UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 2007
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 (x) Accelerated Filer ( ) 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)
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, 36,996,130 shares outstanding as of March 31,
2007.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - February 28, 2007,
August 31, 2006, and February 28, 2006 3
Consolidated Statements of Operations - Three Months
Ended February 28, 2007 and February 28, 2006 4
Consolidated Statements of Operations - Six Months
Ended February 28, 2007 and February 28, 2006 5
Consolidated Statements of Cash Flows - Six Months
Ended February 28, 2007 and February 28, 2006 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 22
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 26
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures 27
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
February 28, August 31, February 28,
2007 2006 2006
------------------ ----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,453 $ 69,691 $ 13,420
Marketable securities - 27,600 -
Receivables, net 62,406 270,354 138,193
Income taxes receivable 6,078 - -
Inventories 73,183 31,600 69,389
Prepaid expenses 1,126 2,173 1,657
Deferred income taxes 9,495 7,849 6,047
------------------ ----------------- -----------------
Total current assets 173,741 409,267 228,706
PROPERTY, PLANT AND EQUIPMENT, NET 60,585 61,066 61,507
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED 4,183 4,183 4,183
INTANGIBLES, NET 8,368 8,276 8,459
DEFERRED INCOME TAXES 21,527 22,383 11,238
OTHER ASSETS 1,029 1,079 1,214
------------------ ----------------- -----------------
TOTAL ASSETS $ 269,433 $ 506,254 $ 315,307
================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Notes payable and current maturities of long-term debt $ 3,256 $ 6,428 $ 8,448
Accounts payable 20,244 28,866 21,776
Accrued expenses 71,557 275,643 120,814
Income taxes payable - 14,179 8,872
------------------ ----------------- -----------------
Total current liabilities 95,057 325,116 159,910
------------------ ----------------- -----------------
LONG-TERM DEBT - 1,455 3,471
------------------ ----------------- -----------------
MINORITY INTEREST IN SUBSIDIARIES 6,622 5,027 5,577
------------------ ----------------- -----------------
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 shares authorized; no shares issued or outstanding; - - -
Series M Convertible Non-Voting Preferred, par value $0.l0 per share;
1,066,667 shares authorized, issued and outstanding 107 107 107
Common stock, par value $0.10 per share; 100,000,000 shares authorized;
42,615,436, 42,053,167 and 40,965,695 shares issued;
36,977,072, 36,415,567 and 35,495,589 shares outstanding 4,262 4,205 4,097
Capital in excess of par value 129,166 112,099 83,989
Retained earnings 172,647 197,750 193,933
Accumulated other comprehensive loss (1,381) (2,489) (3,440)
Treasury stock, at cost; 5,638,364, 5,637,600 and 5,470,106 shares (137,047) (137,016) (132,337)
------------------ ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 167,754 174,656 146,349
------------------ ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 269,433 $ 506,254 $ 315,307
================== ================= =================
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)
February 28, February 28,
2007 2006
----------------- ------------------
NET SALES AND LICENSING FEES $ 45,009 $ 114,977
COST OF SALES 31,327 74,145
----------------- ------------------
GROSS PROFIT 13,682 40,832
----------------- ------------------
OPERATING EXPENSES:
Research and development 6,206 6,145
Selling 3,426 3,910
General and administrative 5,724 7,225
----------------- ------------------
Total operating expenses 15,356 17,280
----------------- ------------------
OPERATING (LOSS) INCOME (1,674) 23,552
INTEREST INCOME, NET 462 177
OTHER EXPENSE, NET (2,399) (730)
EQUITY IN NET LOSS OF AFFILIATE (417) (780)
MINORITY INTEREST IN (EARNINGS) LOSS OF SUBSIDIARIES (390) 131
----------------- ------------------
(LOSS) INCOME BEFORE INCOME TAXES (4,418) 22,350
INCOME TAX BENEFIT (EXPENSE) 2,348 (7,680)
----------------- ------------------
NET (LOSS) INCOME (2,070) 14,670
DIVIDENDS ON PREFERRED STOCK (182) (160)
----------------- ------------------
NET (LOSS) INCOME APPLICABLE TO COMMON SHARES $ (2,252) $ 14,510
================= ==================
BASIC (LOSS) EARNINGS PER SHARE $ (0.06) $ 0.41
================= ==================
NUMBER OF SHARES USED IN BASIC (LOSS) EARNINGS PER SHARE
CALCULATIONS 36,604 35,688
================= ==================
DILUTED (LOSS) EARNINGS PER SHARE
$ (0.06) $ 0.40
================= ==================
NUMBER OF SHARES USED IN DILUTED (LOSS) EARNINGS PER SHARE
CALCULATIONS 36,604 36,914
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.17 $ 0.15
================= ==================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
February 28, February 28,
2007 2006
----------------- ------------------
NET SALES AND LICENSING FEES $ 57,893 $ 124,803
COST OF SALES 40,062 80,809
----------------- ------------------
GROSS PROFIT 17,831 43,994
----------------- ------------------
OPERATING EXPENSES:
Research and development 12,364 11,786
Selling 7,191 7,316
General and administrative 11,778 13,452
----------------- ------------------
Total operating expenses 31,333 32,554
----------------- ------------------
OPERATING (LOSS) INCOME (13,502) 11,440
INTEREST INCOME, NET 2,032 1,205
OTHER EXPENSE, NET (6,818) (1,933)
EQUITY IN NET LOSS OF AFFILIATE (958) (1,594)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (2,062) (701)
----------------- ------------------
(LOSS) INCOME BEFORE INCOME TAXES (21,308) 8,417
INCOME TAX BENEFIT (EXPENSE) 9,053 (3,192)
----------------- ------------------
NET (LOSS) INCOME (12,255) 5,225
DIVIDENDS ON PREFERRED STOCK (363) (320)
----------------- ------------------
NET (LOSS) INCOME APPLICABLE TO COMMON SHARES $ (12,618) $ 4,905
================= ==================
BASIC (LOSS) EARNINGS PER SHARE $ (0.35) $ 0.14
================= ==================
NUMBER OF SHARES USED IN BASIC (LOSS) EARNINGS PER SHARE
CALCULATIONS 36,527 35,882
================= ==================
DILUTED (LOSS) EARNINGS PER SHARE $ (0.35) $ 0.14
================= ==================
NUMBER OF SHARES USED IN DILUTED (LOSS) EARNINGS PER SHARE
CALCULATIONS 36,527 37,145
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.34 $ 0.30
================= ==================
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 SIX MONTHS ENDED
(in thousands)
(Unaudited)
February 28, February 28,
2007 2006
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (12,255) $ 5,225
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 4,832 4,358
(Gain) loss on sale of assets (87) 59
Excess tax benefits from stock-based compensation arrangements (3,682) -
Equity in net loss of affiliate 958 1,594
Foreign exchange loss 9 33
Accretion of debt discount 72 227
Minority interest in earnings of subsidiaries 2,062 701
Stock-based compensation expense 1,271 1,641
Change in deferred income taxes (782) (229)
Changes in assets and liabilities:
Receivables 209,454 90,695
Inventories (42,560) (42,340)
Prepaid expenses 1,048 226
Intangibles and other assets (298) (52)
Accounts payable (8,801) 3,374
Accrued expenses (203,945) (101,331)
Income taxes receivable / payable (20,241) (4,070)
------------------ -----------------
Net cash used in operating activities (72,945) (39,889)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities 27,600 -
Purchases of property and equipment (3,721) (5,336)
Sales of investments and property 162 23
Acquisition of business - (2,620)
Investment in affiliate (1,140) (1,525)
------------------ -----------------
Net cash provided by (used in) investing activities 22,901 (9,458)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (4,707) (5,925)
Proceeds from short-term debt - 266
Dividends paid (12,849) (11,034)
Payments to acquire treasury stock - (15,083)
Minority interest in dividends paid by subsidiaries (467) -
Cash settlement of employee stock awards (31) -
Proceeds from exercise of stock options 15,854 712
Excess tax benefits from stock-based compensation arrangements 3,682 -
------------------ -----------------
Net cash provided by (used) in financing activities 1,482 (31,064)
------------------ -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES 324 756
NET DECREASE IN CASH AND CASH EQUIVALENTS (48,238) (79,655)
CASH AND CASH EQUIVALENTS, August 31 69,691 93,075
------------------ -----------------
CASH AND CASH EQUIVALENTS, February 28 $ 21,453 $ 13,420
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the six months for:
Income taxes $ 8,272 $ 6,859
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 six month periods ended February 28, 2007 and 2006 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, 2006.
