly known as MaxyAg,
Inc.), a wholly-owned subsidiary of Maxygen, Inc. Established in May 2002, the
DeltaMax joint venture was formed to create, develop and commercialize herbicide
tolerant and insect resistant traits for the cotton seed market. D&PL has
licensed from DeltaMax the developed traits for commercialization in both the
U.S. and other cotton-producing countries in the world. For the quarters ended
November 30, 2003, and November 30, 2002, D&PL's equity in the net loss of
DeltaMax was $415,000 and $460,000, respectively.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Other comprehensive loss includes the following related to the Company's soybean
hedging program for the three-month periods ended November 30, 2003 and November
30, 2002 (in thousands):
2003 2002
------------------- -------------------
Deferred net gain, as of August 31 $ 262 $ 304
Net gains on hedging instruments
arising during the year 248 118
Reclassification adjustment of
(gains) losses on hedging
instruments to earnings - -
------------------- -------------------
Net change in accumulated other
comprehensive loss 248 118
------------------- -------------------
Deferred net gain on derivative
instruments included in accumulated
other comprehensive loss at
November 30 $ 510 $ 422
=================== ===================
The net gain of $510,000 included in accumulated other comprehensive loss at
November 30, 2003 consists of net unrealized losses of $113,000 and net realized
gains of $623,000. The net unrealized losses of $113,000 will be recognized in
earnings within the next twelve months; however, the actual amount that will be
charged to earnings may vary as a result of changes in market conditions. The
net realized gains of $623,000 will be reclassified into earnings in the period
in which the forecasted transaction affects earnings, which generally occurs
during D&PL's second and third quarters.
For the three-month periods ended November 30, 2003 and November 30, 2002, D&PL
recorded no gains or losses in earnings as a result of hedge ineffectiveness or
discontinuance of cash flow hedges related to soybeans.
12. CONTINGENCIES
Product Claims
D&PL is named as a defendant in various lawsuits that allege, among other
things, that certain of D&PL's products (including those containing Monsanto's
technology) did not perform as the farmer had anticipated or expected. In some
of these cases, Monsanto and/or the dealer or distributor who sold the seed are
also named as defendants. In all cases where the seed sold contained either or
both of Monsanto's Bollgard and/or Roundup Ready gene technologies, and where
the farmer alleged a failure of one or more of those technologies, D&PL has
tendered the defense of the case to Monsanto and requested indemnity. Pursuant
to the terms of the February 2, 1996 Bollgard Gene License and Seed Services
Agreement (the "Bollgard Agreement") and the February 2, 1996 Roundup Ready Gene
License and Seed Services Agreement (the "Roundup Ready Agreement") (both as
amended December 1999, January 2000 and March 2003 and the Roundup Ready
Agreement as additionally amended July 1996) D&PL has a right to be
contractually indemnified by Monsanto against all claims arising out of the
failure of Monsanto's gene technology. Pharmacia remains liable for Monsanto's
performance under these indemnity agreements. Some of the product liability
lawsuits contain varietal claims which are aimed solely at D&PL. D&PL does not
have a right to indemnification from Monsanto for any claims involving varietal
characteristics separate from or in addition to the failure of the Monsanto
technology. D&PL believes that the resolution of these matters will not have a
material impact on the consolidated financial statements. D&PL intends to
vigorously defend itself in these matters.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II(R) cotton seed infringes Bayer's Australian patent
that claims an alleged invention entitled "Prevention of Bt Resistance
Development." The suit seeks an injunction, damages and other relief against
Deltapine Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. Deltapine Australia's response to the suit is
due in March 2004.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners pertaining to four matters under the
Bollgard(R) and Roundup Ready(R) Licenses for the United States and two matters
under license agreements for Argentina and the Republic of South Africa,
respectively. Monsanto's notice of dispute asserts that D&PL's failure to
address these issues would be a breach of D&PL obligations under the relevant
agreements and reserves all of Monsanto's rights under these agreements. In
August 2003, D&PL and D&M Partners responded to Monsanto's positions on each
issue and notified Monsanto of three additional disputes, each concerning
Monsanto's compliance with its obligations under the Bollgard and Roundup Ready
Licenses for the United States. In accordance with the dispute resolution
provisions of the subject agreements, the issues raised in Monsanto, D&PL and
D&M Partners' notices have been submitted to a panel of senior executives.
Monsanto has subsequently withdrawn from the executive panel the issue involving
the license agreements for the Republic of South Africa and has submitted to the
executive panel one additional issue of interpretation of the Bollgard and
Roundup Ready Licenses for the United States. D&PL is committed to participating
in good faith resolution of the issues in dispute. Any issues not resolved by
the executive panel may be submitted to binding arbitration as provided in the
relevant agreements.
In July 2003, D&PL was named as a defendant along with a local resident in a
lawsuit filed in the Circuit Court of Dunklin County, Missouri. This case was
removed to the United States District Court for the Eastern District of
Missouri, Southwest Division, on August 22, 2003. The lawsuit alleges that D&PL
committed certain business torts, including malicious prosecution of a civil
action, interference with contractual relationships and other claims when D&PL
pursued a claim in an earlier lawsuit against the plaintiff in this litigation.
The defense of this claim has been tendered to D&PL's liability and insurance
carriers. D&PL's insurance carriers have agreed to provide a defense to this
action and indemnity subject to the reservation of certain specific rights. This
case is in the very early pre-trial phase and initial discovery is now ongoing.
In July 2002, Syngenta Biotechnology, Inc. ("SBI") brought suit in the U.S.
District Court in Delaware alleging that D&PL's making, using, selling and
offering to sell cotton planting seed containing Monsanto's insect-resistant Bt
genes, being sold under the trade name Bollgard, and Monsanto's herbicide
tolerance genes, being sold under the trade name Roundup Ready, infringes U.S.
Patent 6,051,757 entitled "Regeneration Of Plants Containing Genetically
Engineered T-DNA". In July 2003, SBI added D&M Partners as an additional
defendant. The suit seeks a preliminary and permanent injunction against D&PL,
Monsanto and D&M Partners against further acts of alleged infringement,
contributory infringement and inducement of infringement of SBI's patent and
recovery of damages for an unspecified amount including treble damages on
account of the defendants' alleged willful infringement. D&PL has demanded that
Pharmacia and Monsanto each agree to defend D&PL in this suit and to indemnify
D&PL against damages, if any, which may be awarded. Monsanto has assumed the
defense of D&PL and D&M Partners and has filed an answer generally denying
infringement and other claims made in the litigation. D&PL is assisting Monsanto
to the extent reasonably necessary for the conduct of the litigation. Trial in
this case has been scheduled for October 2004. Management has not determined the
effect, if any, this litigation will have on D&PL.
In May 2002, Pharmacia Corporation filed a suit in state court in Missouri
against D&PL International Technology Corp. ("DITC"), D&PL's subsidiary, seeking
a declaratory judgment that it was entitled to invoke the cross purchase
provision in the Operating Agreement for D&M International, LLC, a limited
liability company jointly owned by Pharmacia and DITC. In the alternative,
Pharmacia sought a declaratory judgment that DITC was deemed to have consented
to Pharmacia's transfer of the Operating Agreement to Monsanto and its issuance
and transfer of shares of Monsanto's stock. DITC moved to dismiss on June 6,
2002, because the case was moot and did not present a justiciable controversy,
in that DITC had already invoked its rights under the cross purchase provision
and had caused Pharmacia's interest in D&M International, LLC to be redeemed.
Instead of answering DITC's motion, on or about June 13, 2002, Pharmacia filed
an amended petition, dropping all of its prior claims, and seeking a declaratory
judgment that DITC has no contractual rights to enjoin Pharmacia from selling
its shares of Monsanto or to seek damages for Pharmacia's prior initial public
offering of Monsanto's shares to the public. DITC moved to dismiss the suit,
since it had never threatened to enjoin the spin-off, and, in the alternative,
moved for a more definite statement. On October 12, 2002, the Court denied
DITC's motion to dismiss but granted DITC's motion for a more definite
statement. Pharmacia filed a Second Amended Petition on October 30, 2002, and
DITC filed a motion to dismiss the Second Amended Petition on November 19, 2002.
On January 14, 2003, the Court denied DITC's motion to dismiss, and the case in
now in discovery.
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.
A corporation owned by the son of D&PL's former Guatemalan distributor sued in
1989 asserting that D&PL violated an agreement with it by granting to another
entity an exclusive license in certain areas of Central America and southern
Mexico. The suit seeks damages of 5,292,459 Guatemalan quetzales (approximately
$677,000 at December 31, 2003 exchange rates) and an injunction preventing D&PL
from distributing seed through any other licensee in that region. The Guatemalan
court, where this action is proceeding, has twice declined to approve the
injunction sought. D&PL continues to make available seed for sale in Central
America and Mexico.
14. EARNINGS PER SHARE
For the quarters ended November 30, 2003, and November 30, 2002, Common Stock
Equivalents were not included in D&PL's calculation of diluted earnings per
share because their inclusion would have been antidilutive to earnings since
D&PL reported a net loss for each of the aforementioned quarters. As a result,
basic and diluted earnings per share are the same in each respective quarter
ended November 30, 2003, and November 30, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW/OUTLOOK
In fiscal year 2004, we expect net sales and licensing fees to range from $315
million to $330 million and earnings per diluted share (a GAAP measure) to range
from $0.82 to $0.96. We expect to incur expenses relating to our lawsuit against
1
Monsanto (NYSE: MON) and Pharmacia to range from $10 million to $14 million, or
$0.16 to $0.23 per diluted share. Earnings per diluted share before such
expenses (a non-GAAP measure) is expected to range from $1.05 to $1.12. We base
our assumptions on an expected increase in cotton acreage to 14.5 million acres
over the approximately 13.3 million acres we believe were planted in 2003,
constant or improved market share, higher selling prices of our seed, and a
consistent product sales mix in 2004 with 2003. We believe that recent increased
cotton fiber prices, coupled with further sales penetration in 2004 due to
strong customer demand for our key products, some of which were launched in
2003, will all contribute to improved results in 2004.
