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, 2006 or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____to ______
Commission File Number: 000-21788
Exact name of registrant as specified in its charter:
DELTA AND PINE LAND COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification Number: 62-1040440
Address of Principal Executive Offices (including zip code):
One Cotton Row, Scott, Mississippi 38772
Registrant's telephone number, including area code:
(662) 742-4000
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES (x) NO ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES (x) NO ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES ( ) NO (x)
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.10 Par Value, 35,577,779 shares outstanding as of March 31,
2006.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - February 28, 2006,
August 31, 2005, and February 28, 2005 3
Consolidated Statements of Operations - Three Months
Ended February 28, 2006 and February 28, 2005 4
Consolidated Statements of Operations - Six Months
Ended February 28, 2006 and February 28, 2005 5
Consolidated Statements of Cash Flows - Six Months
Ended February 28, 2006 and February 28, 2005 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 27
Signatures 28
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,
2006 2005 2005
------------------ ----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,420 $ 93,075 $ 110,632
Receivables, net 138,193 228,800 139,330
Inventories 69,389 26,625 56,861
Prepaid expenses 1,657 1,874 2,038
Deferred income taxes 6,047 6,305 6,725
------------------ ----------------- -----------------
Total current assets 228,706 356,679 315,586
PROPERTY, PLANT AND EQUIPMENT, NET 61,507 60,158 62,005
EXCESS OF COST OVER NET ASSETS OF
BUSINESSES ACQUIRED 4,183 4,183 4,183
INTANGIBLES, NET 8,459 5,960 5,757
OTHER ASSETS 1,214 1,446 1,545
DEFERRED INCOME TAXES 11,238 10,758 9,685
------------------ ----------------- -----------------
TOTAL ASSETS $ 315,307 $ 439,184 $ 398,761
================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Notes payable and current maturities of long-term debt $ 8,448 $ 10,078 $ 11,405
Accounts payable 21,776 18,218 19,466
Accrued expenses 120,814 221,824 108,508
Income taxes payable 8,872 12,893 10,712
------------------ ----------------- -----------------
Total current liabilities 159,910 263,013 150,091
------------------ ----------------- -----------------
LONG-TERM DEBT 3,471 7,271 11,109
------------------ ----------------- -----------------
MINORITY INTEREST IN SUBSIDIARIES 5,577 4,877 6,572
------------------ ----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 10 )
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.10 per share; 2,000,000 shares authorized;
Series A Junior Participating Preferred, par value $0.10 per share;
501,989, 456,989, and 456,989 shares authorized; no shares issued or
outstanding; - - -
Series M Convertible Non-Voting Preferred, par value $0.l0 per share;
1,066,667 shares authorized, issued and outstanding 107 107 107
Common stock, par value $0.10 per share; 100,000,000 shares authorized;
40,965,695, 40,928,929 and 40,788,040 shares issued;
35,495,589, 36,099,823 and 39,120,574 shares outstanding 4,097 4,093 4,079
Capital in excess of par value 83,989 81,640 78,340
Retained earnings 193,933 199,742 182,071
Accumulated other comprehensive loss (3,440) (4,305) (1,889)
Treasury stock, at cost; 5,470,106, 4,829,106 and 1,667,466 shares (132,337) (117,254) (31,719)
------------------ ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 146,349 164,023 230,989
------------------ ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 315,307 $ 439,184 $ 398,761
================== ================= =================
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,
2006 2005
----------------- ------------------
NET SALES AND LICENSING FEES $ 114,977 $ 119,859
COST OF SALES 74,145 75,175
----------------- ------------------
GROSS PROFIT 40,832 44,684
----------------- ------------------
OPERATING EXPENSES:
Research and development 6,182 5,646
Selling 3,917 3,486
General and administrative 7,333 4,905
----------------- ------------------
Total operating expenses 17,432 14,037
----------------- ------------------
OPERATING INCOME 23,400 30,647
INTEREST INCOME, NET 177 641
OTHER EXPENSE, NET (730) (973)
EQUITY IN NET LOSS OF AFFILIATE (780) (648)
MINORITY INTEREST IN LOSS (EARNINGS) OF SUBSIDIARIES 131 (9)
----------------- ------------------
INCOME BEFORE INCOME TAXES 22,198 29,658
INCOME TAX EXPENSE 7,680 10,498
----------------- ------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 14,518 19,160
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX 358 -
----------------- ------------------
NET INCOME 14,876 19,160
DIVIDENDS ON PREFERRED STOCK (160) (128)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 14,716 $ 19,032
================= ==================
BASIC EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 0.41 $ 0.49
================= ==================
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX $ 0.01 $ -
================= ==================
BASIC EARNINGS PER SHARE $ 0.42 $ 0.49
================= ==================
NUMBER OF SHARES USED IN BASIC EARNINGS PER SHARE
CALCULATIONS 35,688 38,763
================= ==================
DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ 0.39 $ 0.48
================= ==================
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX $ 0.01 $ -
================= ==================
DILUTED EARNINGS PER SHARE $ 0.40 $ 0.48
================= ==================
NUMBER OF SHARES USED IN DILUTED EARNINGS PER SHARE
CALCULATIONS
36,914 40,276
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.15 $ 0.12
================= ==================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
February 28, February 28,
2006 2005
----------------- ------------------
NET SALES AND LICENSING FEES $ 124,803 $ 137,313
COST OF SALES 80,809 83,596
----------------- ------------------
GROSS PROFIT 43,994 53,717
----------------- ------------------
OPERATING EXPENSES:
Research and development 11,786 10,076
Selling 7,316 6,552
General and administrative 13,452 9,444
----------------- ------------------
Total operating expenses 32,554 26,072
----------------- ------------------
OPERATING INCOME 11,440 27,645
INTEREST INCOME, NET 1,205 1,099
OTHER EXPENSE, NET (1,933) (2,480)
EQUITY IN NET LOSS OF AFFILIATE (1,594) (1,386)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (701) (2,345)
----------------- ------------------
INCOME BEFORE INCOME TAXES 8,417 22,533
INCOME TAX EXPENSE 3,192 7,690
----------------- ------------------
NET INCOME 5,225 14,843
DIVIDENDS ON PREFERRED STOCK (320) (256)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 4,905 $ 14,587
================= ==================
BASIC EARNINGS PER SHARE $ 0.14 $ 0.38
================= ==================
NUMBER OF SHARES USED IN BASIC EARNINGS PER SHARE
CALCULATIONS 35,882 38,653
================= ==================
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.37
================= ==================
NUMBER OF SHARES USED IN DILUTED EARNINGS PER SHARE
CALCULATIONS 37,145 40,124
================= ==================
DIVIDENDS PER COMMON SHARE $ 0.30 $ 0.24
================= ==================
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,
2006 2005
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,225 $ 14,843
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 4,358 4,265
Loss (gain) on sale of assets 59 (323)
Equity in net loss of affiliate 1,594 1,386
Foreign exchange loss (gain) 33 (219)
Accretion of debt discount 227 389
Minority interest in earnings of subsidiaries 701 2,345
Stock-based compensation expense 1,641 -
Change in deferred income taxes (229) 974
Changes in assets and liabilities:
Receivables 90,695 45,851
Inventories (42,340) (26,260)
Prepaid expenses 226 (118)
Intangibles and other assets (52) (370)
Accounts payable 3,374 (4,591)
Accrued expenses (101,331) (79,431)
Income taxes payable (4,070) 3,987
------------------ -----------------
Net cash used in operating activities (39,889) (37,272)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,336) (3,561)
Sale of investments and property 23 388
Acquisition of business (2,620) -
Investment in affiliate (1,525) (1,550)
------------------ -----------------
Net cash used in investing activities (9,458) (4,723)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (5,925) -
Dividends paid (11,034) (9,580)
Proceeds from short-term debt 266 -
Minority interest in dividends paid by subsidiary - (359)
Payments to acquire treasury stock (15,083) -
Proceeds from exercise of stock options 712 11,855
------------------ -----------------
Net cash (used in) provided by in financing activities (31,064) 1,916
------------------ -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES 756 1,124
NET DECREASE IN CASH AND CASH EQUIVALENTS (79,655) (38,955)
CASH AND CASH EQUIVALENTS, August 31
93,075 149,587
------------------ -----------------
CASH AND CASH EQUIVALENTS, February 28 $ 13,420 $ 110,632
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the six months for:
Interest, net of capitalized interest $ - $ -
Income taxes paid $ 6,859 $ 1,645
Noncash financing activities:
Tax benefit of stock option exercises $ 54 $ 2,298
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, 2006 and 2005,
are not necessarily indicative of the results to be expected for the full year.
D&PL's investment in its 50%-owned affiliate DeltaMax Cotton, LLC ("DeltaMax")
is accounted for using the equity method. For further information, reference
should be made to the consolidated financial statements and footnotes thereto
included in D&PL's Annual Report to Stockholders on Form 10-K for the year ended
August 31, 2005.
Change in Accounting Principle
Effective September 1, 2005, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123R (Revised 2004), "Share-Based Payments"
("SFAS 123R"). SFAS 123R requires, among other things, the Company to record
compensation expense associated with the grant-date fair value of share option
grants and other equity-based compensation. Upon adoption, the Company
recognized a deferred compensation liability representing the fair value of
certain options granted under the 2005 Omnibus Stock Plan (the "2005 Stock
Plan") which, under the then terms of the 2005 Stock Plan, were to be cash
settled in the event a change in control were to occur that is effected through
the exchange of consideration other than registered shares of the acquiring
company. The liability recognition upon adoption of SFAS 123R resulted in the
recording of a non-cash charge of $358,000 after tax ($0.01 per diluted share).