Merger with Monsanto Company
On August 14, 2006, D&PL entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Monsanto and its wholly-owned subsidiary, Monsanto Sub,
Inc., pursuant to which Monsanto Sub, Inc. will be merged with and into D&PL and
D&PL will become a wholly-owned subsidiary of Monsanto.
Under the terms of the Merger Agreement, upon consummation of the merger, each
outstanding share of D&PL common and preferred stock (except shares held by D&PL
or by Monsanto and its subsidiaries) will be converted into a right to receive
$42.00 per share in cash, without interest, provided that stockholders who so
elect have the right to seek payment of the appraised value of their shares
under Section 262 of the Delaware General Corporation Law.
The Merger Agreement was approved by D&PL's stockholders on December 21, 2006 at
the special shareholders meeting.
The closing of the merger is subject to the expiration of the waiting periods
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "H-S-R
Act"). Appropriate filings and submissions have been made under the H-S-R Act
and the transaction is under review by the federal and state authorities,
including the Antitrust Division of the United States Department of Justice.
Pursuant to the Merger Agreement, D&PL agreed that, until the merger is
consummated or the Merger Agreement is earlier terminated (except as otherwise
expressly permitted by the terms of the Merger Agreement), it will, and it will
cause its subsidiaries to, (i) carry on its business in the ordinary course,
(ii) use reasonable best efforts to preserve intact its current business
organization and goodwill, (iii) keep available the services of its current
officers and employees, and (iv) preserve its relationships with suppliers,
distributors, customers and others.
The Company incurred approximately $2.4 million and $6.8 million of expenses
related to the merger in the three and six months ended February 28, 2007,
including legal and advisory fees and other incremental costs directly
associated with the merger. These expenses are reported as a component of Other
Expense, Net in the Consolidated Statements of Operations.
Immaterial Correction of Prior Period Financial Statements
Subsequent to the issuance of the Company's 2007 first quarter consolidated
financial statements, the Company recorded a correction to such
previously-issued financial statements relating to a misstatement of a marketing
accrual. The correction of approximately $1.3 million ($800,000 after taxes) was
not material to the Company's consolidated financial position or results of
operations for the previous quarter ended November 30, 2006. This does not
impact the year-to-date reported results.
Recently Issued Financial Accounting Standards
SFAS 158 - Employers' Accounting for Defined Benefit Pension and Other
Postretirement Benefits, an Amendment of FASB Statements 87, 88, 106 and 132(R).
This statement, issued by the FASB in September 2006, requires an employer with
a defined benefit pension plan to (1) recognize the funded status of the benefit
plan in its statement of financial position, (2) recognize as a component of
other comprehensive income, net of tax, the gains or losses and prior service
costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost pursuant to FASB Statement No. 87 or
FASB Statement No. 106, (3) measure defined benefit plan assets and obligations
as of the date of the employer's fiscal year-end statement of financial
position, and (4) disclose in the notes to the financial statements additional
information about certain effects on net periodic benefit cost for the next
fiscal year that arise from delayed recognition of the gains or losses, prior
service costs or credits, and transition asset or obligation. Adoption of SFAS
No. 158 is required by the end of the fiscal year ending after December 15,
2006. Therefore, the Company will adopt this standard by August 31, 2007. The
Company is presently evaluating the impact that adopting SFAS 158 will have on
its financial position and results of operations.
FIN 48 - Accounting for Uncertainty in Income Taxes. In July 2006, FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"),
was issued. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes". FIN 48 requires that the tax
effects of a position be recognized only if it is "more-likely-than-not" to be
sustained based solely on the technical merits as of the reporting date. FIN 48
also requires additional disclosures of unrecognized tax benefits, including a
reconciliation of the beginning and ending balances. FIN 48 is effective for
fiscal years beginning after December 15, 2006. Therefore, the Company expects
to implement FIN 48 beginning on September 1, 2007. The Company is presently
evaluating the impact that adopting FIN 48 will have on its financial position
and results of operations.
SAB 108 - Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. In September 2006, staff
from the Securities and Exchange Commission issued Staff Accounting Bulletin
108, which addresses how the effects of prior-year uncorrected misstatements
should be considered when quantifying misstatements in current-year financial
statements. SAB 108 requires companies to quantify misstatements using both the
balance sheet and income statement approaches and to evaluate whether either
approach results in quantifying an error that is material in light of relevant
quantitative and qualitative factors. SAB 108 is effective for fiscal years
ending on or after November 15, 2006. The Company is evaluating the impact that
adoption of this standard will have on its financial position and results of
operations.
2. COMPREHENSIVE (LOSS) INCOME
Total comprehensive (loss) income for the three and six months ended February
28, 2007 and 2006, was (in thousands):
Three Months Ended Six Months Ended
--------------------------------- --------------------------------------
February 28, February 28, February 28, February 28,
2007 2006 2007 2006
--------------- ---------------- ----------------- -------------------
Net (loss) income $ (2,070) $ 14,670 $ (12,255) $ 5,225
Other comprehensive income:
Foreign currency translation gains 531 500 726 949
Net realized and unrealized (losses)
gains on hedging instruments (89) 120 382 (84)
Income tax expense related to other
comprehensive income (235) (215) (471) (328)
--------------- ---------------- ----------------- -------------------
Other comprehensive income, net of tax 207 405 637 537
--------------- ---------------- ----------------- -------------------
Total comprehensive (loss) income $ (1,863) $ 15,075 $ (11,618) $ 5,762
=============== ================ ================= ===================
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, 2006.
Information about D&PL's segments for the three and six month periods ended
February 28, 2007 and 2006 is as follows (in thousands):
Three Months Ended Six Months Ended
------------------------------------ --------------------------------------
February 28, February 28, February 28, February 28,
2007 2006 2007 2006
----------------- ----------------- ------------------ ------------------
Net sales and licensing fees (by segment)
Domestic $ 37,416 $ 109,212 $ 36,261 $ 109,610
International 7,593 5,765 21,632 15,193
----------------- ----------------- ------------------ ------------------
$ 45,009 $ 114,977 $ 57,893 $ 124,803
================= ================= ================== ==================
Net sales and licensing fees
Cottonseed $ 39,455 $ 110,033 $ 52,928 $ 119,102
Soybean seed 4,983 4,400 5,000 4,378
Other 571 544 (35) 1,323
----------------- ----------------- ------------------ ------------------
$ 45,009 $ 114,977 $ 57,893 $ 124,803
================= ================= ================== ==================
Operating (loss) income
Domestic $ (640) $ 25,099 $ (14,910) $ 12,109
International (1,034) (1,547) 1,408 (669)
----------------- ----------------- ------------------ ------------------
$ (1,674) $ 23,552 $ (13,502) $ 11,440
================= ================= ================== ==================
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
previously calculated for pro forma disclosure purposes under SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company charged to income
$594,000 and $1,271,000 of compensation expense for stock options, restricted
stock and restricted stock units in the three and six month periods ended
February 28, 2007, versus $830,000 and $1,641,000 in the three and six month
periods ended February 28, 2006.
Options. The Company recognized gross compensation cost associated with all of
its outstanding stock option awards of $258,000 prior to a tax benefit of
$137,000 in the second quarter of 2007, versus $414,000, prior to a tax benefit
of $147,000, in the prior year period. At February 28, 2007, there was
approximately $1.2 million of unrecognized compensation cost related to stock
option awards, net of an anticipated tax benefit of $456,000 which is expected
to be recognized over a weighted-average period of two years, which represents
the remaining employees' service periods. There were approximately 2.3 million
stock options available for grant at February 28, 2007.