In 2003, we expected planted cotton acreage to approximate 13.9 million acres.
However, inclement weather during the spring reduced plantings to levels we
estimate at 13.3 million acres. Therefore, we expect 2004 results to exceed not
only 2003 actual, but also 2003 forecasted results.
We increased our cottonseed and soybean selling prices in 2004. We expect the
incremental increase in cotton seed selling prices will exceed the anticipated
incremental increase in seed costs. We expect our international business to
remain flat in 2004. Drought conditions continue to impact our Australian
business, and sales in key markets in Europe are also expected to remain flat.
We also expect consolidated operating expenses to increase approximately $5
million to $6 million over last year, partially due to additional research and
development expenses related to new technologies and product development
initiatives.
Other Matters
In August 2003, we announced that we would begin packaging our cottonseed
varieties in bags containing approximately 250,000 seed in the 2004 selling
season, as compared to historically packaging our cottonseed varieties in
50-pound bags. Pima and Acala varieties will continue to be packaged in 50-pound
bags. This is intended to simplify pricing and production planning, and will
help standardize technology fees and make inventory management for our
distribution partners and farmers more precise.
We are continuing to work with third-party trait providers to develop, test and
evaluate elite cotton varieties containing insect resistant genes. If
appropriate testing indicates these third-party traits combined with our
germplasm is competitive and if commercialization agreements are reached, our
elite varieties containing these traits may be available for introduction to
growers as early as 2005, subject to U.S. government regulatory approval being
received. In addition, our joint venture with Verdia, Inc., DeltaMax Cotton LLC,
has initiated cotton transformation of proprietary glyphosate tolerant and
insect resistance genes.
With respect to our suit against Monsanto and Pharmacia, the parties remain in
discovery. A new trial date has not yet been scheduled, but the Court has
ordered an April 2004 fact-discovery deadline as well as other deadlines from
that date until April 15, 2005, when pre-trial statements are due to the Court.
Therefore, the trial is not expected to occur prior to April 15, 2005. On
September 12, 2003, Monsanto amended its response to our lawsuit to include four
counterclaims against us. Monsanto is seeking unspecified damages for its
counterclaims, including the $81 million paid by Monsanto to D&PL as a
termination fee and related expenses. We have answered Monsanto's counterclaims
and do not believe we have any liability. We continue to vigorously pursue our
lawsuit and defend Monsanto's counterclaims. See Part II, Item 1 for further
discussion.
----------
1. On March 31, 2000, Monsanto Company consummated a merger with Pharmacia &
Upjohn Inc. and changed its name to Pharmacia Corporation. On February 9, 2000,
Monsanto Company formed a new subsidiary corporation, Monsanto Ag Company,
which, on March 31, 2000, changed its name to Monsanto Company. On August 31,
2002, Pharmacia distributed to its shareholders its remaining interest in the
new Monsanto Company. Pursuant to the closing of a merger on April 16, 2003,
Pharmacia Corporation merged with and into a wholly-owned subsidiary of Pfizer
Inc. Pharmacia survived the merger as a wholly-owned subsidiary of Pfizer Inc.
In this document, with respect to events occurring on or before March 31, 2000,
the term "Monsanto" refers to the entity then designated Monsanto Company and
renamed Pharmacia Corporation on that date. With respect to events occurring
between March 31, 2000 and April 16, 2003, this entity is referred to as
"Pharmacia". With respect to events occurring after April 16, 2003, the entity
referred to as "Pharmacia" is that entity which on that date became a
wholly-owned subsidiary of Pfizer Inc. With respect to events occurring after
March 31, 2000, the entity formed as Monsanto Ag Company and renamed Monsanto
Company (NYSE: MON) on March 31, 2000, is referred to as "Monsanto".
Pursuant to our previously announced share repurchase program, we repurchased
104,000 shares of our stock in the open market from September 1, 2003 to
December 31, 2003.
Results of Operations
During the first quarter, we reported higher international sales than in the
prior year. In the first quarter, almost all sales relate to our international
business as shipments generally do not occur then in the U.S. due to the
seasonality of our business. International sales increased due to increased
volumes in Brazil and Argentina as well as improvements in our pricing and
foreign exchange rates in those markets. In addition, our first quarter sales
also increased in Australia and China due to the timing of customer shipments.
Due to the seasonal nature of our business, we typically incur losses in our
first and fourth fiscal quarters because the majority of our domestic sales are
made in our second and third quarters. Sales in the first and fourth quarters
are generally limited to those made to export markets and those made by our
non-U.S. joint ventures and subsidiaries located primarily in the Southern
hemisphere.
The following sets forth selected operating data of D&PL (in thousands):
For the Three Months Ended
November 30, November 30,
2003 2002
------------------ -----------------
Operating results-
Net sales and licensing fees $ 13,845 $ 5,599
Gross profit 5,809 1,311
Operating expenses 11,259 9,543
Special charges - (500)
Operating loss (5,450) (8,732)
Loss before income taxes (10,653) (11,388)
Net loss applicable to common shares (7,085) (7,484)
The following sets forth selected balance sheet data of D&PL at the following
dates (in thousands):
November 30, August 31, November 30,
2003 2003 2002
---------------- --------------- ---------------
Balance sheet summary-
Current assets $ 204,495 355,261 181,432
Current liabilities 61,171 204,050 55,752
Working capital 143,324 151,211 125,680
Property, plant and equipment, net 63,220 64,441 62,693
Total assets 279,540 431,552 255,218
Outstanding borrowings 1,846 1,597 3,030
Stockholders' equity 206,348 217,107 192,145
Three months ended November 30, 2003, compared to three months ended November
30, 2002:
For the quarter ended November 30, 2003, we reported a net loss of $7.0 million,
compared to a net loss of $7.4 million reported in the comparable prior year
quarter. The decreased loss was due primarily to higher international sales,
offset by an increase in operating expenses and legal costs related to the
Monsanto/Pharmacia litigation.
Net sales and licensing fees increased approximately $8.2 million to $13.8
million from $5.6 million in the comparable period in the prior year. Gross
profit increased approximately $4.5 million to $5.8 million from $1.3 million.
The increase in net sales and licensing fees is primarily attributable to our
international operations, particularly in Argentina, Brazil and China. Increases
in prices, volumes and improved foreign exchange rates occurred in Argentina and
Brazil. Cottonseed sales at our operations in Australia and in China increased
due to changes in the timing of shipments to customers based on their orders.
Operating expenses increased approximately $1.8 million to $11.3 million from
$9.5 million in the first quarter of 2003. This increase related primarily to
higher insurance, pension and payroll related costs.
During the three months ended November 30, 2002, we reported special charges of
$0.5 million related to the severance costs associated with the closing of our
facility in Centre, Alabama as well as a headcount reduction at our joint
venture in Hebei Province, People's Republic of China. We reported net other
expense of approximately $3.1 million for the quarter ended November 30, 2003
compared to net other expense of approximately $2.1 million for the same period
in the prior year. The increase is attributable to additional legal fees related
to the Monsanto/Pharmacia litigation.
A reconciliation of net income before legal expenses related to the
Monsanto/Pharmacia litigation and special charges (a non-GAAP measure) to net
income (a GAAP measure) follows:
For the Three Months Ended November 30,
---------------------------------------
2003 2002
--------------- ----------------
Diluted Net Loss per Share:
Net loss before legal expenses
related to the Monsanto/Pharmacia
litigation and special charges
(a non-GAAP measure) $ (0.14) $ (0.16)
Effect of Monsanto/Pharmacia litigation (0.05) (0.03)
Effect of special charges - (0.01)
--------------- ----------------
Net loss (a GAAP measure) $ (0.19) $ (0.20)
=============== ================
Use of non-GAAP Financial Measures
In this filing, we disclose non-GAAP financial measures that exclude legal costs
associated with the D&PL versus Monsanto/Pharmacia litigation and special
charges associated with the closing of a U.S. location and a headcount reduction
at an international joint venture. These non-GAAP financial measures are
provided to enhance the user's overall understanding of our current financial
performance from normal operations and our prospects for the future. We believe
that the non-GAAP financial measures are more indicative of our core operating
results. D&PL management uses these non-GAAP financial measures in analyzing
D&PL's performance. These measures should be considered in addition to results
prepared in accordance with GAAP, but should not be considered a substitute for
GAAP results. The non-GAAP financial measures included in this filing have been
reconciled to the most directly comparable GAAP measures.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Overview
Management's discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing in Item 8 of our Annual Report on Form
10-K for the fiscal year ended August 31, 2003. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
We have identified below the accounting policies that involve those estimates
and assumptions that we believe are critical to an understanding of our
financial statements. Our management has discussed the development and selection
of each critical accounting estimate with the Audit Committee of our Board of
Directors, and the Audit Committee has reviewed the related disclosures below.
Since application of these accounting policies involves the exercise of judgment
and use of estimates, actual results could differ from those estimates.
Revenue Recognition
Revenues from domestic seed sales are recognized when the seed is shipped.
Revenues from Bollgard and Roundup Ready licensing fees are recognized when the
seed is shipped. Domestically, the licensing fees charged to farmers for
Bollgard and Roundup Ready cottonseed are based on pre-established planting
rates for each of nine geographic regions and consider the estimated number of
seeds contained in each bag which may vary by variety, location grown, and other
factors.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. Generally, international export sales are not subject
to return. Generally, all other international revenues from the sale of planting
seed, less estimated reserves for returns, are recognized when the seed is
shipped.
All of our domestic seed products (including those containing Bollgard and
Roundup Ready technologies) are subject to return and credit risk, the effects
of which vary from year to year. The annual level of returns and, ultimately,
net sales are influenced by various factors, principally commodity prices and
weather conditions occurring in the spring planting season during our third and
fourth quarters. We provide for estimated returns as sales occur. To the extent
actual returns differ from estimates, adjustments to our operating results are
recorded when such differences become known, typically in our fourth quarter.
All significant returns occur or are accounted for by fiscal year end.
Therefore, the application of this estimate primarily affects our quarterly
information.