In order to conform the comparable provisions of the 1995 Long Term Incentive
Plan and the 2005 Stock Plan, the Company's Board of Directors modified the 2005
Stock Plan on December 29, 2005 such that the Compensation Committee of the
Board of Directors has other redemption alternatives, in its sole discretion,
upon a change in control in which registered shares are not received.
Subsequently, on February 3, 2006, the Financial Accounting Standards Board
("FASB") issued FASB Staff Position No. SFAS 123(R)-4 amending SFAS 123R to
require companies to consider the probability that an event that could require
cash settlement will occur when classifying the instruments as liabilities or
equity. Under this guidance, the deferred compensation liability discussed above
would not have been recognized, and the non-cash charge of $358,000 would not
have been recorded. The FASB Staff Position requires retrospective application;
therefore, the non-cash charge was reversed in the second quarter ended February
28, 2006, and a deferred compensation liability is no longer reported on the
Company's consolidated balance sheet.
For further information regarding the adoption of SFAS 123R see Note 4, "Stock-
Based Compensation Plans" to these consolidated financial statements.
New Accounting Pronouncements
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets, an amendment of SFAS No. 140". Among other changes, SFAS No.
156 requires an entity to recognize a servicing asset or servicing liability in
certain situations and defines measurement methods for these assets and
liabilities. SFAS No. 156 is effective for the fiscal year that begins after
September 15, 2006. The Company does not expect the adoption of this statement
to have a material impact on D&PL's consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments, an amendment of SFAS No. 133 and SFAS No. 140." Among
other changes, SFAS No. 155 further defines what constitutes a derivative as
defined by SFAS No. 133, and addresses certain measurement issues regarding
hybrid financial instruments. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of the fiscal year that
begins after September 15, 2006. The Company does not expect the adoption of
this statement to have a material impact on D&PL's consolidated financial
statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3". Among other
changes, SFAS No. 154 requires that a voluntary change in accounting principle
be applied retrospectively with all prior period financial statements presented
based on the new accounting principle, unless it is impracticable to do so. SFAS
No. 154 provides that (1) a change in method of depreciating or amortizing a
long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed
a "restatement." SFAS No. 154 is effective for accounting changes and correction
of errors made in fiscal years beginning after December 15, 2005. The Company
does not expect the adoption of this statement to have a material impact on
D&PL's consolidated financial statements.
2. COMPREHENSIVE INCOME
Total comprehensive income for the three and six months ended February 28, 2006
and 2005, was (in thousands):
Three Months Ended Six Months Ended
------------------------------------- --------------------------------------
February 28, February 28, February 28, February 28,
2006 2005 2006 2005
----------------- ------------------ ------------------ ------------------
Net income $ 14,876 $ 19,160 $ 5,225 $ 14,843
Other comprehensive income:
Foreign currency translation gains 500 312 949 1,857
Net realized and unrealized gains
(losses) on hedging instruments 120 105 (84) (10)
Income tax expense related to other
comprehensive income (215) (148) (328) (630)
----------------- ------------------ ------------------ ------------------
Other comprehensive income, net of tax 405 269 537 1,217
----------------- ------------------ ------------------ ------------------
Total comprehensive income $ 15,281 $ 19,429 $ 5,762 $ 16,060
================= ================== ================== ==================
3. SEGMENT DISCLOSURES
D&PL is in a single line of business and operates in two business segments,
domestic and international. D&PL's reportable segments offer similar products;
however, the business units are managed separately due to the geographic
dispersion of their operations. D&PL breeds, produces, conditions and markets
proprietary varieties of cotton and soybean planting seed in the United States.
The international segment offers cottonseed in several foreign countries through
both export sales and in-country operations. D&PL develops its proprietary seed
products through research and development efforts in the United States and
certain foreign countries.
D&PL's chief operating decision maker utilizes revenue information in assessing
performance and making overall operating decisions and resource allocations.
Profit and loss information is reported by segment to the chief operating
decision maker and D&PL's Board of Directors. The accounting policies of the
segments are substantially the same as those described in the summary of
significant accounting policies in D&PL's Annual Report to Stockholders on Form
10-K filed for the year ended August 31, 2005.
Information about D&PL's segments for the three and six month periods ended
February 28, 2006 and 2005, is as follows (in thousands):
Three Months Ended Six Months Ended
------------------------------------ --------------------------------------
February 28, February 28, February 28, February 28,
2006 2005 2006 2005
----------------- ----------------- ------------------ ------------------
Net sales and licensing fees (by segment)
Domestic $ 109,212 $ 108,108 $ 109,610 $ 108,660
International 5,765 11,751 15,193 28,653
----------------- ----------------- ------------------ ------------------
$ 114,977 $ 119,859 $ 124,803 $ 137,313
================= ================= ================== ==================
Net sales and licensing fees
Cottonseed $ 110,033 $ 114,457 $ 119,102 $ 131,107
Soybean seed 4,400 4,813 4,378 4,826
Other 544 589 1,323 1,380
----------------- ----------------- ------------------ ------------------
$ 114,977 $ 119,859 $ 124,803 $ 137,313
================= ================= ================== ==================
Operating income (loss)
Domestic $ 24,947 $ 28,530 $ 12,109 $ 19,455
International (1,547) 2,117 (669) 8,190
----------------- ----------------- ------------------ ------------------
$ 23,400 $ 30,647 $ 11,440 $ 27,645
================= ================= ================== ==================
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 123R applies to new awards and to awards that were outstanding on
September 1, 2005 and are subsequently modified or cancelled. Additionally,
compensation cost for the portion of awards for which the requisite service had
not been rendered as of September 1, 2005, will be recognized over the remaining
service period using the compensation cost calculated for pro forma disclosure
purposes previously under SFAS No. 123, "Accounting for Stock-Based
Compensation." Prior periods were not restated to reflect the impact of adopting
SFAS 123R.
Prior to the adoption of SFAS 123R, the Company accounted for employee stock
options and other equity-based compensation awards using the intrinsic value
method of accounting prescribed by APB Opinion 25, "Accounting for Stock Issued
to Employees." No compensation expense was previously recognized related to the
Company's stock options because the number of shares was fixed at the grant date
and each option's exercise price was set at or above the stock's fair market
value on the date the option was granted. Under SFAS 123R, the Company charged
to income $982,000 of compensation expense for stock options, Restricted Stock
and Restricted Stock Units in the second quarter of 2006, in addition to
recording the reversal of the cumulative effect of $358,000, net of tax, related
to the initial adoption of SFAS 123R that was recorded in the first quarter of
2006, which is recorded as a separate component in the statement of operations
(see Footnote 1 for more information on the reversal of the cumulative effect of
accounting change). Total compensation expense recorded for the six-month period
ended February 28, 2006 was $1.64 million.
The 1995 Long-Term Incentive Plan, as amended and restated in March 2000, (the
"LTIP") allows for the awarding of stock options to officers, key employees and
directors. The amended and restated 1995 plan eliminates the ability of the
Board of Directors to award stock appreciation rights, restricted shares of
common stock and performance unit credits. Under the LTIP, options to purchase
5,120,000 shares (after effect of stock splits) of common stock of D&PL were
available for grant. Shares subject to options and awards which expire
unexercised are available for new option grants and awards under the LTIP. The
Compensation Committee of the Board of Directors administers the Plan and has
sole discretion regarding the exercisability of the option grants.
The 2005 Omnibus Stock Plan ("2005 Stock Plan"), approved by the shareholders in
January 2005, provides for the grant of (a) incentive stock options as defined
in the Internal Revenue Code of 1986, as amended, (b) non-qualified stock
options, (c) restricted stock, and (d) restricted stock units to D&PL's
employees, independent contractors and members of the Board of Directors for the
purpose of encouraging share ownership of D&PL. Up to 4,500,000 shares are
available for grants of awards under the Plan. The maximum number of shares
which may be issued for awards of restricted stock and restricted stock units is
2,100,000 shares and the maximum for options is 2,400,000. The Compensation
Committee of the Board of Directors administers the Plan and has sole discretion
regarding the exercisability of the option grants. Any lapsed awards shall again
be available under this plan.
Options. The Company determines the fair value of stock option awards using the
Black-Scholes option-pricing model. Expected volatilities are based on the
historical volatility of the Company's common stock. The Company uses historical
data to estimate share option exercise and employee departure behavior used in
the Black-Scholes option-pricing model. The expected term of share options
granted is derived from the output of the option pricing model and represents
the period of time that share options granted are expected to be outstanding.
The risk-free rate is based on yields of U.S. Treasury securities with similar
terms as the expected life. The following weighted-average assumptions were used
to value D&PL's stock option awards in the second quarter of 2006: 6 year
expected life; expected volatility of 24.6%; risk free rate of 4.46% and annual
dividends of $0.60 per share during the expected term of the options. The
weighted-average fair value of options awarded in the second quarter of 2006 was
$5.66.
The Company recognized gross compensation cost associated with all of its
outstanding stock option awards of $566,000, prior to a tax benefit of $201,000,
in the second quarter of 2006, versus $0 in the prior year period. At February
28, 2006, there was approximately $2.4 million of unrecognized compensation cost
related to stock option awards, net of an anticipated tax benefit of $852,000,
which is expected to be recognized over the remaining employees' service periods
over a weighted-average period of two years.
All outstanding options have a contractual term of 7 to 10 years. All stock
option awards made prior to May 18, 2005 became exercisable ratably over a
five-year service period. Stock option awards made on May 18, 2005 become
exercisable 45 days after issuance. Stock option awards made subsequent to May
18, 2005 become exercisable ratably over a five-year service period. Under both
the LTIP and the 2005 Stock Plan, all outstanding stock options become
exercisable immediately upon a change in control of the Company. There were
approximately 2.4 million stock options available for grant at February 28,
2006.