The following table represents stock option activity for the quarter ended
February 28, 2007:
Number of Intrinsic
Shares Price Range Value
-------------- -------------------------- --------------
Outstanding at November 30, 2006 2,662,458 $ 16.91 $47.31
Exercised (501,496) 16.91 37.44
-------------- ------------ ----------
Outstanding at February 28, 2007 2,160,962 $ 16.91 $47.31 $ 36,657,000
============== ============ ========== ==============
Exercisable at February 28, 2007 1,913,497 $ 16.91 $47.31 $ 32,258,000
============== ============ ========== ==============
The following table summarizes certain information about outstanding and
exercisable stock options at February 28, 2007:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Average
Remaining Weighted Weighted
Contractual Life Average Average
Exercise Price Range in Years Exercise Exercise
Number Price Number Price
--------------------- ------------- ------------------- ------------- -------------- -------------
$16.91 - $19.99 917,978 4.0 $ 19.01 837,770 $ 19.01
$20.00 - $29.99 1,011,154 5.0 $ 26.69 843,897 $ 26.99
$30.00 - $39.99 229,830 4.5 $ 31.63 229,830 $ 31.63
$40.00 - $47.31 2,000 1.2 $ 47.31 2,000 $ 47.31
------------- --------------
2,160,962 4.5 $ 23.97 1,913,497 $ 24.08
============= ==============
Restricted Stock and Restricted Stock Units. In the second quarter of 2007, 60
restricted stock units were granted to directors as dividends on previously
issued restricted stock units, with related compensation cost of approximately
$2,000. Compensation cost was determined based on the market price of the
Company's common stock at the time of award and took into consideration dividend
restrictions and expected forfeitures. Compensation cost will be recognized as
expense ratably over the three-year vesting period.
For the three months ended February 28, 2007, the Company recognized gross
compensation cost associated with all of its restricted stock and restricted
stock units awards of approximately $336,000, prior to a tax benefit of
$181,000, versus $416,000, prior to a tax benefit of $148,000, in the prior year
period. At February 28, 2007, there was $1.7 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
$646,000, 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 February 28, 2007.
The following represents restricted stock and restricted stock units activity
for the quarter ended February 28, 2007:
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 November 30, 2006 95,019 $25.09 14,862 $26.37
Granted - - 60 40.52
Vested (3,040) 22.35 - -
-------------- ------------------
Non-vested at February 28, 2007 91,979 $25.18 14,922 $26.43
============== ==================
5. INVENTORIES
Inventories consisted of the following as of (in thousands):
February 28, August 31, February 28,
2007 2006 2006
------------------ ----------------- -----------------
Finished goods $ 46,088 $ 22,102 $ 45,722
Raw materials 33,874 17,353 32,684
Growing crops 990 1,844 1,147
Supplies 1,421 805 1,192
------------------ ----------------- -----------------
82,373 42,104 80,745
Less reserves (9,190) (10,504) (11,356)
------------------ ----------------- -----------------
$ 73,183 $ 31,600 $ 69,389
================== ================= =================
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
February 28, 2007 and 2006 was approximately $794,000 and $2,680,000,
respectively. The provision recorded for damaged, obsolete and excess inventory
for the six-months ended February 28, 2007 and 2006 was approximately $1,151,000
and $3,422,000, 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):
February 28, August 31, February 28,
2007 2006 2006
------------------ ----------------- -----------------
Land and improvements $ 6,535 $ 6,501 $ 6,470
Buildings and improvements 45,659 45,282 45,107
Machinery and equipment 69,049 67,635 65,222
Germplasm 7,500 7,500 7,500
Breeder and foundation seed 2,000 2,000 2,000
Construction in progress 5,021 2,974 2,996
------------------ ----------------- -----------------
135,764 131,892 129,295
Less accumulated depreciation (75,179) (70,826) (67,788)
------------------ ----------------- -----------------
$ 60,585 $ 61,066 $ 61,507
================== ================= =================
Depreciation expense during the quarters ended February 28, 2007 and 2006 was
approximately $2.2 million and $2.1 million, respectively. Depreciation expense
during the six-month periods ended February 28, 2007 and 2006 was approximately
$4.4 million and $4.2 million, respectively.
7. INTANGIBLES
The components of identifiable intangible assets were as follows as of (in
thousands):
February 28, 2007 August 31, 2006 February 28, 2006
------------------------------- ----------------------------------- -----------------------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
----------- --------------- -------------- ---------------- ------------ ----------------
Trademarks $ 3,182 $ (1,076) $ 3,182 $ (1,037) $ 3,182 $ (997)
Commercialization
agreements 400 (163) 400 (149) 400 (135)
Licenses 3,604 (650) 3,388 (417) 3,507 (247)
Patents 2,432 (166) 2,202 (145) 1,954 (170)
Other 2,202 (1,397) 2,146 (1,294) 2,132 (1,167)
----------- --------------- -------------- ---------------- ------------- ---------------
$ 11,820 $ (3,452) $ 11,318 $ (3,042) $ 11,175 $ (2,716)
=========== =============== ============== ================ ============= ===============
Amortization expense for identifiable intangible assets during the quarters
ended February 28, 2007 and 2006 was approximately $224,000 and $90,000,
respectively. Amortization expense for identifiable intangible assets during the
six-month periods ended February 28, 2007 and February 28, 2006 was
approximately $392,000 and $210,000, respectively. Identifiable intangible asset
amortization expense is estimated to be $200,000 for the remainder of 2007 and
$400,000 in each of the fiscal years from 2008 to 2012.
8. INVESTMENT IN AFFILIATE
D&PL owns a 50% interest in DeltaMax Cotton, LLC, a limited liability company
jointly owned with Verdia, Inc., a subsidiary of DuPont. 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 February 28, 2007 and February 28, 2006, D&PL's equity in the net loss of
DeltaMax was approximately $417,000 and $780,000, respectively. For the
six-month periods ended February 28, 2007 and 2006, D&PL's equity in the net
loss of DeltaMax was approximately $958,000 and $1,594,000, respectively.
9. DERIVATIVE FINANCIAL INSTRUMENTS
Accumulated other comprehensive loss includes the following pre-tax amounts
related to the Company's soybean hedging program for the six-month periods ended
February 28, 2007 and 2006 (in thousands):
2007 2006
------------------- -------------------
Deferred net (loss) gain, as of August 31 $ (136) $ 224
Net gains (losses) on hedging instruments arising during the six months 416 (53)
Reclassification adjustment of gains on hedging
instruments to earnings (34) (31)
------------------- -------------------
Net change in accumulated other comprehensive loss 382 (84)
------------------- -------------------
Deferred net gain on derivative instruments included in accumulated
other comprehensive loss at February 28 $ 246 $ 140
=================== ===================
The deferred net gain of $246,000 included in accumulated other comprehensive
loss at February 28, 2007 consists of $151,000 of net realized gains, and
$95,000 of net unrealized gains. The deferred net 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 six-month periods ended February 28, 2007 and 2006, 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
Merger with Monsanto
The August 14, 2006 Merger Agreement signed by D&PL and Monsanto contains
various provisions related to the possible termination of the Merger Agreement
if certain events occur or do not occur, as the case may be. Depending upon the
termination event, one of the following may occur: (i) Monsanto may be required
to pay D&PL a termination payment of $600 million; (ii) the royalty paid to
Monsanto under certain licenses with D&PL may be reduced; or (iii) D&PL may be
required to pay Monsanto a termination payment of $15 million. The termination
events also impact various dispute and litigation issues pending between D&PL
and Monsanto, which are described more fully below in this footnote.
Product Liability Claims
D&PL is named as a defendant in various lawsuits that allege, among other
things, that certain of D&PL's products (including those containing Monsanto's
technology) did not perform as the farmer had anticipated or expected. In some
of these cases, Monsanto and/or the dealer or distributor who sold the seed are
also named as defendants. In all cases where the seed sold contained either or
both of Monsanto's Bollgard(R) and/or Roundup Ready(R) gene technologies, and
where the farmer alleged a failure of one or more of those technologies, D&PL
has tendered the defense of the case to Monsanto and requested indemnity.