Domestically, we promote our cotton and soybean seed directly to farmers and
sell our seed through distributors and dealers. We also offer various sales
incentive programs for seed and participate in such programs related to the
Bollgard and Roundup Ready technology fees offered by Monsanto. Generally, under
these programs, if a farmer plants his seed and the crop is lost (usually due to
inclement weather) by a certain date, a portion of the price of the seed and
technology fees are forgiven or rebated to the farmer. The amount of the refund
and the impact to D&PL depends on a number of factors including whether the
farmer can replant the crop that was destroyed. We record monthly estimates to
account for these programs. The majority of program rebates occur during the
second and third quarters. Essentially all material claims under these programs
have occurred or are accounted for by fiscal year end.
Provision for Damaged, Obsolete and Excess Inventory
Each year, we record a provision related to inventory based on our estimate of
seed that will not pass our quality assurance ("QA") standards at year end, or
is deemed excess based on our desired seed stock level for a particular variety
("dump seed"). Seed can fail QA standards based on physical defects (i.e., cut
seed, moisture content, discoloration, etc.), germination rates, or transgenic
purities. The amount recorded as inventory provision in a given year is
calculated based on the total quantity of inventory that has not passed QA
standards at any fiscal year end, any seed that is expected to deteriorate
before it can be sold and seed deemed to be excess. In establishing the
provision, we consider the scrap value of the seed to be disposed. An initial
estimate of the needed provision is made at the beginning of each year and
recorded over the course of the year. Adjustments are made monthly, as
necessary.
See Note 7 of the Notes to Consolidated Financial Statements in Item 1 for
further details about inventory reserves.
Deferred Income Taxes
Deferred income taxes are estimated based upon temporary differences between the
income and losses that we report in our financial statements and our taxable
income and losses as determined under applicable tax laws. We estimate the value
of deferred income taxes based on existing tax rates and laws, and our
expectations of future earnings. For deferred income taxes, we applied a
composite statutory income tax rate of 38%.
We are required to evaluate the likelihood of our ability to generate sufficient
future taxable income that will enable us to realize the value of our deferred
tax assets. If, in our judgment, we determine that we will not realize deferred
tax assets, then valuation allowances are recorded. As of November 30, 2003, we
had recorded deferred tax assets of approximately $5.4 million. We estimate that
our deferred tax assets will be realized; therefore, we have not recorded any
valuation allowances as of November 30, 2003.
We use management judgment and estimates when estimating deferred taxes. If our
judgments and estimates prove to be inadequate, or if certain tax rates and laws
should change, our financial results could be materially adversely impacted in
future periods.
Contingent Liabilities
A liability is contingent if the amount is not presently known, but may become
known in the future as a result of the occurrence of some uncertain future
event. D&PL estimates its contingent liabilities based on management's estimates
about the probability of outcomes and its ability to estimate the range of
exposure. Accounting standards require that a liability be recorded if
management determines that it is probable that a loss has occurred and the loss
can be reasonably estimated. In addition, it must be probable that the loss will
be confirmed by some future event. As part of the estimation process, management
is required to make assumptions about matters that are by their nature highly
uncertain. The assessment of contingent liabilities, including legal
contingencies and income tax liabilities, involves the use of critical
estimates, assumptions and judgments. Management's estimates are based on their
belief that future events will validate the current assumptions regarding the
ultimate outcome of these exposures. However, there can be no assurance that
future events, such as court decisions or I.R.S. positions, will not differ from
management's assessments. Whenever practicable, management consults with third
party experts (attorneys, accountants, claims administrators, etc.) to assist
with the gathering and evaluation of information related to contingent
liabilities.
LIQUIDITY AND CAPITAL RESOURCES
In the United States, we purchase seed from contract growers in our first and
second fiscal quarters. Seed conditioning, treating and packaging commence late
in the first fiscal quarter and continue through the third fiscal quarter.
Seasonal cash needs normally begin to increase in the first fiscal quarter and
cash needs peak in the third fiscal quarter. Cash is generated and loan
repayments, if applicable, normally begin in the middle of the third fiscal
quarter and are typically completed by the first fiscal quarter of the following
year. In some cases, we offer customers financial incentives to make early
payments. To the extent we attract early payments from customers, bank
borrowings, if any, are reduced.
In the U.S., we record revenue and accounts receivable for licensing fees on
Bollgard and Roundup Ready seed sales upon shipment, usually in our second and
third quarters. Receivables from seed sales are generally due from May to July.
The licensing fees are due in September, at which time we receive payment. We
then pay Monsanto its royalty for the Bollgard and Roundup Ready licensing fees,
which is recorded as a component of cost of sales. As a result of the timing of
these events, licensing fees receivable and royalties payable peak at fiscal
year end.
The seasonal nature of our business significantly impacts cash flow and working
capital requirements. Historically, we have maintained credit facilities, and
used early payments by customers and cash from operations to fund working
capital needs. In the past, we have borrowed on a short-term basis to meet
seasonal working capital needs. However, in fiscal 2002 and fiscal 2003, we used
cash generated from operations and other available cash to meet working capital
needs. We continue to evaluate potential uses of our cash for purposes other
than for working capital needs. Potential uses may be the acquisition or funding
of alternative technologies (such as DeltaMax Cotton, LLC) that could be used to
enhance our product portfolio and ultimately our long-term earnings potential
and/or an investment in new markets outside the U.S. Another potential use is
the repurchase in the open market of our shares pursuant to our previously
announced share repurchase program. Once the evaluation of certain transactions
that are currently being considered is completed, we may consider other
potential uses of the remaining cash, including increasing the dividend rate or
repurchasing shares more aggressively depending on market considerations and
other factors.
In April 1998, we entered into a syndicated credit facility with three lenders,
which provided for aggregate borrowings of $110 million. This agreement 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 D&PL 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 have had
discussions about a replacement facility that will provide for aggregate
borrowings sufficient to meet working capital needs that will contain terms and
conditions similar to the 1998 facility.
Capital expenditures were $0.7 million and $1.1 million in first quarters of
fiscal 2004 and 2003, respectively. We anticipate that capital expenditures will
approximate $8.0 to $10.0 million in 2004.
In the first quarter, the Board of Directors authorized a quarterly dividend of
$0.10 per share paid on December 12, 2003, to shareholders of record on November
28, 2003. The Board anticipates that quarterly dividends of $0.10 per share will
continue to be paid in the future; however, the Board of Directors reviews this
policy quarterly. Aggregate preferred and common dividends should approximate
$15.6 million in 2004.
In February 2000, the Board of Directors authorized a program for the repurchase
of up to $50 million of our common stock. The shares repurchased under this
program are to be used to provide for option exercises, conversion of our Series
M Convertible Non-Voting Preferred shares and for other general corporate
purposes. At August 31, 2003, we had repurchased 1,303,000 shares at an
aggregate purchase price of approximately $23.8 million under this program.
During the year ended August 31, 2003, we purchased 310,100 shares at an
aggregate purchase price of $6.1 million under this plan. Between September 1,
2003 and December 31, 2003, we repurchased 104,000 shares at an aggregate
purchase price of $2.5 million.
Cash provided from operations, cash on hand, early payments from customers and
borrowings under a loan agreement, if necessary, should be sufficient to meet
the Company's 2004 working capital needs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure relative to fluctuations in the price of soybean raw material
inventory, foreign currency fluctuations and interest rate changes. For more
information about market risk and how we manage specific risk exposures, see
Notes 1 and 14 to our consolidated financial statements contained in our Annual
Report on Form 10-K for the year ended August 31, 2003. Also see Note 11 of the
Notes to Consolidated Financial Statements in Item 1 for further details about
our exposure to market risk.
The fair value of derivative commodity instruments outstanding as of November
30, 2003, was $113,000. A 10% adverse change in the underlying commodity prices
upon which these contracts are based would result in a $100,000 loss in future
earnings arising from these contracts (not counting the gain on the underlying
commodities).
Our earnings are also affected by fluctuations in the value of the U.S. dollar
compared to foreign currencies as a result of transactions in foreign markets.
We conduct non-U.S. operations through subsidiaries and joint ventures in,
primarily, Argentina, Australia, Brazil, China, South Africa and Turkey. At
November 30, 2003, the result of a uniform 10% strengthening in the value of the
dollar relative to the currencies in which our transactions are denominated
would not cause a material impact on earnings.
We utilize fixed and variable-rate debt to maintain liquidity and fund our
business operations, with the terms and amounts based on business requirements,
market conditions and other factors. At November 30, 2003, a 100 basis point
change in interest rates (with all other variables held constant) on the portion
of our debt with variable interest rates would not result in a material change
to our interest expense or cash flow.
For the quarter ended November 30, 2003, a 10% adverse change in the interest
rate that we earned on our excess cash that we invested would not have resulted
in a material change to our net interest income or cash flow.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
D&PL's chief executive officer and chief financial officer have evaluated the
effectiveness of the design and operation of D&PL's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of November 30, 2003.
Based on that evaluation, the chief executive officer and chief financial
officer have concluded that D&PL's disclosure controls and procedures are
effective to ensure that material information relating to D&PL and D&PL's
consolidated subsidiaries is made known to such officers by others within these
entities, particularly during the period this report was prepared, in order to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
There have not been any significant changes in D&PL's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following sets forth all known pending litigation and a description of other
legal matters.
Product Claims
D&PL and Monsanto are named as defendants in a lawsuit filed in Hockley County,
Texas, on April 14, 1999. This lawsuit was removed to the United States District
Court, Lubbock Division, but subsequently remanded back to the state court. This
case was tried to a jury in August of 2002, and an adverse verdict was returned
against D&PL and Monsanto. This case is presently on appeal to the 7th Appellate
Court District (Amarillo Division). In this case the plaintiff alleged that
certain cottonseed acquired from the Paymaster division of D&PL did not perform
as the farmer had anticipated and as allegedly represented to him.