The following table represents stock option activity for the quarter ended
February 28, 2006:
Number of Intrinsic
Shares Price Range Value
-------------- ------------ ---------- --------------
Outstanding at November 30, 2005 3,689,871 $ 15.61 $47.31
Granted 40,824 22.69 23.43
Exercised (21,255) 17.85 22.36
Lapsed or canceled (400) 17.85 17.85
-------------- ------------ ----------
Outstanding at February 28, 2006 3,709,040 15.61 47.31 $11,498,000
============== ============ ========== ==============
Exercisable at February 28, 2006 3,286,730 $ 15.61 $47.31 $9,655,936
============== ==============
The following table summarizes certain information about outstanding and
exercisable stock options at February 28, 2006:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Contractual Life Exercise Exercise
Exercise Price Range Number in Years Price Number Price
--------------------- ------------- ------------------- ------------- -------------- -------------
$14.79 - $19.99 1,615,263 4.7 $ 18.99 1,377,039 $ 19.04
$20.00 - $29.99 1,824,436 4.6 $ 25.87 1,640,350 $ 26.02
$30.00 - $39.99 267,341 5.3 $ 31.51 267,341 $ 31.51
$40.00 - $49.31 2,000 2.2 $ 47.31 2,000 $ 47.31
------------- --------------
3,709,040 4.7 $ 23.29 3,286,730 $ 23.55
============= ==============
Restricted Stock and Restricted Stock Units. In the second quarter of 2006,
5,119 shares of Restricted Stock or Restricted Stock Units were granted to
employees or directors, with total compensation cost of approximately $106,000
determined based on the market price of the Company's common stock at the time
of award and considering dividend restrictions and expected forfeitures.
Compensation cost will be recognized as expense ratably over the three-year
vesting period.
For the three months ended February 28, 2006, the Company recognized gross
compensation cost of approximately $416,000, prior to a tax benefit of $148,000,
related to shares of Restricted Stock and Restricted Stock Units issued in 2005
and 2006 versus $0 in the prior year period. At February 28, 2006, there was
$3.0 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 $1.1 million, 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, 2006. The following represents
Restricted Stock and Restricted Stock Units activity for the quarter ended
February 28, 2006:
Restricted Stock Restricted Stock Units
------------------------------------ -----------------------------------------
Weighted Avg. Weighted Avg.
Number of Grant Date Fair Number of Grant Date Fair
Shares Value Shares Value
-------------- ----------------- ------------------ ------------------
Non-vested at November 30, 2005 146,048 $25.15 24,000 $26.31
Granted 4,710 22.34 409 23.90
Forfeited (537) 25.22 - -
-------------- ------------------
Non-vested at February 28, 2006 150,221 $25.06 24,409 $26.27
============== ==================
The following table illustrates for the three and six months ended February 28,
2005 the effect on operating results and per share information had the Company
accounted for share based compensation in accordance with SFAS 123R (in
thousands).
Three Months Ended Six Months Ended
----------------------- -----------------------
February 28, February 28,
2005 2005
----------------------- -----------------------
Net Income:
As reported $ 19,160 $ 14,843
Add: Total stock-based compensation expense
included in reported net income, net of
related tax effects
- -
Less: Total stock-based compensation expense
determined under the fair value based
method for all awards, net of related tax
effects
(700) (1,431)
----------------------- -----------------------
Pro forma $ 18,460 $ 13,412
======================= =======================
Basic earnings per share:
As reported $ 0.49 $ 0.38
======================= =======================
Pro forma $ 0.47 $ 0.34
======================= =======================
Diluted earnings per share:
As reported $ 0.48 $ 0.37
======================= =======================
Pro forma $ 0.46 $ 0.33
======================= =======================
5. INVENTORIES
Inventories consisted of the following as of (in thousands):
February 28, August 31, February 28,
2006 2005 2005
------------------ ----------------- -----------------
Finished goods $ 45,722 $ 19,713 $ 36,626
Raw materials 32,684 13,156 25,084
Growing crops 1,147 818 169
Supplies 1,192 1,101 1,461
------------------ ----------------- -----------------
80,745 34,788 63,340
Less reserves (11,356) (8,163) (6,479)
------------------ ----------------- -----------------
$ 69,389 $ 26,625 $ 56,861
================== ================= =================
Finished goods and raw material inventory is valued at the lower of average cost
or market. Growing crops are recorded at cost. Elements of cost in inventories
include raw materials, direct production costs, manufacturing overhead and
immaterial general and administrative expenses. Inventory reserves relate to
estimated excess and obsolete inventory. The provision recorded for excess and
obsolete inventory for the quarters ended February 28, 2006 and 2005 was
approximately $2,680,000 and $3,766,000, respectively. The provision recorded
for excess and obsolete inventory for the six-month periods ended February 28,
2006 and February 28, 2005 was approximately $3,422,000 and $3,923,000,
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,
2006 2005 2005
------------------ ----------------- -----------------
Land and improvements $ 6,470 $ 6,263 $ 6,235
Buildings and improvements 45,107 43,018 43,667
Machinery and equipment 65,222 63,142 62,766
Germplasm 7,500 7,500 7,500
Breeder and foundation seed 2,000 2,000 2,000
Construction in progress 2,996 2,564 1,635
------------------ ----------------- -----------------
129,295 124,487 123,803
Less accumulated depreciation (67,788) (64,329) (61,798)
------------------ ----------------- -----------------
$ 61,507 $ 60,158 $ 62,005
================== ================= =================
Depreciation expense during the quarters ended February 28, 2006 and February
28, 2005 was approximately $2.1 million and $2.0 million, respectively.
Depreciation expense during the six-month periods ended February 28, 2006 and
2005 was approximately $4.2 million and $4.1 million, respectively.
7. INTANGIBLES
The components of identifiable intangible assets were as follows as of (in
thousands):
February 28, 2006 August 31, 2005 February 28, 2005
----------- --- --------------- -------------- --- ---------------- ------------- -- ----------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
----------- --------------- -------------- ---------------- ------------- ----------------
Trademarks $ 3,182 $ (997) $ 3,182 $ (958) $ 3,182 $ (918)
Commercialization
agreements 400 (135) 400 (121) 400 (107)
Licenses 3,507 (247) 1,100 (192) 1,100 (138)
Patents 1,954 (170) 1,640 (116) 1,241 (105)
Other 2,132 (1,167) 2,096 (1,071) 2,046 (944)
----------- --------------- -------------- ---------------- ------------- ----------------
$11,175 $ (2,716) $ 8,418 $ (2,458) $ 7,969 $ (2,212)
=========== =============== ============== ================ ============= ================
Amortization expense for identifiable intangible assets during the quarters
ended February 28, 2006 and 2005 was approximately $90,000 and $80,000,
respectively. Amortization expense for identifiable intangible assets during the
six-month periods ended February 28, 2006 and February 28, 2005 was
approximately $210,000 and $200,000, respectively. Identifiable intangible asset
amortization expense is estimated to be $300,000 for the remainder of 2006,
$600,000 in fiscal year 2007 and $500,000 in each of the fiscal years from 2008
to 2011.
On December 29, 2005, D&PL acquired Vikki's Agrotech Pvt. Ltd., an Indian
cottonseed company, for cash of approximately $2.6 million. The results of
Vikki's operations have been included in D&PL's consolidated statements of
operations from the date of acquisition. The initial allocation of the purchase
price resulted in no goodwill and approximately $2.3 million allocated to
licenses. Pro forma results of operations for the three and six month periods
ended February 28, 2006 if the acquisition had occurred at the beginning of the
periods would not have been materially different than reported results for these
periods.
8. INVESTMENT IN AFFILIATE
D&PL owns a 50% interest in DeltaMax Cotton, LLC, a limited liability company
jointly owned with Verdia, Inc. Verdia was acquired by DuPont on July 2, 2004.
Established in May 2002, the DeltaMax joint venture was formed to create,
develop and commercialize herbicide tolerant and insect resistant traits for the
cottonseed market. D&PL has licensed from DeltaMax the developed traits for
commercialization in both the U.S. and other cotton-producing countries in the
world. For the quarters ended February 28, 2006 and February 28, 2005, D&PL's
equity in the net loss of DeltaMax was approximately $780,000 and $648,000,
respectively. For the six-month periods ended February 28, 2006 and 2005, D&PL's
equity in the net loss of DeltaMax was approximately $1,594,000 and $1,386,000,
respectively.
9. DERIVATIVE FINANCIAL INSTRUMENTS
Accumulated other comprehensive loss includes the following related to the
Company's soybean hedging program for the six-month periods ended February 28,
2006 and 2005 (in thousands):
2006 2005
------------------- -------------------
Deferred net gain (loss), as of August 31 $ 224 $ (134)
Net losses on hedging instruments arising during the six months (53) (60)
Reclassification adjustment of (gains) losses on hedging
instruments to earnings (31) 50
------------------- -------------------
Net change in accumulated other comprehensive loss (84) (10)
------------------- -------------------
Deferred net gain (loss) on derivative instruments included in
accumulated other comprehensive loss at February 28 $ 140 $ (144)
=================== ===================
The deferred net gain of $140,000 included in accumulated other comprehensive
loss at February 28, 2006 consists of net unrealized gains of $32,000 and net
realized gains of $108,000. The deferred net unrealized gain of $32,000 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. The net realized gain of $108,000 will be reclassified
into earnings in the period in which the forecasted transaction affects
earnings, which is expected to occur during D&PL's third quarter.
For the six-month periods ended February 28, 2006 and 2005, D&PL recorded no
gains or losses in earnings as a result of hedge ineffectiveness or
discontinuance of cash flow hedges related to soybeans.