Pursuant to the terms of the February 2, 1996 Bollgard Gene License and Seed
Services Agreement (the "Bollgard Agreement") and the February 2, 1996 Roundup
Ready Gene License and Seed Services Agreement (the "Roundup Ready Agreement")
(both as amended December 1999, January 2000, March 2003, and August 2006 and
the Roundup Ready Agreement as additionally amended July 1996), D&PL has a right
to be contractually indemnified by Monsanto against all claims arising out of
the failure of Monsanto's gene technology. Pharmacia remains liable for
Monsanto's performance under these indemnity agreements. Some of the product
liability lawsuits contain varietal claims which are aimed solely at D&PL. D&PL
does not have a right to indemnification from Monsanto for any claims involving
varietal characteristics separate from or in addition to the failure of the
Monsanto technology. D&PL believes that the resolution of these matters will not
have a material adverse impact on the consolidated financial statements. D&PL
intends to vigorously defend itself in these matters.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II(R) cottonseed infringes Bayer's Australian patent
that claims an alleged invention entitled "Prevention of Bt Resistance
Development." The suit seeks an injunction, damages and other relief against
Deltapine Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings. Due to the status of this
matter, management is unable to determine the impact of this matter on the
consolidated financial statements.
On February 17, 2006, D&PL initiated a dispute resolution proceeding under the
1996 Option Agreement and the 2002 Bollgard Gene License on the issue of whether
Monsanto's implementation of a farmer licensing system for the Bollgard gene
technology in Brazil violates D&PL's and its local affiliates' rights to an
exclusive license to develop, produce and sell Bollgard planting seed in Brazil.
On March 27, 2006, D&PL submitted this issue to arbitration before the American
Arbitration Association ("AAA"). As part of this arbitration, D&PL sought to
enjoin Monsanto's implementation of its farmer licensing system and is seeking
damages incurred by D&PL and its affiliates. In July 2006, the Arbitration Panel
conducted a preliminary hearing. The Panel denied a preliminary injunction
without prejudice to granting a permanent injunction upon final hearing. On
August 14, 2006, Monsanto and D&PL entered into a settlement agreement under
which further proceedings in this arbitration are stayed pending the proposed
merger between Monsanto and D&PL and/or a mutually agreed resolution of this
dispute, provided that net technology fees collected under the farmer licensing
system during the period of stay will be divided between Monsanto and its
affiliates and D&PL and its affiliates in a ratio of 56%/44%. MDM Sementes de
Algodao Limitada, D&PL's affiliate in Brazil, sold cotton seed containing
Bollgard gene technology in Brazil in the 2007 sales season.
On June 16, 2006, D&PL submitted to arbitration before the AAA issues involving
D&PL's rights to exclusive rights to Bollgard technology in two additional
Ex-United States countries. Pursuant to settlement agreements entered into on
August 14, 2006, the arbitration with respect to the exclusive licenses in the
two Ex-United States countries and a dispute resolution proceeding involving the
confidentiality provisions of the Bollgard and Roundup Ready Licenses were
stayed pending the merger between Monsanto and D&PL.
On February 5, 2007, pursuant to agreements with Monsanto, D&PL submitted to
dispute resolution an issue involving incentive payments to dealers and
distributors for sublicensing to farmers the right to use Bollgard technology.
This dispute resolution proceeding is currently stayed by mutual agreement of
D&PL and Monsanto.
On February 23, 2007, a former employee of D&PL in Brazil filed a claim under
the Brazilian Labor Code seeking payment of wages, overtime pay, fines and
contributions to a severance guarantee fund. The total amount of this claim is
1,028,712.88 Reals (equivalent to approximately US$496,000 at current exchange
rates). D&PL believes that this claim is without merit and this former employee
is not entitled to any additional compensation. D&PL has asserted its defenses
in the appropriate tribunal. D&PL believes that the resolution of this matter
will not have a material adverse impact on the consolidated financial
statements.
As previously disclosed, the Company has investigated the circumstances relating
to certain payments made by certain employees and third-party contractors of the
foreign branch of a wholly-owned subsidiary of the Company. The Company believes
that payments totaling approximately $42,000 were made to low-level local
officials between 2000 and 2006. Some of these payments were not recorded in the
subsidiary's books and records. The Company first learned of such payments in
2004 and took corrective actions to assure that the payments complied with the
U.S. Foreign Corrupt Practices Act ("FCPA"). Further issues arose with regard to
such payments in the course of due diligence in connection with the Merger with
Monsanto. As previously disclosed, the Company voluntarily notified the U.S.
Department of Justice and the U.S. Securities and Exchange Commission concerning
these matters.
The Company has also conducted a broader review of its compliance with FCPA
requirements and has identified other potential compliance issues. While the
amounts of these other payments were accurately recorded in the books and
records of Company affiliates and were not quantitatively material, some of
these payments were not accurately described in the books and records of Company
affiliates, and as a result, the Company might be subject to liability under the
FCPA. The Company is also reviewing the extent to which these payments were
permissible facilitating payments or were impermissible payments for which the
Company might be subject to liability under the FCPA. The Company has
voluntarily notified the U.S. Department of Justice and the U.S. Securities and
Exchange Commission concerning these matters. However, there can be no assurance
as to what action, if any, either of these authorities might take with regard to
these matters. Due to the status of this matter, management is unable to
determine the impact of this matter 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 ("H-S-R
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 (the
"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 1998 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 1998 Merger
Agreement. On January 18, 2000, after unsuccessful negotiations, D&PL re-filed
its suit, (the "1998 Merger Litigation"). D&PL seeks in excess of $1 billion in
compensatory and $1 billion in punitive damages for breach of the 1998 Merger
Agreement.
On September 12, 2003, Monsanto amended its answer to include four counterclaims
against D&PL. Monsanto is seeking an unspecified amount of 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. 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.
Pursuant to the Agreement and Plan of Merger between Monsanto, Monsanto Sub,
Inc. and D&PL, entered into on August 14, 2006 (the "2006 Merger Agreement"),
Monsanto and D&PL have agreed to take steps necessary to stay the 1998 Merger
Litigation for a period of up to twelve months. On August 27, 2006, the
Mississippi Supreme Court entered an Order staying proceedings in the 1998
Merger Litigation through February 27, 2007. On March 5, 2007, the Mississippi
Supreme Court extended the stay until September 4, 2007. The 2006 Merger
Agreement provides the 1998 Merger Litigation will be dismissed with prejudice
upon certain circumstances including (1) completion of the merger, (2) the
merger is not completed by the Outside Date (as defined in the 2006 Merger
Agreement) and certain regulatory approvals have not been obtained, or the
completion of the merger is prevented by a law or order related to anti-trust or
competition law, (3) Monsanto breaches any covenant or agreement in the 2006
Merger Agreement in a material respect and fails to cure upon notice, or (4)
D&PL breaches the covenants and agreements in the 2006 Merger Agreement in a
material respect and fails to cure upon notice. (In the circumstances described
in items (2) and (3), Monsanto is required to pay D&PL $600 million in cash.) In
the following circumstances, the stay of the 1998 Merger Litigation will
terminate and the parties may then pursue any and all rights in that litigation:
(1) D&PL breaches its representations or warranties under the 2006 Merger
Agreement and fails to cure upon notice, (2) the merger has not been completed
by the Outside Date and there has been a material adverse change with respect to
D&PL, or (3) the 2006 Merger Agreement is terminated by agreement of D&PL and
Monsanto or for any reason other than as specified above.
11. EARNINGS PER SHARE
For the quarter and six months ended February 28, 2007, common share equivalents
were not included in D&PL's calculation of diluted loss per share because their
inclusion would have been antidilutive since D&PL reported a net loss for each
of the aforementioned periods. As a result, basic and diluted losses per share
are the same in the quarter and six month periods ended February 28, 2007.
