UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended May 31, 2006 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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One)
Large Accelerated Filer ( ) Accelerated Filer (x) Non-Accelerated Filer ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES ( ) NO (x)
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, 35,888,054 shares outstanding as of June 30,
2006.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - May 31, 2006,
August 31, 2005, and May 31, 2005 3
Consolidated Statements of Operations - Three Months
Ended May 31, 2006 and May 31, 2005 4
Consolidated Statements of Operations - Nine Months
Ended May 31, 2006 and May 31, 2005 5
Consolidated Statements of Cash Flows - Nine Months
Ended May 31, 2006 and May 31, 2005 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
May 31, August 31, May 31,
2006 2005 2005
------------------ ----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 141,018 $ 93,075 $ 111,287
Receivables, net 315,254 228,800 258,087
Inventories 32,784 26,625 29,099
Prepaid expenses 816 1,874 1,024
Deferred income taxes 10,792 6,305 5,230
------------------ ----------------- -----------------
Total current assets 500,664 356,679 404,727
PROPERTY, PLANT AND EQUIPMENT, NET 59,778 60,158 61,255
EXCESS OF COST OVER NET ASSETS OF
BUSINESSES ACQUIRED 4,183 4,183 4,183
INTANGIBLES, NET 8,170 5,960 5,797
OTHER ASSETS 1,268 1,446 1,492
DEFERRED INCOME TAXES 10,574 10,758 7,603
------------------ ----------------- -----------------
TOTAL ASSETS $ 584,637 $ 439,184 $ 485,057
================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Notes payable and current maturities of long-term debt $ 8,064 $ 10,078 $ 11,491
Accounts payable 9,194 18,218 11,820
Accrued expenses 329,114 221,824 242,960
Income taxes payable 31,168 12,893 19,995
------------------ ----------------- -----------------
Total current liabilities 377,540 263,013 286,266
------------------ ----------------- -----------------
LONG-TERM DEBT 3,578 7,271 11,217
------------------ ----------------- -----------------
MINORITY INTEREST IN SUBSIDIARIES 5,271 4,877 5,219
------------------ ----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 10 )
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;
501,989, 456,989, and 456,989 shares authorized; no shares issued or
outstanding; - - -
Series M Convertible Non-Voting Preferred, par value $0.l0 per share; 107 107 107
1,066,667 shares authorized, issued and outstanding
Common stock, par value $0.10 per share; 100,000,000 shares authorized;
41,521,498, 40,928,929 and 40,857,834 shares issued;
35,970,798, 36,099,823 and 36,138,728 shares outstanding 4,152 4,093 4,086
Capital in excess of par value 97,041 81,640 79,941
Retained earnings 236,055 199,742 213,891
Accumulated other comprehensive loss (4,520) (4,305) (1,390)
Treasury stock, at cost; 5,550,700, 4,829,106 and 4,719,106 shares (134,587) (117,254) (114,280)
------------------ ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 198,248 164,023 182,355
------------------ ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 584,637 $ 439,184 $ 485,057
================== ================= =================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
May 31, May 31,
2006 2005
----------------- ------------------
NET SALES AND LICENSING FEES $ 286,618 $ 203,320
COST OF SALES 184,696 129,747
----------------- ------------------
GROSS PROFIT 101,922 73,573
----------------- ------------------
OPERATING EXPENSES:
Research and development 6,631 5,781
Selling 3,793 3,706
General and administrative 9,163 6,143
In-process research and development and related transactional costs 7,042 -
----------------- ------------------
Total operating expenses 26,629 15,630
----------------- ------------------
OPERATING INCOME 75,293 57,943
INTEREST (EXPENSE) INCOME, NET (341) 336
OTHER EXPENSE, NET (1,336) (851)
EQUITY IN NET LOSS OF AFFILIATE (821) (781)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 307 394
----------------- ------------------
INCOME BEFORE INCOME TAXES 73,102 57,041
INCOME TAX EXPENSE 25,424 20,757
----------------- ------------------
NET INCOME 47,678 36,284
DIVIDENDS ON PREFERRED STOCK (160) (128)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 47,518 $ 36,156
================= ==================
BASIC EARNINGS PER SHARE $ 1.33 $ 0.94
================= ==================
NUMBER OF SHARES USED IN BASIC EARNINGS PER SHARE
CALCULATIONS 35,734 38,416
================= ==================
DILUTED EARNINGS PER SHARE $ 1.28 $ 0.91
================= ==================
NUMBER OF SHARES USED IN DILUTED EARNINGS PER SHARE
CALCULATIONS 37,123 39,839
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.15 $ 0.12
================= ==================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
May 31, May 31,
2006 2005
----------------- ------------------
NET SALES AND LICENSING FEES $ 411,422 $ 340,633
COST OF SALES 265,505 213,343
----------------- ------------------
GROSS PROFIT 145,917 127,290
----------------- ------------------
OPERATING EXPENSES:
Research and development 18,416 15,857
Selling 11,110 10,258
General and administrative 22,616 15,587
In-process research and development and related transactional costs 7,042 -
----------------- ------------------
Total operating expenses 59,184 41,702
----------------- ------------------
OPERATING INCOME 86,733 85,588
INTEREST INCOME, NET 864 1,435
OTHER EXPENSE, NET (3,270) (3,331)
EQUITY IN NET LOSS OF AFFILIATE (2,415) (2,167)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (394) (1,951)
----------------- ------------------
INCOME BEFORE INCOME TAXES 81,518 79,574
INCOME TAX EXPENSE 28,616 28,447
----------------- ------------------
NET INCOME 52,902 51,127
DIVIDENDS ON PREFERRED STOCK (480) (384)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 52,422 $ 50,743
================= ==================
BASIC EARNINGS PER SHARE $ 1.46 $ 1.32
================= ==================
NUMBER OF SHARES USED IN BASIC EARNINGS PER SHARE
CALCULATIONS 35,832 38,573
================= ==================
DILUTED EARNINGS PER SHARE $ 1.43 $ 1.28
================= ==================
NUMBER OF SHARES USED IN DILUTED EARNINGS PER SHARE
CALCULATIONS 37,093 39,928
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.45 $ 0.36
================= ==================
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 NINE MONTHS ENDED
(in thousands)
(Unaudited)
May 31, May 31,
2006 2005
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,902 $ 51,127
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,027 6,461
Loss (gain) on sale of assets 54 (309)
In-process research and development and related charges 7,042 -
Excess tax benefits from stock-based compensation arrangements (1,285) -
Equity in net loss of affiliate 2,415 2,167
Foreign exchange loss (gain) 374 (95)
Accretion of debt discount 340 583
Minority interest in earnings of subsidiaries 394 1,951
Stock-based compensation expense 2,493 67
Change in deferred income taxes (4,301) 4,574
Changes in assets and liabilities:
Receivables (86,467) (72,774)
Inventories (5,978) 1,595
Prepaid expenses 1,020 897
Intangibles and other assets 50 (382)
Accounts payable (9,424) (12,351)
Accrued expenses 107,056 54,853
Income taxes payable 19,644 13,494
------------------ -----------------
Net cash provided by operating activities 93,356 51,858
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,246) (5,129)
Sale of investments and property 72 433
Acquisition of business and in-process research and development and
related charges (9,662) -
Investment in affiliate (2,325) (2,230)
------------------ -----------------
Net cash used in investing activities (18,161) (6,926)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (51,049) -
Dividends paid (16,589) (14,044)
Proceeds from short-term debt 45,000 -
Minority interest in dividends paid by subsidiary - (1,318)
Payments to acquire treasury stock (17,333) (82,561)
Proceeds from exercise of stock options 11,572 13,176
Excess tax benefits from stock-based compensation arrangements 1,285 -
------------------ -----------------
Net cash used in financing activities (27,114) (84,747)
------------------ -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES (138) 1,515
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 47,943 (38,300)
CASH AND CASH EQUIVALENTS, August 31 93,075 149,587
------------------ -----------------
CASH AND CASH EQUIVALENTS, May 31 $ 141,018 $ 111,287
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest, net of capitalized interest $ 238 $ -
Income taxes paid $ 12,381 $ 9,261
Noncash financing activities:
Tax benefit of equity awards $ 2,067 $ 2,518
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"; or the "Company") is seasonal in nature; thus, the results of
operations for the three and nine month periods ended May 31, 2006 and 2005, are
not necessarily indicative of the results to be expected for the full year.
D&PL's investment in its 50%-owned affiliate DeltaMax Cotton, LLC ("DeltaMax")
is accounted for using the equity method. For further information, reference
should be made to the consolidated financial statements and footnotes thereto
included in D&PL's Annual Report to Stockholders on Form 10-K for the year ended
August 31, 2005.
New Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments, an amendment of SFAS No. 133 and SFAS No. 140." Among
other changes, SFAS No. 155 further defines what constitutes a derivative as
defined by SFAS No. 133, and addresses certain measurement issues regarding
hybrid financial instruments. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of the fiscal year that
begins after September 15, 2006. The Company does not expect the adoption of
this statement to have a material impact on D&PL's consolidated financial
statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3". Among other
changes, SFAS No. 154 requires that a voluntary change in accounting principle
be applied retrospectively with all prior period financial statements presented
based on the new accounting principle, unless it is impracticable to do so. SFAS
No. 154 provides that (1) a change in method of depreciating or amortizing a
long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed
a "restatement." SFAS No. 154 is effective for accounting changes and correction
of errors made in fiscal years beginning after December 15, 2005. The Company
does not expect the adoption of this statement to have a material impact on
D&PL's consolidated financial statements.