10. COMMITMENTS AND CONTINGENCIES
Product Liability Claims
D&PL is named as a defendant in various lawsuits that allege, among other
things, that certain of D&PL's products (including those containing Monsanto's
technology) did not perform as the farmer had anticipated or expected. In some
of these cases, Monsanto and/or the dealer or distributor who sold the seed are
also named as defendants. In all cases where the seed sold contained either or
both of Monsanto's Bollgard and/or Roundup Ready gene technologies, and where
the farmer alleged a failure of one or more of those technologies, D&PL has
tendered the defense of the case to Monsanto and requested indemnity. Pursuant
to the terms of the February 2, 1996 Bollgard Gene License and Seed Services
Agreement (the "Bollgard Agreement") and the February 2, 1996 Roundup Ready Gene
License and Seed Services Agreement (the "Roundup Ready Agreement") (both as
amended December 1999, January 2000 and March 2003 and the Roundup Ready
Agreement as additionally amended July 1996), D&PL has a right to be
contractually indemnified by Monsanto against all claims arising out of the
failure of Monsanto's gene technology. Pharmacia remains liable for Monsanto's
performance under these indemnity agreements. Some of the product liability
lawsuits contain varietal claims which are aimed solely at D&PL. D&PL does not
have a right to indemnification from Monsanto for any claims involving varietal
characteristics separate from or in addition to the failure of the Monsanto
technology. D&PL believes that the resolution of these matters will not have a
material impact on the consolidated financial statements. D&PL intends to
vigorously defend itself in these matters.
Other Legal Matters
On December 9, 2003, Bayer BioScience N.V. and Bayer CropScience GmbH
(collectively "Bayer") filed a suit in the Federal Court of Australia alleging
that the importing, exporting, selling and other alleged uses by Deltapine
Australia Pty Ltd., D&PL's wholly-owned Australian subsidiary ("Deltapine
Australia"), of Bollgard II(R) cottonseed infringes Bayer's Australian patent
that claims an alleged invention entitled "Prevention of Bt Resistance
Development." The suit seeks an injunction, damages and other relief against
Deltapine Australia. Deltapine Australia disputes the validity, infringement and
enforceability of Bayer's patent. On April 16, 2004, Deltapine Australia
responded to the suit, denying infringement and asserting affirmative defenses
and cross claims. The suit is in pretrial proceedings. Due to the status of this
matter, management is presently unable to determine the impact, if any, of this
matter on the consolidated financial statements.
In July 2003, D&PL received a notice from Monsanto asserting that disputes exist
among Monsanto, D&PL and D&M Partners, a partnership of D&PL (90%) and Monsanto
(10%), pertaining to matters under the Bollgard and Roundup Ready Licenses for
the United States and matters under license agreements for Argentina and the
Republic of South Africa. In August 2003, D&PL and D&M Partners responded to
Monsanto's positions on each issue and notified Monsanto of additional disputes,
each concerning Monsanto's compliance with its obligations under the Bollgard
and Roundup Ready Licenses for the United States. In accordance with the dispute
resolution provisions of the subject agreements, the issues raised in Monsanto,
D&PL and D&M Partners' notices were submitted to a panel of senior executives
(the "Executive Panel"). Monsanto subsequently withdrew from the Executive Panel
the issue involving the license agreements for the Republic of South Africa and
submitted to the Executive Panel one additional issue of interpretation of the
Bollgard and Roundup Ready Licenses for the United States. Issues arising from
operations in Argentina and issues involving technology fees and interest have
been settled and are no longer in dispute. On May 20, 2004, Monsanto submitted
to arbitration before the American Arbitration Association two unresolved
issues: whether D&M Partners has paid Monsanto all royalties due and whether
D&PL has made unauthorized transfers of materials containing Monsanto
technology. In this arbitration proceeding, Monsanto seeks an adjudication of
its alleged right to terminate the Bollgard and Roundup Ready Licenses, to
dissolve D&M Partners, to obtain an accounting and to receive monetary damages
and a return or destruction of materials containing Monsanto technologies. D&PL
denies the claims asserted by Monsanto in the arbitration filing and has filed
appropriate responses to Monsanto's claims and filed three counterclaims based
on the issues submitted by D&PL to the Executive Panel. The parties are
currently conducting discovery. The Arbitration Panel has set an August 2006
final hearing date.
On November 8, 2004, Monsanto submitted one new claim allegedly involving a
dispute under the license agreements to the Executive Panel. This issue has been
resolved by the Executive Panel. On March 31, 2005, D&PL submitted an issue
involving an international license under the 1996 Option Agreement between
Monsanto and D&PL for resolution by the Executive Panel. The Executive Panel has
that claim under consideration. D&PL is committed to participating in good faith
resolution of the issues in dispute through arbitration, or through the
Executive Panel, as applicable. Due to the status of this matter, management is
unable to determine the impact, if any, of this matter on the consolidated
financial statements.
On February 17, 2006, D&PL submitted an additional issue for resolution under
the dispute resolution process under the 1996 Option Agreement and the 2002
Bollgard Gene License. This dispute involves whether Monsanto's implementation
of a farmer licensing system for the Bollgard Gene technology in Brazil violates
D&PL's and its local affiliate's rights to an exclusive license to develop,
produce and sell Bollgard planting seed in Brazil. On March 1, 2006, D&PL filed
a suit against Monsanto in the Chancery Court of New Castle County, Delaware,
seeking to enjoin Monsanto's implementation of the new farmer licensing system
pending the resolution of the issues submitted to the Executive Panel. D&PL's
motion for a preliminary injunction was denied; however, the Delaware Court
retained jurisdiction of the case to consider D&PL's motion to compel
arbitration. On March 27, 2006 D&PL submitted to arbitration before the American
Arbitration Association the dispute on whether Monsanto's implementation of a
farmer licensing system is in violation of D&PL's and its Affiliates' rights to
an exclusive license to develop, produce and sell Bollgard planting seed in
Brazil. As part of this arbitration, D&PL is seeking to enjoin Monsanto's
implementation of its farmer licensing system and for damages incurred by D&PL
and its Affiliates.
In response to D&PL's submission of this dispute to the alternative dispute
resolution, on February 23, 2006, Monsanto filed a suit for declaratory judgment
in the Circuit Court of St. Louis County, Missouri, for the court to determine
the issues in dispute. D&PL believes that this suit is barred by the binding
alternative dispute resolution provisions in the subject contracts and will so
respond, seeking to have this proceeding dismissed or stayed pending the
completion of the contractually required dispute resolution process. D&PL is
committed to participating in good faith resolution of this dispute through the
dispute resolution process and, in particular, through the above described
arbitration. MDM Sementes de Algodao Limitada, D&PL's affiliate in Brazil, is
proceeding with a planned launch of sales of cotton seed containing Bollgard
technology in Brazil in the 2006 sales season.
On February 20, 2006, D&PL submitted two additional issues for resolution under
binding dispute resolution; one dispute arises under the most favored license
provisions of the U.S. Bollgard License and the other under confidentiality
provisions of the U.S. Bollgard and Roundup Ready Licenses. Monsanto has
responded on each of these issues and D&PL expects to proceed with alternative
dispute resolution through the Executive Panel or arbitration, as applicable.
On February 28, 2006, D&PL filed suit in the Circuit Court of Dunklin County,
Missouri, seeking to recover Soybean Seed Services Fees in the amount of
approximately $2,200,000 which Monsanto has refused to pay D&PL with respect to
soybean seed containing Monsanto's Roundup Ready technology sold by D&PL during
the 2005 planting season. The suit also seeks a declaratory judgment that D&PL's
payments of royalties under its Roundup Ready Soybean License have been
correctly calculated and paid during the years 2002-2005.
In December 1999, Mycogen Plant Science, Inc. ("Mycogen") filed a suit in the
Federal Court of Australia alleging that Monsanto Australia Ltd., Monsanto's
wholly-owned Australian subsidiary, and Deltapine Australia have been infringing
two of Mycogen's Australian patents by making, selling, and licensing cotton
planting seed expressing insect resistance. The suit sought injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. Consistent with its commitments, Monsanto agreed
to defend D&PL in this suit and to indemnify D&PL against damages, if any were
awarded. The claims by Mycogen and crossclaims by Monsanto and D&PL were
dismissed with prejudice by an agreed order entered January 27, 2006. The
settlement and dismissal of this case confirmed D&PL's rights to sell Bollgard
planting seed in Australia on the existing terms of its license from Monsanto.
D&PL incurred no material expense for the dismissal of this litigation.
D&PL vs. Monsanto Company and Pharmacia Corporation
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")
effectively terminating Monsanto's efforts to gain government approval of the
merger of Monsanto with D&PL under the May 8, 1998 Merger Agreement. On December
30, 1999, D&PL filed suit in the First Judicial District of Bolivar County,
Mississippi, seeking, among other things, the payment of the $81 million
termination fee due pursuant to the Merger Agreement, compensatory damages and
punitive damages. On January 2, 2000, D&PL and Monsanto reached an agreement
whereby D&PL would withdraw the suit, without prejudice, for the purpose of
negotiating a settlement of D&PL's claims, and Monsanto would immediately pay
the $81 million. On January 3, 2000, Monsanto paid to D&PL the termination fee
of $81 million as required by the Merger Agreement. On January 18, 2000, after
unsuccessful negotiations, D&PL re-filed its suit. D&PL seeks in excess of $1
billion in compensatory and $1 billion in punitive damages for breach of the
Merger Agreement between the parties.