For D&PL, items that are considered in the determination of common share
equivalents include the Series M Convertible Non-Voting Preferred shares, stock
options, restricted stock and restricted stock units. At February 28, 2007, the
total of those items was approximately 3.3 million. The computation of common
share equivalents is dependent on the weighted-average market value of D&PL
common stock during the period under consideration, among other things.
Therefore, only a portion of these items would be considered common share
equivalents for purposes of the diluted earnings per share calculation.
Approximately 1,682,000 outstanding stock options were not included in the
computation of diluted earnings per share for the three months ended February
28, 2006, and approximately 1,640,000 outstanding stock options were not
included in the computation of diluted earnings per share for the six months
ended February 28, 2006, 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)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
February 28, February 28, February 28, February 28,
2007 2006 2007 2006
----------------- ----------------- ---------------- ------------------
(Loss)Income:
Net (loss)income $ (2,070) $ 14,670 $ (12,255) $ 5,225
Less: Preferred stock dividends (182) (160) (363) (320)
----------------- ----------------- ---------------- ------------------
Net (loss)income for basic EPS $ (2,252) $ 14,510 $ (12,618) $ 4,905
Effect of dilutive securities:
Convertible preferred stock dividends 182 160 363 320
----------------- ----------------- ---------------- ------------------
Net (loss)income available to common
stockholders plus assumed conversions - for
diluted EPS $ (2,070) $ 14,670 $ (12,255) $ 5,225
================= ================= ================ ==================
Shares:
Basic EPS shares 36,604 35,688 36,527 35,882
Effect of dilutive securities:
Options to purchase stock - 117 - 160
Restricted stock and restricted stock units - 42 - 36
Convertible preferred stock - 1,067 - 1,067
----------------- ----------------- ---------------- ------------------
Diluted EPS shares 36,604 36,914 36,527 37,145
================= ================= ================ ==================
Per Share Amounts:
Basic $ (0.06) $ 0.41 $ (0.35) $ 0.14
==================================== ================ ==================
Diluted $ (0.06) $ 0.40 $ (0.35) $ 0.14
================= ================= ================ ==================
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, 2006.
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
--------------------------------------- ------------------------------------
February 28, February 28, February 28, February 28,
2007 2006 2007 2006
------------------ ------------------ ------------------ ---------------
Service cost $ 235 $ 273 $ - $ -
Interest cost 328 287 8 8
Expected return on assets (372) (295) (5) (6)
Amortization of prior service cost - 4 - -
Recognized net actuarial loss (gain) 117 180 (12) 14
------------------ ------------------ ------------------ ---------------
Net periodic pension expense $ 308 $ 449 $ (9) $ 16
================== ================== ================== ===============
Pension SERP
Six Months Ended Six Months Ended
--------------------------------------- ------------------------------------
February 28, February 28, February 28, February 28,
2007 2006 2007 2006
------------------ ------------------ ------------------ ---------------
Service cost $ 470 $ 546 $ - $ -
Interest cost 656 575 16 16
Expected return on assets (744) (590) (10) (12)
Amortization of prior service cost - 7 - -
Recognized net actuarial loss (gain) 234 360 (24) 28
------------------ ------------------ ------------------ ---------------
Net periodic pension expense $ 616 $ 898 $ (18) $ 32
================== ================== ================== ===============
The amount of the minimum pension liability that is recorded as a component of
Accrued Expenses at February 28, 2007 was $4.4 million. As of February 28, 2007,
D&PL had not made any contributions to the Plan.
As of February 28, 2007, no contributions have been made to the SERP. D&PL
presently does not anticipate contributing any amounts to the SERP in 2007.
13. CREDIT FACILITY
The Company and certain of its subsidiaries maintain 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 is set to expire on 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. Presently, the Company has begun negotiations
with the bank to extend the Credit Agreement.
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. The Company is also required
to pay an annual fee of 0.125% of the daily-unused portion of the Credit
Agreement. The primary financial covenant requires the Company's funded
indebtedness under the Credit Agreement to not exceed 50% of certain current and
long-term assets, defined in the Credit Agreement and determined as of the last
day of each fiscal quarter.
During the quarter and six months ended February 28, 2007, the Company did not
borrow against the credit facility. As of February 28, 2007, there were no
borrowings outstanding under the Credit Agreement, other than existing letters
of credits as discussed above.
14. RELATED PARTY TRANSACTIONS
During the six months ended February 28, 2007, DeltaMax paid Temasek Life
Science Laboratory ("TLL") approximately $421,000 for research activities TLL
conducted for DeltaMax. TLL is a related party of Temasek Capital and Temasek
Holdings. Dr. Chua, a member of the board of directors of D&PL, was the Chief
Scientific Advisor of Temasek Capital from April 2001 to March 2003 and was
appointed to be Corporate Advisor to Temasek Holdings in April 2003 through
March 2006, and has advised TLL since April 2004. Dr. Chua was appointed to the
Board of Directors of TLL effective March 15, 2007. Dr. Chua has been a paid
consultant to Pioneer Hi-Bred International, Inc., a DuPont subsidiary, for
several years and continues in this capacity. In July 2004, DuPont acquired
Verdia, Inc., which owns 50% of DeltaMax. For further information about
DeltaMax, reference should be made to Note 5 to the consolidated financial
statements contained in D&PL's Annual Report on Form 10-K for the year ended
August 31, 2006.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW/OUTLOOK
Research and seed development remains the foundation of our company. During
2006, our cottonseed varieties were planted on approximately 51% of all the
cotton acreage in the U.S. Our farmer customers continue to enjoy the benefits
of high yielding germplasm which incorporates Monsanto's first and second
generation insect resistance and herbicide tolerance traits. During 2007, we
expect to offer as many as nine varieties containing the second generation
Monsanto insect resistant (Bollgard II(R), or "BG II") and herbicide tolerance
traits (Roundup Ready Flex(R), or "RRF") and expect to have enough seed to plant
three million acres containing these traits. Four of these varieties are
single-gene RRF and five varieties contain both the RRF gene technology and BG
II. Additionally, we continue to dedicate resources to the development of the
traits we have licensed from Syngenta and DuPont, which, with respect to
Syngenta, is expected to be launched later this decade, and for DuPont, 2011 and
beyond.
Internationally, we began sales of transgenic cotton varieties in Brazil during
the first quarter of 2007 as well as the introduction of hybrids at our joint
ventures in China. We began selling Bollgard cotton hybrids in India in 2006
and, subject to regulatory approvals, we expect to sell BG II hybrids in India
beginning in 2008.
Expected 2007 U.S. cotton acreage has been affected by the sharp increase in
corn commodity prices. USDA planting intentions issued on March 30, 2007
indicated that 2007 cotton acreage could be as low as 12.1 million acres,
representing a 21% decline from 2006 planted acreage. This decline impacted our
2007 second quarter results as decreased sales volumes resulted in a second
quarter loss. We believe that this decline in volumes is attributable in part to
timing as farmers have pushed back their planting decisions to later in the
Spring than in previous years. However, based on the anticipated decline in
cotton acreage, we have revised 2007 earnings guidance which is discussed below.
International results for the second quarter and year-to-date period were better
than last year due to higher sales volumes and the introduction of transgenic
cotton varieties in Brazil. Results were also impacted by $2.4 million and $6.8
million of expenses associated with the pending merger with Monsanto for the
three and six month periods ended February 28, 2007.
Monsanto Merger
Appropriate filings and submissions have been made under the H-S-R Act in
connection with our pending merger with Monsanto, and the transaction is under
review by the Antitrust Division of the United States Department of Justice
("USDOJ"). We are committed to cooperate with the antitrust authorities to allow
a thorough review within the allotted time frame. The Company and Monsanto have
complied with the request for additional information from the USDOJ and have
agreed to extend the waiting period with the USDOJ. Under the terms of the
Merger Agreement, the initial period established for satisfaction of the merger
closing conditions was February 14, 2007; however, there is an automatic
extension period of six months provided for in the Merger Agreement, if
necessary, to complete the antitrust review. This extension period has been
effected in order to allow the authorities to complete their review.