2. COMPREHENSIVE INCOME
Total comprehensive income for the three and nine months ended May 31, 2006 and
2005, was (in thousands):
Three Months Ended Nine Months Ended
------------------------------------- --------------------------------------
May 31, May 31, May 31, May 31,
2006 2005 2006 2005
----------------- ------------------ ------------------ ------------------
Net income $ 47,678 $ 36,284 $ 52,902 $ 51,127
Other comprehensive (loss) income:
Foreign currency translation
(losses) gains (995) 314 (46) 2,832
Net realized and unrealized
(losses) gains on hedging instruments (85) 367 (169) 352
Income tax benefit related to other
comprehensive income 376 (182) 76 (838)
----------------- ------------------ ------------------ ------------------
Other comprehensive (loss) income,
net of tax (704) 499 (139) 2,346
----------------- ------------------ ------------------ ------------------
Total comprehensive income $ 46,974 $ 36,783 $ 52,763 $ 53,473
================= ================== ================== ==================
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 Annual Report to Stockholders on Form
10-K filed for the year ended August 31, 2005.
Information about D&PL's segments for the three and nine month periods ended May
31, 2006 and 2005, is as follows (in thousands):
Three Months Ended Nine Months Ended
------------------------------------ --------------------------------------
May 31, May 31, May 31, May 31,
2006 2005 2006 2005
----------------- ----------------- ------------------ ------------------
Net sales and licensing fees (by segment)
Domestic $ 276,055 $ 194,042 $ 385,665 $ 302,702
International 10,563 9,278 25,757 37,931
----------------- ----------------- ------------------ ------------------
$ 286,618 $ 203,320 $ 411,422 $ 340,633
================= ================= ================== ==================
Net sales and licensing fees
Cottonseed $ 272,002 $ 188,386 $ 391,104 $ 319,493
Soybean seed 14,432 14,390 18,810 19,216
Other 184 544 1,508 1,924
----------------- ----------------- ------------------ ------------------
$ 286,618 $ 203,320 $ 411,422 $ 340,633
================= ================= ================== ==================
Operating income
Domestic $ 73,525 $ 55,770 $ 85,634 $ 75,225
International 1,768 2,173 1,099 10,363
----------------- ----------------- ------------------ ------------------
$ 75,293 $ 57,943 $ 86,733 $ 85,588
================= ================= ================== ==================
4. STOCK-BASED COMPENSATION PLANS
Share-Based Payments. Effective September 1, 2005, the Company adopted SFAS No.
123R utilizing the modified prospective approach. Under the modified prospective
approach, SFAS No. 123R applies to new awards and to awards that were
outstanding on September 1, 2005 and are subsequently modified or cancelled.
Additionally, compensation cost for the portion of awards for which the
requisite service had not been rendered as of September 1, 2005, will be
recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes previously under SFAS No. 123,
"Accounting for Stock-Based Compensation." Prior periods were not restated to
reflect the impact of adopting SFAS No. 123R. The Company elected to use the
alternative (shortcut) method to determine the amount of excess tax benefits
that would have been recognized in additional paid-in capital had the Company
previously adopted SFAS No. 123 for recognition purposes.
Prior to the adoption of SFAS No. 123R, the Company accounted for employee stock
options and other equity-based compensation awards using the intrinsic value
method of accounting prescribed by APB Opinion 25, "Accounting for Stock Issued
to Employees." No compensation expense was previously recognized related to the
Company's stock options because the number of shares was fixed at the grant date
and each option's exercise price was set at or above the stock's fair market
value on the date the option was granted. Under SFAS No. 123R, the Company
charged to income $852,000 of compensation expense for stock options, Restricted
Stock and Restricted Stock Units in the third quarter of 2006 and $2.50 million
for the nine-month period ended May 31, 2006.
The 1995 Long-Term Incentive Plan, as amended and restated in March 2000, (the
"LTIP") allows for the awarding of stock options to officers, key employees and
directors. Under the LTIP, options to purchase 5,120,000 shares (after effect of
stock splits) of common stock of D&PL were available for grant. Shares subject
to options and awards which expire unexercised are available for new option
grants and awards under the LTIP. The Compensation Committee of the Board of
Directors administers the Plan and has sole discretion regarding the
exercisability of the option grants.
The 2005 Omnibus Stock Plan ("2005 Stock Plan"), approved by the shareholders in
January 2005, provides for the grant of (a) incentive stock options as defined
in the Internal Revenue Code of 1986, as amended, (b) non-qualified stock
options, (c) restricted stock, and (d) restricted stock units to D&PL's
employees, independent contractors and members of the Board of Directors for the
purpose of encouraging share ownership of D&PL. Up to 4,500,000 shares are
available for grants of awards under the Plan. The maximum number of shares
which may be issued for awards of restricted stock and restricted stock units is
2,100,000 shares and the maximum for options is 2,400,000. The Compensation
Committee of the Board of Directors administers the Plan and has sole discretion
regarding the exercisability of the option grants. Any lapsed awards shall again
be available under this plan.
Options. The Company determines the fair value of stock option awards using the
Black-Scholes option-pricing model. Expected volatilities are based on the
historical volatility of the Company's common stock. The Company uses historical
data to estimate share option exercise and employee departure behavior used in
the Black-Scholes option-pricing model. The expected term of share options
granted is derived from the output of the option pricing model and represents
the period of time that share options granted are expected to be outstanding.
The risk-free rate is based on yields of U.S. Treasury securities with similar
terms as the expected life of the options. The following weighted-average
assumptions were used to value D&PL's stock option awards in the third quarter
of 2006: 6 year expected life; expected volatility of 24.3%; risk free rate of
4.79% and annual dividends of $0.60 per share during the expected term of the
options. The weighted-average fair value of options awarded in the third quarter
of 2006 was $7.07.
The Company recognized gross compensation cost associated with all of its
outstanding stock option awards of $425,000, prior to a tax benefit of $149,000,
in the third quarter of 2006, versus $0 in the prior year period. At May 31,
2006, there was approximately $2.2 million of unrecognized compensation cost
related to stock option awards, net of an anticipated tax benefit of $781,000,
which is expected to be recognized over the remaining employees' service periods
over a weighted-average period of two years.
All outstanding options have a contractual term of 7 to 10 years. All stock
option awards made prior to May 18, 2005 became exercisable ratably over a
five-year service period. Stock option awards made on May 18, 2005 become
exercisable 45 days after issuance. Stock option awards made subsequent to May
18, 2005 become exercisable ratably over a five-year service period. Under both
the LTIP and the 2005 Stock Plan, all outstanding stock options become
exercisable immediately upon a change in control of the Company. There were
approximately 2.3 million stock options available for grant at May 31, 2006.
The following table represents stock option activity for the quarter ended May
31, 2006:
Number of Intrinsic
Shares Price Range Value
-------------- -------------------------- --------------
Outstanding at February 28, 2006 3,709,040 $ 15.61 $47.31
Granted 33,325 22.51 29.75
Exercised (490,049) 15.61 27.56
Lapsed or canceled (1,000) 17.85 17.85
-------------- ------------ ----------
Outstanding at May 31, 2006 3,251,316 $ 16.91 $47.31 $ 16,639,000
============== ============ ========== ==============
Exercisable at May 31, 2006 2,891,879 $ 16.91 $47.31 $ 14,418,000
============== ==============
The following table summarizes certain information about outstanding and
exercisable stock options at May 31, 2006:
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Exercise Price Contractual Life Exercise Exercise
Range Number in Years Price Number Price
--------------------- ------------- ------------------- ------------- -------------- -------------
$16.91 - $19.99 1,429,399 4.3 $ 19.03 1,274,372 $ 19.10
$20.00 - $29.99 1,552,576 4.8 $ 26.18 1,348,166 $ 26.35
$30.00 - $39.99 267,341 5.3 $ 31.51 267,341 $ 31.51
$40.00 - $47.31 2,000 2.2 $ 47.31 2,000 $ 47.31
------------- --------------
3,251,316 4.7 $ 23.29 2,891,879 $ 23.55
============= ==============
Restricted Stock and Restricted Stock Units. In the third quarter of 2006, 3,668
shares of Restricted Stock or Restricted Stock Units were granted to employees
(3,530 shares of Restricted Stock) or directors (138 Restricted Stock Units for
dividends on previously issued Restricted Stock Units), with total compensation
cost of approximately $101,000 determined based on the market price of the
Company's common stock at the time of award and considering dividend
restrictions and expected forfeitures. Compensation cost will be recognized as
expense ratably over the three-year vesting period.
For the three months ended May 31, 2006, the Company recognized gross
compensation cost associated with all of its Restricted Stock and Restricted
Stock Units awards of approximately $427,000, prior to a tax benefit of
$149,000, versus $67,000, prior to a tax benefit of $24,000, in the prior year
period. At May 31, 2006, there was $2.7 million of unrecognized compensation
cost related to shares of Restricted Stock and Restricted Stock Units which is
expected to be recognized, net of an anticipated tax benefit of $959,000, over a
weighted-average period of two years.
There were approximately 1.9 million shares available for grants of Restricted
Stock and Restricted Stock Units at May 31, 2006. The following represents
Restricted Stock and Restricted Stock Units activity for the quarter ended May
31, 2006:
Restricted Stock Restricted Stock Units
------------------------------------ -----------------------------------------
Weighted Avg. Weighted Avg.