On September 12, 2003, Monsanto amended its answer to include four counterclaims
against D&PL. Monsanto is seeking unspecified damages for its counterclaims,
including the $81 million paid by Monsanto to D&PL as a termination fee and
related expenses. D&PL answered the counterclaims, denying all liability, and
D&PL intends to vigorously defend itself against these counterclaims. On
December 21, 2004, Monsanto filed a motion to amend its answer to withdraw two
of its four counterclaims. On February 17, 2005, D&PL filed a motion with the
trial court to amend its complaint to add a claim against Monsanto for
fraudulently inducing D&PL to extend the deadline to complete the merger with
Monsanto. The Mississippi Supreme Court has stayed the proceedings in this case
pending the resolution of two interlocutory appeals filed by D&PL. Due to the
status of this matter, management is unable to determine the impact of this
matter on the consolidated financial statements.
11. EARNINGS PER SHARE
Dilutive common share equivalents consist of both D&PL's Series M Convertible
Non-Voting Preferred shares and the outstanding options to purchase D&PL's
common stock and Restricted Stock and Restricted Stock Units that have been
issued under the 1995 Long-Term Incentive Plan and the 2005 Omnibus Stock Plan.
Approximately 1,682,000 and 119,000 outstanding stock options were not included
in the computation of diluted earnings per share for the three months ended
February 28, 2006 and February 28, 2005, respectively, and approximately
1,640,000 and 192,000 outstanding stock options were not included in the
computation of diluted earnings per share for the six months ended February 28,
2006 and February 28, 2005, respectively, because the exercise price exceeded
the average market price of D&PL's common stock for each respective reporting
date. These excluded options expire at various dates from 2007 to 2015.
The table below reconciles the basic and diluted per share computations:
(in thousands, except per share amounts) For the Three Months Ended For the Six Months Ended
----------------------------------- -------------------------------------
February 28, February 28, February 28, February 28,
2006 2005 2006 2005
----------------- ---------------- ----------------- ------------------
Income:
Net income $ 14,876 $ 19,160 $ 5,225 $ 14,843
Less: Preferred stock dividends (160) (128) (320) (256)
----------------- ---------------- ----------------- ------------------
Net income for basic EPS $ 14,716 $ 19,032 $ 4,905 $ 14,587
Effect of Dilutive Securities:
Convertible preferred stock dividends 160 128 320 256
----------------- ---------------- ----------------- ------------------
Net income available to common
stockholders plus assumed conversions - for
diluted EPS $ 14,876 $ 19,160 $ 5,225 $ 14,843
================= ================ ================= ==================
Shares:
Basic EPS shares 35,688 38,763 35,882 38,653
Effect of Dilutive Securities:
Options to purchase stock 117 446 160 404
Restricted Stock and Restricted Stock Units 42 - 36 -
Convertible preferred stock 1,067 1,067 1,067 1,067
----------------- ---------------- ----------------- ------------------
Diluted EPS shares 36,914 40,276 37,145 40,124
================= ================ ================= ==================
Per Share Amounts:
$ 0.42 $ 0.49 $ 0.14 $ 0.38
================= ================ ================= ==================
Diluted $ 0.40 $ 0.48 $ 0.14 $ 0.37
================= ================ ================= ==================
12. EMPLOYEE BENEFIT PLANS
Substantially all full-time employees are covered by a noncontributory defined
benefit plan (the "Plan"). Benefits are paid to employees, or their
beneficiaries, upon retirement, death or disability based on their final average
compensation over the highest consecutive five years. D&PL's funding policy is
to make contributions to the Plan that are at least equal to the minimum amounts
required to be funded in accordance with the provisions of ERISA.
Effective January 1992, D&PL adopted a Supplemental Executive Retirement Plan
(the "SERP"), which will pay supplemental pension benefits to certain employees
whose benefits from the Plan were decreased as a result of certain changes made
to the Plan. The benefits from the SERP will be paid in addition to any benefits
the participants may receive under the Plan and will be paid from Company
assets, not Plan assets. For further information about D&PL's employee benefit
plans, reference should be made to Note 11 to the consolidated financial
statements contained in D&PL's Annual Report on Form 10-K for the year ended
August 31, 2005.
The components of net periodic pension expense for D&PL's Plan and SERP follow
as of (in thousands):
Pension SERP
Three Months Ended Three Months Ended
--------------------------------------- ---------------------------------------
February 28, February 28, February 28, February 28,
2006 2005 2006 2005
------------------ ------------------ ------------------ ------------------
Service cost $ 273 $ 213 $ - $ -
Interest cost 287 274 8 9
Expected return on assets (295) (272) (6) (7)
Amortization of prior service cost 4 1 - -
Recognized net actuarial loss (gain) 180 101 14 (1)
------------------ ------------------ ------------------ ------------------
Net periodic pension expense $ 449 $ 317 $ 16 $ 1
================== ================== ================== ==================
Pension SERP
Six Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
February 28, February 28, February 28, February 28,
2006 2005 2006 2005
------------------ ------------------ ------------------ ------------------
Service cost $ 546 $ 426 $ - $ -
Interest cost 575 548 16 18
Expected return on assets (590) (544) (12) (14)
Amortization of prior service cost 7 2 - -
Recognized net actuarial loss (gain) 360 202 28 (2)
------------------ ------------------ ------------------ ------------------
Net periodic pension expense $ 898 $ 634 $ 32 $ 2
================== ================== ================== ==================
The amount of the minimum pension liability that is recorded as a component of
Accrued Expenses at February 28, 2006 was $7.1 million. As of February 28, 2006,
D&PL had not made any contributions to the Plan. D&PL anticipates contributing
$2 million to the Plan in 2006.
As of February 28, 2006, no contributions have been made to the SERP. D&PL
presently does not anticipate contributing any amounts to the SERP in 2006.
13. CREDIT FACILITY
On April 15, 2005, Delta and Pine Land Company and certain of its subsidiaries
entered into an unsecured $75 million credit agreement (the "Credit Agreement")
with Bank of America, N.A. (the "Bank"). The Credit Agreement provides for
unsecured revolving loans up to a maximum aggregate amount outstanding of $75
million, plus Letters of Credit which were outstanding prior to the execution of
the Credit Agreement in the amount of approximately $2 million. Of the total
commitment, $50 million represents a seasonal commitment available from October
to July of each year. The Credit Agreement was originally set to expire on July
31, 2006. However, on December 5, 2005, pursuant to the Company's request as
provided for in the Credit Agreement, the Company and the Bank agreed to extend
the Credit Agreement until July 31, 2007, at which time all outstanding amounts
under the Credit Agreement will be due and payable, subject to the Company's
right to request an additional one-year extension and the Bank's acceptance of
that request.
In general, borrowings under the Credit Agreement bear interest at a rate
calculated according to a Eurodollar rate, plus .55%. The Eurodollar rate is
generally the 30-day, 60-day or 90-day LIBOR rate. The Company is required to
pay an annual fee of 0.125% of the daily-unused portion of the Credit Agreement.
The primary financial covenant requires the Company's funded indebtedness under
the Credit Agreement to not exceed 50% of certain current and long-term assets,
defined in the Credit Agreement and determined as of the last day of each
quarter.
As of February 28, 2006, there was $266,000 outstanding under the Credit
Agreement, in addition to the existing Letters of Credit discussed above. The
applicable interest rate at February 28, 2006, under the Credit Agreement was
5.155%. Borrowings under the Credit Facility did not occur until February 28,
2006, thus the weighted-average interest rate under the Credit Facility for the
three and six-month periods ended February 28, 2006 was the same as the interest
rate at February 28, 2006.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW/OUTLOOK
Cottonseed shipments to our customers in the U.S. market began in earnest late
in the second quarter and planting is under way in south Texas, western Arizona
and the San Joaquin Valley. We will continue to process and ship cottonseed
until early in the fourth quarter. Our sales are being led by DP 555 BG/RR, DP
444 BG/RR, and a more recent entry to the cottonseed market, DP 445 BG/RR, a
mid-maturing variety that has experienced heavy demand this year. Due to the
introduction of new cottonseed treatments, primarily the AVICTA(TM) Complete Pak
from Syngenta, we are experiencing a shift in sales from the second quarter to
the third quarter as our customers finalize decisions on treatment options.
Because of the shift in sales from the second quarter to the third quarter, our
unit shipments were down in the second quarter of this fiscal year compared to
the prior year, but our domestic revenues are slightly higher due to additional
revenue from the seed treatments and higher cottonseed and technology prices. We
did experience an increase in sales of Pima cottonseed varieties in the second
quarter compared to the prior year, due to an increase in acres planted to Pima
varieties. Our per unit cost for cottonseed is higher this year due primarily to
the cost of the seed treatments.
Internationally, shipments began in the second quarter to our customers in
countries in the Northern hemisphere, primarily Greece, Mexico and Spain, and
continued at our joint ventures in Brazil and China. For the six-month period
ended February 28, 2006, international operating results are down from the prior
year due to lower sales in Australia (as a result of increased competition),
Brazil (due to a reduction in acreage planted to cotton), and China (as a result
of increased competition). Sales to Greece, Mexico and Spain are lower through
February 28, 2006 compared to prior year levels, but we believe that this is
primarily due to a shift in sales from the second quarter to the third quarter,
as shipments to these countries have increased thus far in the third quarter.
However, we expect that overall international shipments will be lower in the
2006 fiscal year compared to 2005, due to issues surrounding the revision of
laws governing the planting of transgenic crops in Mexico that delayed our
ability to import certain transgenic varieties, and due to other factors
discussed above.
Due to the amount of cash that we have returned to shareholders in the form of
stock repurchases totaling approximately $85 million in fiscal 2005 and an
additional $15 million through March 31, 2006 and increased dividends, and
strategic uses that we have made of our cash, including the acquisition of the
VipCot licenses from Syngenta, we borrowed from our credit facility for the
first time at the end of the second quarter. We expect to continue borrowing
under this credit facility to meet working capital needs through mid-May, and
expect to have fully repaid our borrowings by the end of our third quarter. We
will continue to explore alternatives for uses of our cash that we will generate
as we collect receivables from our seed sales, including the expansion into new
markets, acquisitions of technology, share repurchases and dividends, as well as
other options. We expect to continue to repurchase shares in the open market.