D&PL and Monsanto were named as defendants in a lawsuit filed in the 106th
Judicial District Court of Gaines County, Texas, on April 27, 2000. In this case
the plaintiff alleges, among other things, that certain cottonseed acquired from
D&PL that contained the Roundup Ready(R) gene did not perform as the farmer had
anticipated. D&PL and Monsanto are investigating the claims to determine the
cause or causes of the alleged problem. Pursuant to the terms of the February 2,
1996 Roundup Ready Gene License and Seed Service Agreement (the "Roundup Ready
Agreement"), D&PL has tendered the defense of this claim to Monsanto and
requested indemnity. Pursuant to the Roundup Ready Agreement, Monsanto is
contractually obligated to defend and indemnify D&PL against all claims arising
out of the failure of the Roundup(R) glyphosate tolerance gene and Monsanto has
agreed to do so. D&PL will not have a right of indemnification from Monsanto,
however, for any claim involving defective varietal characteristics separate
from or in addition to the herbicide tolerance gene and such claims are
contained in this litigation.
D&PL was named as a defendant in two lawsuits filed in the 110th Judicial
District Court of Floyd County, Texas; one suit was filed October 16, 2002, and
the other November 21, 2002. In each of these cases the plaintiffs allege that
the seed purchased from D&PL failed to perform as represented and seek
compensatory damages for crop losses incurred during the 2002 growing season.
D&PL and the claimants in these cases have now entered into an agreement for
binding arbitration of the claims pursuant to the arbitration clause contained
in the Monsanto Gene Licensing Agreement executed by the growers. Although these
claims involve a cotton variety that contains the Roundup Ready gene, no claim
against Monsanto was alleged, nor was there any allegation that Monsanto
technology caused or contributed to plaintiffs' claims. Thus, it does not
presently appear that Monsanto is contractually obligated to defend and/or
indemnify D&PL in the Floyd County cases. D&PL is presently investigating these
claims to determine the causes of the alleged problems.
D&PL and Monsanto and various retail seed suppliers were named in six 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; two of the other cases were filed on November 15, 1999, in the
Court of Common Pleas of Hampton County, South Carolina. The two 1999 state
court lawsuits were removed to the United States District Court for the District
of South Carolina but were subsequently remanded back to the state court in
which they were filed. The remaining three lawsuits were filed July 29, 2002, in
the Court of Common Pleas of Hampton County, South Carolina. The 2002 state
court filing of one of those cases was removed to United States District Court
for the District of South Carolina, Beaufort Division, but has now been remanded
back to Hampton County. In each of these cases the plaintiff alleges, among
other things, that certain seed acquired from D&PL which contained the Roundup
Ready gene and/or the Bollgard(R) gene did not perform as the farmer had
anticipated. These lawsuits also include varietal claims aimed solely at D&PL.
One of the 1999 cases filed in Hampton County as well as the 1999 case filed in
the United States District Court seek class action treatment for all purchasers
of certain D&PL varieties which contain the Monsanto technology. D&PL and
Monsanto are continuing to investigate the claims to determine the cause or
causes of the alleged problem. Pursuant to the terms of the Roundup Ready
Agreement and the Bollgard Agreement between D&PL and Monsanto, D&PL has a right
to be contractually indemnified against all claims arising out of the failure of
Monsanto's gene technology. D&PL will not have a right to indemnification,
however, from Monsanto for any claim involving varietal characteristics separate
from or in addition to the failure of the Monsanto technology and such claims
are contained in each of these lawsuits.
D&PL was named in four lawsuits filed in the State of Mississippi. One 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. Two
lawsuits were filed in the Circuit Court of Holmes County, Mississippi; one was
filed March 14, 2002, and the second on August 19, 2002. Both cases include
numerous plaintiffs who allege that certain cotton seed sold by D&PL was
improperly mixed or blended and failed to perform as advertised. In the second
Holmes County lawsuit, D&PL has filed a Third Party Complaint which seeks a
declaration that its insurers are responsible for the cost of defending the
action and for full indemnification of D&PL in the event a judgment is rendered
against it. Another lawsuit was filed in the Circuit Court of Noxubee County on
August 12, 2002, and involves a third-party complaint filed by a local seed
distributor who was sued by a local farmer in a complaint which alleges that
certain seed sold by the complaining distributor failed to comply with federal
and state seed law requirements. D&PL 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 terms of any Gene Licensing Agreement with Monsanto.
D&PL, along with Monsanto, were named in two companion cases filed in the State
of Georgia. One was filed in the United States District Court for the Middle
District of Georgia, Albany Division, on April 5, 2002; and the other case was
filed in the Superior Court of Fulton County, Georgia, on April 29, 2002. The
case filed in Fulton County was removed to the United States District Court on
May 28, 2002. The cases were consolidated into a single action pending before
the United States District Court for the Middle District of Georgia, but were,
on motion of D&PL and Monsanto, transferred to the United States District Court
for the Eastern District of Missouri by Order dated August 26, 2003. Both suits
allege that seed purchased by plaintiffs from D&PL, and technology purchased
from Monsanto, failed to perform as represented and seek damages for crop losses
during the 1998 growing season; the lawsuit further alleges that certain cotton
varieties sold by D&PL suffered from a disease or malady known as "bronze wilt."
Pursuant to the terms of the Roundup Ready Agreement, D&PL has tendered the
defense of these claims to Monsanto and requested indemnity. Pursuant to the
terms of the Roundup Ready Agreement, Monsanto is contractually obligated to
defend and indemnify D&PL against all claims arising out of the failure of the
Roundup glyphosate tolerance gene. D&PL will have no right of indemnification
from Monsanto, however, for any claim involving varietal characteristics
separate from or in addition to the herbicide tolerance gene and such claims are
contained in this litigation.
All lawsuits related to product claims seek monetary damages. See Note 12 of the
Notes to Consolidated Financial Statements in Item 1 for further details about
product claims.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II cotton seed infringes Bayer's Australian patent that
claims an alleged invention entitled "Prevention of Bt Resistance Development."
The suit seeks an injunction, damages and other relief against Deltapine
Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. Deltapine Australia's response to the suit is
due in March 2004.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners pertaining to four matters under the
Bollgard and Roundup Ready Licenses for the United States and two matters under
license agreements for Argentina and the Republic of South Africa, respectively.
Monsanto's notice of dispute asserts that D&PL's failure to address these issues
would be a breach of D&PL obligations under the relevant agreements and reserves
all of Monsanto's rights under these agreements. In August 2003, D&PL and D&M
Partners responded to Monsanto's positions on each issue and notified Monsanto
of three additional disputes, each concerning Monsanto's compliance with its
obligations under the Bollgard and Roundup Ready Licenses for the United States.
In accordance with the dispute resolution provisions of the subject agreements,
the issues raised in Monsanto, D&PL and D&M Partners' notices have been
submitted to a panel of senior executives. Monsanto has subsequently withdrawn
from the executive panel the issue involving the license agreements for the
Republic of South Africa and has submitted to the executive panel one additional
issue of interpretation of the Bollgard(R) and Roundup Ready(R) Licenses for the
United States. D&PL is committed to participating in good faith resolution of
the issues in dispute. Any issues not resolved by the executive panel may be
submitted to binding arbitration as provided in the relevant agreements.
In July 2003, D&PL was named as a defendant along with a local resident in a
lawsuit filed in the Circuit Court of Dunklin County, Missouri. This case was
removed to the United States District Court for the Eastern District of
Missouri, Southwest Division, on August 22, 2003. The lawsuit alleges that D&PL
committed certain business torts, including malicious prosecution of a civil
action, interference with contractual relationships and other claims when D&PL
pursued a claim in an earlier lawsuit against the plaintiff in this litigation.
The defense of this claim has been tendered to D&PL's liability and insurance
carriers. D&PL's insurance carriers have agreed to provide a defense to this
action and indemnity subject to the reservation of certain specific rights. This
case is in the very early pre-trial phase and initial discovery is now ongoing.
In December 2002, D&PL filed a suit in the Circuit Court of Holmes County,
Mississippi, against Nationwide Agribusiness and other insurance companies
seeking a declaration that the allegations of the Holmes County, Mississippi
lawsuits referenced under "Product Claims" immediately above are covered by
D&PL's comprehensive general liability and umbrella liability policies. This
case was removed by the defendants to the United States District Court for the
Southern District of Mississippi where a Motion to Remand the case to state
court is now pending. In this litigation, D&PL seeks a declaration that its
insurers are responsible for the cost of defending such actions, and full
indemnification of D&PL in the event a judgment is rendered against it based
upon the seed mix claim alleged by plaintiffs. D&PL alleges in this litigation
that the allegations of plaintiffs' complaint are covered by one or more of
D&PL's insurance policies issued by the defendant insurance companies.
In November 2002, D&PL filed suit in the Circuit Court of Washington County,
Mississippi, against its fire insurance carrier, Reliance Insurance Company of
Illinois. That suit seeks recovery of seed inventory lost, damaged or destroyed
during a fire that occurred in November 1999 at D&PL's Hollandale, Mississippi
facility. A Stay Order has now been entered in this case pursuant to the powers
of the Receiver of Reliance Insurance Company of Illinois, which is now in
liquidation.
In July 2002, Syngenta Biotechnology, Inc. ("SBI") brought suit in the U.S.
District Court in Delaware alleging that D&PL's making, using, selling and
offering to sell cotton planting seed containing Monsanto's insect-resistant Bt
genes, being sold under the trade name Bollgard, and Monsanto's herbicide
tolerance genes, being sold under the trade name Roundup Ready, infringes U.S.
Patent 6,051,757 entitled "Regeneration Of Plants Containing Genetically
Engineered T-DNA." In July 2003, SBI added D&M Partners as an additional
defendant. The suit seeks a preliminary and permanent injunction against D&PL,
Monsanto and D&M Partners against further acts of alleged infringement,
contributory infringement and inducement of infringement of SBI's patent and
recovery of damages for an unspecified amount including treble damages on
account of the defendants' alleged willful infringement. D&PL has demanded that
Pharmacia Corporation and Monsanto each agree to defend D&PL in this suit and to
indemnify D&PL against damages, if any, which may be awarded. Monsanto has
assumed the defense of D&PL and D&M Partners and has filed an answer generally
denying infringement and other claims made in the litigation. D&PL is assisting
Monsanto to the extent reasonably necessary for the conduct of the litigation.