Number of Grant Date Fair Number of Shares Grant Date Fair
Shares Value Value
-------------- ----------------- ------------------ ------------------
Non-vested at February 28, 2006 150,221 $25.06 24,409 $26.27
Granted 3,530 28.48 138 27.08
Vested (55,938) 25.22 (9,816) 26.27
Forfeited (2,241) 25.22 - -
-------------- ------------------
Non-vested at May 31, 2006 95,572 $25.35 14,731 $26.28
============== ==================
The following table illustrates for the three and nine month periods ended May
31, 2005 the effect on operating results and per share information had the
Company accounted for share-based compensation in accordance with SFAS No. 123R
(in thousands):
Three Months Ended Nine Months Ended
----------------------- -----------------------
May 31, May 31,
2005 2005
----------------------- -----------------------
Net Income:
As reported $ 36,284 $ 51,127
Add: Total stock-based compensation expense
included in reported net income, net of
related tax effects 43 43
Less: Total stock-based compensation expense
determined under the fair value based
method for all awards, net of related tax
effects (1,357) (2,788)
----------------------- -----------------------
Pro forma $ 34,970 $ 48,382
======================= =======================
Basic earnings per share:
As reported $ 0.94 $ 1.32
======================= =======================
Pro forma $ 0.91 $ 1.24
======================= =======================
Diluted earnings per share:
As reported $ 0.91 $ 1.28
======================= =======================
Pro forma $ 0.88 $ 1.22
======================= =======================
5. INVENTORIES
Inventories consisted of the following as of (in thousands):
May 31, August 31, May 31,
2006 2005 2005
------------------ ----------------- -----------------
Finished goods $ 28,137 $ 19,713 $ 21,367
Raw materials 18,616 13,156 15,955
Growing crops 959 818 749
Supplies 876 1,101 1,124
------------------ ----------------- -----------------
48,588 34,788 39,195
Less reserves (15,804) (8,163) (10,096)
------------------ ----------------- -----------------
$ 32,784 $ 26,625 $ 29,099
================== ================= =================
Finished goods and raw material inventory are valued at the lower of average
cost or market. Growing crops are recorded at cost. Elements of cost in
inventories include raw materials, direct production costs, manufacturing
overhead and immaterial general and administrative expenses. Inventory reserves
relate to estimated damaged, obsolete and excess inventory. The provision
recorded for damaged, obsolete and excess inventory for the quarters ended May
31, 2006 and 2005 was approximately $7.7 million and $5.9 million, respectively.
The provision recorded for damaged, obsolete and excess inventory for the
nine-month periods ended May 31, 2006 and 2005 was approximately $11.1 million
and $9.8 million, respectively. See Note 9 for a description of hedging
activities related to inventory.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of (in thousands):
May 31, August 31, May 31,
2006 2005 2005
------------------ ----------------- -----------------
Land and improvements $ 6,432 $ 6,263 $ 6,266
Buildings and improvements 44,980 43,018 43,607
Machinery and equipment 66,726 63,142 63,258
Germplasm 7,500 7,500 7,500
Breeder and foundation seed 2,000 2,000 2,000
Construction in progress 1,089 2,564 1,764
------------------ ----------------- -----------------
128,727 124,487 124,395
Less accumulated depreciation (68,949) (64,329) (63,140)
------------------ ----------------- -----------------
$ 59,778 $ 60,158 $ 61,255
================== ================= =================
Depreciation expense during the quarters ended May 31, 2006 and 2005 was
approximately $2.4 million and $2.1 million, respectively. Depreciation expense
during the nine-month periods ended May 31, 2006 and 2005 was approximately $6.6
million and $6.2 million, respectively.
7. INTANGIBLES
The components of identifiable intangible assets were as follows as of (in
thousands):
May 31, 2006 August 31, 2005 May 31, 2005
----------- --- --------------- -------------- --- ---------------- ------------- -- ----------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
----------- --------------- -------------- ---------------- ------------- ----------------
Trademarks $ 3,182 $ (1,017) $ 3,182 $ (958) $ 3,182 $ (938)
Commercialization
agreements 400 (142) 400 (121) 400 (114)
Licenses 3,229 (275) 1,100 (192) 1,350 (165)
Patents 2,029 (136) 1,640 (116) 1,104 (108)
Other 2,112 (1,212) 2,096 (1,071) 2,110 (1,024)
----------- --------------- -------------- ---------------- ------------- ----------------
$ 10,952 $ (2,782) $ 8,418 $ (2,458) $ 8,146 $ (2,349)
=========== =============== ============== ================ ============= ================
Amortization expense for identifiable intangible assets during the quarters
ended May 31, 2006 and 2005 was approximately $110,000 and $100,000,
respectively. Amortization expense for identifiable intangible assets during the
nine-month periods ended May 31, 2006 and 2005 was approximately $377,000 and
$300,000, respectively. Identifiable intangible asset amortization expense is
estimated to be $100,000 for the remainder of 2006, $320,000 in fiscal year 2007
and $400,000 in each of the fiscal years from 2008 to 2011.
On December 29, 2005, D&PL acquired Vikki's Agrotech Pvt. Ltd., an Indian
cottonseed company, for cash of approximately $2.6 million. The results of
Vikki's operations have been included in D&PL's consolidated statements of
operations from the date of acquisition. The initial allocation of the purchase
price resulted in no goodwill and approximately $2.3 million allocated to
licenses. Pro forma results of operations for the nine-month period ended May
31, 2006, if the acquisition had occurred at the beginning of the period, would
not have been materially different than reported results for the nine-month
period.
On May 22, 2006, D&PL announced the acquisition of Syngenta's global cotton seed
assets, comprised of operations and assets in India, Brazil, Europe, and certain
cotton germplasm in the United States. The primary assets include conventional
and transgenic germplasm containing Syngenta's VipCot(TM) insect-resistant
cotton genes. D&PL acquired a license to VipCot in 2004 and expects to
commercialize varieties containing these traits in 2008 or 2009, subject to
receiving regulatory approvals. As a result of this transaction, D&PL incurred a
pre-tax charge of $7.0 million, or $0.12 per diluted share, related to the
write-off of in-process research and development (IPR&D) acquired in the
transaction and related transaction costs during the third quarter.
8. INVESTMENT IN AFFILIATE
D&PL owns a 50% interest in DeltaMax Cotton, LLC, a limited liability company
jointly owned with Verdia, Inc. Verdia was acquired by DuPont on July 2, 2004.
Established in May 2002, the DeltaMax joint venture was formed to create,
develop and commercialize herbicide tolerant and insect resistant traits for the
cottonseed market. D&PL has licensed from DeltaMax the developed traits for
commercialization in both the U.S. and other cotton-producing countries in the
world. For the quarters ended May 31, 2006 and 2005, D&PL's equity in the net
loss of DeltaMax was approximately $821,000 and $781,000, respectively. For the
nine-month periods ended May 31, 2006 and 2005, D&PL's equity in the net loss of
DeltaMax was approximately $2.4 million and $2.2 million respectively.
9. DERIVATIVE FINANCIAL INSTRUMENTS
Accumulated other comprehensive loss includes the following related to the
Company's soybean hedging program for the nine-month periods ended May 31, 2006
and 2005 (in thousands):
2006 2005
------------------- -------------------
Deferred net gain (loss), as of August 31 $ 224 $ (134)
Net gains (losses) on hedging instruments arising during the
nine months 4 (177)
Reclassification adjustment of (gains) losses on hedging
instruments to earnings (173) 436
------------------- -------------------
Net change in accumulated other comprehensive loss (169) 259
------------------- -------------------
Deferred net gain on derivative instruments included in accumulated
other comprehensive loss at May 31 $ 55 $ 125
=================== ===================
The deferred net gain of $55,000 included in accumulated other comprehensive
loss at May 31, 2006 is a net unrealized gain. The deferred net unrealized gain
will be recognized in earnings within the next twelve to eighteen months;
however, the actual amount that will be charged to earnings may vary as a result
of changes in market conditions.
For the nine-month periods ended May 31, 2006 and 2005, D&PL recorded no gains
or losses in earnings as a result of hedge ineffectiveness or discontinuance of
cash flow hedges related to soybeans.
10. COMMITMENTS AND CONTINGENCIES
Product Liability Claims
D&PL is named as a defendant in various lawsuits that allege, among other
things, that certain of D&PL's products (including those containing Monsanto's
technology) did not perform as the farmer had anticipated or expected. In some
of these cases, Monsanto and/or the dealer or distributor who sold the seed are
also named as defendants. In all cases where the seed sold contained either or
both of Monsanto's Bollgard 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 seed performance claims which are aimed solely at D&PL. D&PL
does not have a right to indemnification from Monsanto for any claims involving
seed performance 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 its consolidated financial statements. D&PL intends to
vigorously defend itself in these matters.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II(R) cottonseed infringes Bayer's Australian patent
that claims an alleged invention entitled "Prevention of Bt Resistance
Development." The suit seeks an injunction, damages and other relief against
Deltapine Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings. Due to the status of this
matter, management is presently unable to determine the impact, if any, of this
matter on the consolidated financial statements.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners, a partnership of D&PL (90%) and Monsanto
(10%), pertaining to matters under the Bollgard and Roundup Ready Licenses for
the United States and matters under license agreements for Argentina and the
Republic of South Africa. In August 2003, D&PL and D&M Partners responded to
Monsanto's positions on each issue and notified Monsanto of additional disputes,
each concerning Monsanto's compliance with its obligations under the Bollgard
and Roundup Ready Licenses for the United States. In accordance with the dispute
resolution provisions of the subject agreements, the issues raised in Monsanto,
D&PL and D&M Partners' notices were submitted to a panel of senior executives
(the "Executive Panel"). Monsanto subsequently withdrew from the Executive Panel
the issue involving the license agreements for the Republic of South Africa and
submitted to the Executive Panel one additional issue of interpretation of the
Bollgard and Roundup Ready Licenses for the United States. Issues arising from
operations in Argentina and issues involving technology fees and interest have
been settled and are no longer in dispute. On May 20, 2004, Monsanto submitted
to arbitration before the American Arbitration Association ("AAA") two
unresolved issues: whether D&M Partners has paid Monsanto all royalties due and
whether D&PL has made unauthorized transfers of materials containing Monsanto
technology. In this arbitration proceeding, Monsanto seeks an adjudication of
its alleged right to terminate the Bollgard and Roundup Ready Licenses, to
dissolve D&M Partners, to obtain an accounting and to receive monetary damages
and a return or destruction of materials containing Monsanto technologies. D&PL
denies the claims asserted by Monsanto in the arbitration filing and has filed
appropriate responses to Monsanto's claims and filed three counterclaims based
on the issues submitted by D&PL to the Executive Panel. The parties have
completed discovery and have filed motions for summary disposition on specific
issues. The Arbitration Panel has set an August 2006 final hearing date.