2006 Earnings Guidance
On April 4, 2006, we announced that we were raising our earnings guidance for
the 2006 fiscal year to $1.15 to $1.25 per diluted share, after charges of $0.10
per diluted share related to our lawsuit against Pharmacia and Monsanto. In the
first quarter we announced earnings guidance for the 2006 fiscal year of $1.10
to $1.20, after charges of $0.10 per diluted share related to our lawsuit
against Pharmacia and Monsanto. Our 2006 guidance takes into consideration
additional revenues expected to be derived from higher technology fees from
Monsanto's new traits and seed mix changes, partially offset by additional costs
related to product development and the launch of new technologies, expenses
related to share-based compensation and sales and marketing expenses.
Earnings are significantly affected by planted cotton acreage in the U.S. Based
on current market conditions (primarily commodity prices and the cost of
inputs), we now expect cotton plantings in the U.S. to increase over 2005
plantings of 14.2 million acres by 3%, based on various industry estimates. Our
updated earnings guidance is based on increased cotton acreage as well as
assumptions regarding the maintenance of our market share and product/sales mix
targets being met. The USDA issued its Planting Intentions report on March 31,
2006, and has estimated 2006 cotton acreage of 14.6 million acres, which
represents a 3% increase over the prior year, or 439,000 acres.
RESULTS OF OPERATIONS
Due to the seasonal nature of our business, we typically incur losses in our
first and fourth quarters because the majority of our domestic sales are made in
our second and third quarters. Sales in the first and fourth quarters are
generally limited to those made to export markets and those made by our non-U.S.
joint ventures and subsidiaries located primarily in the Southern hemisphere.
The following sets forth selected operating data of D&PL (in thousands):
For the Three Months Ended For the Six Months Ended
-------------------------------------- ------------------------------------
February 28, February 28, February 28, February 28,
2006 2005 2006 2005
------------------ ----------------- ---------------- ----------------
Operating results-
Net sales and licensing fees $ 114,977 $ 119,859 $ 124,803 $ 137,313
Gross profit 40,832 44,684 43,994 53,717
Operating expenses 17,432 14,037 32,554 26,072
Operating income 23,400 30,647 11,440 27,645
Income before income taxes 22,198 29,658 8,417 22,533
Net income applicable to common shares 14,716 19,032 4,905 14,587
The following sets forth selected balance sheet data of D&PL at the following
dates (in thousands):
February 28, August 31, February 28,
2006 2005 2005
------------- -------------- ---------------
Balance sheet summary-
Current assets $ 228,706 $ 356,679 $ 315,586
Current liabilities 159,910 263,013 150,091
Working capital 68,796 93,666 165,495
Property, plant and equipment, net 61,507 60,158 62,005
Total assets 315,307 439,184 398,761
Outstanding borrowings 11,919 17,349 22,514
Stockholders' equity 146,349 164,023 230,989
Three months ended February 28, 2006, compared to three months ended February
28, 2005:
For the quarter ended February 28, 2006, we reported net income of $14.9
million, compared to net income of $19.2 million in the comparable prior year
quarter. This decrease was primarily due to a shift in the number of domestic
cottonseed units shipped from the second quarter to the third quarter in the
current year versus the prior year, lower international net sales and licensing
fees, and an increase in operating expenses.
Net sales and licensing fees decreased approximately $4.9 million to $115.0
million and gross profit decreased approximately $3.9 million to $40.8 million.
Domestically, lower cottonseed shipments were offset by higher prices for both
seed and technology. Margin earned on those cottonseed sales was lower due to
lower margins earned on cottonseed treatments and an increase in incentive
payments made to our distributor customers. Historically, we have earned a
rebate on sales of third-party cottonseed treatments, which was recorded as a
component of Net Sales and Licensing Fees. However, beginning in 2006, we are
now invoicing our customers for those treatments (which is recorded as revenue),
and remitting a portion of that revenue to the manufacturer of the seed
treatments (which is recorded as cost of goods sold). Additionally, net sales
and licensing fees in Greece and Mexico were lower primarily due to an
anticipated shift in product shipments from the second quarter to the third
quarter.
Operating expenses increased approximately $3.4 million to $17.4 million in the
second quarter of 2006. This increase primarily related to increased spending on
research and development activities, higher professional fees related to
litigation (other than the Pharmacia/Monsanto suit), and stock-based
compensation costs.
We reported net other expense of approximately $730,000 for the quarter ended
February 28, 2006 compared to $973,000 for the same period in the prior year.
The decrease is attributable to lower legal fees related to the
Pharmacia/Monsanto litigation. In the three months ended February 28, 2006, we
incurred $755,000, or $0.01 per diluted share, related to the Pharmacia/Monsanto
litigation expenses, compared to $1.5 million, or $0.02 per diluted share, in
the three months ended February 28, 2005.
The first quarter of 2006 included a non-cash charge of $358,000 after tax
($0.01 per diluted share) for the cumulative effect of an accounting change
related to stock-based compensation. However, changes in accounting guidance
promulgated since that time that are to be applied retroactively necessitate the
need for us to reverse the non-cash charge, which we have done in the second
quarter of 2006. See Note 1 to Consolidated Financial Statements for the three
months ended February 28, 2006 for further discussion of this accounting change.
Six months ended February 28, 2006, compared to six months ended February 28,
2005:
For the six-month period ended February 28, 2006, we reported net income of $5.2
million, compared to net income of $14.8 million reported in the comparable
prior year period. This decrease was primarily due to a shift in the number of
domestic cottonseed units shipped in the current year versus the prior year, a
reduction in international net sales and licensing fees, and an increase in
operating expenses.
Net sales and licensing fees decreased approximately $12.5 million to $124.8
million and gross profit decreased approximately $9.7 million to $44.0 million.
Domestically, lower cottonseed shipments were offset by higher prices for both
seed and technology, but the margin earned on those cottonseed sales was lower
due to lower margins earned on cottonseed treatments (see discussion above in
the three-month discussion) and an increase in incentive payments made to our
distributor customers. The decrease in net sales and licensing fees is also
attributable to international operations, particularly in South America,
Australia, Greece and Mexico. Sales in South America were lower primarily due to
a reduction in the acreage planted to cotton in Brazil and the decrease in sales
in Australia relates to lower volumes as a result of increased competition, both
of which we reported in the first quarter of 2006. Sales to Greece and Mexico
were lower in the second quarter due to a shift in product shipments from the
second quarter to the third quarter.
Operating expenses increased approximately $6.5 million to $32.6 million in the
six months ended February 28, 2006. This increase primarily related to increased
spending on research and development activities, higher professional services
fees related to litigation (other than the Pharmacia/Monsanto suit), and
share-based compensation costs.
We reported net other expense of approximately $1.9 million for the six-month
period ended February 28, 2006 compared to $2.5 million for the same period in
the prior year. The decrease is attributable to lower legal fees related to the
Pharmacia/Monsanto litigation. In the six months ended February 28, 2006, we
incurred $2.0 million, or $0.03 per diluted share, related to the
Pharmacia/Monsanto litigation expenses, compared to $3.0 million, or $0.05 per
diluted share, in the six months ended February 28, 2005.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently utilize off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
As of February 28, 2006, we owed approximately $5.7 million for a portion of our
raw materials that had been received from the 2005 production season. This
amount represents the amount due on seed production delivered that had not yet
been paid. It does not include other amounts that may become due from
contingencies contained in seed production contracts. The amount owed of $5.7
million is included in Current Liabilities in our Consolidated Balance Sheet at
February 28, 2006.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to adopt accounting
policies and make significant judgments and estimates to develop amounts
reflected and disclosed in the financial statements. In many cases, there are
alternative policies or estimation techniques that could be used. We maintain a
thorough process to review the application of our accounting policies and to
evaluate the appropriateness of the many estimates that are required to prepare
our financial statements. However, even under optimal circumstances, estimates
routinely require adjustment based on changing circumstances and the receipt of
new or better information.
Information regarding our "Critical Accounting Policies and Estimates" can be
found in our Annual Report to Stockholders on Form 10-K for the year ended
August 31, 2005. The four critical accounting policies that we believe are
either the most judgmental, or involve the selection or application of
alternative accounting policies, and are material to our financial statements
are those relating to revenue recognition, 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.
LIQUIDITY AND CAPITAL RESOURCES
In the United States, we purchase seed from contract growers in our first and
second quarters. Seed conditioning, treating and packaging commence late in the
first quarter and continue through the third quarter. Seasonal cash needs
normally begin to increase in the first quarter and cash needs peak in the third
quarter. Cash is generated and loan repayments, if applicable, normally begin in
the middle of the third quarter and are typically completed by the first quarter
of the following year. In some cases, we offer customers financial incentives to
make early payments. To the extent we attract early payments from customers,
bank borrowings, if any, are reduced.
In the U.S., we record revenue and accounts receivable for technology licensing
fees on transgenic seed sales upon shipment, usually in our second and third
quarters. Receivables from seed sales generally become due in May and June. The
licensing fees are due in September, at which time we receive payment. We then
pay Monsanto its royalty for the Bollgard and Roundup Ready licensing fees,
which is recorded as a component of cost of sales. As a result of the timing of
these events, licensing fees receivable and royalties payable peak at our year
end, August 31.
The seasonal nature of our business significantly impacts cash flow and working
capital requirements. Historically, we have maintained credit facilities, and
used cash generated from operations and other available cash to meet working
capital needs. We continue to evaluate potential uses of our cash for purposes
other than for working capital needs. Potential uses of our cash in the future
may be the acquisition of, or funding of, alternative technologies (such as, or
in addition to, DeltaMax and Syngenta) that could be used to enhance our product
portfolio and ultimately our long-term earnings potential and/or an investment
in new markets outside the U.S. Another potential use is the repurchase of our
shares pursuant to our recently announced $50 million share repurchase program.