Trial in this case has been scheduled for October 2004.
In May 2002, Pharmacia Corporation filed a suit in state court in Missouri
against D&PL International Technology Corp. ("DITC"), D&PL's subsidiary, seeking
a declaratory judgment that it was entitled to invoke the cross purchase
provision in the Operating Agreement for D&M International, LLC, a limited
liability company jointly owned by Pharmacia and DITC. In the alternative,
Pharmacia sought a declaratory judgment that DITC was deemed to have consented
to Pharmacia's transfer of the Operating Agreement to Monsanto and its issuance
and transfer of shares of Monsanto's stock. DITC moved to dismiss on June 6,
2002, because the case was moot and did not present a justiciable controversy,
in that DITC had already invoked its rights under the cross purchase provision
and had caused Pharmacia's interest in D&M International, LLC to be redeemed.
Instead of answering DITC's motion, on or about June 13, 2002, Pharmacia filed
an amended petition, dropping all of its prior claims, and seeking a declaratory
judgment that DITC has no contractual rights to enjoin Pharmacia from selling
its shares of Monsanto or to seek damages for Pharmacia's prior initial public
offering of Monsanto's shares to the public. DITC moved to dismiss the suit,
since it had never threatened to enjoin the spin-off, and, in the alternative,
moved for a more definite statement. On October 12, 2002, the Court denied
DITC's motion to dismiss but granted DITC's motion for a more definite
statement. Pharmacia filed a Second Amended Petition on October 30, 2002, and
DITC filed a motion to dismiss the Second Amended Petition on November 19, 2002.
On January 14, 2003, the Court denied DITC's motion to dismiss, and the case in
now in discovery.
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 an injunction against continued
sale of seed containing Monsanto's Ingard(R) gene and recovery of an unspecified
amount of damages. The litigation is currently in discovery and pretrial
proceedings. Consistent with its commitments, Monsanto has agreed to defend D&PL
in this suit and to indemnify D&PL against damages, if any are awarded. Monsanto
is providing separate defense counsel for D&PL. D&PL is assisting Monsanto to
the extent reasonably necessary.
A corporation owned by the son of D&PL's former Guatemalan distributor sued in
1989 asserting that D&PL violated an agreement with it by granting to another
entity an exclusive license in certain areas of Central America and southern
Mexico. The suit seeks damages of 5,292,459 Guatemalan quetzales (approximately
$677,000 at December 31, 2003, exchange rates) and an injunction preventing D&PL
from distributing seed through any other licensee in that region. The Guatemalan
court, where this action is proceeding, has twice declined to approve the
injunction sought. D&PL continues to make seed available for sale in Central
America and Mexico.
D&PL vs. Monsanto Company and Pharmacia Corp.
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
effectively terminating Monsanto's efforts to gain government approval of the
merger of Monsanto with D&PL under the May 8, 1998, Merger Agreement. On
December 30, 1999, D&PL filed suit (the "December 30 Suit") in the First
Judicial District of Bolivar County, Mississippi, seeking among other things,
the payment of the $81 million termination fee due pursuant to the merger
agreement, compensatory damages and punitive damages. On January 2, 2000, D&PL
and Monsanto reached an agreement whereby D&PL would withdraw the December 30
Suit, and Monsanto would immediately pay the $81 million. On January 3, 2000,
Monsanto paid to D&PL a termination fee of $81 million as required by the merger
agreement. On January 18, 2000, D&PL filed a suit (the "January 18 Suit")
reinstating essentially all of the allegations contained in the December 30
Suit. The January 18 Suit by D&PL against Monsanto seeks in excess of $1 billion
in compensatory and $1 billion in punitive damages for breach of contract under
the merger agreement between the parties. D&PL alleges that Monsanto failed to
make its best efforts, commercially reasonable efforts, and/or reasonable best
efforts to obtain antitrust approval from the U.S. Department of Justice, as
required under the terms of the merger agreement. D&PL also seeks damages for
breach of the January 2, 2000, agreement pursuant to which the parties were to
negotiate for two weeks to resolve the dispute over failure of the merger to
close.
The parties litigated for several months over the appropriate forum to hear the
case. A Delaware Court of Chancery ruling rejected Monsanto's attempt to
maintain the action in Delaware and returned the parties to the Circuit Court
for the First Judicial District of Bolivar County, Mississippi. Monsanto filed a
motion for summary judgment on the breach of contract claims alleging that D&PL
suffered no cognizable damages as a result of the failed merger. On December 18,
2000, D&PL amended its complaint to include a claim for tortious interference
with prospective business relations on the grounds that Monsanto's unreasonable
delay prevented the consummation of the merger and kept D&PL from being in a
position to enter into transactions and relationships with others in the
industry. In light of the merger of Monsanto into Pharmacia & Upjohn, Inc.,
after the filing of the original complaint, D&PL named both Pharmacia Corp. (the
renamed existing defendant) and Monsanto Company (a newly spun-off subsidiary)
as defendants in the amended complaint. D&PL filed two motions to compel
additional discovery from Monsanto. Pharmacia and Monsanto filed a motion for
summary judgment and a motion to dismiss the added claim of tortious
interference contained in the amended complaint. Pharmacia and Monsanto alleged
that they were entitled to 1) dismissal of the action on the grounds that D&PL's
amended complaint did not satisfy any of the elements of a tortious interference
claim and, thus, did not state a viable claim; and 2) summary judgment because
D&PL has not suffered any injury as a result of Monsanto's actions. On November
15, 2001, the Circuit Court denied the defendants' motion for summary judgment
on the breach of contract claims, holding that the case presents issues for
trial by jury. The Court also denied defendants' motion to dismiss or for
summary judgment on D&PL's claim for tortious interference with business
relationships. The Court also granted substantially all of the discovery sought
by D&PL in its motion to compel. The judge to whom this case was assigned has
retired and a new judge has been appointed. On September 12, 2003, Monsanto
amended its answer to include four counterclaims against D&PL, alleging breach
of contract, fraudulent inducement, and negligent misrepresentation. The
fraudulent inducement and negligent misrepresentation claims allege that D&PL
misrepresented the status of the Department of Justice's investigation into
D&PL's acquisition of the Sure Grow companies prior to the signing of the
Agreement. The breach of contract claim alleges that D&PL failed to notify
Monsanto that D&PL had sustained a material adverse change, where the alleged
adverse change resulted from the conduct that D&PL seeks damages for in this
litigation. The breach of contract claim also alleges that D&PL failed to use
requisite efforts to inform Monsanto that Monsanto was not using requisite
efforts to complete the transaction. Monsanto is seeking unspecified damages for
its counterclaims, including the $81 million paid by Monsanto to D&PL as a
termination fee and related expenses. D&PL answered the counterclaims, denying
all liability, and D&PL intends to vigorously defend against these
counterclaims. On December 5, 2003, Monsanto filed a motion for partial summary
judgment on a portion of D&PL's damage claims. D&PL is opposing this motion. The
parties are currently in discovery, and the Court has ordered an April 2004
fact-discovery deadline as well as other deadlines from that date until April
15, 2005, when pre-trial statements are due to the Court. Therefore, the trial
is not expected to occur prior to April 15, 2005.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Business
Domestic
Delta and Pine Land Company, a Delaware corporation, and subsidiaries ("D&PL")
is primarily engaged in the breeding, production, conditioning and marketing of
proprietary varieties of cotton planting seed in the United States and other
cotton producing nations. We also breed, produce, condition and distribute
soybean planting seed in the United States.
Since 1915, we have bred, produced and/or marketed upland picker varieties of
cotton planting seed for cotton varieties that are grown primarily east of Texas
and in Arizona. We have used our extensive classical plant breeding programs to
develop a gene pool necessary for producing cotton varieties with improved
agronomic traits important to farmers (such as crop yield) and to textile
manufacturers (such as enhanced fiber characteristics).
In 1980, we added soybean seed to our product line. In 1996, we commenced
commercial sales in the United States of cotton planting seed containing
1
Bollgard(R) ("Bollgard") gene technology licensed from Monsanto which expresses
a protein toxic to certain lepidopteran pests. Since 1997, we have marketed in
the U.S. cotton planting seed that contains a gene that provides tolerance to
glyphosate-based herbicides, commonly referred to as Roundup Ready(R) ("Roundup
Ready") Cotton. In 1997, we commenced commercial sales in the U.S. of soybean
planting seed that contains a gene that provides tolerance to glyphosate-based
herbicides ("Roundup Ready Soybeans"). In 1998, we commenced sales of cotton
planting seed of varieties containing both the Bollgard and Roundup Ready genes.
International
During the 1980's, as a component of our long-term growth strategy, we began to
market our products, primarily cottonseed, internationally. Over a period of
years, we have strengthened and expanded our international staff in order to
support our expanding international business. In foreign countries, cotton
acreage is often planted with farmer-saved seed which has not been delinted or
treated and is of low overall quality. We believe that we have an attractive
opportunity to penetrate foreign markets because of our widely adaptable,
superior cotton varieties, technological know-how in producing and conditioning
high-quality seed and our brand name recognition. Furthermore, Monsanto's
Bollgard and Roundup Ready gene technologies (that we either have licensed or
have options to license) are effective in many countries and could bring value
to farmers.
We sell our products in foreign countries through (i) export sales to
distributors, (ii) direct in-country operations through either joint ventures or
wholly-owned subsidiaries and (iii) to a lesser degree, licensees. The method
varies and evolves, depending on our assessment of the potential size and
profitability of the market, governmental policies, currency and credit risks,
sophistication of the target country's agricultural economy, and costs (as
compared to risks) of commencing physical operations in a particular country. In
2003, the majority of international sales came from direct in-country operations
(primarily Argentina, Australia, Brazil, China, South Africa and Turkey).
See Note 3 of the Notes to Consolidated Financial Statements in Item 1 for
further details about business segments.