On February 17, 2006, D&PL submitted an issue for resolution under the dispute
resolution process under the 1996 Option Agreement and the 2002 Bollgard Gene
License. This dispute involves whether Monsanto's implementation of a farmer
licensing system for the Bollgard Gene technology in Brazil violates D&PL's and
its local affiliate's rights to an exclusive license to develop, produce and
sell Bollgard planting seed in Brazil. In response to D&PL's submission of this
dispute to the alternative dispute resolution, on February 23, 2006, Monsanto
filed a suit for declaratory judgment in the Circuit Court of St. Louis County,
Missouri, for the court to determine the issues in dispute. D&PL believes that
this suit is barred by the binding alternative dispute resolution provisions in
the subject contracts and that the issue of submission to Arbitration has been
resolved by the below described decision of the Delaware Court.
On March 1, 2006, D&PL filed a suit against Monsanto in the Chancery Court of
New Castle County, Delaware, seeking to enjoin Monsanto's implementation of the
new farmer licensing system for Brazil pending the resolution of the issues
submitted to the Executive Panel. D&PL's motion for a preliminary injunction was
denied; however, the Delaware Court granted D&PL's motion to compel arbitration.
On March 27, 2006, D&PL submitted to arbitration before the AAA the dispute on
whether Monsanto's implementation of a farmer licensing system is in violation
of D&PL's and its affiliate's rights to an exclusive license to develop, produce
and sell Bollgard planting seed in Brazil. As part of this arbitration, D&PL is
seeking to enjoin Monsanto's implementation of its farmer licensing system and
for damages incurred by D&PL and its affiliate. The Arbitration Panel has
scheduled a hearing on D&PL's request for a preliminary injunction in July 2006
and a final hearing in November 2006. D&PL is committed to participating in good
faith resolution of this dispute through arbitration. MDM Sementes de Algodao
Limitada, D&PL's affiliate in Brazil, is proceeding with a planned launch of
sales of cotton seed containing Bollgard technology in Brazil in the 2006 sales
season.
On March 31, 2005 and May 4, 2006, D&PL submitted the disputes involving D&PL's
right to exclusive licenses to Bollgard technology in two Ex-U.S. countries
under the 1996 Option Agreement between Monsanto and D&PL for resolution by an
Executive Panel.
On February 20, 2006, D&PL submitted two additional issues for dispute
resolution before an Executive Panel; one dispute under the most favored license
provisions of the U.S. Bollgard License and the other under confidentiality
provisions of the U.S. Bollgard and Roundup Ready Licenses. These issues have
not been resolved through the Executive Panel.
On June 16, 2006, D&PL submitted to arbitration before the AAA the issues
involving D&PL's rights to exclusive rights to Bollgard technology in the two
Ex-U.S. countries and D&PL's rights to more favorable license terms under its
U.S. Bollgard and Bollgard II licenses.
On February 28, 2006, D&PL filed suit in the Circuit Court of Dunklin County,
Missouri, seeking to recover Soybean Seed Services Fees in the amount of
approximately $2,200,000 which Monsanto has refused to pay D&PL with respect to
soybean seed containing Monsanto's Roundup Ready technology sold by D&PL during
the 2005 planting season. The suit also seeks a declaratory judgment that D&PL's
royalties under its Roundup Ready Soybean License have been correctly calculated
and paid during the years 2002-2005. This case is in pretrial proceedings.
Due to the status of the various matters concerning Monsanto discussed above,
management is unable to determine the impact of these matters on the
consolidated financial statements.
D&PL vs. Monsanto Company and Pharmacia Corporation
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
effectively terminating Monsanto's efforts to gain government approval of the
merger of Monsanto with D&PL under the May 8, 1998 Merger Agreement. On December
30, 1999, D&PL filed suit in the First Judicial District of Bolivar County,
Mississippi, seeking, among other things, the payment of the $81 million
termination fee due pursuant to the Merger Agreement, compensatory damages and
punitive damages. On January 2, 2000, D&PL and Monsanto reached an agreement
whereby D&PL would withdraw the suit, without prejudice, for the purpose of
negotiating a settlement of D&PL's claims, and Monsanto would immediately pay
the $81 million. On January 3, 2000, Monsanto paid to D&PL the termination fee
of $81 million as required by the Merger Agreement. On January 18, 2000, after
unsuccessful negotiations, D&PL re-filed its suit. D&PL seeks in excess of $1
billion in compensatory and $1 billion in punitive damages for breach of the
Merger Agreement between the parties.
On September 12, 2003, Monsanto amended its answer to include four counterclaims
against D&PL. Monsanto is seeking unspecified damages for its counterclaims,
including the $81 million paid by Monsanto to D&PL as a termination fee and
related expenses. D&PL answered the counterclaims, denying all liability, and
D&PL intends to vigorously defend itself against these counterclaims. On
December 21, 2004, Monsanto filed a motion to amend its answer to withdraw two
of its four counterclaims.
On February 17, 2005, D&PL filed a motion with the trial court to amend its
complaint to add a claim against Monsanto for fraudulently inducing D&PL to
extend the deadline to complete the merger with Monsanto. The Mississippi
Supreme Court has stayed the proceedings in this case pending the resolution of
two interlocutory appeals filed by D&PL. Oral arguments before the Mississippi
State Supreme Court are set for August 15, 2006. Due to the status of this
matter, management is unable to determine the impact of this matter on the
consolidated financial statements.
11. EARNINGS PER SHARE
Dilutive common share equivalents consist of both D&PL's Series M Convertible
Non-Voting Preferred shares and the outstanding options to purchase D&PL's
common stock and Restricted Stock and Restricted Stock Units that have been
issued under the 1995 Long-Term Incentive Plan and the 2005 Omnibus Stock Plan.
Approximately 498,000 and 542,000 outstanding stock options were not included in
the computation of diluted earnings per share for the three months ended May 31,
2006 and 2005, respectively, and approximately 1,483,000 and 204,000 outstanding
stock options were not included in the computation of diluted earnings per share
for the nine months ended May 31, 2006 and 2005, respectively, because the
exercise price exceeded the average market price of D&PL's common stock for each
respective reporting date. These excluded options expire at various dates from
2007 to 2015.
The table below reconciles the basic and diluted per share computations:
(in thousands, except per share amounts) For the Three Months Ended For the Nine Months Ended
----------------------------------- -------------------------------------
May 31, May 31, May 31, May 31,
2006 2005 2006 2005
----------------- ---------------- ----------------- ------------------
Income:
Net income $ 47,678 $ 36,284 $ 52,902 $ 51,127
Less: Preferred stock dividends (160) (128) (480) (384)
----------------- ---------------- ----------------- ------------------
Net income for basic EPS $ 47,518 $ 36,156 $ 52,422 $ 50,743
Effect of Dilutive Securities:
Convertible preferred stock dividends 160 128 480 384
----------------- ---------------- ----------------- ------------------
Net income available to common
stockholders plus assumed conversions - for
diluted EPS $ 47,678 $ 36,284 $ 52,902 $ 51,127
================= ================ ================= ==================
Shares:
Basic EPS shares 35,734 38,416 35,832 38,573
Effect of Dilutive Securities:
Options to purchase stock 317 356 194 288
Restricted Stock and Restricted Stock Units 5 - - -
Convertible preferred stock 1,067 1,067 1,067 1,067
----------------- ---------------- ----------------- ------------------
Diluted EPS shares 37,123 39,839 37,093 39,928
================= ================ ================= ==================
Per Share Amounts:
Basic $ 1.33 $ 0.94 $ 1.46 $ 1.32
================= ================ ================= ==================
Diluted $ 1.28 $ 0.91 $ 1.43 $ 1.28
================= ================ ================= ==================
12. EMPLOYEE BENEFIT PLANS
Substantially all full-time employees are covered by a noncontributory defined
benefit plan (the "Plan"). Benefits are paid to employees, or their
beneficiaries, upon retirement, death or disability based on their final average
compensation over the highest consecutive five years. D&PL's funding policy is
to make contributions to the Plan that are at least equal to the minimum amounts
required to be funded in accordance with the provisions of ERISA.
Effective January 1992, D&PL adopted a Supplemental Executive Retirement Plan
(the "SERP"), which will pay supplemental pension benefits to certain employees
whose benefits from the Plan were decreased as a result of certain changes made
to the Plan. The benefits from the SERP will be paid in addition to any benefits
the participants may receive under the Plan and will be paid from Company
assets, not Plan assets. For further information about D&PL's employee benefit
plans, reference should be made to Note 11 to the consolidated financial
statements contained in D&PL's Annual Report on Form 10-K for the year ended
August 31, 2005.