We are currently considering other potential uses of our cash, including
increasing the dividend rate or repurchasing additional shares depending on
market considerations and other factors. As a part of this analysis, we continue
to evaluate the Company's liquidity needs and its capital structure.
On April 15, 2005, we entered into an unsecured $75 million credit agreement
(the "Credit Agreement") with Bank of America, N.A. (the "Bank"). The Credit
Agreement provides for unsecured revolving loans up to a maximum aggregate
amount outstanding of $75 million, plus Letters of Credit which were outstanding
prior to the execution of the Credit Agreement in the amount of approximately $2
million. Of the total commitment, $50 million represents a seasonal commitment
available from October to July of each year. The Credit Agreement was originally
set to expire on July 31, 2006. However, on December 5, 2005, pursuant to the
Company's request as provided for in the Credit Agreement, the Company and the
Bank extended the Credit Agreement to July 31, 2007, at which time all
outstanding amounts under the Credit Agreement will be due and payable, subject
to the Company's right to request an additional one-year extension and the
Bank's acceptance of that request.
In general, borrowings under the Credit Agreement bear interest at a rate
calculated according to a Eurodollar rate, plus 0.55%. The Eurodollar rate is
generally the 30-day, 60-day or 90-day LIBOR rate. We are also required to pay
unused fees of 0.125% annually calculated on the daily-unused portion of the
Credit Agreement. The primary financial covenant requires the Company's funded
indebtedness under the Credit Agreement to not exceed 50% of certain current and
long-term assets, defined in the Credit Agreement and determined as of the last
day of each quarter.
As of February 28, 2006, there was $266,000 outstanding under the Credit
Agreement, other than the existing Letters of Credit as discussed above. Through
March 31, 2006, borrowings under the Credit Agreement were $27.5 million. We
anticipate that all borrowings under the Credit Agreement (other than the
Letters of Credit) will be repaid before the end of our third fiscal quarter,
May 31, 2006.
Capital expenditures were $5.3 million and $3.6 million in the six months ended
February 28, 2006 and 2005, respectively. We anticipate that capital
expenditures will approximate $8.0 million to $10.0 million in 2006.
For the six months ended February 28, 2006, aggregate dividends of $11.0 million
have been paid on common and preferred shares. The Board of Directors
anticipates that quarterly dividends of $0.15 per share will continue to be paid
in the future; however, the Board of Directors reviews this policy quarterly.
Based on a quarterly dividend of $0.15 per share in 2006, aggregate preferred
and common stock dividends should approximate $22.0 million in 2006.
Cash Used for Share Repurchases
From September 1, 2005 through March 31, 2006, we repurchased 649,400 shares at
an aggregate purchase price of approximately $15.3 million under the June 30,
2005, share repurchase program. We expect to repurchase shares under this plan
over time and through a variety of methods, which generally will include open
market purchases. The timing and amount of repurchases under this program will
depend on market conditions, legal restrictions and other factors.
The following table presents the number of shares purchased monthly for the
three-month period ended February 28, 2006:
Approximate Dollar
Total Total Number of Shares Value of Shares that
Number of Average Purchased as Part of May Yet Be Purchased
Shares Price Paid Publicly Announced Plan Under the June 2005
Period Purchased per Share Plan
----------------------------------------- ------------ ------------ -------------------------- -----------------------
December
(December 1, 2005 to December 31, 2005) 105,000 $ 23.57 105,000 $ 39,577,374
January
(January 1, 2006 to January 31, 2006) 215,000 $ 22.97 215,000 $ 34,638,910
February
(February 1, 2006 to February 28, 2006) 106,000 $ 23.85 106,000 $ 32,110,500
------------ --------------------------
Total 426,000 426,000 $ 32,110,500
============ ==========================
Cash provided from operations, cash on hand, early payments from customers and
borrowings under the credit facility should be sufficient to meet our 2006
working capital needs.
Availability of Information on Our Website
Additional information (including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) and 15(d) of the Exchange
Act, and statements of beneficial ownership) is available free of charge at our
website at www.deltaandpine.com under Media & News, as soon as reasonably
practicable after we electronically file such material with or furnish such
material to the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure relative to fluctuations in the price of soybean raw material
inventory, foreign currency fluctuations and interest rate changes. For more
information about market risk and how we manage specific risk exposures, see
Notes 1 and 15 to our consolidated financial statements contained in our Annual
Report on Form 10-K for the year ended August 31, 2005. Also see Note 9 of the
Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on
Form 10-Q for further details about our exposure to market risk.
The fair value of derivative commodity instruments outstanding as of February
28, 2006, was $28,900. A 10% adverse change in the underlying commodity prices
upon which these contracts are based would result in a $171,000 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, 2006, the result of a uniform 10% change in the value of the dollar
relative to the currencies in which our transactions are denominated would not
cause a material impact on net earnings.
For the three months ended February 28, 2006, a 10% adverse change in the
interest rate that we earned on our cash that we invested would not have
resulted in a material change to our net interest income or cash flow.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
D&PL's chief executive officer and chief financial officer have evaluated the
effectiveness of the design and operation of D&PL's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of February 28, 2006.
Based on that evaluation, the chief executive officer and chief financial
officer have concluded that D&PL's disclosure controls and procedures are
effective to ensure that material information relating to D&PL and D&PL's
consolidated subsidiaries is made known to such officers by others within these
entities in order to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
There have not been any changes in D&PL's internal control over financial
reporting or in other factors that have materially affected, or are reasonably
likely to materially affect, D&PL's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A complete discussion of all known pending litigation in which D&PL is named as
a defendant and a description of other legal matters can be found in Part I,
Item 3, of D&PL's Annual Report on Form 10-K for the year ended August 31, 2005.
The following discussion only relates to changes in the status of items reported
in that Annual Report on Form 10-K, or new items that have come to the Company's
attention since that time.
Regarding the interlocutory appeal before the Mississippi Supreme Court in the
March 14, 2002, Holmes County, Mississippi lawsuit, oral argument was presented
to the Mississippi Supreme Court on February 16, 2006, and the parties are now
awaiting the Court's decision.
Regarding the December 2002 suit filed by D&PL against Nationwide Agribusiness
and other insurance companies in the Circuit Court of Holmes County,
Mississippi, Motions for Summary Judgment filed separately by Nationwide and
D&PL were orally argued on March 15, 2006 and March 20, 2006. On March 21, 2006,
the Court entered a minute docket entry taking the case under advisement. On
March 31, 2006, the District Judge entered an Order Denying D&PL's Summary
Judgment Motion and Granting Nationwide's Summary Judgment Motion. D&PL is now
considering whether or not to appeal the District Judge's decision.
Regarding the October 6, 2005 suit filed by multiple plaintiffs against D&PL,
Monsanto and another seed producer in the United States District Court for the
Eastern District of Texas, Marshall Division, the litigation has been concluded
with no material impact to D&PL. Accordingly, D&PL has withdrawn from the
lawsuit filed September 6, 2005 by Monsanto in the United States District Court,
Western District, Austin Division that D&PL joined on November 30, 2005 (as
discussed in Part II, Item 1 of our Form 10-Q filed for the quarter ended
November 30, 2005).
On February 17, 2006, D&PL submitted an issue for resolution under the dispute
resolution process under the 1996 Option Agreement and the 2002 Bollgard Gene
License. This dispute involves whether Monsanto's implementation of a farmer
licensing system for the Bollgard Gene technology in Brazil violates D&PL's and
its local affiliate's rights to an exclusive license to develop, produce and
sell Bollgard planting seed in Brazil. On March 1, 2006, D&PL filed a suit
against Monsanto in the Chancery Court of New Castle County, Delaware, seeking
to enjoin Monsanto's implementation of the new farmer licensing system pending
the resolution of the issues submitted to the Executive Panel. D&PL's motion for
a preliminary injunction was denied; however, the Delaware Court retained
jurisdiction of the case to consider D&PL's motion to compel arbitration. On
March 27, 2006, D&PL submitted to arbitration before the American Arbitration
Association the dispute on whether Monsanto's implementation of a farmer
licensing system is in violation of D&PL's and its affiliates' rights to an
exclusive license to develop, produce and sell Bollgard planting seed in Brazil.
As part of this arbitration, D&PL is seeking to enjoin Monsanto's implementation
of its farmer licensing system and for damages incurred by D&PL and its
Affiliates.
In response to D&PL's submission of this dispute to the alternative dispute
resolution process, on February 23, 2006, Monsanto filed a suit for declaratory
judgment in the Circuit Court of St. Louis County, Missouri, for the court to
determine the issues in dispute. D&PL believes that this suit is barred by the
binding alternative dispute resolution provisions in the subject contracts and
will so respond, seeking to have this proceeding dismissed or stayed pending the
completion of the contractually required dispute resolution process. D&PL is
committed to participating in good faith resolution of this dispute through the
dispute resolution process and, in particular, through the above described
arbitration. MDM Sementes de Algodao Limitada, D&PL's affiliate in Brazil is
proceeding with a planned launch of sales of cotton seed containing Bollgard
technology in Brazil in the 2006 sales season.
On February 20, 2006, D&PL submitted two additional issues for resolution under
binding dispute resolution; one dispute arises under the most favored license
provisions of the U.S. Bollgard License and the other under confidentiality
provisions of the U.S. Bollgard and Roundup Ready Licenses. Monsanto has
responded on each of these issues and D&PL expects to proceed with alternative
dispute resolution through the Executive Panel or arbitration, as applicable.