--------
1. On March 31, 2000, Monsanto Company consummated a merger with Pharmacia &
Upjohn Inc. and changed its name to Pharmacia Corporation. On February 9, 2000,
Monsanto Company formed a new subsidiary corporation, Monsanto Ag Company,
which, on March 31, 2000, changed its name to Monsanto Company. On August 31,
2002, Pharmacia distributed to its shareholders its remaining interest in the
new Monsanto Company. Pursuant to the closing of a merger on April 16, 2003,
Pharmacia Corporation merged with and into a wholly-owned subsidiary of Pfizer
Inc. Pharmacia survived the merger as a wholly-owned subsidiary of Pfizer Inc.
In this document, with respect to events occurring on or before March 31, 2000,
the term "Monsanto" refers to the entity then designated Monsanto Company and
renamed Pharmacia Corporation on that date. With respect to events occurring
between March 31, 2000 and April 16, 2003, this entity is referred to as
"Pharmacia". With respect to events occurring after April 16, 2003, the entity
referred to as "Pharmacia" is that entity which on that date became a
wholly-owned subsidiary of Pfizer Inc. With respect to events occurring after
March 31, 2000, the entity formed as Monsanto Ag Company and renamed Monsanto
Company (NYSE: MON) on March 31, 2000, is referred to as "Monsanto".
Joint Ventures
In March 1995, D&PL and Monsanto formed D&M International, LLC to introduce
cotton planting seed in international markets combining our acid delinting
technology and elite germplasm (cottonseed varieties) with Monsanto's Bollgard
and Roundup Ready gene technologies. In May 2002, Pharmacia activated a cross
purchase provision in the operating agreement for D&M International, LLC, and we
elected to have D&M International, LLC redeem Pharmacia's 50% interest in D&M
International, LLC. As a result of the redemption of Pharmacia's interest, we
now own all of D&M International, LLC.
In November 1995, D&M International, LLC formed a subsidiary, D&PL China Pte
Ltd. ("D&PL China"). D&PL China is 80% owned by D&M International, LLC and 20%
owned by a Singaporean entity. In November 1996, D&PL China formed Hebei Ji Dai
Cottonseed Technology Company Ltd. ("Ji Dai") with parties in Hebei Province,
one of the major cotton producing regions in the People's Republic of China. Ji
Dai is 67% owned by D&PL China and 33% owned by Chinese parties. In June 1997,
Ji Dai commenced construction of a cottonseed conditioning and storage facility
in Shijiazhuang, Hebei, China, pursuant to the terms of the joint venture
agreement. The new facility was completed in December 1997 and seed processing
and sales of seed of 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. ("CDM") is owned 60% by D&M International, LLC, and 40% by
Ciagro. In September 1998, CDM began construction of a cottonseed conditioning
and storage facility in Avia Terai, Chaco, Argentina. Construction was completed
in June 1999. CDM has been licensed to sell our cotton varieties containing
Monsanto's Bollgard gene technology. Sales of such varieties commenced in 1999.
CDM has also been licensed to sell Roundup Ready cottonseed varieties, which
received government approval in 2001. Roundup Ready cottonseed has been
available for sale in Argentina since October 2002.
In July 1998, D&PL China and the Anhui Provincial Seed Corporation formed a
joint venture, Anhui An Dai Cotton Seed Technology Company, Ltd. ("An Dai")
which is located in Hefei City, Anhui, China. An Dai is 49% owned by D&PL China
and 51% owned by Chinese parties. Under the terms of the joint venture
agreement, An Dai produces, conditions and sells our varieties of acid-delinted
cottonseed, which contain Monsanto's Bollgard gene. Commercial sales of our
cotton varieties containing the Bollgard gene technology began in 2000. In
January 2002, An Dai began construction of a cottonseed conditioning and storage
facility in Hefei City, Anhui, China. Construction was completed in October 2003
and the facility is now operational.
In November 1998, D&M International, LLC and Maeda Administracao e Participacoes
Ltda, an affiliate of Agropem - Agro Pecuria Maeda S.A., formed a joint venture
in Minas Gerais, Brazil. The joint venture, MDM Maeda Deltapine Monsanto Algodao
Ltda. ("MDM"), produces, conditions and sells our varieties of acid-delinted
cotton planting seed. In 2000, we began selling our conventional cotton
varieties. MDM will introduce transgenic cottonseed varieties containing both
Bollgard and Roundup Ready gene technologies in the Brazilian market as soon as
government approvals are obtained. Monsanto is responsible for obtaining these
government approvals and has announced approval may not occur until 2005. MDM is
51% owned by D&M International, LLC and 49% owned by Maeda Administracao e
Participacoes S/A (formerly Maeda Administracao e Participacoes Ltda).
In October 2001, we announced that we had signed Letters of Intent with two
parties in China to form two new joint ventures there, one each in Hubei and
Henan provinces. These two new potential markets contain approximately 4.5
million acres of cotton planted in 2001 which is almost 2.5 times the size of
the combined Hebei and Anhui markets. A joint venture agreement was negotiated
and agreed to with the parties in Henan province and the agreement was submitted
to the Chinese government authorities for approval. However, in April 2002,
China announced rules prohibiting new foreign investment in seed companies that
intend to sell genetically modified seed, which will restrict the ability of
non-Chinese companies, including us, from investing in such joint ventures.
However, our joint venture in Hebei province, Ji Dai, signed a distribution
agreement with a party in the Henan province and distributed seed there in
fiscal 2003. We expect to continue to expand our business in China through our
existing joint ventures, Ji Dai and An Dai.
In May 2002, we established DeltaMax Cotton, LLC ("DeltaMax"), a limited
liability company jointly owned with Verdia, Inc. ("Verdia", formerly known as
MaxyAg, Inc.), a wholly-owned subsidiary of Maxygen, Inc. DeltaMax was formed to
create, develop and commercialize value-enhancing traits for the cottonseed
market that will complement and/or compete with traits available today. It is
currently focusing on a glyphosate-tolerant strategy, an insect-resistance
strategy and a nematode-resistance strategy for use in cotton. Commercialization
of new traits developed by this venture is not expected until after 2009.
DeltaMax will contract research and development activities to Verdia, third
parties and D&PL when appropriate, and license its products to D&PL and
potentially to others. D&PL and Verdia each own 50% of DeltaMax.
Subsidiaries
D&PL South Africa, Inc. ("D&PL South Africa"), our wholly-owned subsidiary,
through a South African branch, commercializes cottonseed varieties containing
Monsanto's Bollgard and Roundup Ready technologies in South Africa. In addition,
D&PL South Africa maintains winter nursery facilities, produces cottonseed
varieties for export to other countries and processes foundation seed grown in
that country. We maintain a winter nursery and foundation seed operation in
Canas, Costa Rica and have a delinting plant there to process foundation seed
for export to the United States. Multiple winter nursery locations are used to
manage seed production risks. The use of Southern Hemisphere winter nurseries
and seed production programs such as these can accelerate the introduction of
new varieties because we can raise at least two crops per year by taking
advantage of the Southern Hemisphere growing season.
Deltapine Australia Pty. Ltd., our wholly-owned Australian subsidiary, breeds,
produces, conditions and markets cotton planting seed in Australia. Certain
varieties developed in Australia are well adapted to other major cotton
producing countries and Australian-developed varieties are exported to those
areas. We sell seed of both conventional and transgenic varieties, containing
Monsanto's Bollgard and Roundup Ready technologies, in Australia.
Turk DeltaPine, Inc. ("Turk DeltaPine"), our wholly-owned subsidiary, through a
Turkish branch, produces, conditions and markets cotton planting seed in Turkey.
In addition, Turk DeltaPine produces conventional cottonseed varieties for sale
in Turkey and Europe.
Employees
As of December 31, 2003, we employed a total of 542 full time employees
worldwide, excluding approximately 110 employees of joint ventures. Due to the
nature of the business, we utilize seasonal employees in our delinting plants
and our research and foundation seed programs. The maximum number of seasonal
employees approximates 175 and typically occurs in October and November of each
year. We consider our employee relations to be good.
Biotechnology
Insect Resistance for Cotton
Collaborative biotechnology licensing agreements, which were executed with
Monsanto in March 1992 and subsequently revised in April 1993, October 1993,
February 1996, December 1999, January 2000 and March 2003, provide for the
commercialization of Monsanto's Bollgard ("Bacillus thuringiensis" or "Bt") gene
technology in our varieties in the United States. The selected Bt gene is from a
bacterium found naturally in soil and produces proteins toxic to certain
lepidopteran larvae, the principal cotton pests in many cotton growing areas.
Monsanto created a transgenic cotton plant by inserting Bt genes into cotton
plant tissue. The resulting transgenic plant tissue is lethal to certain
lepidopteran larvae that consume it. The gene and related technology were
patented or licensed from others by Monsanto and were licensed to us for use
under the trade name Bollgard. In our primary markets, the cost of insecticides
is a major expenditure for many cotton growers. The insect resistant
capabilities of transgenic cotton containing the Bollgard gene may reduce the
amount of insecticide required to be applied by cotton growers using planting
seed containing the Bollgard gene. In October 1995, the United States
Environmental Protection Agency ("EPA") completed its initial registration of
the Bollgard gene technology, thus clearing the way for commercial sales of seed
containing the Bollgard gene. In 1996, we sold commercially for the first time
two Deltapine varieties, which contained the Bollgard gene, in accordance with
the terms of the Bollgard Gene License and Seed Services Agreement (the
"Bollgard Agreement") among D&PL, Monsanto and D&M Partners. This initial EPA
registration had been set to expire on January 1, 2001 but was updated to expire
January 1, 2002. In September 2001, the EPA renewed the registration for an
additional five years, at which time the EPA will, among other things,
reevaluate the effectiveness of the insect resistance management plan and decide
whether to convert the registration to a non-expiring (and/or unconditional)
registration.