The components of net periodic pension expense for D&PL's Plan and SERP follow
as of (in thousands):
Pension SERP
Three Months Ended Three Months Ended
--------------------------------------- ---------------------------------------
May 31, May 31, May 31, May 31,
2006 2005 2006 2005
------------------ ------------------ ------------------ ------------------
Service cost $ 273 $ 213 $ - $ -
Interest cost 287 274 8 9
Expected return on assets (295) (272) (6) (6)
Amortization of prior service cost 4 1 - -
Recognized net actuarial loss (gain) 180 101 14 (1)
------------------ ------------------ ------------------ ------------------
Net periodic pension expense $ 449 $ 317 $ 16 $ 2
================== ================== ================== ==================
Pension SERP
Nine Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
May 31, May 31, May 31, May 31,
2006 2005 2006 2005
------------------ ------------------ ------------------ ------------------
Service cost $ 819 $ 639 $ - $ -
Interest cost 862 822 24 27
Expected return on assets (885) (816) (18) (20)
Amortization of prior service cost 11 3 - -
Recognized net actuarial loss (gain) 540 303 42 (3)
------------------ ------------------ ------------------ ------------------
Net periodic pension expense $ 1,347 $ 951 $ 48 $ 4
================== ================== ================== ==================
The amount of the minimum pension liability that is recorded as a component of
Accrued Expenses at May 31, 2006 was $7.1 million. As of May 31, 2006, D&PL had
not made any contributions to the Plan; however, on June 27, 2006, a $3.7
million contribution was made to the Plan.
As of May 31, 2006, no contributions have been made to the SERP. D&PL presently
does not anticipate contributing any amounts to the SERP in 2006.
13. CREDIT FACILITY
On April 15, 2005, D&PL and certain of its subsidiaries entered into an
unsecured $75 million credit agreement (the "Credit Agreement") with Bank of
America, N.A. (the "Bank"). The Credit Agreement provides for unsecured
revolving loans up to a maximum aggregate amount outstanding of $75 million,
plus Letters of Credit which were outstanding prior to the execution of the
Credit Agreement in the amount of approximately $2 million. Of the total
commitment, $50 million represents a seasonal commitment available from October
to July of each year. The Credit Agreement was originally set to expire on July
31, 2006. However, on December 5, 2005, pursuant to the Company's request as
provided for in the Credit Agreement, the Company and the Bank agreed to extend
the Credit Agreement until July 31, 2007, at which time all outstanding amounts
under the Credit Agreement will be due and payable, subject to the Company's
right to request an additional one-year extension and the Bank's acceptance of
that request.
In general, borrowings under the Credit Agreement bear interest at a rate
calculated according to a Eurodollar rate, plus .55%. The Eurodollar rate is
generally the 30-day, 60-day or 90-day LIBOR rate. The Company is required to
pay an annual fee of 0.125% of the daily-unused portion of the Credit Agreement.
The primary financial covenant requires the Company's funded indebtedness under
the Credit Agreement to not exceed 50% of certain current and long-term assets,
defined in the Credit Agreement and determined as of the last day of each
quarter.
During the quarter ended May 31, 2006, the Company borrowed approximately $45
million, which was fully repaid by May 31, 2006. As of May 31, 2006, there were
zero borrowings outstanding under the Credit Agreement, except for the existing
Letters of Credit discussed above.
14. SUBSEQUENT EVENTS
Effective June 30, 2006, D&PL acquired several licenses from DuPont (NYSE: DD)
subsidiary Pioneer Hi-Bred International, Inc., including its OptimumTM GATTM
herbicide tolerance technology for cotton globally and soybeans in the U.S.,
enabling the Company to enhance its product portfolio. Additionally, the Company
has acquired licenses for other products developed by DuPont's biotechnology
research program and certain enabling technologies for use in cotton, soybeans
and other crops.
The OptimumTM GATTM trait developed by DuPont will provide farmers with expanded
weed control options and is expected to help optimize yield. This herbicide
tolerance technology makes plants tolerant to both glyphosate and ALS
herbicides, including sulfonylureas. Previously, DuPont announced plans to
commercialize OptimumTM GATTM in Pioneer(R) brand corn and soybeans and also
secured significant global outlicense agreements. D&PL and DuPont, through its
subsidiary Pioneer Hi-Bred International, Inc., are partners in a joint venture,
DeltaMax Cotton LLC, which was initially formed to develop and commercialize
glyphosate tolerance technology in cotton. The Company also announced that it
has reached an agreement to license select soybean lines suitable for planting
in the Southern soybean market through the involvement of GreenLeaf Genetics
LLC.
D&PL paid DuPont $20.5 million pursuant to the transaction and expects to
account for this transaction in the fourth quarter as an IPR&D write-off.
Technology fee sharing for the OptimumTM GATTM technology for cotton is
essentially consistent with the existing terms in the DeltaMax Collaboration
agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW/OUTLOOK
Our revenues for the third quarter of 2006 represent the highest of any single
quarter in the Company's history. Net income for the quarter is second only to
the second quarter of 2000, the quarter in which we received an $81 million
termination payment from Monsanto related to a failed merger. These record
results are driven by an increase in planted acreage and an increase in market
share in the key markets east of Texas, resulting in an increase in domestic
cottonseed units sold over the prior year. Additionally, our revenues were
positively impacted by higher technology fees per unit and a sales mix change to
more premium-priced, stacked-trait units. Seed treatment revenues were
positively impacted by the introduction of the AVICTA(TM) Complete Pak from
Syngenta and increased sales of Gaucho(TM) from Bayer and other premium seed
treatments. The increase in domestic units sold in the third quarter was
partially driven by a shift in sales from the second quarter, as our customers
finalized their planting decisions on treatment options. However, domestic units
sold in the year-to-date nine month period also exceeded those of the same
period in the prior year, and we anticipate that full year results will show an
overall increase in unit sales over 2005.
On June 30, 2006, the USDA released its planted acreage report, which reflected
15.3 million acres of overall cotton plantings in the U.S., a 7% increase, or
1.1 million acres, over the 2005 crop year. This report indicated an increase
over the USDA's March 31, 2006 Prospective Plantings report which had estimated
the U.S. cotton acres to be 14.6 million. The June 30th report reflected an
increase in the higher value Mid-South and Southeast regions of 580,000 acres
over 2005 and an increase of 245,000 over the March 31, 2006 Prospective
Plantings report. The report indicated that the Southwest region (TX, OK, NM)
increased 500,000 acres over 2005 plantings which represented an increase of
400,000 acres over the March intentions. Western plantings of extra-long staple
Pima cottons are expected to be up over 2005 by 66,000 acres and up 2,000 acres
over the March 2006 report.
Our view of the impact on our business of the 2006 acreage changes compared to
2005 is that along with the increase in acreage in the Mid-South and Southeast
regions of the U.S., D&PL also increased market share three to five percentage
points in those regions. Much of the increase in acreage in the Southwest region
occurred on dryland acreage. These acres were planted with lower cost "brown
bag" seed. Due to the ongoing drought in that area this acreage will likely not
produce harvestable yields.
Internationally, units shipped during the current-year quarter were higher than
for the same period in the prior year due to a shift in shipments from the
second quarter. For the year-to-date period, revenues from our international
segment are down from the same prior-year period due to lower shipments in
certain of our international markets. Sales were down in the following countries
for the following reasons: Australia (due to lower volumes); Brazil (due to a
reduction in planted cotton acreage caused by weak commodity prices and the
strengthening of the Brazilian currency); China (as a result of new product
registration difficulties with Chinese regulatory agencies); Greece (due to a
large carryover inventory of seed from the prior year by our distributor); and
Mexico (due to issues surrounding the revision of laws governing the planting of
transgenic crops in Mexico that delayed our ability to import certain transgenic
varieties).
On May 22, 2006, we announced that we had acquired Syngenta's global cotton seed
assets, comprised of operations and assets in India, Brazil, Europe, and certain
cotton germplasm in the United States. The primary assets acquired consist of
conventional and transgenic germplasm containing Syngenta's VipCot(TM)
insect-resistant cotton genes. We acquired a license to VipCot in 2004 and
expect to commercialize varieties containing these traits in 2008 or 2009,
subject to receiving regulatory approvals. As a result of this transaction, we
incurred a pre-tax charge of $7.0 million, or $0.12 per diluted share, related
to the IPR&D charge and related transaction costs during the third-quarter. For
more information, see the section titled "Acquired In-Process Research and
Development" later in this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
On June 30, 2006, D&PL acquired several licenses from DuPont (NYSE: DD)
subsidiary Pioneer Hi-Bred International, Inc., including its OptimumTM GATTM
herbicide tolerance technology for cotton globally and soybeans in the U.S.,
enabling the Company to enhance its product portfolio. Additionally, the Company
has acquired licenses for other products developed by DuPont's biotechnology
research program and certain enabling technologies for use in cotton, soybeans
and other crops.
The OptimumTM GATTM trait developed by DuPont will provide farmers with expanded
weed control options and is expected to help optimize yield. This herbicide
tolerance technology makes plants tolerant to both glyphosate and ALS
herbicides, including sulfonylureas. Previously, DuPont announced plans to
commercialize OptimumTM GATTM in Pioneer(R) brand corn and soybeans and also
secured significant global outlicense agreements. D&PL and DuPont, through its
subsidiary Pioneer Hi-Bred International, Inc., are partners in a joint venture,
DeltaMax Cotton LLC, which was initially formed to develop and commercialize
glyphosate tolerance technology in cotton. The Company also announced that it
has reached an agreement to license select soybean lines suitable for planting
in the Southern soybean market through the involvement of GreenLeaf Genetics
LLC.