2007 Earnings Guidance
We expect domestic sales of cottonseed to decline in 2007 from 2006 due to a
reduction of planted cotton acreage due to increased corn plantings. However, we
are unable to develop and do not have a precise estimate of what cotton
plantings will ultimately be due to farmer uncertainty, current commodity prices
and weather conditions. We expect International sales to moderately improve over
2006 due to the introduction of transgenic cotton varieties in Brazil and sales
of cotton hybrids in China.
Assuming that planted cotton acreage declines to 12.1 million acres as
forecasted by the USDA in its March 31 Planting Intentions Report, which
represents a 21% reduction from the 15.3 million acres planted in 2006, our
earnings for the fiscal year 2007 may range from $.53 to $.63 per diluted share,
after special charges of $.26 per diluted share related to the proposed merger
with Monsanto. This revised range compares to our earlier forecast of $1.10 to
$1.20 per share after special charges of $.26 per share related to the merger.
The Company's updated earnings guidance is based on decreased cotton acreage as
well as assumptions regarding maintenance of our market share and product/sales
mix target being met.
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. However, due to lower domestic cottonseed
shipments in the second quarter of the current fiscal year, we are reporting a
loss for this quarter also. 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 Six Months Ended
-------------------------------------- ---------------------------------
February 28, February 28, February 28, February 28,
2007 2006 2007 2006
------------------ ----------------- ---------------- -------------
Operating results-
Net sales and licensing fees $ 45,009 $ 114,977 $ 57,893 $ 124,803
Gross profit 13,682 40,832 17,831 43,994
Operating expenses 15,356 17,280 31,333 32,554
Operating (loss) income (1,674) 23,552 (13,502) 11,440
(Loss) income before income taxes (4,418) 22,350 (21,308) 8,417
Net (loss) income applicable to common shares (2,252) 14,510 (12,618) 4,905
The following sets forth selected balance sheet data of D&PL at the following
dates (in thousands):
February 28, February 28,
2007 August 31, 2006 2006
------------------ ----------------- -----------------
Balance sheet summary-
Current assets $ 173,741 $ 409,267 $ 228,706
Current liabilities 95,057 325,116 159,910
Working capital 78,684 84,151 68,796
Property, plant and equipment, net 60,585 61,066 61,507
Total assets 269,433 506,254 315,307
Outstanding borrowings 3,256 7,883 11,919
Stockholders' equity 167,754 174,656 146,349
Three months ended February 28, 2007, compared to three months ended February
28, 2006:
For the quarter ended February 28, 2007, we reported a net loss of $2.1 million
compared to net income of $14.7 million in the prior year quarter. The loss for
the quarter was due to low domestic cottonseed shipments, partially offset by an
increase in revenues from our international business and lower operating
expenses.
Net sales and licensing fees decreased approximately $70.0 million to $45.0
million and gross profit decreased approximately $27.2 million to $13.7 million.
The revenue decrease was primarily attributable to lower domestic cottonseed
shipments due to customer indecision regarding planting decisions. Higher
commodity prices for corn have caused an increase in acres planted to corn,
which is negatively impacting our cottonseed shipments. This decrease was
partially offset by higher revenues from our international business compared to
last year's quarter, as Brazil continues to benefit from the introduction in the
current year of transgenic cottonseed varieties.
Operating expenses decreased approximately $1.9 million to $15.4 million in the
second quarter of 2007. This decrease was primarily due to lower advertising
expenses and lower legal fees related to the various arbitration issues with
Monsanto which have been stayed or dismissed due to our pending merger with
Monsanto.
We reported net other expense of approximately $2.4 million for the quarter
ended February 28, 2007, compared to $730,000 for the same period in the prior
year. The increase of $1.7 million is primarily attributed to $2.4 million in
expenses associated with our proposed merger with Monsanto offset by a reduction
in legal fees from the litigation with Pharmacia/Monsanto.
Six months ended February 28, 2007, compared to six months ended February 28,
2006:
For the six months ended February 28, 2007, we reported a net loss of $12.3
million compared to net income of $5.2 million in the prior year period. This
loss is also due to the domestic factors discussed above, offset by improved
results in our international business and lower operating expenses.
Net sales and licensing fees decreased approximately $66.9 million to $57.9
million and gross profit decreased approximately $26.2 million to $17.8 million.
The revenue decrease was primarily attributable to lower domestic cottonseed
shipments as discussed above. This decrease was partially offset by an increase
in revenues from our international business, primarily in South America, offset
somewhat by a decrease in revenues from Australia, South Africa, Turkey, Greece
and Spain. The increase in South America is primarily due to the introduction of
transgenic cotton varieties in Brazil in the current year and an increase in
cotton acreage in Brazil. Sales in Australia have been impacted by reduced
cotton acreage due to the continued severe drought conditions. In South Africa,
revenue decreased as a result of lower cotton acreage due to competition from
corn production. Sales in Turkey, Greece and Spain were lower due to a shift in
sales there to later in the year and difficulty due to exportation of seed from
Turkey to Greece and Spain.
Operating expenses decreased approximately $1.2 million to $31.3 million in the
first quarter of 2007. This decrease was primarily due to lower advertising
expenses and lower legal fees related to various Monsanto arbitration issues as
discussed above, offset by an increase in research and development in our
international division.
We reported net other expense of approximately $6.8 million for the six months
ended February 28, 2007, compared to $1.9 million for the same period in the
prior year. The increase of $4.9 million is primarily attributed to $6.8 million
in expenses associated with our proposed merger with Monsanto offset by a
reduction in legal fees associated with the Pharmacia/Monsanto litigation.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently utilize off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
As of February 28, 2007, we owed approximately $2.9 million for a portion of our
raw materials that had been received from the 2006 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 $2.9
million is included in Current Liabilities in our Consolidated Balance Sheet at
February 28, 2007.
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, 2006. 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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
SFAS 158 - Employers' Accounting for Defined Benefit Pension and Other
Postretirement Benefits, an Amendment of FASB Statements 87, 88, 106 and 132(R).
This statement, issued by the FASB in September 2006, requires an employer with
a defined benefit pension plan to (1) recognize the funded status of the benefit
plan in its statement of financial position, (2) recognize as a component of
other comprehensive income, net of tax, the gains or losses and prior service
costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost pursuant to FASB Statement No. 87 or
FASB Statement No. 106, (3) measure defined benefit plan assets and obligations
as of the date of the employer's fiscal year-end statement of financial
position, and (4) disclose in the notes to the financial statements additional
information about certain effects on net periodic benefit cost for the next
fiscal year that arise from delayed recognition of the gains or losses, prior
service costs or credits, and transition asset or obligation. Adoption of SFAS
No. 158 is required by the end of the fiscal year ending after December 15,
2006. Therefore, we will adopt this standard by August 31, 2007. We are
presently evaluating the impact that adopting SFAS 158 will have on our
financial position and results of operations.
FIN 48 - Accounting for Uncertainty in Income Taxes. In July 2006, FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"),
was issued. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes". FIN 48 requires that the tax
effects of a position be recognized only if it is "more-likely-than-not" to be
sustained based solely on the technical merits as of the reporting date. FIN 48
also requires additional disclosures of unrecognized tax benefits, including a
reconciliation of the beginning and ending balances. FIN 48 is effective for
fiscal years beginning after December 15, 2006. Therefore, we expect to
implement FIN 48 beginning on September 1, 2007. We are presently evaluating the
impact that adopting FIN 48 will have on our financial position and results of
operations.
SAB 108 - Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. In September 2006, staff
from the Securities and Exchange Commission issued Staff Accounting Bulletin
108, which addresses how the effects of prior-year uncorrected misstatements
should be considered when quantifying misstatements in current-year financial
statements. SAB 108 requires companies to quantify misstatements using both the
balance sheet and income statement approaches and to evaluate whether either
approach results in quantifying an error that is material in light of relevant
quantitative and qualitative factors. SAB 108 is effective for fiscal years
ending on or after November 15, 2006. We are evaluating the impact that adoption
of this standard will have on our financial position and results of operations.