On February 28, 2006, D&PL filed suit in the Circuit Court of Dunklin County,
Missouri, seeking to recover Soybean Seed Services Fees in the amount of
approximately $2,200,000 which Monsanto Company has wrongly refused to pay D&PL
with respect to soybean seed containing Monsanto's Roundup Ready technology sold
by D&PL during the 2005 planting season. The suit also seeks a declaratory
judgment that D&PL's payments of Royalties under its Roundup Ready Soybean
License have been correctly calculated and paid during the years 2002-2005.
In December 1999, Mycogen Plant Science, Inc. ("Mycogen") filed a suit in the
Federal Court of Australia alleging that Monsanto Australia Ltd., Monsanto's
wholly-owned Australian subsidiary, and Deltapine Australia have been infringing
two of Mycogen's Australian patents by making, selling, and licensing cotton
planting seed expressing insect resistance. The suit sought injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. Consistent with its commitments, Monsanto agreed
to defend D&PL in this suit and to indemnify D&PL against damages, if any were
awarded. The claims by Mycogen and crossclaims by Monsanto and D&PL were
dismissed with prejudice by an agreed order entered January 27, 2006. The
settlement and dismissal of this case confirmed D&PL's rights to sell Bollgard
planting seed in Australia on the existing terms of its license from Monsanto.
D&PL incurred no material expense for the dismissal of this litigation.
Item 1A. Risk Factors
Various statements included herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on current expectations and are indicated
by words or phrases such as "anticipate," "estimate," "expect," "project,"
"believe," "is or remains optimistic," "currently envisions" and similar words
or phrases and involve known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Forward-looking statements include
statements relating to such matters as anticipated financial performance
(including when earnings estimates are discussed), existing products, technical
developments, new products, new technologies, research and development
activities, and similar matters. These forward-looking statements are based
largely on our expectations and are subject to a number of risks and
uncertainties, many of which are beyond our control. Actual results could differ
materially from these forward-looking statements as a result of, among others,
changes in the competitive marketplace, including the introduction of new
products or pricing changes by our competitors, changes in the economy and other
similar events. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, we cannot assure
you that the forward-looking information contained herein will in fact
transpire. The risks and uncertainties that may affect the operations,
performance, development and results of our business include those noted
elsewhere herein and the following:
Demand for and supply of planting seed
Demand for our seed will be affected by government programs and policies
and by weather in all countries where we sell products and operate. Demand
for seed is also influenced by commodity prices, the cost of other crop
inputs, and the demand for a crop's end-uses such as textiles, animal feed,
cottonseed oil, food and raw materials for industrial use. Weather impacts
crop yields, commodity prices and the planting decisions that farmers make
regarding both original planting commitments and, when necessary,
replanting levels. These factors all also influence the cost and
availability of seed for subsequent seasons.
Competition
The planting seed market is highly competitive, and our products face
competition from a number of seed companies, diversified crop protection
product companies, agricultural biotechnology companies, governmental
agencies and academic and scientific institutions. In addition, several of
our distributors/customers have also entered the cotton planting seed
business. These competitors will launch in 2006 varieties containing the
Bollgard II and Roundup Ready Flex technologies at the same time we expect
to launch those technologies in our varieties. A number of crop protection
product and biotechnology companies have seed production and/or
distribution capabilities to ensure market access for new seed products and
new technologies that may compete with the Bollgard, Bollgard II and
Roundup Ready gene technologies of Monsanto, our principal licensor of such
technology. Our seed products and technologies contained therein may
encounter substantial competition from technological advances by others or
products from new market entrants. Many of our competitors are, or are
affiliated with, large diversified companies that have substantially
greater resources than we have.
Litigation and other legal matters
We currently are engaged in a dispute resolution and arbitration process
with Monsanto, the principal licensor of our cotton technology and
competitor of ours in the cotton planting seed business. In the
arbitration, Monsanto is seeking a determination by the arbitrators of its
right to terminate certain agreements between our companies, including the
Bollgard and Roundup Ready licenses. In addition, we are currently engaged
in litigation with Monsanto concerning the failed merger of the companies.
The result 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, 2005.)
New technologies
There is no assurance that new technologies such as the DeltaMax and the
Syngenta technologies will result in commercially viable products or that
such technologies will be developed in the time frame or for the amounts
estimated to complete development. Also, there is no assurance that
regulatory approval will be obtained for the products.
Governmental policies
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign governments
and shipping disruptions. Particular policies which may affect our domestic
and international operations include the use of and the acceptance of
products that were produced from plants that have been genetically
modified, the testing, quarantine and other restrictions relating to the
import and export of plants and seed products and the availability (or lack
thereof) of proprietary protection for plant products. The absence or lack
of enforcement of intellectual property laws may lead to counterfeit and
farmer-saved seed which negatively impacts our sales. In addition, United
States government policies, particularly those affecting foreign trade and
investment, may impact our international operations.
Regulatory matters
The publicity related to genetically modified organisms ("GMOs") or
products made from plants that contain GMOs may have an effect on our sales
in the future. In 2005, approximately 95% of our cottonseed that was sold
in the United States contained either or both of Monsanto's Bollgard,
Bollgard II and Roundup Ready gene technologies, and 96% of our soybean
seed sales contained the Roundup Ready gene technology. Although many
farmers have rapidly adopted these technologies, the concern of some
customers and governmental entities over finished products that contain
GMOs could impact demand for crops (and ultimately seed) raised from seed
containing such traits. In addition, regulatory approvals for Monsanto's
Bollgard and Bollgard II technologies expire in 2006. Monsanto is
responsible for obtaining and maintaining regulatory approvals and is
planning to seek re-registration of both Bollgard and Bollgard II, but
there is no assurance that their efforts will be successful, nor what the
terms and conditions of any re-registration will be.
International operating risks
Due to the varying levels of agricultural and social development of the
international markets in which we operate and because of factors within the
particular international markets we target, international profitability and
growth may be less stable and predictable than domestic profitability and
growth. Furthermore, actions taken by the U.S. government, including that
taken by the U.S. military, the war in Iraq, and conflicts between major
cotton producing nations, may serve to further complicate our ability to
execute our long range ex-U.S. business plans because those plans include
future expansion into Uzbekistan, Pakistan and India. World health concerns
about infectious diseases also affect the conduct of our international
business.
Subsidies and trade agreements
Our farmer customers in many markets, including the U.S., benefit from
government subsidy programs. The Farm Security and Rural Investment Act of
2002 expires on January 1, 2007 (although the bill includes the 2007 cotton
planting season), and future U.S. farm subsidy programs are uncertain.
Various other countries, including Brazil, have challenged, and may
continue to challenge, the appropriateness of U.S. farm subsidies through
the World Trade Organization ("WTO") or other forums. In particular, the
WTO has ruled in Brazil's favor in its challenge that certain U.S.
subsidies violate the provisions of the WTO. It is not clear if, when, or
to what extent, U.S. subsidies will be modified as a result of this ruling.
However, in the event changes to subsidies are made, they may negatively
impact U.S. farmers which could result in a decline in planted cotton
acreage. Also, in WTO discussions in Hong Kong in late December 2005, U.S.
negotiators committed to reduce cotton export subsidies (the "Step 2"
program) in 2007, and to reduce overall agricultural export subsidies by
2013. U.S. farm programs, including government subsidies, and WTO rulings
impacting such programs may materially affect the results of our business.
In addition, the U.S. Congress, in an attempt to reduce the U.S.
government's budget deficit, may also revise the farm subsidy program
and/or its agricultural policy.
Other
Overall profitability will depend on the factors noted above, as well as
worldwide commodity prices, our ability to successfully open new
international markets, the technology partners' ability to obtain timely
government approval (and maintain such approval) for existing and for
additional biotechnology products on which they and D&PL are working, the
terms of such government approvals, our technology partners' ability to
successfully defend challenges to proprietary technologies licensed to us
and our ability to produce sufficient commercial quantities of high quality
planting seed of these products. Any delay in or inability to successfully
complete these projects may affect future profitability. In addition,
earnings forecasts do not consider the impact of potential transactions,
their related accounting and other factors, that may be under consideration
by the Company, but have not yet been completed or their effect determined
at the date of a particular filing.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The disclosure required under this Part II, Item 2 of this Quarterly Report on
Form 10-Q is contained in Part I, Item 2 hereof under the heading "Cash Used for
Share Repurchases" and is incorporated herein by reference.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders of Delta and Pine Land Company was held
on January 16, 2006. The following matters were brought to a vote with the noted
results:
Item For Against Abstain Non-Voted
1. Re-election of Class I Director 33,750,040 0 640,336 0
Dr. Nam-Hai Chua
2. Re-election of Class I Director 33,957,660 0 432,716 0
W. Thomas Jagodinski
3. Re-election of Class I Director 33,954,839 0 435,537 0
Stanley P. Roth
4. Ratify appointment of KPMG LLP as the
independent public accountants for the fiscal
year ending August 31, 2006 34,198,428 187,455 4,493 0
Item 5. Other Information
None
Item 6. Exhibits.
Exhibits.
4.09 Notice of Removal of Rights Agent and Appointment of Successor Rights
Agent and Amendment No. 3 to the Rights Agreement.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under
the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under
the Securities Exchange Act of 1934.
32.00 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Rule 13a-14(b) Under the Securities Exchange Act of 1934 and Section
1350 of Chapter 63 of Title 18 of the United States Code.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTA AND PINE LAND COMPANY
Date: April 10, 2006 /s/ W. Thomas Jagodinski
------------------------
W. Thomas Jagodinski
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: April 10, 2006 /s/ Kenneth M. Avery
--------------------
Kenneth M. Avery
Vice President - Finance, Treasurer and Assistant
Secretary
(Principal Financial and Accounting Officer)