D&PL paid DuPont $20.5 million for the licenses to these technologies from
available cash and expects to account for this transaction in the fourth quarter
as an IPR&D write-off. Technology fee sharing for the OptimumTM GATTM technology
for cotton is essentially consistent with the existing terms in the DeltaMax
Collaboration agreement.
2006 Earnings Guidance
On July 6, 2006, we announced that our earnings guidance that had been
previously announced for the 2006 fiscal year will be impacted by the IPR&D
charge taken during the third quarter of $.12 per diluted share related to the
Syngenta transaction and the anticipated IPR&D charge of $0.34 to $0.36 per
share related to the DuPont/Pioneer transaction, which was effective June 30,
2006, offset partially by lower than previously expected expenses from the
lawsuit against Pharmacia and Monsanto. The previous guidance of $1.15 to $1.25
per diluted share, after expected charges of $0.10 per diluted share related to
our lawsuit against Pharmacia and Monsanto, has been revised to $.70 to $.83 per
diluted share, after charges of $0.46 to $0.48 per diluted share related to
IPR&D charges and $0.06 to $0.08 per diluted share related to our lawsuit
against Pharmacia and Monsanto.
While our core business earnings guidance is unchanged, achieving those results
is still dependent on certain factors being met during the fourth quarter of our
year, primarily the absence of unexpected domestic seed returns or a weather
event that would increase our exposure to claims from crop loss programs for
seed and technology fees.
RESULTS OF OPERATIONS
Due to the seasonal nature of our business, we typically incur losses in our
first and fourth 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 For the Nine Months Ended
-------------------------------------- ------------------------------------
May 31, May 31, May 31, May 31,
2006 2005 2006 2005
------------------ ----------------- ---------------- ----------------
Operating results-
Net sales and licensing fees $ 286,618 $ 203,320 $ 411,422 $ 340,633
Gross profit 101,922 73,573 145,917 127,290
Operating expenses 26,629 15,630 59,184 41,702
Operating income 75,293 57,943 86,733 85,588
Income before income taxes 73,102 57,041 81,518 79,574
Net income applicable to common shares 47,518 36,156 52,422 50,743
The following sets forth selected balance sheet data of D&PL at the following
dates (in thousands):
May 31, August 31, May 31,
2006 2005 2005
------------------ ----------------- -----------------
Balance sheet summary-
Current assets $ 500,664 $ 356,679 $ 404,727
Current liabilities 377,540 263,013 286,266
Working capital 123,124 93,666 118,461
Property, plant and equipment, net 59,778 60,158 61,255
Total assets 584,637 439,184 485,057
Outstanding borrowings 11,642 17,349 22,708
Stockholders' equity 198,248 164,023 182,355
Three months ended May 31, 2006, compared to three months ended May 31, 2005:
For the quarter ended May 31, 2006, we reported net income of $47.7 million,
compared to net income of $36.3 million in the comparable prior-year quarter.
This increase was primarily due to an increase in domestic sales in the current
year quarter versus the prior year, offset by an increase in operating expenses,
which included an IPR&D pre-tax charge of $7.0 million (see discussion in
"Acquired In-Process Research and Development" below).
Net sales and licensing fees increased approximately $83.3 million to $286.6
million and gross profit increased approximately $28.3 million to $101.9
million. Domestic revenues increased over the prior year due to increased cotton
acreage and increased market share in our key markets east of Texas which
resulted in an increase in units sold. In addition, higher technology fees per
unit, a shift in our sales mix to more premium-priced, stacked-trait products,
and treatment revenues, partially offset by an increase in incentive payments
made to our distributor customers, contributed to this increase. Historically,
we have earned a fee on sales of third-party cottonseed treatments, which was
recorded as a component of Net Sales and Licensing Fees. However, beginning in
2006, we are invoicing our customers for those treatments (which is recorded as
revenue), and remitting a portion of that revenue to the manufacturer of the
seed treatments (which is recorded as cost of goods sold). The gross profit
margin percentage that we earn on those seed treatments is lower than what we
have traditionally earned on cottonseed sales, which has slightly depressed our
overall gross margin stated as a percentage of revenues. International revenues
were slightly higher than the prior-year quarter due to a shift of sales into
the third quarter in Mexico and Spain, and higher unit sales in Turkey.
Operating expenses increased approximately $11.0 million to $26.6 million in the
third quarter of 2006. This increase primarily related to the IPR&D charge
discussed above, increased spending on research and development activities, and
higher General and Administrative expenses. General and Administrative expenses
were higher due to an approximate $1.7 million increase in professional fees
primarily related to various arbitration proceedings with Monsanto (other than
the Pharmacia/Monsanto suit), and an increase of approximately $800,000 related
to compensation costs (e.g. equity-based compensation, pension, etc.).
We reported net other expense of approximately $1.3 million for the quarter
ended May 31, 2006, compared to $0.9 million for the same period in the prior
year. The increase is attributable to legal fees related to the
Pharmacia/Monsanto litigation. In the three months ended May 31, 2006, we
incurred $1.0 million, or $0.02 per diluted share, related to the
Pharmacia/Monsanto litigation expenses, compared to $0.7 million, or $0.01 per
diluted share, in the three months ended May 31, 2005.
Nine months ended May 31, 2006, compared to nine months ended May 31, 2005:
For the nine-month period ended May 31, 2006, we reported net income of $52.9
million, compared to net income of $51.1 million reported in the comparable
prior year period. This increase was primarily due to an increase in domestic
revenues, offset by a reduction in international net sales and licensing fees,
and an increase in operating expenses, including the previously referenced $7.0
million IPR&D charge related to the Syngenta transaction.
Net sales and licensing fees increased approximately $70.8 million to $411.4
million and gross profit increased approximately $18.6 million to $145.9
million. As the majority of our domestic sales occur in the third quarter, the
reasons for the increase in domestic revenues are the same as discussed in the
three-month discussion above. International revenues were lower primarily in
South America, Australia, and Mexico. Sales in South America were lower
primarily due to a reduction in the cotton acreage in Brazil and the decrease in
sales in Australia relates to lower volumes. Sales to Mexico were lower due to
issues surrounding the revision of laws governing the planting of transgenic
crops in Mexico that delayed our ability to import certain transgenic varieties.
Operating expenses increased approximately $17.5 million to $59.2 million in the
nine months ended May 31, 2006. This increase is primarily related to the $7.0
million IPR&D pre-tax charge, increased spending on research and development
activities, and higher General and Administrative expenses. General and
Administrative expenses were impacted by an approximate $4.5 million increase in
professional services fees related to arbitration (other than the
Pharmacia/Monsanto suit), and an increase of approximately $1.8 million related
to compensation costs (e.g., equity-based compensation, pension, etc.).
We reported net other expense of approximately $3.3 million for the nine-month
period ended May 31, 2006, compared to $3.3 million for the same period in the
prior year. The amount reported relates to lower legal fees related to the
Pharmacia/Monsanto litigation, offset by a decrease in other income due to a
gain that was recognized from the sale of property in the prior-year period. In
the nine months ended May 31, 2006, we incurred $2.9 million, or $.05 per
diluted share, related to Pharmacia/Monsanto litigation expenses, compared to
$3.8 million, or $0.06 per diluted share, in the nine months ended May 31, 2005.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently utilize off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
As of May 31, 2006, we owed approximately $2.3 million for a portion of our raw
materials that had been received from the 2005 production season. This amount
represents the amount due on seed production delivered that had not yet been
paid. It does not include other amounts that may become due from contingencies
contained in seed production contracts. The amount owed of $2.3 million is
included in Current Liabilities in our Consolidated Balance Sheet at May 31,
2006.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to adopt accounting
policies and make significant judgments and estimates to develop amounts
reflected and disclosed in the financial statements. In many cases, there are
alternative policies or estimation techniques that could be used. We maintain a
thorough process to review the application of our accounting policies and to
evaluate the appropriateness of the many estimates that are required to prepare
our financial statements. However, even under optimal circumstances, estimates
routinely require adjustment based on changing circumstances and the receipt of
new or better information.
Information regarding our "Critical Accounting Policies and Estimates" can be
found in our Annual Report to Stockholders on Form 10-K for the year ended
August 31, 2005. The four critical accounting policies that we believe are
either the most judgmental, or involve the selection or application of
alternative accounting policies, and are material to our financial statements
are those relating to revenue recognition, including accounting for various
incentive programs (crop loss and replant programs), provision for damaged,
obsolete and excess inventory, deferred income taxes and contingent liabilities.
Management has discussed the development and selection of these critical
accounting policies and estimates with the Audit Committee of our Board of
Directors and with our independent registered public accounting firm.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
The previously discussed acquisition of Syngenta's global cotton seed assets
resulted in capitalizing and immediately expensing $7.0 million related to
acquired in-process research and development that has no alternative future use.
The primary assets acquired consist of conventional and transgenic germplasm
containing Syngenta's VipCot insect-resistant cotton genes. Certain regulatory
approvals are required before any of the germplasm acquired can be
commercialized. As this transaction occurred at the end of the quarter, we are
still finalizing estimates of costs to complete these projects and will provide
those estimates in our Annual Report on Form 10-K for the year ended August 31,
2006. There is no assurance that these technologies will result in commercially
viable products or that regulatory approval will be obtained for the products.