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 our
first quarter and continue through our third quarter. Seasonal cash needs
normally begin to increase in our first quarter and cash needs peak in our third
quarter. Cash is generated and loan repayments, if applicable, normally begin in
the middle of our third quarter and are typically completed by our 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 United States, we record revenue and accounts receivable for technology
licensing fees on transgenic seed sales upon shipment, usually in our second and
third fiscal quarters. Receivables from seed sales generally become due in May
and June. The licensing fees are due in September, at which time we receive
payment. We then pay Monsanto its royalty for the Bollgard, Bollgard II, Roundup
Ready and Roundup Ready Flex licensing fees, which is recorded as a component of
cost of sales. As a result of the timing of these events, licensing fees
receivable and royalties' payable peak at our fiscal year end, August 31.
The seasonal nature of our business significantly impacts cash flow and working
capital requirements. Historically, we have maintained credit facilities and
used early payments by customers and cash from operations to fund working
capital needs. In the past, we have borrowed on a short-term basis to meet
seasonal working capital needs. From 2002 through 2005, we used cash generated
from operations and other available cash to meet working capital needs. Since
2006, we have utilized our credit facility to fund working capital needs, in
addition to early payments from customers and cash from operations. We continue
to evaluate potential uses of our cash for purposes other than for working
capital needs. Other potential uses of our cash in the future may be the
acquisition of, or funding of, alternative technologies (such as, or in addition
to, DeltaMax and Syngenta) that could be used to enhance our product portfolio
and ultimately our long-term earnings potential and/or an investment in new
markets outside the United States such as India. The Merger Agreement restricts
us from authorizing, recommending or proposing, or entering into an agreement in
principle or an agreement with respect to any merger, consolidation or business
combination (other than the Monsanto merger) or any acquisition or disposition
of any assets, except that in the case of the acquisition or disposition of
assets, the Merger Agreement does not prevent us and our subsidiaries from:
o acquiring or disposing of assets outside of the ordinary course of
business consistent with past practice so long as the aggregate amount of
those assets to be acquired or disposed of are less than $10 million; or
o acquiring or disposing of assets in the ordinary course of business
consistent with past practice.
However, the Merger Agreement does prohibit us, without Monsanto's prior written
consent, from purchasing, redeeming, or otherwise acquiring our outstanding
shares.
We maintain 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 is set to expire on 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. Presently, the Company has
begun negotiations with the bank to extend the Credit Agreement. Additionally,
at the option of the Bank the Credit Agreement can be terminated upon a change
in control as defined in the Credit Agreement.
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 fiscal quarter.
During the quarter ended February 28, 2007, the Company did not borrow under the
Credit Agreement. As of February 28, 2007, there were no amounts outstanding
under the Credit Agreement, other than the existing Letters of Credit as
discussed above.
Capital expenditures were $3.7 million and $5.3 million in the six months ended
February 28, 2007 and 2006, respectively. We anticipate that capital
expenditures will approximate $8.0 million to $10.0 million in 2007.
For the six months ended February 28, 2007, aggregate dividends of $12.8 million
have been paid on common and preferred shares. The Board of Directors
anticipates that quarterly dividends of $0.17 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 $0.17 per share in 2007, aggregate preferred
and common stock dividends should approximate $25.8 million in 2007. Pursuant to
the Merger Agreement executed with Monsanto, our Board of Directors is precluded
from increasing the quarterly dividend rate above $0.17 per share.
CASH USED FOR SHARE REPURCHASES
Pursuant to the Merger Agreement executed with Monsanto, we are precluded from
future repurchases or issuances of our own shares except our Board of Directors
has authorized the issuance of approximately 155,000 shares of restricted stock
or restricted stock units to our directors, officers and key employees in
accordance with the provisions of the 2005 Omnibus Stock Plan. These shares of
restricted stock and restricted stock units, if issued, will vest over a three
year period. However, at the effective time of the merger, those shares of
restricted stock and restricted stock units will become immediately vested and
will be converted into the right to receive $42.00 per share in cash without
interest and less any applicable withholding tax. If the merger does not close,
these instruments will vest 40% on the first anniversary of their issuance, 30%
on the second anniversary of their issuance and the remaining 30% on the third
anniversary of their issuance.
From September 1, 2006 through February 28, 2007, 684 shares of restricted D&PL
common stock held by employees were tendered to the Company on the day the
restrictions lapsed (approximate value of $31,000). The employees received cash
in lieu of shares net of applicable income taxes related to the exercise of the
employee's stock award. Pursuant to our stock option and award plans and our
stock repurchase plan, the surrender of these shares is treated as an open
market repurchase for purposes of determining the amount that may be repurchased
under the June 2005 repurchase authorization. Under that plan, we have remaining
authorization of approximately $27.4 million subject to the terms of the Merger
Agreement noted above.
Cash provided from operations, cash on hand, early payments from customers and
borrowings under the credit facility should be sufficient to meet our 2007
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, 2006. 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 February
28, 2007, was $117,000. A 10% adverse change in the underlying commodity prices
upon which these contracts are based would result in a $109,000 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
February 28, 2007, 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 February 28, 2007, 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 February 28, 2007.
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, 2006.
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 two lawsuits filed in the Circuit Court of Holmes County, Mississippi,
motions are now pending in the August 19, 2002 case identical to those filed o
March 14, 2002. The court entered an order on January 26th, 2007 severing the
claims of the plaintiffs and directing that the non-Holmes County plaintiffs to
re-file in an appropriate venue. Three plaintiffs remain with cases pending in
Holmes County. None of the severed plaintiffs have yet re-filed. Neither of
these lawsuits alleges that the Monsanto gene technology failed, and
accordingly, it does not appear that D&PL has a claim for indemnity or defense
under the terms of any of the gene licenses with Monsanto.
Regarding the December 2002 declaratory judgment suit filed by D&PL against
Nationwide Agribusiness and other insurance companies in the Circuit Court of
Holmes County, Mississippi, and removed to the U.S. District Court for the
Southern District of Mississippi, in which summary judgment was subsequently
entered against D&PL and D&PL appealed to the U.S. Court of appeals for the
Fifth Circuit, all appellate briefs have now been submitted and the Fifth
Circuit has set the case for oral argument for Wednesday May 2, 2007.
Regarding the civil action filed in October 2002 in a Turkish court by Ozbugday
Tarim Isletmeleri ve Tohumculuk A.S. ("OTIT"), a former distributor, seeking an
injunction against D&PL's affiliate's continued sale of Sure Grow varieties in
Turkey, on or about November 30, 2006, The High Court of Appeals revoked a prior
decision and returned the case to the lower court for further consideration of
whether Turk Deltapine should be required to post security before the case can
be decided on merits.
Regarding the lawsuit filed in the Circuit Court of Hinds County, Mississippi,
by Product Services Company and Ted Dickerson, the request by International
Paper, co-defendant, for a change in venue to another Mississippi county was
denied on November 15, 2006. The case is now in pre-trial discovery.
On February 5, 2007, pursuant to agreements with Monsanto, D&PL submitted to
dispute resolution an issue involving incentive payments to dealers and
distributors for sublicensing to farmers the right to use Bollgard technology.
This dispute resolution proceeding is currently stayed by mutual agreement of
D&PL and Monsanto.
On February 23, 2007, a former employee of D&PL in Brazil filed a claim under
the Brazilian Labor Code seeking payment of wages, overtime pay, fines and
contributions to a severance guarantee fund. The total amount of this claim is
1,028,712.88 Reals (equivalent to approximately US$496,000 at current exchange
rates). D&PL believes that this claim is without merit and this former employee
is not entitled to any additional compensation. D&PL has asserted its defenses
in the appropriate tribunal. D&PL believes that the resolution of this matter
will not have a material adverse impact on the consolidated financial
statements.