Pursuant to the terms of the Bollgard Agreement, farmers must buy a limited use
sublicense for the technology from D&M Partners, a partnership of D&PL (90%) and
Monsanto (10%), in order to purchase seed containing the Bollgard gene
technology. Monsanto determines the licensing fee growers pay for use of
Bollgard technology. Growers may receive discounts and/or rebates of licensing
fees under certain crop destruct, crop replant and other programs. D&M Partners
contracts the billing and collection activities for Bollgard and Roundup Ready
licensing fees to Monsanto. The distributor/dealers who coordinate the farmer
licensing process receive a portion of the technology sublicensing fee,
presently approximately 15%. After the dealers and distributors are compensated,
D&M Partners pays Monsanto a royalty equal to 71% of the net sublicense fee
(technology sublicensing fees less certain distributor/dealer payments), and we
receive the remainder of net sublicense revenue for our services. The expiration
date of the Bollgard Agreement is determined by the last to expire of the patent
rights licensed under that agreement. On that basis (unless we terminate sooner,
as is permitted after October 11, 2008), the expiration date of the Bollgard
Agreement will be November 4, 2018.
Pursuant to the Bollgard Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto must also indemnify us against a) costs of
inventory and b) lost profits on inventory which becomes unsaleable because of
patent infringement claims. Monsanto must defend any claims of failure of
performance of a Bollgard gene. Monsanto and D&PL share the cost of any product
performance claims in proportion to each party's share of the net sublicense
fees. The indemnity from Monsanto only covers performance claims involving
failure of performance of the Bollgard gene and not claims arising from other
causes. Pharmacia remains liable for Monsanto's performance under these defense
and indemnity agreements.
In December 2000, D&PL and Monsanto executed the Bollgard II Gene License and
Seed Services Agreement (the "Bollgard II Agreement") for Monsanto's subsequent
insect resistance product. The Bollgard II Agreement contains essentially the
same terms as the Bollgard Agreement. On December 23, 2002, Monsanto announced
that it had received U.S. regulatory clearance for Bollgard II. We
commercialized limited quantities of our Bollgard II cotton varieties in the
U.S. during fiscal 2003.
In May 2002, we signed a product development agreement with Syngenta Seed AG
("Syngenta") whereby Syngenta will pay us for development work, including
introgression, testing and evaluation, of Syngenta's insect resistance
technology in our elite cotton germplasm. We may commercialize varieties
containing Syngenta's insect resistance technology if we reach a
commercialization agreement and Syngenta obtains U.S. government regulatory
approval. Syngenta has announced that it expects to receive full U.S. regulatory
approval in time for the 2005 season.
In January 2003, we announced a collaboration agreement with Dow AgroSciences
LLC ("DAS") under which we will develop, test and evaluate elite cotton
varieties containing DAS insect resistance traits. We may commercialize
varieties containing DAS insect resistance technology if we reach a
commercialization agreement and DAS obtains U.S. government regulatory approval.
Herbicide Tolerance for Cotton
In February 1996, D&PL, Monsanto and D&M Partners executed the Roundup Ready
Gene License and Seed Services Agreement (the "Roundup Ready Agreement"), which
provides for the commercialization of Roundup Ready cottonseed. Pursuant to the
collaborative biotechnology licensing agreements executed in 1996 and amended in
July 1996, December 1999, January 2000 and March 2003, we have also developed
transgenic cotton varieties that are tolerant to Roundup(R), a glyphosate-based
herbicide sold by Monsanto. In 1996, such Roundup Ready plants were approved by
the Food and Drug Administration, the USDA, and the EPA. The Roundup Ready
Agreement grants a license to D&PL and certain of our affiliates the right in
the United States to sell cottonseed of our varieties that contain Monsanto's
Roundup Ready gene. The Roundup Ready gene makes cotton plants tolerant to
contact with Roundup herbicide applications made during a finite early season
growth period. Similar to the Bollgard Agreement, farmers must execute limited
use sublicenses in order to purchase seed containing the Roundup Ready gene.
Monsanto determines the licensing fee growers pay for use of Roundup Ready
technology. Growers may receive discounts and/or rebates of licensing fees under
certain crop destruct, crop replant and other programs. The distributors/dealers
who coordinate the farmer licensing process receive a portion of the technology
sublicensing fee. After the dealers and distributors are compensated, D&M
Partners pays Monsanto a royalty equal to 70% of the net sublicense fee
(technology sublicensing fees less certain distributor/dealer payments), and we
receive the remainder of net sublicense revenue for our services. The expiration
date of the Roundup Ready Agreement is determined by the last to expire of the
patent rights licensed under that agreement. On that basis (unless we terminate
sooner, as is permitted after October 11, 2008), the expiration date of the
Roundup Ready Agreement will be January 16, 2018.
Pursuant to the Roundup Ready Agreement, Monsanto must defend and indemnify us
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto will also indemnify us against the cost of
inventory that becomes unsaleable because of patent infringement claims, but
Monsanto is not required to indemnify us against lost profits on such unsaleable
seed. In contrast with the Bollgard Agreement, where the cost of gene
performance claims will be shared in proportion to the division of net
sublicense revenue, Monsanto must defend and must bear the full cost of any
claims of failure of performance of the Roundup Ready Gene. Pharmacia remains
liable for Monsanto's performance under these defense and indemnity agreements.
In both agreements, generally, we are responsible for varietal/seed performance
issues, and Monsanto is responsible for failure of the genes.
Cotton Technology Licenses for Countries Outside the United States
In February 1996, D&PL and Monsanto executed an Option Agreement (subsequently
amended in December 1999) which provides us with option rights for an exclusive
license for Monsanto's Bollgard and other genes active against lepidopteran
insects in each country outside the United States where Monsanto commercializes
such genes in cotton (except for Australia where we have an option for a
non-exclusive license to such genes and India where we have no option rights to
such genes), option rights to non-exclusive licenses to Roundup Ready genes in
cotton in all countries outside the United States, and option rights to
non-exclusive licenses for all countries for any gene that may be commercialized
by Monsanto that enhances the fiber characteristics of cotton. The terms of such
licenses must be offered and negotiated in good faith. All such licenses that
are non-exclusive must provide us most favored licensee status. The Option
Agreement remains in effect so long as the Bollgard Agreement and Roundup Ready
Agreement for the United States remain in effect. Pursuant to the Option
Agreement, Monsanto and D&PL (or D&PL's affiliates or joint venture companies)
have entered into exclusive Bollgard licenses for seven countries outside the
United States and a non-exclusive license for lepidopteran active genes for
Australia, as well as non-exclusive Roundup Ready licenses for four countries
outside the United States.
Herbicide Tolerance for Soybeans
In February 1997, D&PL and Monsanto executed a Roundup Ready Soybean License
Agreement which provided for commercialization of Roundup Ready soybean seed.
Effective September 1, 2001, D&PL and Monsanto executed a new Roundup Ready
Soybean License and Seed Services Agreement (the "Roundup Ready Soybean
Agreement") for 2001 and future years. The Roundup Ready Soybean Agreement
grants a non-exclusive license to D&PL to produce and to sell in the United
States soybean seed containing Monsanto's Roundup Ready gene. The Roundup Ready
gene makes soybean plants tolerant to contact with Roundup herbicide
applications when used in accordance with product instructions. Similar to the
Bollgard Agreement and the Roundup Ready Agreement for cotton, farmers must
execute limited use sublicenses in order to purchase soybean seed containing the
Roundup Ready gene. The royalty charged to the seed partners, including D&PL, is
set annually by Monsanto. We receive a portion of the royalty for our services
under the Roundup Ready Soybean Agreement and may receive additional incentives
based on a separate licensee incentive agreement. We have the right to terminate
the Roundup Ready Soybean Agreement at our option upon 90 days notice to
Monsanto; Monsanto may terminate the agreement only for cause. Unless terminated
sooner, the Roundup Ready Soybean Agreement will expire December 31, 2012.
Since 1987, we have conducted research to develop soybean plants that are
tolerant to certain DuPont Sulfonylurea herbicides. Such plants enable farmers
to apply these herbicides for weed control without significantly affecting the
agronomics of the soybean plants. Since soybean seed containing the STS(R)
herbicide-tolerant trait is not genetically engineered, sale of this seed does
not require government approval, although the herbicide to which they express
tolerance must be EPA approved.
Transformation, Enabling and Other Technologies
In March 1998, D&PL and the United States of America, as represented by the
Secretary of Agriculture (USDA) were granted United States Patent No. 5,723,765,
entitled "Control Of Plant Gene Expression". Subsequently, two other patents
(United States Patent Nos. 5,925,808 and 5,977,441) were granted under the same
title. These patents for the Technology Protection System resulted from a
concept developed by research scientists employed by both D&PL and the U.S.
Department of Agriculture's Agricultural Research Service ("USDA-ARS"). The
patents broadly cover all species of plants and seed, both transgenic and
conventional, for a system designed to allow control of progeny seed viability
without harming the crop. One application of the technology could be to control
unauthorized planting of seed of proprietary varieties (sometimes called "brown
bagging") by making such a practice non-economic since unauthorized saved seed
will not germinate, and, therefore, would be useless for planting. Another
application of the technology would be to prevent the unlikely possibility of
transfer of transgenes, through pollen, to closely related species of plants.
These patents have the prospect of opening significant worldwide seed markets to
the sale of transgenic technology in varietal crops in which crop seed currently
is saved and used in subsequent seasons as planting seed. D&PL and the USDA
executed a commercialization agreement on July 6, 2001, for this technology
giving us the exclusive right to market this technology. Once developed, we
intend licensing of this technology to be widely available to other seed
companies.
In July 1999, United States Patent No. 5,929,300, entitled "Pollen Based
Transformation System Using Solid Media," was issued to the United States of
America as represented by the Secretary of Agriculture (USDA). This patent
covers transformation of plants. The patent for the Pollen Transformation System
resulted from a research program conducted pursuant to a Cooperative Research
and Development Agreement between D&PL and the USDA-ARS in Lubbock, Texas. D&PL
and the USDA executed on December 18, 2000, a commercialization agreement,
providing us exclusive rights to market this technology to third parties,
subject to certain rights reserved to the USDA. This transformation method uses
techniques and plant parts that are not covered by currently issued plant
transformation U.S. patents held by others. It is a method which should be more
efficient and effective than many other plant transformation techniques
currently available. This patent and the marketing rights apply to all plant
species on which this method of transformation is effective.