LIQUIDITY AND CAPITAL RESOURCES
In the United States, we purchase seed from contract growers in our first and
second quarters. Seed conditioning, treating and packaging commence late in the
first quarter and continue through the third quarter. Seasonal cash needs
normally begin to increase in the first quarter and cash needs peak in the third
quarter. Cash is generated and loan repayments, if applicable, normally begin in
the middle of the third quarter and are typically completed by the first quarter
of the following year. In some cases, we offer customers financial incentives to
make early payments. To the extent we attract early payments from customers,
bank borrowings, if any, are reduced.
In the U.S., we record revenue and accounts receivable for technology licensing
fees on transgenic seed sales upon shipment, usually in our second and third
quarters. Receivables from seed sales generally become due in May and June. The
licensing fees are due in September, at which time we receive payment. We then
pay Monsanto its royalty for the Bollgard and Roundup Ready licensing fees,
which is recorded as a component of cost of sales. As a result of the timing of
these events, licensing fees receivable and royalties payable peak at our year
end, August 31.
The seasonal nature of our business significantly impacts cash flow and working
capital requirements. Historically, we have maintained credit facilities, and
used cash generated from operations and other available cash to meet working
capital needs. We continue to evaluate potential uses of our cash for purposes
other than for working capital needs. Potential uses of our cash in the future
may be the acquisition of, or funding of, alternative technologies (such as, or
in addition to, DeltaMax and Syngenta) that could be used to enhance our product
portfolio and ultimately our long-term earnings potential and/or an investment
in new markets outside the U.S. Another potential use is the repurchase of our
shares pursuant to our recently announced $50 million share repurchase program.
We are currently considering other potential uses of our cash, including
increasing the dividend rate or repurchasing additional shares depending on
market considerations and other factors. As a part of this analysis, we continue
to evaluate the Company's liquidity needs and its capital structure.
On April 15, 2005, we entered into an unsecured $75 million credit agreement
(the "Credit Agreement") with Bank of America, N.A. (the "Bank"). The Credit
Agreement provides for unsecured revolving loans up to a maximum aggregate
amount outstanding of $75 million, plus Letters of Credit which were outstanding
prior to the execution of the Credit Agreement in the amount of approximately $2
million. Of the total commitment, $50 million represents a seasonal commitment
available from October to July of each year. The Credit Agreement was originally
set to expire on July 31, 2006. However, on December 5, 2005, pursuant to the
Company's request as provided for in the Credit Agreement, the Company and the
Bank extended the Credit Agreement to July 31, 2007, at which time all
outstanding amounts under the Credit Agreement will be due and payable, subject
to the Company's right to request an additional one-year extension and the
Bank's acceptance of that request.
In general, borrowings under the Credit Agreement bear interest at a rate
calculated according to a Eurodollar rate, plus 0.55%. The Eurodollar rate is
generally the 30-day, 60-day or 90-day LIBOR rate. We are also required to pay
unused fees of 0.125% annually calculated on the daily-unused portion of the
Credit Agreement. The primary financial covenant requires the Company's funded
indebtedness under the Credit Agreement to not exceed 50% of certain current and
long-term assets, defined in the Credit Agreement and determined as of the last
day of each quarter.
During the quarter ended May 31, 2006, the Company borrowed approximately $45
million, which was fully repaid by May 31, 2006. As of May 31, 2006, there were
no amounts outstanding under the Credit Agreement, other than the existing
Letters of Credit as discussed above. All borrowings under the Credit Agreement
have been repaid as of May 31, 2006.
Capital expenditures were $6.2 million and $5.1 million in the nine months ended
May 31, 2006 and 2005, respectively. We anticipate that capital expenditures
will approximate $7.0 million to $10.0 million in 2006.
For the nine months ended May 31, 2006, aggregate dividends of $16.6 million
have been paid on common and preferred shares. The Board of Directors
anticipates that quarterly dividends of $0.15 per share will continue to be paid
in the future; however, the Board of Directors reviews this policy quarterly.
Based on a quarterly dividend of $0.15 per share in 2006, aggregate preferred
and common stock dividends should approximate $22.0 million in 2006.
Cash Used for Share Repurchases
From September 1, 2005 through June 30, 2006, we repurchased 808,494 shares at
an aggregate purchase price of approximately $19.7 million under the June 30,
2005, share repurchase program. We expect to repurchase shares under this plan
over time and through a variety of methods, which generally will include open
market purchases. The timing and amount of repurchases under this program will
depend on market conditions, legal restrictions and other factors.
The following table presents the number of shares purchased monthly for the
three-month period ended May 31, 2006:
Approximate Dollar
Total Total Number of Shares Value of Shares that
Number of Average Purchased as Part of May Yet Be Purchased
Shares Price Paid Publicly Announced Plan Under the June 2005
Period Purchased per Share Plan
----------------------------------------- ------------ ------------ -------------------------- -----------------------
March
(March 1, 2006 to March 31, 2006) 8,400 $ 27.20 8,400 $ 31,882,020
April
(April 1, 2006 to April 30, 2006) 5,000 $ 29.02 5,000 $ 31,736,920
May
(May 1, 2006 to May 31, 2006) 67,194 $ 27.93 67,194 $ 29,860,192
------------ --------------------------
Total 80,594 80,594 $ 29,860,192
============ ==========================
Cash provided from operations, cash on hand, early payments from customers and
borrowings under the credit facility should be sufficient to meet our 2006
working capital needs.
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, and statements of beneficial ownership) is available free of charge at our
website at www.deltaandpine.com under Media & News, as soon as reasonably
practicable after we electronically file such material with or furnish such
material to the Securities and Exchange Commission.
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 15 to our consolidated financial statements contained in our Annual
Report on Form 10-K for the year ended August 31, 2005. Also see Note 9 of the
Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on
Form 10-Q for further details about our exposure to market risk.
The fair value of derivative commodity instruments outstanding as of May 31,
2006, was $57,000. A 10% adverse change in the underlying commodity prices upon
which these contracts are based would result in a $374,000 loss in future
earnings (not including the gain on the underlying commodities).
Our earnings are also affected by fluctuations in the value of the U.S. dollar
compared to foreign currencies as a result of transactions in foreign markets.
We conduct non-U.S. operations through subsidiaries and joint ventures in,
primarily, Argentina, Australia, Brazil, China, South Africa and Turkey. At May
31, 2006, the result of a uniform 10% change in the value of the dollar relative
to the currencies in which our transactions are denominated would not cause a
material impact on net earnings.
For the three months ended May 31, 2006, a 10% adverse change in the interest
rate that we earned on our cash that we invested would not have resulted in a
material change to our net interest income or cash flow.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
D&PL's chief executive officer and chief financial officer have evaluated the
effectiveness of the design and operation of D&PL's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of May 31, 2006. 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 in order to allow
timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
There have not been any changes in D&PL's internal control over financial
reporting or in other factors that have materially affected, or are reasonably
likely to materially affect, D&PL's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A complete discussion of all known pending litigation in which D&PL is named as
a defendant and a description of other legal matters can be found in Part I,
Item 3, of D&PL's Annual Report on Form 10-K for the year ended August 31, 2005.
The following discussion only relates to changes in the status of items reported
in that Annual Report on Form 10-K, or new items that have come to the Company's
attention since that time.
Regarding the interlocutory appeal before the Mississippi Supreme Court in the
March 14, 2002, Holmes County, Mississippi lawsuit, oral arguments were
presented to the Mississippi Supreme Court on February 16, 2006. On April 20,
2006, the Supreme Court denied D&PL's Interlocutory Appeal and returned these
cases to the trial court for further proceedings. It is anticipated that the
trial court will sever the individual claims of the involved growers in that
litigation.
Regarding the December 2002 suit filed by D&PL against Nationwide Agribusiness
and other insurance companies in the Circuit Court of Holmes County,
Mississippi, Motions for Summary Judgment filed separately by Nationwide and
D&PL were orally argued on March 15, 2006 and March 20, 2006. On March 21, 2006,
the Court entered a minute docket entry taking the case under advisement. On
March 31, 2006, the District Judge entered an Order Denying D&PL's Summary
Judgment Motion and Granting Nationwide's Summary Judgment Motion. On April 26,
2006, D&PL filed a Notice of Appeal of the District Court's decision to the
United States District Court of Appeals for the 5th Circuit.
On February 17, 2006, D&PL submitted an issue for resolution under the dispute
resolution process under the 1996 Option Agreement and the 2002 Bollgard Gene
License. This dispute involves whether Monsanto's implementation of a farmer
licensing system for the Bollgard Gene technology in Brazil violates D&PL's and
its local affiliate's rights to an exclusive license to develop, produce and
sell Bollgard planting seed in Brazil. In response to D&PL's submission of this
dispute to the alternative dispute resolution process, on February 23, 2006,
Monsanto filed a suit for declaratory judgment in the Circuit Court of St. Louis
County, Missouri, for the court to determine the issues in dispute. D&PL
believes that this suit is barred by the binding alternative dispute resolution
provisions in the subject contracts and that the issue of submission to
arbitration has been resolved by the below described decision of the Delaware
Court.
On March 1, 2006, D&PL filed a suit against Monsanto in the Chancery Court of
New Castle County, Delaware, seeking to enjoin Monsanto's implementation of the
new farmer licensing system pending the resolution of the issues submitted to
the Executive Panel. D&PL's motion for a preliminary injunction was denied;
however, the Delaware Court granted D&PL's motion to compel arbitration. On
March 27, 2006, D&PL submitted to arbitration before the American Arbitration
Association ("AAA") the dispute on whether Monsanto's implementation of a farmer
licensing system is in violation of D&PL's and its affiliate's rights to an
exclusive license to develop, produce and sell Bollgard planting seed in Brazil.