As previously disclosed, the Company has investigated the circumstances relating
to certain payments made by certain employees and third-party contractors of the
foreign branch of a wholly-owned subsidiary of the Company. The Company believes
that payments totaling approximately $42,000 were made to low-level local
officials between 2000 and 2006. Some of these payments were not recorded in the
subsidiary's books and records. The Company first learned of such payments in
2004 and took corrective actions to assure that the payments complied with the
U.S. Foreign Corrupt Practices Act ("FCPA"). Further issues arose with regard to
such payments in the course of due diligence in connection with the Merger with
Monsanto. As previously disclosed, the Company voluntarily notified the U.S.
Department of Justice and the U.S. Securities and Exchange Commission concerning
these matters.
The Company has also conducted a broader review of its compliance with FCPA
requirements and has identified other potential compliance issues. While the
amounts of these other payments were accurately recorded in the books and
records of Company affiliates and were not quantitatively material, some of
these payments were not accurately described in the books and records of Company
affiliates, and as a result, the Company might be subject to liability under the
FCPA. The Company is also reviewing the extent to which these payments were
permissible facilitating payments or were impermissible payments for which the
Company might be subject to liability under the FCPA. The Company has
voluntairly notified the U.S. Department of Justice and the U.S. Securities and
Exchange Commission concerning these matters. However, there can be no assurance
as to what action, if any, either of these authorities might take with regard to
these matters. Due to the status of this matter, management is unable to
determine the impact of this matter on the financial statements. The Company
does not believe that these circumstances will have any effect on the
consummation of the Merger.
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:
Merger with Monsanto
Our contemplated Merger with Monsanto is subject to approval by government
agencies. The inability to complete this merger may have a material effect
on D&PL. However, such effect cannot be known at this time.
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 launched in 2006 varieties containing the
Bollgard II and Roundup Ready Flex technologies at the same time we
launched 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, Roundup
Ready and Roundup Ready Flex 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 have initiated arbitration proceedings with Monsanto, the principal
licensor of our cotton technologies, concerning our rights to exclusive
licenses to Monsanto's insect resistance technology in Brazil, Egypt and
Burkina Faso. Each of these arbitration proceedings are currently stayed
pending the approval and completion of the Merger between us and Monsanto.
If this Merger should not be completed, the stay of these arbitration
proceedings would be lifted. The result of these arbitrations, if adversely
determined to us, could materially affect our future operations in these
three countries. All other arbitration proceedings with Monsanto, including
the arbitration in which Monsanto sought to terminate licenses between our
companies, have been dismissed with prejudice, barring revival of the
claims asserted in those proceedings.
In the litigation with Monsanto arising from Monsanto's failure to
consummate the 1998 Merger Agreement (the "1998 Merger Litigation") D&PL
seeks in excess of $1 billion in compensatory and $1 billion in punitive
damages. In its counterclaims Monsanto seeks an unspecified amount of
damages including recovery of $81 million paid to D&PL as a termination fee
and related expenses. The 1998 Merger Litigation has been stayed until
September 4, 2007. The 1998 Merger Litigation will be terminated with
respect to our claims against Monsanto and Monsanto's counterclaims against
us upon completion of the merger between our Company and Monsanto pursuant
to the 2006 Merger Agreement or upon termination by us or by Monsanto of
the 2006 Merger Agreement without completion of the merger where (1) the
merger is not completed by the Outside Date (as defined in the 2006 Merger
Agreement) and certain regulatory approvals have not been obtained, or the
completion of the merger is prevented by a law or order related to
anti-trust or competition law, (2) Monsanto breaches any covenant or
agreement in the 2006 Merger Agreement in a material respect and fails to
cure within twenty days after we inform them in writing of the breach or
(3) D&PL breaches the covenants and agreements in the 2006 Merger Agreement
in a material respect and fails to cure within twenty days after Monsanto
informs us in writing of the breach. (In the circumstances described in
items (1) and (2), Monsanto is required to pay our Company $600 million in
cash.) On the other hand, (1) if we breach our representations and
warranties in the 2006 Merger Agreement in a material respect and fail to
cure within twenty days after Monsanto informs us in writing of the breach
and thereafter Monsanto terminates, (2) if the merger has not been
completed by the Outside Date and a material adverse change in our Company
has occurred as of the effective date of termination or (3) if the 2006
Merger Agreement is terminated by agreement of D&PL and Monsanto or for any
reason other than those specified above, the stay of the 1998 Merger
Litigation will be lifted and we or Monsanto would be permitted to pursue
any and all rights and remedies with respect to this litigation. Under
these circumstances, the results of this litigation (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,
2006.)
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 2006, approximately 96% of our cottonseed that was sold
in the United States contained one or more of Monsanto's Bollgard, Bollgard
II, Roundup Ready and Roundup Ready Flex 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 expired in 2006. On July 7, 2006,
Monsanto announced that the United States Environmental Protection Agency
had extended the registration of the Bollgard technology through the 2009
growing season. Also, Bollgard II was recently granted a non-expiring
re-registration by the EPA. 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 United States government,
including that taken by the United States military, the wars in Iraq and
Afghanistan, and conflicts between major cotton producing nations, may
serve to further complicate our ability to execute our long range ex-United
States 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.
Government supports and trade agreements
Our farmer customers in many markets, including the United States, benefit
from government support programs. The Farm Security and Rural Investment
Act of 2002 covers the 2007 cotton planting season but future United States
farm programs are uncertain. Various other countries, including Brazil,
have challenged, and may continue to challenge, the appropriateness of
United States farm programs through the World Trade Organization ("WTO") or
other forums. In particular, the WTO has ruled in Brazil's favor in its
challenge that certain United States programs violate the provisions of the
WTO. While some programs have been changed as a result of the ruling, it is
not clear if, when, or to what extent, the United States will make further
modifications. However, in the event changes are made, they may negatively
impact United States farmers which could result in a decline in planted
cotton acreage. Also, in WTO discussions in Hong Kong in late December
2005, United States negotiators agreed to eliminate cotton export subsidies
in 2006 (the "Step 2" program was eliminated on August 1, 2006) and to
eliminate all agricultural export subsidies by 2013. United States farm
programs and WTO rulings impacting such programs may materially affect the
results of our business. In addition, the United States Congress, in an
attempt to reduce the United States government's budget deficit, may also
revise farm programs 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 we 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
The Annual Meeting of the Shareholders of Delta and Pine Land Company was held
on February 19, 2007. The following matters were brought to a vote with the
noted results:
Item For Against Abstain Non-Voted
1. Re-election of Class II Director
Joseph M. Murphy 28,663,616 0 2,153,135 5,832,010
2. Re-election of Class II Director
Rudi E. Scheidt 28,663,616 0 2,153,235 5,832,010
3. Ratify appointment of KPMG LLP as the
independent public accountants for the
fiscal year ending August 31, 2007 30,647,266 165,198 34,287 5,802,010
Jon E. M. Jacoby, F. Murray Robinson, Nam-Hai Chua, W. Thomas Jagodinski and Stanley P. Roth continued as directors following
the annual Meeting.
A special meeting of the Shareholders of Delta and Pine land Company was held on
December 21, 2006. The following matter was brought to a vote with the noted
results:
1. Ratify the proposed merger between Monsanto
and Delta and Pine Land Company 29,544,549 108,791 8,944 6,789,092
2. Approve Adjournment 26,662,242 2,990,064 9,978 6,789,092
Item 5. Other Information
None
Item 6. Exhibits.
Exhibits.
31.01 Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, by the Principal Executive Officer.
31.02 Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, by the Principal Financial and
Accounting Officer.
32.01 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by
the Principal Executive Officer.
32.02 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by
the Principal Financial and Accounting Officer.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTA AND PINE LAND COMPANY
Date: April 9, 2007 /s/ W. Thomas Jagodinski
-------------------------
W. Thomas Jagodinski
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: April 9, 2007 /s/ Kenneth M. Avery
--------------------
Kenneth M. Avery
Vice President - Chief Financial Officer and
Assistant Secretary
(Principal Financial and Accounting Officer)