The technologies described above resulted from basic research and will require
further development in order to be used in commercial seed. We estimate that it
will be several years before either of these technologies could be available
commercially. In addition, we have rights to other transformation, enabling and
other technologies that are useful to our research and commercial efforts and,
in some cases, may be sublicensed to others.
Other
We have licensing, research and development, confidentiality and material
transfer agreements with providers of technology that we are evaluating for
potential commercial applications and/or introduction. We also contract with
third parties to perform research on our behalf for enabling and other
technologies that we believe have potential commercial applications in varietal
crops around the world.
Commercial Seed
The following table presents the number of commercial cottonseed and soybean
seed varieties we sold in the years ended August 31, 2003 and 2002:
2003 2002
--------------- ---------------
Cotton
Conventional 20 24
Bollgard 5 6
Roundup Ready 14 16
Bollgard/Roundup Ready 14 16
Bollgard II/Roundup Ready 2 -
--------------- ---------------
55 62
=============== ===============
Soybeans
Conventional 1 2
Roundup Ready 15 10
STS 2 2
--------------- --------------
18 14
=============== ==============
In addition to the above, in 2003, we had 76 experimental cotton varieties and 6
experimental soybean varieties in late stage development prior to
commercialization. In 2002, we had 59 experimental cotton varieties and 11
experimental soybean varieties in late stage development prior to
commercialization.
Seed of all commercial plant species is either varietal or hybrid. Our cotton
and soybean seed are varietals. Varietal plants can be reproduced from seed
produced by a parent plant, with the offspring exhibiting only minor genetic
variations. The Plant Variety Protection Act of 1970, as amended in 1994, in
essence prohibits, with limited exceptions, purchasers of varieties protected
under the amended Act from selling seed harvested from these varieties without
permission of the plant variety protection certificate owner. Some foreign
countries provide similar legal protection for breeders of crop varieties.
Although cotton is varietal and, therefore, can be grown from seed of parent
plants saved by the growers, most farmers in our primary domestic markets
purchase seed from commercial sources each season because cottonseed requires
delinting prior to seed treatment with chemicals and in order to be sown by
modern planting equipment. Delinting and conditioning may be done either by a
seed company on its proprietary seed or by independent delinters for farmers.
Modern cotton farmers in upland picker areas generally recognize the greater
assurance of genetic purity, quality and convenience that professionally grown
and conditioned seed offers compared to seed they might save. Additionally, U.S.
patent laws make unlawful any unauthorized planting of seed containing patented
technology, such as Bollgard and Roundup Ready, saved from prior crops.
We farm approximately 3,000 acres in the U.S., primarily for research purposes
and for production of cotton and soybean foundation seed. Additionally, we have
annual agreements with various growers to produce seed for cotton and soybeans.
The growers plant parent seed purchased from us and follow quality assurance
procedures required for seed production. If the grower adheres to our
established quality assurance standards throughout the growing season and if the
seed meets our standards upon harvest, we may be obligated to purchase specified
minimum quantities of seed, usually in our first and second fiscal quarters, at
prices equal to the commodity market price of the seed plus a grower premium. We
then condition the seed for sale.
The majority of our sales are made from late in the second fiscal quarter
through the end of the third fiscal quarter. Varying climatic conditions can
change the quarter in which seed is delivered, thereby shifting sales and our
earnings between quarters. Thus, seed production, distribution and sales are
seasonal and interim results will not necessarily be indicative of our results
for a fiscal year.
Revenues from domestic seed sales are recognized when the seed is shipped.
Revenues from Bollgard and Roundup Ready licensing fees are recognized when the
seed is shipped. Domestically, the licensing fees charged to farmers for
Bollgard and Roundup Ready cottonseed are based on pre-established planting
rates for nine geographic regions and consider the estimated number of seeds
contained in each bag which may vary by variety, location grown, and other
factors.
International export revenues are recognized upon the later of when the seed is
shipped or the date letters of credit (or instruments with similar security
provisions) are confirmed. Generally, international export sales are not subject
to return. Generally, all other international revenues from the sale of planting
seed, less estimated reserves for returns, are recognized when the seed is
shipped.
Domestically, we promote our cotton and soybean seed directly to farmers and
sell our seed through distributors and dealers. All of our domestic seed
products (including those containing Bollgard and Roundup Ready technologies)
are subject to return and credit risk, the effects of which vary from year to
year. The annual level of returns and, ultimately, net sales are influenced by
various factors, principally commodity prices and weather conditions occurring
in the spring planting season during our third and fourth quarters. We provide
for estimated returns as sales occur. To the extent actual returns differ from
estimates, adjustments to our operating results are recorded when such
differences become known, typically in our fourth quarter. All significant
returns occur and are accounted for by fiscal year end. We also offer various
sales incentive programs for seed and participate in such programs related to
the Bollgard and Roundup Ready technology fees offered by Monsanto. Generally,
under these programs, if a farmer plants his seed and the crop is lost (usually
due to inclement weather) by a certain date, a portion of the price of the seed
and technology fees are forgiven or rebated to the farmer. The amount of the
refund and the impact to D&PL depends on a number of factors including whether
the farmer can replant the crop that was destroyed. We record monthly estimates
to account for these programs. The majority of program rebates occur during the
second and third quarters. Essentially all material claims under these programs
have occurred or are accounted for by fiscal year end.
Availability of Information on Our Website
Additional information (including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) and 15(d) of the Exchange
Act) is available at our website at www.deltaandpine.com under Investor
Relations, as soon as reasonably practicable after we electronically file such
material with the Securities and Exchange Commission.
RISKS AND UNCERTAINTIES
From time to time, we may publish forward-looking statements relating to such
matters as anticipated financial performance, existing products, technical
developments, new products, new technologies, research and development
activities, and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, we note that a variety of factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed in our forward-looking statements. The
risks and uncertainties that may affect the operations, performance, development
and results of our business include those noted elsewhere in this filing and the
following:
Demand for our seed will be affected by government programs and policies
and by weather. Demand for seed is also influenced by commodity prices, the
cost of other crop inputs, and the demand for a crop's end-uses such as
textiles, animal feed, cottonseed oil, food and raw materials for
industrial use. These factors, along with weather, influence the cost and
availability of seed for subsequent seasons. Weather impacts crop yields,
commodity prices and the planting decisions that farmers make regarding
both original planting commitments and, when necessary, replanting levels.
The planting seed market is highly competitive, and our products face
competition from a number of seed companies, diversified chemical
companies, agricultural biotechnology companies, governmental agencies and
academic and scientific institutions. A number of chemical and
biotechnology companies have seed production and/or distribution
capabilities to ensure market access for new seed products and new
technologies that may compete with the Bollgard and Roundup Ready gene
technologies of Monsanto, our principal licensor of such technology. We
currently are engaged in a dispute resolution process with Monsanto. (See
Part II, Item 1.) Our seed products and technologies contained therein may
encounter substantial competition from technological advances by others or
products from new market entrants. Many of our competitors are, or are
affiliated with, large diversified companies that have substantially
greater resources than we.
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign governments.
Particular policies which may affect our domestic and international
operations include the use of and the acceptance of products that were
produced from plants that have been genetically modified, the testing,
quarantine and other restrictions relating to the import and export of
plants and seed products and the availability (or lack thereof) of
proprietary protection for plant products. In addition, United States
government policies, particularly those affecting foreign trade and
investment, may impact our international operations.
The publicity related to genetically modified organisms ("GMOs") or
products made from plants that contain GMOs may have an effect on our sales
in the future. In 2003, approximately 96% of our cottonseed that was sold
in the United States contained either or both of Monsanto's Bollgard and
Roundup Ready gene technologies, and 94% of our soybean seed sales
contained the Roundup Ready gene technology. Although many farmers have
rapidly adopted these technologies, the concern of some customers and
governmental entities over finished products that contain GMOs could impact
demand for crops (and ultimately seed) raised from seed containing such
traits.
Due to the varying levels of agricultural and social development of the
international markets in which we operate and because of factors within the
particular international markets we target, international profitability and
growth may be less stable and predictable than domestic profitability and
growth. Furthermore, recent action taken by the U.S. government, including
that taken by the U.S. military in the aftermath of the tragic events of
September 11, 2001, the war in Iraq, and conflicts between major cotton
producing nations, may serve to further complicate our ability to execute
our long range ex-U.S. business plans because those plans include future
expansion into Uzbekistan, Pakistan and India. World health concerns about
infectious diseases also affect the conduct of our international business.
Overall profitability will depend on the factors noted above as well as
weather conditions, government policies in all countries where we sell
products and operate, worldwide commodity prices, our ability to
successfully open new international markets, our ability to develop the
High Plains market, the technology partners' ability to obtain timely
government approval (and maintain such approval) for existing and for
additional biotechnology products on which they and D&PL are working, our
technology partners' ability to successfully defend challenges to
proprietary technologies licensed to us and our ability to produce
sufficient commercial quantities of high quality planting seed of these
products. Any delay in or inability to successfully complete these projects
may affect future profitability.
The risks and uncertainties that may affect the operations, performance,
development and results of our business include those noted elsewhere in this
Item and in "Risks and Uncertainties" in Item 7 of D&PL's Form 10-K filed for
the year ended August 31, 2003.
Item 6. Exhibits and Reports on Form 8-K
Exhibits.
31.01 Section 302 Certification of Principal Executive Officer
31.02 Section 302 Certification of Principal Financial Officer
32.01 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350 by Principal Executive Officer
32.02 Certification of Periodic Financial Report Pursuant to 18 U.S.C.
Section 1350 by Principal Accounting and Financial Officer
Reports on Form 8-K.
On January 6, 2004, D&PL filed a report on Form 8-K dated January 6, 2004 under
Items 7 and 9 announcing a press release dated January 6, 2004, reporting
results of operations and financial condition for the quarter ended November 30,
2003.
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: January 14, 2004 /s/ W. Thomas Jagodinski
---------------------------------------
W. Thomas Jagodinski
President, Chief Executive Officer and Director
Date: January 14, 2004 /s/ R. D. Greene
----------------------------------------
R. D. Greene
Vice President - Finance, Treasurer and
Assistant Secretary