As part of this arbitration, D&PL is seeking to enjoin Monsanto's implementation
of its farmer licensing system and for damages incurred by D&PL and its
affiliate. The Arbitration Panel has scheduled a hearing on D&PL's request for a
preliminary injunction in July 2006 and a final hearing in November 2006. D&PL
is committed to participating in good faith resolution of this dispute through
arbitration. MDM Sementes de Algodao Limitada, D&PL's affiliate in Brazil is
proceeding with a planned launch of sales of cotton seed containing Bollgard
technology in Brazil in the 2006 sales season.
On March 31, 2005 and May 4, 2006, D&PL submitted disputes involving D&PL's
right to exclusive licenses to Bollgard Technology in two Ex-U.S. countries
under the 1996 Option Agreement between Monsanto and D&PL for resolution by an
Executive Panel.
On February 20, 2006, D&PL submitted two additional issues for dispute
resolution before an Executive Panel; one dispute under the most favored license
provisions of the U.S. Bollgard License and the other under confidentiality
provisions of the U.S. Bollgard and Roundup Ready Licenses. These issues have
not been resolved through the Executive Panel.
On June 16, 2006 D&PL submitted to arbitration before the AAA the issues
involving D&PL's rights to exclusive rights to Bollgard technology in the two
Ex-U.S. countries and D&PL's rights to more favorable license terms under its
U.S. Bollgard and Bollgard II Licenses.
On February 28, 2006, D&PL filed suit in the Circuit Court of Dunklin County,
Missouri, seeking to recover Soybean Seed Services Fees in the amount of
approximately $2,200,000 which Monsanto Company has wrongly refused to pay D&PL
with respect to soybean seed containing Monsanto's Roundup Ready technology sold
by D&PL during the 2005 planting season. The suit also seeks a declaratory
judgment that D&PL's payments of Royalties under its Roundup Ready Soybean
License have been correctly calculated and paid during the years 2002-2005. This
case is in pre-trial proceedings.
Item 1A. Risk Factors
Various statements included herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on current expectations and are indicated
by words or phrases such as "anticipate," "estimate," "expect," "project,"
"believe," "is or remains optimistic," "currently envisions" and similar words
or phrases and involve known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Forward-looking statements include
statements relating to such matters as anticipated financial performance
(including when earnings estimates are discussed), existing products, technical
developments, new products, new technologies, research and development
activities, and similar matters. These forward-looking statements are based
largely on our expectations and are subject to a number of risks and
uncertainties, many of which are beyond our control. Actual results could differ
materially from these forward-looking statements as a result of, among others,
changes in the competitive marketplace, including the introduction of new
products or pricing changes by our competitors, changes in the economy and other
similar events. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, we cannot assure
you that the forward-looking information contained herein will in fact
transpire. The risks and uncertainties that may affect the operations,
performance, development and results of our business include those noted
elsewhere herein and the following:
Demand for and supply of planting seed
Demand for our seed will be affected by government programs and policies
and by weather in all countries where we sell products and operate. Demand
for seed is also influenced by commodity prices, the cost of other crop
inputs, and the demand for a crop's end-uses such as textiles, animal feed,
cottonseed oil, food and raw materials for industrial use. Weather impacts
crop yields, commodity prices and the planting decisions that farmers make
regarding both original planting commitments and, when necessary,
replanting levels. These factors all also influence the cost and
availability of seed for subsequent seasons.
Competition
The planting seed market is highly competitive, and our products face
competition from a number of seed companies, diversified crop protection
product companies, agricultural biotechnology companies, governmental
agencies and academic and scientific institutions. In addition, several of
our distributors/customers have also entered the cotton planting seed
business. These competitors will launch in 2006 varieties containing the
Bollgard II and Roundup Ready Flex technologies at the same time we expect
to launch those technologies in our varieties. A number of crop protection
product and biotechnology companies have seed production and/or
distribution capabilities to ensure market access for new seed products and
new technologies that may compete with the Bollgard, Bollgard II and
Roundup Ready gene technologies of Monsanto, our principal licensor of such
technology. Our seed products and technologies contained therein may
encounter substantial competition from technological advances by others or
products from new market entrants. Many of our competitors are, or are
affiliated with, large diversified companies that have substantially
greater resources than we have.
Litigation and other legal matters
We currently are engaged in a dispute resolution and arbitration process
with Monsanto, the principal licensor of our cotton technology and
competitor of ours in the cotton planting seed business. In the
arbitration, Monsanto is seeking a determination by the arbitrators of its
right to terminate certain agreements between our companies, including the
Bollgard and Roundup Ready licenses. In addition, we are currently engaged
in litigation with Monsanto concerning the failed merger of the companies.
In addition, we have brought two other disputes with Monsanto before an
arbitration panel. The result of this litigation/arbitration (and the
process of litigating) may materially affect the results of our business.
(See Part I, Item 3, of D&PL's Annual Report on Form 10-K for the year
ended August 31, 2005.)
New technologies
There is no assurance that new technologies such as the DeltaMax, DuPont
and Syngenta technologies will result in commercially viable products or
that such technologies will be developed in the time frame or for the
amounts estimated to complete development. Also, there is no assurance that
regulatory approval will be obtained for the products.
Governmental policies
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign governments
and shipping disruptions. Particular policies which may affect our domestic
and international operations include the use of and the acceptance of
products that were produced from plants that have been genetically
modified, the testing, quarantine and other restrictions relating to the
import and export of plants and seed products, and the availability (or
lack thereof) of proprietary protection for plant products. The absence or
lack of enforcement of intellectual property laws may lead to counterfeit
and farmer-saved seed which negatively impacts our sales. In addition,
United States government policies, particularly those affecting foreign
trade and investment, may impact our international operations.
Regulatory matters
The publicity related to genetically modified organisms ("GMOs") or
products made from plants that contain GMOs may have an effect on our sales
in the future. In 2005, approximately 95% of our cottonseed that was sold
in the United States contained either or both of Monsanto's Bollgard,
Bollgard II and Roundup Ready gene technologies, and 96% of our soybean
seed sales contained the Roundup Ready gene technology. Although many
farmers have rapidly adopted these technologies, the concern of some
customers and governmental entities over finished products that contain
GMOs could impact demand for crops (and ultimately seed) raised from seed
containing such traits. In addition, regulatory approvals for Monsanto's
Bollgard and Bollgard II technologies expire in 2006. On July 7, 2006,
Monsanto announced that the United States Environment Protection Agency had
extended the registration of the Bollgard technology through the 2009
growing season. An announcement regarding the registration of the Bollgard
II technology is expected later in 2006. However, there is no assurance
that such registration will be extended, or what the terms and conditions
of any re-registration will be. Monsanto is responsible for obtaining and
maintaining regulatory approvals for the technologies we license from them.
International operating risks
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, actions taken by the U.S. government, including that
taken by the U.S. military, 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.
Subsidies and trade agreements
Our farmer customers in many markets, including the U.S., benefit from
government subsidy programs. The Farm Security and Rural Investment Act of
2002 expires on January 1, 2007 (although the bill includes the 2007 cotton
planting season), and future U.S. farm subsidy programs are uncertain.
Various other countries, including Brazil, have challenged, and may
continue to challenge, the appropriateness of U.S. farm subsidies through
the World Trade Organization ("WTO") or other forums. In particular, the
WTO has ruled in Brazil's favor in its challenge that certain U.S.
subsidies violate the provisions of the WTO. It is not clear if, when, or
to what extent, U.S. subsidies will be modified as a result of this ruling.
However, in the event changes to subsidies are made, they may negatively
impact U.S. farmers which could result in a decline in planted cotton
acreage. Also, in WTO discussions in Hong Kong in late December 2005, U.S.
negotiators committed to reduce cotton export subsidies (the "Step 2"
program) in 2007, and to reduce overall agricultural export subsidies by
2013. U.S. farm programs, including government subsidies, and WTO rulings
impacting such programs may materially affect the results of our business.
In addition, the U.S. Congress, in an attempt to reduce the U.S.
government's budget deficit, may also revise the farm subsidy program
and/or its agricultural policy.
Other
Overall profitability will depend on the factors noted above, as well as
worldwide commodity prices, our ability to successfully open new
international markets, the technology partners' ability to obtain timely
government approval (and maintain such approval) for existing and for
additional biotechnology products on which they and D&PL are working, the
terms of such government approvals, our technology partners' ability to
successfully defend challenges to proprietary technologies licensed to us
and our ability to produce sufficient commercial quantities of high quality
planting seed of these products. Any delay in or inability to successfully
complete these projects may affect future profitability. In addition,
earnings forecasts do not consider the impact of potential transactions,
their related accounting and other factors, that may be under consideration
by the Company, but have not yet been completed or their effect determined
at the date of a particular filing.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The disclosure required under this Part II, Item 2 of this Quarterly Report on
Form 10-Q is contained in Part I, Item 2 hereof under the heading "Cash Used for
Share Repurchases" and is incorporated herein by reference.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits.
Exhibits.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under
the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under
the Securities Exchange Act of 1934.
32.00 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Rule 13a-14(b) Under the Securities Exchange Act of 1934 and
Section 1350 of Chapter 63 of Title 18 of the United States Code.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTA AND PINE LAND COMPANY
Date: July 10, 2006 /s/ W. Thomas Jagodinski
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W. Thomas Jagodinski
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: July 10, 2006 /s/ Kenneth M. Avery
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Kenneth M. Avery
Vice President - Finance, Treasurer and
Assistant Secretary
(Principal Financial and Accounting Officer)